National Income is a core concept in macroeconomics, representing the total value of all goods and services produced by a country within a specific time period, usually a financial year. It provides a quantitative basis for assessing the overall economic performance of a nation.
Basic Concepts of National Income
1. Gross Domestic Product (GDP)
GDP is the total monetary value of all final goods and services produced within the domestic territory of a country during a financial year. It includes the value of output produced by both residents and non-residents.
2. Gross National Product (GNP)
GNP is the total value of final goods and services produced by the normal residents of a country in one year, irrespective of whether they are produced within or outside the domestic territory.
GNP = GDP + Net Factor Income from Abroad (NFIA)
3. Net Domestic Product (NDP)
NDP is obtained by deducting depreciation from GDP. Depreciation is the fall in the value of fixed capital due to wear and tear.
NDP = GDP – Depreciation
4. Net National Product (NNP)
NNP is the value of goods and services produced by the normal residents of a country after accounting for depreciation.
NNP = GNP – Depreciation
Market Price vs. Factor Cost
National income aggregates can be measured at market price (MP) or factor cost (FC).
- Market Price includes indirect taxes and excludes subsidies.
- Factor Cost is the cost incurred on factors of production and excludes the effect of taxes and subsidies.
Factor Cost = Market Price – Indirect Taxes + Subsidies
Methods of Calculating National Income
There are three official methods used to estimate national income:
1. Production Method (Value Added Method)
This method measures the net value added at each stage of production within the domestic territory.
Net Value Added at FC = Value of Output – Intermediate Consumption – Depreciation – Net Indirect Taxes
2. Income Method
This method adds up all incomes earned by factors of production in the form of wages, rent, interest, and profit.
National Income = Compensation of Employees + Rent + Interest + Profit + Mixed Income + Net Factor Income from Abroad
3. Expenditure Method
This method calculates the total expenditure incurred on final goods and services during a year.
National Income = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports (Exports – Imports) + NFIA – Depreciation – Net Indirect Taxes
Aggregates of National Income
There are eight major aggregates used in national income accounting:
- GDP at MP = Net Domestic Product at FC + Depreciation + Net Indirect Taxes
- GDP at FC = NDP at FC + Depreciation
- GNP at MP = GDP at MP + Net Factor Income from Abroad
- GNP at FC = GNP at MP – Net Indirect Taxes
- NNP at MP = GNP at MP – Depreciation
- NNP at FC = GNP at FC – Depreciation (This is the National Income)
- NDP at MP = GDP at MP – Depreciation
- NDP at FC = GDP at FC – Depreciation
Final Goods vs Intermediate Goods
- Final Goods are ready for consumption or investment and included in national income.
- Intermediate Goods are used for further production and are not included to avoid double counting.
Inclusions and Exclusions
Included in National Income:
- Imputed rent of owner-occupied houses
- Wages in kind
- Interest on loans taken for productive purposes
- Mixed income of self-employed
Not Included in National Income:
- Transfer payments (like pension, scholarship)
- Sale of second-hand goods
- Purchase of shares and bonds
- Windfall gains (like lottery)
- Services for self-consumption (like domestic services by housewives)
Circular Flow of Income
The national income also reflects the circular flow of income and expenditure within the economy. In a two-sector model (households and firms), income earned by households through factor services is spent back on goods and services produced by firms, maintaining economic balance.
Real and Nominal GDP
- Nominal GDP is the value of output at current prices.
- Real GDP is the value of output at constant prices. It helps track actual growth by adjusting for inflation.
GDP Deflator = (Nominal GDP ÷ Real GDP) × 100
GDP and Welfare
While GDP growth is a sign of economic health, it does not fully reflect the well-being of citizens. Non-monetary factors like environment, income distribution, leisure, and social indicators must be considered to assess real welfare.
References:
NCERT – https://ncert.nic.in/textbook.php?leec1=2-6
Other Related Chapters & Topics: Macroeconomics Page
