CONCEPTS OF NATIONAL INCOME

AND ITS MEASURES

Presented by :-
76 – 83
A01-A07 (3CMBA)
INRODUCTION
 National income is the final outcome of all economic
activities of a nation valued in terms of money.
 National income shows the economic position of a
nation .
 It also will help to assess and compare the economic
progress achieved by a country over a period of
time.
 JM Keynes, a famous economist defined
national income as follows:-”National income
is the money value of all goods & services
produced in a country during a year.
MEASURES OF NATIONAL
INCOME
 Gross Domestic Product (GDP) is the total value of all final goods
and services produced in an economy in a one-year period.
-It is the single most-used economic measure.
 Gross National Product (GNP) is the aggregate final output of
citizens and businesses of an economy in one year.
• Net domestic product (NDP) – the sum of consumption expenditures,
government expenditures, net foreign expenditures, and investment
less depreciation.

• Net National Product (NNP)

NNP is defined as GNP less depreciation.
Depreciation is that part of total productive assets which is used to
replace the capital worn out in the process of creating GNP.
NNP gives the measure of net output available for consumption by the
society.
 The Circular Flow
Wages, rents,
interest,
profits

Factor services

Goods
Household e Firms
e r n m(production)
TaxesGovernment Gov nt
Sav d imn gent
ingFinancial
s marketspveens t
Im SIn
po
rts Personal consumption ports
E x
Other countries

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Methods Of measuring
National income

 Value Added Method- Value added is the increase in

value that a firm contributes to a product or service.
 Income Method
 Expenditure Method
 Steps Of Measuring NY
Value Added Method
-Identification and
Classification of producing
enterprises
-Estimation of net value
added
-Estimation of national
income
Income method
-Identificationand
Classification of producing
enterprises
-Classification of factor
income
-Estimation of factor
income.
Expenditure method
-Identification of
institutional units incurring
final expenditure.
-classification of final
expenditure.
-Estimation of final
expenditure.
 Expenditure Method

Private final consumption expenditure

+ government final consumption expenditure
+ gross domestic capital formation
+ net exports (exports-imports)

Gross domestic
Product at market price.
-
Depreciation

Net domestic product at Market price

-
Net indirect taxes

Net factor Income from abroad

+
Net domestic product at factor cost

National Income
NATIONAL INCOME :SOME
ACCOUNTING RELATIONSHIPS

 (a) At market price

 GNP=GNI (Gross National Income)
 GDP=GNP-Net Income from Aboard
 NNP=GNP-Depreciation
 NDP (Net Domestic Product)=NNP-net income from aboard

 (b) At factor cost

 GNP at factor cost = GNP at market price – net indirect taxes
 NNP at factor cost =NNP at market price – net indirect taxes
 NDP at factor cost = NNP at market price – net income from
aboard
 NDP at factor cost = GDP at market price – depreciation
Other National Income Terms

 Personal income (PI) is national income

plus net transfer payments from government
minus amounts attributed but not received.

PI = NI + Transfer payments from government

+ Net non-business interest income
– Corporate retained earnings
– Social security taxes
NATIONAL DISPOSABLE INCOME
 It is the sum total of net domestic income at factor
cost, net indirect taxes, net factor income from
abroad and net current transfers from rest of the
world
  Disposable personal income is personal
income minus personal income taxes and
payroll taxes.
 Disposable personal income is what people
have readily available to spend.
DPI = PI - Personal taxes
Some Limitations of National Income
Accounting

 Limitations of national income accounting

include the following:
– Measurement problems exist.
– GDP measures economic activity, not welfare.
– Subcategories are often interdependent.