© VIT BUSINESS SCHOOL , VELLORE, TAMIL NADU.

NATIONAL INCOME
PECIAL THANKS TO Dr. ANNADURAI C

PRESENTED BY:
ANURADA S.
SUJIT KUMAR
SHIVAM SETH
AURIPRYADARSHNI
INDHU RAMCHANDRAN
 NATIONAL INCOME:
WHAT IS NATIONAL INCOME?
• National Income is the sum of all factor
earnings from current production of goods and
services.
• Factor earnings are incomes of factor of
production: land, labor, and services.
or
• The sum of all incomes of the people of a
country is called national income.

National income = value of final goods and

services produced =
wages+rent+intrest+profits = National Product
Source: Macroeconomic theories and policies written by Richard T. Froyen page no.22 part 2.3
I.S.B.N:0-02-339591-5
 THE CIRCULAR FLOW OF MONEY
THROUGH ECONOMY.
INCOME MARKETS FOR FACTOR FACTOR PAYMENTS
OF PRODUCTION

PRIVATE FINANCIAL MARKETS

SAVING
PUBLIC SAVING

HOUSEHOLD TAXES GOVERNMENT INVESTMENT FIRM

GOVERNMENT
PURCHASES

MARKETS FOR GOODS

CONSUMPTION AND SERVICES FIRM REVENUE

SOURCE: FIG 3-1, PAGE 45, MACROECONOMIC 6TH EDITION BY N. GREGORY MANKIW I.S.B.N:978-0-230-22492-6
CONCEPTS OF NATIONAL INCOME:

Gross
Gross National Net National Personal
Domestic
Product Product Income
Product

Disposable
Corporate Private
Personal Real Income
Income Income
Income

Domestic Per Capita

Income Income
 G.D.P: Gross Domestic Product
• G.D.P. is the measure of all currently produced final goods and
services within the boundary of a country evaluated at
market prices.
• Four important aspects from the statement
1. Currently produced.
2. Final goods and services.
3. Evaluated at market price.
4. Within the country boundary i.e. within an economy of a
nation.

GDP=GNP-Net Income Earned Abroad

or
GDP = private consumption + gross investment + government spending +
(exports − imports)
Real GDP: GDP evaluated at a set of constant prices.
Nominal GDP: GDP evaluated at current market prices.

Source: Macroeconomic theories and policies written by Richard T. Froyen page no.18 part 2.2 I.S.B.N:0-02-
339591-5
 Various concept of national product
NET FACTOR
INCOME FROM
ABROAD

LESS DEPRECIATION LESS NET

GROSS PRIVATE GROSS PRIVATE INDIRECT TAXES
INVESTMENT (I) INVESTMENT NET PRIVATE
INVESTMENT

NET EXPORTS NET EXPORTS NET EXPORTS

WAGES
+
PROFIT
GOVERNMENT GOVERNMENT GOVERNMENT +
PURCHASES PURCHASES PURCHASES INTRESTS
+
RENT
CONSUMPTION CONSUMPTION CONSUMPTION
EXPENDITURE EXPENDITURE EXPENDITURE

GNP GDP NDPMP NDPFC

 G.N.P: Gross National Product
• Gross National Product is defined as the total market
value of all final goods and services produced in a year
in a country.

• G.D.P. measures total income produced domestically,

G.N.P. measures the total income earned by nationals.

• We add receipts of factor income (wages, profit, and

rent) from rest of the world and subtract payments of
factor income to the rest of the world.

G.N.P=G.D.P+ Income earned by its citizens abroad -

Income earned by foreigners in the country

SOURCE: PAGE 28, MACROECONOMIC 6TH EDITION BY N. GREGORY MANKIW

I.S.B.N:978-0-230-22492-6
 N.N.P: Net National Product (national
income at market price)
• To obtain N.N.P. we subtract the
depreciation of capital (the economy’s
stock plant, equipment, and residential
structures that wears out during the
year.

N.N.P. = G.N.P - Depreciation(consumption

of fixed capital)

SOURCE: PAGE 28, MACROECONOMIC 6TH EDITION BY N. GREGORY MANKIW

I.S.B.N:978-0-230-22492-6
Personal Income & Disposable
Personal Income
• Personal Income is the national
income accounts measure of the
income received by person from
all sources.
• When we subtract personal tax
payments from personal income,
we get a measure of disposable
(after-tax) personal income.

Source: Macroeconomic theories and policies written by Richard T.

Froyen page no.25 part 2.4 I.S.B.N:0-02-339591-5
 FROM NATIONAL INCOME TO DISPOSABLE
INCOME

LESS
NET FACTOR INCOME 1.UNDISTRIBUTED LESS PERSONAL
CORPORATE PROFITS. TAXES
FROM ABROAD
2. CORPORATE TAXES
3. SOCIAL SECURITY
PROFITS CONTRIBUTION.

INTRESTS CONSUMPTION
+
SAVINGS
RENT PLUS
TRANSFER
PAYMENTS
WAGES AND SALARIES

NATIONAL INCOME PERSONAL DISPOSABLE INCOME

(NI OR NNPFC) INCOME PI DI
Corporate Income & Domestic Income

• CORPORATE INCOME: Incomes and

profits of companies or public
corporation.

• DOMESTIC INCOME: Income

generated by the factors of
production within the country from
its own resources.
 Per Capita Income
• Average earning of an individual
in a particular year. Per capita
income reflects gross national
product per person.

Per capita income = national income of a

country/population of a country
 Private Income
• Any type of income received by a private
individual or household, often derived from
occupational activities or income of an
individual that is not in the form of
a salary (e.g. income from investments).

Private income = national income(NNP at factor cost) +

transfer payments + interest on public debt – social
securities – profits and surpluses of public undertakings
 Real Income
• Real income is the income of individuals or
nations after adjusting for inflation.

Real NNP = NNP for current year * base year index / current year
index
Measurement Of National Income
• Value added method
• Income method
• Expenditure method
 VALUE ADDED METHOD or OUTPUT
METHOD or PRODUCTION METHOD
• Under this method the economy is divided into different industrial
sectors such as agriculture, fishing, mining, construction,
manufacturing, trade and commerce, transport, communication and
other services.
• The net value added at factor cost (NVAFC) by each productive
enterprise as well as by each industry or sector is estimated.
• In order to arrive at the net value added factor cost by an enterprise
we have to subtract the following from the output of an enterprise:
1. Intermediate consumption which is the value of goods such as raw
materials, fuels purchased from other firms.
2. Consumption of fixed capital (i.e. depreciation)
3. Net indirect taxes.
• When we add net values at factor cost by all industries or sectors to
get net domestic product at factor cost NDPFC.
• To the NDP we add the net factor income from abroad to get net
national product factor cost NNPFC which is also called as national
income.
NNPFC=NDPFC+NET FACTOR INCOME ABROAD
 INCOME METHOD
• Under this method, national income is obtained by summing up of the
incomes of all individuals of a country.
• Steps involved in calculation
• Identify the productive enterprises and classify them into various
industrial sectors such as agriculture, fishing, manufacturing,
communication etc.
• Classify the factor payments.
1. Compensation of employees which includes wages and salaries,
employers contribution to social security scheme.
2. Rent and royalty.
3. Interests.
4. Profit 1. dividends 2. undistributed profits 3. corporate income tax.
5. Mixed income of the self employed.
• Measure factor payments.
• Adding up of factor payments.
• Summing up the incomes paid out by all industrial sector we can obtain
domestic factor income NDPFC.
• Add net factor income earned from abroad to domestic factor income
to get national product at factor cost NNPFC.
 INCOME METHOD NET INDIRECT
TAXES
NET FACTOR CONSUMPTION
CONSUMPTION
INCOME FROM OF FIXED
OF FIXED CAPITAL
ABROAD CAPITAL
DIVIDENDS DIVIDENDS
UNDISTRIBUTED UNDISTRIBUTED
PROFITS PROFIT PROFITS PROFIT
CORPORATE CORPORATE
INCOME TAX INCOME TAX

INTREST INTREST INTREST INTREST

RENT RENT RENT RENT

MIXED INCOME OF MIXED INCOME OR MIXED INCOME OF MIXED INCOME OF

SELF-EMPLOYED SELF-EMPLOYED SELF EMPLOYED SELF EMPLOYED

COMPENSATION COMPENSATION OF COMPENSATION COMPENSATION

OF EMPLOYEES EMPLOYEES OF EMPLOYEES OF EMPLOYEES
NDP FC NNP FC GDP FC GDP MP
 EXPENDITURE METHOD
• Expenditure method arrives at national income by adding up all expenditures made
on goods and services during a year.
• Expenditure on consumer goods and services by individuals and households. This is
called final private consumption expenditure and is denoted by C.
• Government expenditure on G&S to satisfy collective wants. This is called
governments final consumption expenditure and is denoted by G.
• The expenditure by productive enterprise on capital goods and inventories or stock.
This is called gross domestic capital formation denoted by I.
• The expenditure made by foreigners on G&S of a country exported to other
countries is exports denoted by X. enterprise & government on import of G&S from
other countries are termed as imports denoted by M.

GDPMP=C+G+I+(X-M)

• On deducting depreciation (consumption of fixed capital) from GDPMP gives

net domestic product at market price NDPMP.
• Then we deduct net indirect taxes to arrive at NDPFC.
• Then we add net factor income from abroad to get net national product at
factor cost NNPFC.
NNPFC=GDPMP- consumption of fixed capital – net indirect taxes +net factor
income from abroad
 EXPENDITURE METHOD
NET FACTOR INCOME
GROSS DOMESTIC LESS
FROM ABROAD
CAPITAL DEPRECIATION
FORMATION
NET DOMESTIC LESS NET NET DOMESTIC
CAPITAL INDIRECT TAX CAPITAL FORMATION
GOVT. FINAL FORMATION
CONSUMPTION GOVT. FINAL GOVERNMENT FINAL
EXPENDITURE CONSUMPTION CONSUMPTION
EXPENDITURE EXPENDITURE

PRIVATE FINAL PRIVATE FINAL PRIVATE FINAL

CONSUMPTION CONSUMPTION CONSUMPTION
EXPENDITURE EXPENDITURE EXPENDITURE

NET EXPORTS NET EXPORTS NET EXPORTS

(X-M) (X-M) (X-M)

GDPMP  NDPMP  NDP FC  NNPMP

 Problems in Calculating National Income
• Treatment of non-monetary transactions.
• Treatment of government activities in national
income accounts.
• Treatment of income generated by foreign firms.
• Conceptual Difficulties
 Black Money
 Non-Monetization transactions
 Overlapping of occupation
 Services go unaccounted

• Statistical Difficulties:
• Lack of adequate statistical data.
• Error of double counting
• Illiteracy in India: most producers have no idea
of quantity and value of their output and do
not follow the practice of keeping regular
accounts.
• Occupational specialization is incomplete.
• In developing countries production, both
agricultural and industrial is unorganized and
scattered in these countries. This makes the
calculation difficult.
National Income Uses
 Helps study the rate of growth of an economy.
 Helps study inter-sector growth.
 Enables study of inter-class income distribution.
 Helps make international comparisons, living
standard of people.
 Helpful in planning and evaluating plan progress.
 Helps measure capacity of each country to bear
common burden of international institutions like
the UNO and I.M.F.
 REFERENCES:
• MACROECONOMICS Theories and Policies WRITTEN BY RICHARD T.
FROYEN, ISBN:0-02-339591-5
• MACROECONOMICS “6TH EDITION” WRITTEN BY N.GREGORY
MANKIW, ISBN:978-0-230-22492-6
• NCERT BOOKS, CLASS 12, MACROECONOMICS.
• Photocopy material provided by Dr. Annadurai C. sir.
• www.wikipedia.com TOPIC: NATIONAL INCOME used just for
understanding purpose “NO MATERIAL” has been intentionally
copied from this site, if there is any resemblance with the online
material it may be just a coincidence and we Regret for any
inconvenience caused.
 Thank you

© VIT BUSINESS SCHOOL , VELLORE, TAMIL NADU.