National Income

NATIONAL INCOME

PECIAL THANKS TO Dr. ANNADURAI C

PRESENTED BY:

ANURADA S.

SUJIT KUMAR

SHIVAM SETH

AURIPRYADARSHNI

INDHU RAMCHANDRAN

© VIT BUSINESS SCHOOL , VELLORE, TAMIL NADU.

NATIONAL INCOME:WHAT IS NATIONAL INCOME?• National Income is the sum of all factor

earnings from current production of goods andservices.

• Factor earnings are incomes of factor ofproduction: 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.

MARKETS FOR FACTOR OF PRODUCTION

FINANCIAL MARKETS

GOVERNMENT

MARKETS FOR GOODS AND SERVICES

HOUSEHOLD FIRM

INCOME

PRIVATE SAVING

TAXES

CONSUMPTION FIRM REVENUE

FACTOR PAYMENTS

INVESTMENT

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

GOVERNMENT PURCHASES

PUBLIC SAVING

CONCEPTS OF NATIONAL INCOME:

Gross Domestic Product

Gross National Product

Net National Product

Personal Income

Disposable Personal Income

Corporate Income

Private Income

Real Income

Domestic Income

Per Capita 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 statement1. 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 Abroador

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

GROSS PRIVATE INVESTMENT (I)

NET EXPORTS

GOVERNMENT PURCHASES

CONSUMPTION EXPENDITURE

GROSS PRIVATE INVESTMENT

NET EXPORTS

GOVERNMENT PURCHASES

CONSUMPTION EXPENDITURE

LESS DEPRECIATION

NET PRIVATE INVESTMENT

NET EXPORTS

GOVERNMENT PURCHASES

CONSUMPTION EXPENDITURE

LESS NET INDIRECT TAXES

WAGES+

PROFIT+

INTRESTS+

RENT

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 yearin 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, andrent) from rest of the world and subtract payments offactor 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 thedepreciation of capital (the economy’sstock plant, equipment, and residentialstructures that wears out during theyear.

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 nationalincome accounts measure of theincome received by person fromall sources.

• When we subtract personal taxpayments 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

NET FACTOR INCOME FROM ABROAD

PROFITS

INTRESTS

RENT

WAGES AND SALARIES

CONSUMPTION+

SAVINGS

LESS PERSONAL TAXES

LESS1.UNDISTRIBUTED CORPORATE PROFITS.2. CORPORATE TAXES3. SOCIAL SECURITY CONTRIBUTION.

PLUS TRANSFER PAYMENTS

NATIONAL INCOME PERSONAL DISPOSABLE INCOME

(NI OR NNPFC) INCOME PI DI

Corporate Income & Domestic Income

• CORPORATE INCOME: Incomes andprofits of companies or publiccorporation.

• DOMESTIC INCOME: Incomegenerated by the factors ofproduction within the country fromits own resources.

Per Capita Income

• Average earning of an individualin a particular year. Per capitaincome reflects gross nationalproduct per person.

Per capita income = national income of a country/population of a country

Private Income

• Any type of income received by a privateindividual or household, often derived fromoccupational activities or income of anindividual that is not in the form ofa 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 industrialsectors such as agriculture, fishing, mining, construction,manufacturing, trade and commerce, transport, communication andother services.

• The net value added at factor cost (NVAFC) by each productiveenterprise as well as by each industry or sector is estimated.

• In order to arrive at the net value added factor cost by an enterprisewe have to subtract the following from the output of an enterprise:

1. Intermediate consumption which is the value of goods such as rawmaterials, 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 nationalincome.

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

DIVIDENDS

UNDISTRIBUTED PROFITS

CORPORATE INCOME TAX

INTREST

RENT

MIXED INCOME OF SELF-EMPLOYED

COMPENSATION OF EMPLOYEES

NET FACTOR INCOME FROM

ABROAD

PROFIT

INTREST

RENT

MIXED INCOME OR SELF-EMPLOYED

COMPENSATION OF EMPLOYEES

CONSUMPTION OF FIXED CAPITAL

NET INDIRECT TAXES

DIVIDENDS

UNDISTRIBUTED PROFITS

CORPORATE INCOME TAX

INTREST

RENT

MIXED INCOME OF SELF EMPLOYED

COMPENSATION OF EMPLOYEES

CONSUMPTION OF FIXED CAPITAL

PROFIT

INTREST

RENT

MIXED INCOME OF SELF EMPLOYED

COMPENSATION 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 fromother countries are termed as imports denoted by M.

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

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

GROSS DOMESTIC CAPITAL

FORMATION

GOVT. FINAL CONSUMPTION EXPENDITURE

PRIVATE FINAL CONSUMPTION EXPENDITURE

NET EXPORTS(X-M)

NET EXPORTS(X-M)

PRIVATE FINAL CONSUMPTION EXPENDITURE

NET DOMESTIC CAPITAL

FORMATIONGOVT. FINAL

CONSUMPTION EXPENDITURE

LESS DEPRECIATION

LESS NET INDIRECT TAX

NET FACTOR INCOME FROM ABROAD

NET DOMESTIC CAPITAL FORMATION

PRIVATE FINAL CONSUMPTION EXPENDITURE

NET EXPORTS(X-M)

GOVERNMENT FINAL CONSUMPTION EXPENDITURE

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 ideaof quantity and value of their output and donot follow the practice of keeping regularaccounts.

• Occupational specialization is incomplete.

• In developing countries production, bothagricultural and industrial is unorganized andscattered in these countries. This makes thecalculation 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.GREGORYMANKIW, 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 intentionallycopied from this site, if there is any resemblance with the onlinematerial it may be just a coincidence and we Regret for anyinconvenience caused.

Thank you

© VIT BUSINESS SCHOOL , VELLORE, TAMIL NADU.