National Income

Analysis
 National Income
 National Income refers to “total National output
or value of a nation’s output during a specified
period (usually one year) of time.
 There are three different ways of looking at the
value of Nation’s output: Gross National Product
(GNP), Gross National income (GNI) and Gross
National Expenditure (GNE)- represented by
Output total, Income Total and Expenditure total
respectively.
 National Income

 GNP is the sum of value added of all firms in

the same period – the total value of final goods
and services produced. It is a monetary
measure or money value as there is no other
way of adding up different sorts of goods and
services produced.
 National Income
 GNI values national output as sum of the total
payments made to factors owners for their
services in production – earning or income
received by factors.
 GNE values national output by taking the
value of expenditure on goods and services
produced (Aggregate expenditure on
consumption and investments).
 National Income Calculation
Based on these three approaches the national
income may be calculated using three different
methods:
1. Production Method
2. Income method
3. Expenditure method
Whichever method used ,the national income is the
same.
GNP=GNI=GNE
 Production Method
 This method views national income from the output
side.
 It consists of finding out the net value of all goods
and services produced in various sectors of the
economy during a year and adding them up. The total
obtained is called the Final Products Total.
 Economy is divided into different sectors –
magriculture,mining, manufacturing, trade ransport,
communications, construction, banking and
insurance, electricity, gas and water supply,
healthcare, eductiion, defence and so on.
 Production Mehtod
 The value of gross product of all producers in a sector
is totaled up and from this the value of intermediate
products is subtracted in order to avoid double
counting. When we add up the net figures of each of
the sectors we get GNP.
 GNP does not measure the value of all the goods and
services but only the final goods and services– goods
& services purchased for final use and not for resale
or further processing.
A few points to be noted:
 Sale of existing goods or services is not part

of GNP – value ofautos produced in 2006 are

part of 2006 GNP and not to be counted in
GNP of 2007 when they are sold.
 An increase in inventory is considered final

good because it involves current production

(or value added)
 Value of services of a housewife( cooking, cleaning
etc) or work for self use is not considered while those
of a restaurant cook or cleaner are considered. The
latter does not go through a market channels.
 Illegal income not considered because its counting is
not possible.
 Goods and services for self consumption and rent for
self occupied house rent not considered
 Income Method
 This is also called Factor Income Method.
 In this method National Income is calculated from the
distribution side – income earned orreceived by
individuals of the country
 In this method National Income is obtained by
totaling all the incomes according to the factors of
production used in producing national output –
adding up rent of land and buildings, wages and
salaries of employees, profit of entrepreneurs, interest
on capital and income of the self employed.
 Transfer payments are not counted. e.g.,when an
individual sells his house the price received is not an
income- it represents transfer payment ; represents no
addition to national output. Similarly income of
beggars, scholarships, aid to the needy, relief
payments are not included – obtained without
producing anything. Only those payments
representing cost payments to a factor of
production for contribution towards production
during the period are to be consiered
 Expenditure Method
National Income under this method is calculated
by adding up all the expenditure made on on
goods and services during the specific
period.
GNE is found out by totaling
1. Personal consumtion expenditure (C) –
private individual expenditure on
consumption of consumer goods and services
 Domestic private investments (I) – total of
private business spending on new investments,
replacements and renewals (investment in land
or stock market not included why?)
 Net Export of goods and services (X-M) –
surplus of all goods and services we provide
to foreigners over above what they provide to
us. (Wheat, shipping services, dividends and
interest etc.)
 Government Expenditure (G ) – money spent
by Govt on purchase of goods and services

 GNE= C + I=(X-M) + G
 Concepts of National Income

Gross National Product (GNP)

 Money Value of at market price of all final

goods and services produced by an economy

during a given year.
 Excludes intermediate products, non market

outputs ,include imputed value of goods also.

 Net National Product (NNP)
 This refers to value of all goods and services
(including services of govt employees) and
net investment at prices actually paid for them.
It is derived by deducting depreciation or
capital consumption allowances from GNP –
represents net output available for
consumption by the society.
NNP = GNP- depreciation
 National Income (NI)
Also known as Net National Product Income
 It measures the income accruing to the factors of

production for their contribution towards producing

current output.
 NI is obtained by deducting indirect taxes and

business transfers from NNP and adding subsidies.

 NI = NNP-Tr payments-indirect Taxes+ subsidies
 Private Income
 Income obtained by private individuals from
any source, productive or otherwise, plus the
retained income of corporations.
 Personal Income (PI)
 Spend able income at current prices available
to individuals before personal taxes are
deducted
 PI = Private Income – retained earnings before
taxes
 Disposable Income (DI)
 This is the income which individuals have at
their disposal after payment of personal taxes
(and employee contribution to Social security
and pension funds) from Personal Income.
An individual can spend this income on
consumption and/or save.
 DI= C + S
 GDP and GNP
 GDP Gross domestic product refers to the
money value of all final goods and services
produced in the domestic territory of a country
during a specified period ,usually a year. This
also includes net exports.
 GNP is the money value of all final goods and
services produced in an economy during a
specfied period. This also includes net factor
incomes from abroad.
 GDP and GNP
 So what is the difference between the two ?
 While GDP considers only net exports, GNP includes
net income from other factor incomes i.e., income from
investments, employment, rent etc earned by nationals
abroad less those earned by foreigners in the country
 GDP has of late become more popular to understand the
economic performance of a country. (USA shifted from
GNP to GDP in 1991)
Nominal income and Real income
 We have defined National income as money value of
the out put of final goods and services by the
economy. The money value means valuing at the
present market prices.
 When one compares income in different periods the
increase or decrease the values arrived at are at the
respective prices. The prices are changing ;so the
measurement is like using a flexible yard stick rather
than a standard invariant measuring rod.
 Deflator
Real Income = Nominal Income
GDP Deflator
Example: 2006 1996
Output 50 40
Prices 7 6
Nominal GDP 350 240(growth 46%)
GDP@ const.price 300 240
GDP Deflator = 350/300 =1.167
 Nominal growth in GDP is growth due to increase
in price levels not necessarily increase in output
or increased economic activities .
 Real GDP growth is growth in GDP due to
increase in production and economic activity
which will raise the standard of living of the
people.