Trends In National

Income

Introduction
The aggregate flow of goods and services represents the aggregate

income earned by factors of production employed during the year, and

is termed as national income or national product.

The rate of growth of national income when compared with the rate of

growth of population indicates whether the economy is declining,

stagnant or developing.

Basic concepts in National Income

There

are various concepts of National Income. These different

concepts explain about the phenomenon of economic activities of the
various sectors of the various sectors of the economy. The main
concepts of NI are: GDP, GNP, NNP, NI, PI, DI, and PCI.

Gross Domestic Product (GDP)

Gross National Product (GNP)
Net National Product (NNP)
National Income (NI)
Personal Income (PI)
Disposable Income (DI)
Per capita Income (PCI)

Gross Domestic Product

Gross domestic product is the money value of all final goods and

services produced within the domestic territory of a country during a

year.
GDP can be estimated at current prices and at constant prices
If domestic product is estimated on the basis of prevailing prices then it is called

GDP at current prices.

If domestic product is estimated on the basis of prices prevailing at a particular
point of time then it is called GDP at constant prices.

Algebraic expression:
GDP=C+I+G+(X-M)

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import

GDP at Factor cost

Using the Income Approach GDP is calculated by adding up the factor

incomes to the factors of production in the society.

GDP FC = GDP-ID+S

Where,
ID=Indirect Taxes
S= Subsidies

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and
services produced annually in a country plus net factor income from
abroad.
The GNP can be expressed as the following equation:

GNP=GDP+NFIA (Net Factor Income from Abroad)

or, GNP=C+I+G+(X-M)+NFIA

Net National Product (NNP)

Net National Product is the market value of all final goods and services
after allowing for depreciation. It is also called National Income at
market price. When charges for depreciation are deducted from the
gross national product, we get it. Thus,
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income (NI)

National Income is also known as National Income at factor cost.

National income at factor cost means the sum of all incomes earned by
resources suppliers for their contribution of land, labor, capital and
organizational ability. Hence the sum of the income received by factors
of production in the form of rent, wages, interest and profit is called
National Income. Symbolically,
NI=NNP+ Subsidies-Interest Taxes
or,GNP- Depreciation+Subsidies-Indirect Taxes
or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies

Personal Income (PI)

Personal Income i s the total money income received by individuals and

households of a country from all possible sources before direct taxes.
Therefore, personal income can be expressed as follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-

Social Security Contribution+Transfer Payments

Disposable Income (DI)

The income left after the payment of direct taxes from personal income
is called Disposable Income. Disposable income means actual income
which can be spent on consumption by individuals and families. Thus, it
can be expressed as:
DI=PI-Direct Taxes
From consumption approach,
DI=Consumption Expenditure+Savings
Per Capita Income (PCI)
Per Capita Income of a country is derived by dividing the national
income of the country by the total population of a country. Thus,

ESTIMATION OF NATIONAL INCOME IN INDIA

In India, the first attempt to estimate national income and per capita income was made

in the year 1867-68 by Shri Dadabhai Naoroji.

Immediately after independence, the Government set up the National Income

Committee in August, 1949 to prepare a report on national income and related

estimates to suggest improvements in the collection of data, and to recommend
guidelines for research in the field of national income. The First Report of the
Committee was published in 1951, and the Final Report in 1954.
The task of preparing national income estimates has been assigned to the Central

Statistical Organisation (CSO). The CSO has been producing annual official estimates
of national income of India since 1955 and publishing the same in its annual report
National Accounts Statistics.

METHODS OF COMPUTING NATIONAL INCOME

These methods are

The Product Method
The Income Method and
The Expenditure Method

Value Added Method

Value added method is also named as Product method. This method is used to

measure national income at the phases of production of each enterprise and each
industrial sector during a year. In fact this method measures the contribution of each
enterprise in the flow of goods and services in the economy.
Under this method, the economy is- generally divided into three industrial classes
namely
(a) Primary sector
(b) Industrial sector and
(c) Service sector.

For computing national income, the values added by the above three sectors at each

stage is worked out. The value of output at each enterprise is found by multiplying
the physical output with the market prices of the goods produced

Precautions for this approach

Problem of double counting: This pitfall can be avoided by either

counting the final value of the output or by including the extra value
that each firm adds to an item.
Value addition in particular year: GDP thus includes only those

goods and services that are newly produced within the current period.
Stock appreciation: Stock appreciation, if any, must be deducted

from value added. This is necessary as there is no real increase in

output.
Production for self consumption. In this method, the production of

goods for self consumption should be valued at the prevailing market

prices.

The Expenditure Method

To measure national income is to add up all expenditures made for final goods and

services at current market prices by households, firms and government during a

year.
(i) Consumption expenditure: It includes expenditure on all goods and services

produced and sold to the final consumer during the year.

(ii) Investment expenditure: (a) new plants, (b) adding to the stock of inventories

and (c) on newly constructed houses.

(iii) Governnnent expenditure: It includes all government expenditure on currently

produced goods and services.

(iv) Net exports: Net exports are defined as total exports minus total imports.
NI = C + 1 +G + (X M)

Precautions
(i) The expenditure on second hand goods should not be included

as they do not contribute to the current years production of goods.

(ii) Similarly, expenditure on purchase of old shares and bonds is

not included as these also do not represent expenditure on currently

produced goods and services.
(iii) Expenditure on transfer payments by government such as

unemployment benefit, old age pensions, interest on public debt should

also not be included because no productive service is rendered in
exchange by recipients of these payments.

The Income Approach

In the production process of an economy, the factors of production are

engaged by the enterprises. They are paid money incomes for their
participation in the production. National income thus may be defined as
the sum of wages, rent, interest and profit received or accrued to the
factors of production in lieu of their services. The four categories of
payments are briefly described below :
(i) Wages
(ii) Rents
(iii) Interest
(iv) Profits

Precautions
(i) Transfer payments such as gifts, donations, scholarships, indirect

taxes should not be included in the estimation of national income.

(ii) Illegal money earned through smuggling and gambling should not

be included.
(iii) Windfall gains such as -prizes won, lotteries etc. is not be

included in the estimation of national income.

(iv) Receipts from the sale of financial assets such as shares,

bonds should not be included in measuring national income as they are

not related to generation of income in the current year production of
goods.

Trends in National Income

Trends In National Income Growth and Structure

Trends in net national Product and per capita

Income:
Increase in NNP at current prices reflects the
effects of two factors
Increase in the production of real goods and

services (Indicator of real Growth)

The rise in prices (an unreal inflation)

Therefore national income figures are deflated

at constant prices to eliminate the effect of

change in prices

But it conceal the population effect, this is

why per capita income is calculated.

Growth in NNP at constant prices indicates the

rate of growth of goods and services

Growth of per capita income at constant prices
indicates the change in the standard of living of
the people

Net national
income
capitaPlans
net
Annual Growth
Rates
During Per
the
at factor cost
FIRST PLAN (1951-56)
SECOND PLAN (195661)
THIRD PLAN (196166)
THREE ANNUAL
PLANS (1966-69)
FOURTH PLAN (196974)
FIFTH PLAN (1974-79)
ANNUAL PLAN (197980)
SIXTH PLAN (198085)
SEVENTH PLAN
(1985-90)
TWO ANNUAL PLANS
(1990-92)
EIGHTH PLAN (199297)
NINTH PLAN (19972002)
TENTH PLAN (20022007)
ELEVENTH PLAN
(2007-2012)1R

national income

At current Prices

At 2004-05

At current Prices

At 2004-05

1.9

4.2

0.0

2.4

9.6

4.2

7.4

2.2

9.5

2.6

7.1

0.3

12.2

3.7

9.8

1.5

10.8
10.4

3.2
4.9

8.4
8.0

0.9
2.6

8.4

-5.9

5.8

-8.2

15.3

5.4

12.8

3.1

13.8

5.5

11.4

3.3

15.3

2.8

13.0

0.8

16.6

6.7

14.2

4.6

10.6

5.5

8.6

3.5

12.8

7.5

11.1

5.9

16.1

7.8

14.6

6.3

Reasons
During the 3rd plan, NNP slumped down to 2.6%, and growth

of per capita income was 0.4% is largely the consequence

of a serious drought in 1965-66 followed by another drought
year as a business recession.
During the 4th plan sharp increase in prices and shortfall in

the production on account of lower utilization of resources

were the principal factors responsible for a lower growth
rate.
During

the
satisfactory.

5th

plan

performance

can

be

considered

7th plan achieved its objectives, as a welcome development.

10th plan-highest recorded so far.

Trends in distribution of NI by Industrial Origin

FROM NOTES