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National Income Accounting IndigoLearn Page | 1

National Income Accounting

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1. INTRODUCTION

1.1. Structure of the Unit

1.2. System of National Accounts

➢ United Nations has developed concepts of National Income and these concepts and

definitions are adopted by most countries for computation and reporting of National

Income. Such concepts are given in System of National Accounts (SNA).

➢ National accounts refer to the accounts of the various Macro-economic activities that

nations undertake macro-economic factors and methods of computation and reporting

of such macroeconomic factors and activities. The system given by United Nations for

such National Accounts is known as System of National Accounts.

National Income

Concepts of National Income

1. GDPMP

2. NDPMP

3. GNPMP

4. NNPMP

5. GDPFC

6. NDPFC

7. NNPFC

8. Per Capital Income

9. Personal Income

10. Disposable Income

Methods of Computation of National Income

Product Method Income Method

Expenditure Method

Usefullness and Limitations of

National Income

System of Regional Accoutns

in India

Question:

What is the purpose that SNA serves?

Answer:

1. It provides a comprehensive accounting framework

2. For compiling and reporting Macroeconomic statistics

3. It helps in analyzing and evaluating performance of an economy.


1.3. Circular Flow of Income

➢ In Production phase, firms employ factors of production for production of goods and

provision of services.

➢ In the next phase of Income distribution, firms pay factor incomes to the factors of

production in the form of rent, wages, interest and profits towards land, labor, capital

and entrepreneurship.

➢ In the expenditure or disposition phase, the income received by factors of production

is spent on various goods and services, and such expenditure leads to further production

of goods and services.

➢ In the circular flow, the same income flows at three different levels and thus National

Income can be computed and analyzed from three different angles, viz. Flow of

Production, Flow of income and Flow of expenditure.

Production of Goods

and Services

Distribution as Factor Incomes

(Rent, wages, int, profit)

Disposition -Consumption/Investment


2. CONCEPTS OF NATIONAL INCOME

2.1. Gross Domestic Product

➢ Gross Domestic Product (GDP) refers to the value of goods and services produced in a

country.

➢ GROSS refers to the value being gross of depreciation. Depreciation represents the

value of Capital Expenditure made for production of goods and provision of services,

which is one the factors of production. As the benefit of capital expenditure generally

extends beyond one year, depreciation is charged every year as an expense over the

years to which the benefit of such capital expenditure is spread. Such amount of

depreciation is included in the value of GDP which is a measure of National Income, as

it represents the value attributed to one of the factors of production, i.e. Capital

Expenditure.

➢ DOMESTIC refers to the goods or services

o being produced within the domestic territory of the country; or

o Produced by Resident Production Units. Resident Production Units are those

units producing goods or providing services having predominant economic

interest in the domestic territory of a country.

o Such units may or may not be citizens of the country or incorporated in the

said country. Such units will be said to have a predominant economic interest

in the domestic territory of the country if the units have engaged in purchase

or sale of goods in the country for a period of one year or more.

➢ GDP at Market Prices: GDP is a measure of all the goods produced and services provided

in the country. However, the quantities of various goods and services cannot be

summed to arrive at GDP for lack of common unit of measurement. E.g. Cloth produced

is measured in square yards, while crude oil is measured in barrels.

Hence, the value of all the goods and services produced within the country is generally

determined in terms of money, where the value is determined based on the money that

is to be paid or can be received on purchase or sale of such goods or services in a

market place. Such value us generally known as the Market Price. Thus, GDP is the

value of goods and services generally measured at Market Prices.

➢ Value of only final goods and services to be considered in computation of GDP.


Example 1:

Production cycle of manufacturing thread involves

• Production of cotton

• Manufacture of thread

Market Price / Value of cotton = INR 50

Market Price / Value of thread = INR 70

At each stage, there is production of goods like cotton, thread and yarn. Hence while

computation of GDP, value of all the three should be included.

However, if value of all the three final products is added up (50+70 = INR 120), it will

result in double counting, as explained below:

Cotton is a raw material used in manufacture of thread, and thread is a raw material

used in manufacture of yarn. These goods which are consumed as inputs by a process of

production are called intermediate goods.

Hence, the value of the thread may be expressed as

INR 70 = INR 50 (value of cotton which is a raw material)

+

INR 20 (other costs of manufacturing thread)

INR 20 is the value added by the process of manufacturing of cloth.

The value of thread is hence included at INR 70 in computing GDP. However, the value

of cotton (INR 50) is already included in the computation of GDP directly, and if the

value is again included as part of thread, it will lead to double counting.

Hence, we exclude the value cotton while computing GDP. Only goods sold to the

ultimate consumer are counted. These goods which are not intermediate goods

consumed in any production process, and are sold directly to ultimate consumers for

consumption are called as “Final Goods”.

Thus, while computing GDP, only the value of final goods (thread in the given example)

is to be considered.


GDP will be computed as:

Value of total output – Value of Intermediate Output = INR 120 – INR 50 = INR 70

Note: The value of cotton (INR 50) is ignored and is not included in GDP as it is already

included in the value of thread.

GDP = Value of Output in the Domestic Territory – Value of Intermediate

Consumption

GDP = ∑ Value Added

➢ Value of only Economic goods should be considered for computation of GDP

Activities, like child rearing, hobbies like playing guitar, collecting stamps, painting, or

playing football etc., which cannot be assigned a monetary or market value and which

are not generally exchanged in a market place are called Non Economic activities. Such

activities are excluded from GDP.

Hence, GDP is the market value of “Economic” Goods and Services.

Note: According to the production boundary defined in the System of Nation

Accounts, value of production out of activities like agriculture, fishing, forestry etc.

should be included in GDP, even if such goods are consumed by the producer himself.

➢ The goods and services considered for the purpose of computing GDP must be

produced during a given time interval.

Example 2:

Manufacture and sale of chocolates

At the end of Year 1:

Opening Stock = 0 Units

Production = 20,000 Units

Sales = 0 Units

Year 0 / Today

Year 1

Year 2

Production: 20,000 Units

Sales: Nil Production: 10,000 Units

Sales: 5000 Units


Question:

Define Gross Domestic Product (GDP)

Answer:

o GDP is a measure of Market value

o Of Final, Economic Goods and Services (Excludes Intermediate goods)

o Gross of Depreciation

o Produced in the Domestic Territory / by Resident Production Units

o During a Given period of time.

Closing Stock = 20,000 Units

At the end of Year 2:

Opening Stock = 20,000 Units


Sales = 5000 Units

Closing Stock = 25,000 Units

Points to note:

1. It is the value of goods produced that is included in GDP, irrespective of value of

goods sold or exchanged during the period.

2. Increase in closing stock is generally due to production during the period, and is

hence included in computing GDP. Increase in the closing stock from Year 1 to Year

2 is 5000 Units (25,000 Units – 20,000 Units). Such increase is due to production

during the year of 10,000 Units, however there is a decrease also of 5,000 Units from

the stock due to sale of goods, hence the net increase is only 5,000 Units.

3. Value of sale of goods produced in earlier period is not included in GDP of current

year.

4. Expenditure incurred for the purpose of production only is included in valuing the

goods produced during the period for inclusion in computing GDP. Other Monetary

transactions like borrowings, investments, stocks and bonds are to be excluded.

5. Sale of second hand goods is not included in computing GDP as they were included

when they were produced. Hence, they will not be included again during sale.

This is known as the “FLOW” concept. Production of goods and services is not a one-

time activity. It’s a flow. And hence GDP is computed for a given period. So GDP is a

“Flow” measure of output per time period.


➢ Summary of all inclusions and exclusions for computation of GDP –

Inclusions Exclusions

Depreciation Financial Transactions

Includes Non-citizens of the country if Resident Production Unit

Goods produced outside the territory of the country even if by Indian citizens

"Economic" goods and services are included Produce out of illegal activities (Like Gambling, narcotic drugs)

Intermediate Goods

Non-Economic goods/services

Produced goods, even of not sold/exchanged Exchange of goods which were not produced in the current period

➢ Real GDP and Nominal GDP

GDP is generally at Market Prices

Value of goods to be included in GDP = Quantity X Market Price

Nominal GDP: The actual average price level subsisting in the country currently is

considered as the Market Price to arrive at the GDP. Hence it is also known as GDP at

current prices.

Real GDP: It refers to the value of Gross Domestic Product in terms of constant prices

of a chosen base year. The average price level of a chosen base year is considered as

the Market Price for computing GDP. In India, 2011-12 is taken as the base year to

compute Real GDP.

Example 3:

In case of a chocolate manufacturer,

In 2011-12,


Market Price = INR 50 per unit.

Contribution to GDP by the Manufacturer = 10,000 Units X INR 50 = INR 500,000

In 2015-16,

There was a strike during the year by the workers and total production fell


Market Price = INR 80 per unit.

Contribution to GDP by the Manufacturer = 7,500 Units * INR 80 = INR 600,000


NDP = GDP - Depreciation

Points to note:

1. The total contribution to GDP increased from year 2011-12 to year 2015-16 despite

there being a strike during the year by the workers.

2. If there was no price rise between 2011-12 and 2015-16, the contribution to GDP by

the manufacturer would have been

7500 units * INR 50 = INR 3, 75,000

3. The increase in contribution to GDP of the chocolate manufacturer in the year 2015-

16 despite the strike that took place was because of a rise in prices, but not because

of an increase in the real output.

4. Due to increase in the average price level in the country, the nominal GDP would rise

without any real increase in physical output. In order to depict the increase in output

because of real increase in physical output in the country, we may choose a base

year, and consider average prices of that year to compute GDP. This is known as Real

GDP or GDP at constant prices.

2.2. Net Domestic Product (NDP)

➢ NDP is a measure net of Depreciation.

➢ NDP excludes the cost of capital consumption, which was included in GDP in the form

of Depreciation.

2.3. Gross National Product (GNP)

➢ For the computation of GDP, the value of goods and services produced within the

domestic territory of the nation is considered, including production by Resident

Production Units, even if such units are not citizens of the country or incorporated in

the country.

➢ GDP excludes production by Indian citizens outside the country, as the same is not

produced within the domestic territory.

➢ However, GNP includes the earnings of the country’s residents and corporations

incorporated within the country earned overseas. GNP excludes the earnings of foreign

residents or foreign corporations from production within the domestic territory.

➢ The term “National” in GNP refers to “Normal residents” of the country even if they are

working outside or are set up outside the country.

(India is used to refer to the domestic territory or domestic country for convenience)


GNP = GDP + earnings of Indian Corporations / Indian residents Overseas –

earnings of foreign residents or corporations in India

GNPMP = GDP MP + Net Factor Income from abroad (NFIA)

NNPMP = NDP +NFIA

= GNP – Depreciation

= GDP – Depreciation + NFIA

Important:

1. The difference between a measure which is “Gross” and a measure which is

“Net” is Depreciation.

2. The difference between a measure which is “Domestic” and a measure which

is “National” is NFIA.

➢ Earnings of Indian Corporations / Indian residents Overseas net of earnings of foreign

residents or corporations in India is known as Net Factor Income from Abroad (NFIA).

➢ NFIA will be positive if earnings of Indian residents overseas exceed the earnings of

foreign residents in India, and it shall be added while computing GNP.

➢ NFIA will be negative if earnings of foreign residents in India exceed the earnings of

Indian residents overseas, and it shall be subtracted while computing GNP.

2.4. Net National Product (at Market Prices)

➢ Net National Product at market prices is a measure of the market value of all the final

economic goods and services produced by the normal residents within the domestic

territory of a country including Net Factor Income from Abroad (NFIA) during an

accounting year excluding depreciation.


Example 4:

In the example of the chocolate manufacturer referred in Example 3, the value of the

chocolate in the market was INR 50.

Taking the example further, to manufacture the chocolate, the manufacturer has incurred

costs (Payments to factors of production) which amounted to INR 40.

For permitting the manufacturing unit to be set up, the manufacturer paid an amount

which came to be INR 7 per unit. This is also known as taxes on production (E.g.

Factory License, pollution tax etc. unrelated to quantum of production)

As the manufacturer wanted to sell the chocolates, the Government wanted a share from

such sale and the manufacturer further charged INR 3 per unit to be collected from the

customer which could be paid to the Government. Such taxes are known as product

taxes and may be imposed on manufacture or sale of goods/services. E.g. Excise Duty,

Sales tax, GST etc.

The total price of the product which a customer had to pay for purchasing was

50 = 40 + 7 + 3

In the given example,

Market Price = 50

Factor Cost = 40

Difference = Indirect Taxes = 10

2.5. GDP at Factor Cost

➢ The various components generally comprising the market price of goods and services is

depicted below:

Market Price

Factor Cost

Rent (Land)

Wages (Labor)

Interest (Capital)

Profit (Entreprenuer)

Indirect Taxes

Product Taxes

Production Taxes

Subsidy


Example 5:

Further to Example 4, the Government gives a subsidy to the chocolate manufacturer of

INR 5 per unit of chocolate sold.

In this case the total price to be paid by the customer would reduce to INR 45 as the

balance of INR 5 is given by the Government to the producer.

That is,

Market Price = 45 = 40 + 10 - 5

Market Price = 45

Factor Cost = 40

Difference = Indirect Taxes – Subsidy = 10 – 5 = 5

Hence,

Market Price = Factor Cost + Indirect Taxes – Subsidy

Factor Cost = Market price + Subsidy – Indirect Taxes

GDPFC = GDP at market prices + Subsidy – Indirect taxes

NDPFC = GDPFC – Depreciation

= NDP at Market Prices + Subsidy – Indirect Taxes

➢ GDP measured at Factor Cost instead of Market Prices is known as GDP at Factor Cost

(GDPFC). GDPFC excludes the value of taxes, and also excludes the effect of subsidy (The

amount of subsidy is added back to nullify its effect).

2.6. Net Domestic Product at Factor Cost (NDPFC)

➢ NDPFC refers to the total factor incomes earned by the factors of production, excluding

depreciation.


NNPFC = NNPMP + Subsidy – Indirect taxes

= NDPFC + NFIA

Question:

Define Nation Income

Answer:

National Income refers to

o The Factor Income

o Accruing to Normal residents of the country

o During a given period in time

o Net of Depreciation

Per Capita Income = GDPMP / Population

2.7. Net National Product at Factor Cost (NNPFC)

➢ Net National Product at Factor Cost refers to the factor income accruing to the normal

residents of the country during a year, net of depreciation. NNPFC is also known as

National Income.

2.8. Per Capita Income (PCI)

➢ Per Capita Income is an indicator of standard of living of a country. While PCI is a

measure of the average income in a country, it may not be an adequate measure of

welfare because it does not reflect the distribution of such income among people in the

country.

2.9. Personal Income

➢ Personal Income is the income received by persons from all sources, including income

from non-productive activities.

➢ Personal income includes all income received during the current period, which may or

may not have been earned in the current period.

➢ Incomes not earned only in the current period but received in the current period to be

included. Example – retirement benefits received, family pension, welfare payments

(Known as “Transfer Payments”) etc.


Personal Income = National Income + Income received but not earned –

Income earned but not received

Disposable Income = Personal Income + Personal income taxes

Summary of Measures of National Income:

1. GDPMP

2. NDPMP = GDPMP – Depreciation

3. GNPMP = GDPMP +/- NFIA

4. NNPMP = GNPMP – Depreciation

= NDPMP +/- NFIA

5. GDPFC = GDPMP + Subsidy – Indirect taxes

6. NDPFC = GDPFC – Depreciation

7. NNPFC [National Income] = NDPFC + NFIA

8. Per Capita Income = GDPMP / Population

9. Personal Income = NNPFC + Income received but not earned – Income earned but

not received

10. Disposable Income = Personal income – Direct/ Personal Income taxes

➢ Income received from non-productive activities, for example, scholarship received by a

student, compensation for natural calamities etc. also shall be included for computing

Personal Income.

➢ Income earned during the year but not received shall be excluded for Personal Income

computation. Example – Employer’s contribution to retirement benefits every year is

earned year by year but not received, hence is excluded.

2.10. Disposable Income

➢ Disposable Income is the income that is actually available for an individual for spending

or saving after paying personal income taxes to the Government.


3. METHODS OF COMPUTATION OF NATIONAL INCOME

The three methods for computing National Income are:

1. Product method – It measures the value of goods and services produced. It measures

National Income at the first phase of Circular flow of Income (Para 1.3), viz. Production

phase.

2. Income method – It measures the contribution of various factors of production and the

factor payments made for production of goods and services. It measures National Income

at the second phase of Circular flow of Income, viz. Income phase.

3. Expenditure method – This method measures the expenditure made by various persons

across the country and is a measure at the third phase of Circular flow of Income, viz.

Expenditure phase.

3.1 Product Method

➢ It is also known as the Value added method or Industrial Origin Method or Net Output

Method. The value added method measures the contribution of each producing

enterprise in the domestic territory of the country in an accounting year.

➢ Computation of National Income under the Product method:

Step 1 – Identification of all the producers and classification based on sectors

Producers

Primary Sector

Farming, dairy, fishing, mining, quarrying etc.

Secondary Sector

Manufacture of consumer goods, pharmaceuticals,

electricity etc.

Tertiary/Service Sector

Provision of services like marketing,

advertising, finance, banking etc.


Step 2 – Computation of Gross Value Added (GVA)

➢ The value of intermediate goods and intermediate consumption must be excluded while

computing the National Income. Hence, the value of intermediate consumption is

reduced from the value of all output to arrive at GVA.

➢ GVAMP = Value of all output – Intermediate consumption

Note: Only the value of goods produced shall be considered, irrespective of the sales

made in the particular year. Hence, the value of output in GVA shall be the value of

goods produced in the given period.

GVAMP = Value of output – Intermediate consumption

= Value of production – Intermediate consumption

= [Value of sales + Closing stock – Opening Stock] – Intermediate consumption

= Value of sales + changes in stock – Intermediate consumption

Step 3 – Estimation of National Income

➢ Net Value Added (NVAMP) = GVAMP – Depreciation

➢ Net Value Added (NVAFC) = NVAMP + Subsidy – Indirect taxes

➢ Net National Product (NNPFC) = NVAFC + NFIA → NATIONAL INCOME

3.2 Income Method

➢ Under the Income Method, computation of National Income is done at the Flow of

Income angle of the circular flow of income.

➢ Production of goods and services is the combined effort of all the factors of production.

Whatever is earned at the production stage is distributed to all the factors of production

in the form of factor incomes.

➢ The Income method measures the income that is paid to all the factors of production by

all the production units in a country. Since the measure is of payments to factors of

production, the measure we start with under income method is already at factor cost

and is not at market prices.

➢ The sum of all the payments to the Factors of production within the domestic territory

of a country = Net Domestic Product at Factor cost (NDPFC).


➢ When one person provides a combination of various factor services, it may be difficult

to bifurcate and identify each factor income separately. The factor payments made for

various factor services, which cannot be distinguished, is known as the “Mixed Income

for the self-employed”. Example – In case of a famer working on a piece of land bringing

his own capital,

Note: Transfer payments like retirement benefits, scholarships etc. should be excluded

from National Income.

➢ NDPFC

= Compensation of employees + Rent + Interest + Profit + Mixed Income of self-employed

Operating surplus

➢ NNP FC = NDPFC + NFIA → NATIONAL INCOME

➢ Hence, National Income by Income method = Compensation of employees

+ Rent

+ Interest

+ Profit

+ Mixed Income of self employed

+ NFIA

3.3 Expenditure Method

➢ Under the Expenditure Method, computation of National Income is done at the Flow of

expenditure angle of the circular flow of income.

➢ The broad categories of persons who spend money in an economy are as shown below:

Persons spending money

Consumers

Expenditure on consumer goods or

assets

Producers/Organsiation

For purchase of raw material (intermediary

goods), making payments to factors of production

Government

Expenditure for welfare of people, military forces, education, law and order

etc.


➢ The Gross Domestic Product under Expenditure method shall be the aggregate of the

expenditure made by all the three entities – consumers, organizations and the

government. Since there is an aggregation of expenditure, this measure is at “market

price” (including indirect taxes).

3.3.1 Components of GDPMP under the Expenditure method:

1) Private Final Consumption Expenditure (PFCE)

➢ This refers to the consumption expenditure made by the final consumers.

➢ Expenditure made for consumption refers to the money spent on purchase of goods

or services sold in the market. Hence, whatever goods are sold in the market by a

person is bought by another person.

Hence, Consumption Expenditure = Goods sold in the domestic market * the market

price

Note: Even goods produced and consumed by self shall be included.

➢ In PFCE,

“Private” refers to expenditure only by common people and final consumers, and

not the Government.

“Final” refers to expenditure only on final goods and the value of intermediary

goods and services shall be excluded.

“Consumption Expenditure” refers to consumption of goods and services.

Expenditure on capital items (Land, building, car etc.) does not form part of PFCE.

➢ Investment in foreign financial assets like shares of foreign companies, bonds,

depository receipts shall be included in PFCE. However, only NET Investment is

considered, i.e., any foreign investment made in financial assets in India shall be

reduced, and only the net investment shall be considered.

GDPMP

PFCE GFCEGross Domestic

Capital Formation

Assets built and used

Change in Inventory

Net Exports


2) Government Final Consumption Expenditure (GFCE)

➢ GFCE is Similar to PFCE, but it refers to the consumption expenditure made by the

Government for all activities like healthcare, defense, education etc.

Note: The Government also pays people compensation for loss due to natural

calamities, pensions for employees, scholarships to students, unemployment

allowance etc. These are known as Transfer Payments. These payments are an

expenditure to the Government; however, they shall not form part of the GDP.

3) Gross Domestic Capital Formation

➢ Here, we include all that capital expenditure which we excluded from PFCE and

GFCE.

➢ It includes expenditure made on houses, cars, land, valuable items like diamonds,

or a valuable painting etc. by individuals and the Government. It also includes

expenditure made by the Government on roads, bridges, dams, defense equipment

etc.

➢ If any expenditure is made on capital asset to be used, then such expenditure shall

form part of “Gross Domestic Capital Formation”. However, if capital assets are

regularly bought and sold, then the change in inventory (Closing inventory – Opening

inventory) shall form part of “Gross Domestic Capital Formation”.

Note: Only the value of final goods is included. Value of any intermediate

consumption shall be excluded from Gross Domestic Capital Formation.

Further, only expenditure made in the domestic territory is included.

4) Net Exports

➢ In PFCE and GFCE, only the goods sold in the domestic market are included.

However, GDO should include all the goods produced within the domestic territory,

even if they are sold outside the domestic territory or exported. Similarly, goods

produced outside the domestic territory, which are imported and sold within the

domestic territory, are included in PFCE and GFCE. However, since these goods are

not produced within the domestic territory, the value of such goods should be

excluded for computing National Income. Hence, as part of Net Exports, all the

Exports are added and all the imports are reduced.

Net Exports = Exports – Imports


Question:

Compute National Income

Consumption 750

Investment 250 Government Purchase 100

Exports 100

Imports 200

Answer:

As the question gives PFCE, GFCE, Capital formation and net exports, National Income

shall be computed under the Expenditure method.

National Income = PFCE, GFCE, Capital formation (Investment) + Exports – Imports

= Consumption (750) + Government expense (100) + Investment (250) + Exports (100)

– Imports (200)

= 1000 = National Income

3.3.2 Estimation of National Income

➢ National Income refers to the Net National Product at factor cost. Hence, NNPFC shall

be arrived at as follows:

NNPFC = GDPMP - Depreciation + NFIA – Indirect taxes + Subsidy


Question:

Compute

(a) GDPMP

(b) National Income

Inventory Investment 100

Exports 200

Indirect taxes 100

NFIA -50

Personal Consumption Expenditure 3500

Gross residential construction investment 300

Depreciation 50

Imports 100

Government Purchases of goods and services 1000

Gross public investment 200

Gross business fixed investment 300 Answer: Expenditure Method

Each elements given in the question are divided into the following buckets:

PFCE GFCE Gross Domestic Capital Formation

Net Exports Relevant for NNPFC

Personal consumption expenditure (3500)

Govt purchase of goods and services (1000)

Inventroy investment (100)

Exports (200) Indirect taxes (-100)

Gross residential construction investment (300)

Imports (-100) NFIA (-50)

Gross business fixed investment (300)

Depreciation (-50)

Gross public investment (200)

3500 1000 900 100 -200

(a) Computation of GDPMP

GDPMP = PFCE + GFCE + Gross domestic capital formation + Net Exports

= 3500 + 1000 + 900 + 100

= 5500

(b) Computation of National Income

National Income = GDPMP – Indirect taxes – Depreciation +NFIA

= 5500 – 100 – 50 – 50

National Income = 5300


Question:

(a) Compute GDPMP using income method

(b) Compute GNPMP using income method

(c) Compute GDPMP and GNPMP using expenditure method and compare results

Personal Consumption 7314

Depreciation 800

Wages 6508

Indirect business taxes 1000

Interest 1060

Domestic investment 1442

Government expenditures 2196

Rental Income 34

Corporate Profits 682

Exports 1346

NFIA 40

Mixed Income 806

Imports 1408

Answer:

Each elements given in the question are divided into the following buckets:

GDP MP (Income method) GDP MP (Expenditure method) GNP MP

Wages (6508) Personal consumption (7314) NFIA (40)

Interest (1060) Domestic investment (1442)

Rental Income (34) Exports (1346)

Corporate profits (682) Imports (-1408)

Mixed Income (806) Government expenditure (2196)

Depreciation (800) - As the total of factor payments gives us NDP at FC and we need GDP at FC

Indirect taxes (1000) - As we want to arrive at MP, and factor payments are at factor costs

10,890 10,890 40


(a) GNPMP as per Income method = 10,890 (Refer table above)

(b) GNPMP as per Income method = GNPMP + NFIA

=10,890 + 40

= 10,930

(c) GDPMP as per Expenditure method = 10,890 (Refer table above)

GNPMP as per Expenditure method = GNPMP + NFIA

=10,890 + 40

= 10,930

With the above computation, it is seen that GDPMP and GNPMP are the same when computed as per

Income method and Expenditure method.

Question:

Compute GNPMP using Value Added Method

Value of output in primary sector 500

NFIA -20

Value of output in tertiary sector 700

Intermediate consumption in secondary sector 400

Value of output in secondary sector 900

Government transfer payments 600

Intermediate consumption in tertiary sector 300

Intermediate consumption in primary sector 250

Answer:

National Income under Value added method –

Step 1:

Total value of output = Value of output in all three sectors = Primary (500) + Secondary (900) + Tertiary

(700) = 2100

Step 2:

GVA = GDPMP = Total Value of output – Intermediate consumption = 2100 – Intermediate primary (250)

– Intermediate secondary (400) – Intermediate tertiary (300) = 1150

Step 3:

GNPMP = GDPMP + NFIA = 1150 – 20 = 1130.


3.4 Purpose for three methods for computation of National Income

➢ It gives us three different views of the same economy. Ideally, National Income using all

three methods should be the same. However, there may be differences in National

Income when computed using various methods due to the following reasons:

o Non-availability of information

o Information may escape the attention of the estimator

Such differences may direct towards existence of loopholes in the economy.

➢ The method of computation may depend on the nature of the economy. In case of an

economy which is developed and there is adequate information through compliance of

procedures like filing timely Income tax returns etc., then Income method may be the

easiest method for computation of National Income.

➢ Further, in complex countries like India it may not be possible to use only one method

to estimate National Income. Hence, different methods may be used for different

sectors or industries within the same country. For example, in Agriculture sector, most

producers are exempt from paying income taxes, so information about their incomes

may not be available to compute National Income under Income method. The best

method for such sector may be Product Method.

4. USEFULNESS AND LIMITATIONS OF NATIONAL INCOME

4.1 Usefulness and Significance

➢ In understanding the economy –

o National Income is the value of goods and services. It measures the level of

economic activity that takes place in a country, which is a measure of demand, and

that in turn evaluates the performance of the country.

o It helps in analyzing statistics through ratios like Investment to GDP, Government

expenditure to GDP, taxes to GDP. This assists the Government in making policies

for growth.

o National Income measures may help in comparing the standards of living of various

countries, their strength, and economic conditions.

➢ To the businesses –

o National Income talks measures the level of income in an economy, which in turn

determines demand. These statistics help businesses forecast demand.

➢ To the Govt. –

o National Income statistics like GDP, Per Capita Income etc. depict economic

welfare of the country.


o Helps the Government in understanding each sector, evaluate trends in sectors and

their growth for formulating sector wise policy. It also helps in making projections

and development trends of the economy.

o National Income measures help evaluate the performance of Government policies.

Growth in GDP or Per Capita Income on implementation of policies may be

reflective of their success.

4.2 Limitations And Challenges In Computation Of National Income

GDP measures pose the following challenges –

➢ Problems in the computation –

o Difficulty in making distinction between Final goods and Intermediate goods

o Issue of non-inclusion of transfer payments

o Valuation of new goods at transfer prices

o Issues relating to self-consumption

o Lack of adequate data

o Production and income hidden from Govt. – tax evasion or illegal activities

o Absence of recording of income due to illiteracy

➢ Ignoring other measures of welfare –

o GDP concerns only about output. Technological innovations are ignored which

are true measures of growth

o GDP and Per Capita Income are inadequate measures of welfare, and may not

reflect actual income distribution in the economy.

o Volunteer work done without any remuneration, though it contributes to social

welfare is ignored, as it is not economic activity.

o Non-economic contributors like health of people, education levels, political

participation, gender equality, fairness are ignored.

o Economic “bads” like crime, pollution, traffic congestion, though they affect

people’s wellbeing, are ignored in National Income measures.

o National Income measures do not make a distinction between activities that

make us better off, and those that prevent us from becoming worse off.

5. SYSTEM OF REGIONAL ACCOUNTS IN INDIA

➢ India being a vast country, with many states and Union Territories, each of these states

assume their own importance, and it is imperative to understand the performance of

each of these states for understanding performance of the country as whole.

➢ Thus, there exists a system of regional accounts in India.

➢ Each state and Union Territory computes Net State Domestic Product (NSDP), which is

the value of all the goods and services within domestic territory of a state within a given

period, net of depreciation.

➢ Per Capita = NSDP / Mid-Year projected (Average) population of the state


➢ Directorates of Economics and Statistics of the State (DES) do the computation of measures

under the system of regional accounts, with assistance form the central organization.

➢ DES organization computes Income of the state based on various activities undertaken in

state.

➢ However, activities like defense, railways, banking, and central government

administration, which are undertaken across state boundaries and may not be assigned to

any one state directly, are accumulated for the nation as a whole, and then allocated to

each state separately Such activities are known as Supra Regional Activities.

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