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Subjects /Indian Economy / National Income

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Introduction
27 Mar 2021

National Income is the final output of all new goods and services a country produced in one year.

A variety of measures including gross domestic product, gross national product, net national income, and adjusted national income are used to estimate total economic activity in a country or region.

GDP of a country

Gross Domestic Production (GDP) – it is the total (Market) value of all the goods and services finally produced within the domestic boundaries of a country, over a period of time of 1 year.

GDP is calculated at 2 prices, at Current Price and Constant Price. When it is calculated at current price, it is called Nominal GDP and when it is calculated at Constant Price, it is called Real GDP.

GDP at Current Price is:

Nominal GDP

GDP at Constant Price is:

Real GDP (calculated at base year)


GDP Deflator

When Nominal GDP is divided by Real GDP and the output is multiplied by 100, we get GDP deflator.

          GDP Deflator = (Nominal GDP/Real GDP) x 100

 GDP at Factor Cost

There are 4 factors of production – Labour, Land, Capital and Entrepreneurship.

  1. Labour = Wages
  2. Land = Rent
  3. Capital = Interest
  4. Entrepreneurship = Profit

When cost of these factors are considered, the result is GDP at Factor Cost.

How to calculate GDP at Market Price?

(Factor Cost + Taxes – Subsidy = Market Price)

GDP at Market Price = GDP at factor cost + Taxes – Subsidy

Gross National Production-GNP

Gross National Production is calculated from GDP.

When we add Net Income from abroad (Export – Import) to GDP, we get GNP.

GNP = GDP + Net Income from Abroad.

Net Income from abroad = Import - Export


Net National Production (NNP)

If we deduct Depreciation from GNP, we get NNP

NNP = GNP - Depreciation

It is NNP at Market Price

NNP at Factor Cost is National Income

NNP at factor cost = NNP (at Market Price) – Taxes + Subsidy


Per Capita Income

If we divide National Income with total population of a country, we get Per Capita Income.

Per Capita Income = National Income/Population.

Methods to calculate GDP and National Income

There are 3 main methods to calculate the GDP and National Income of a country, these are:

  1. Income Method
  2. Expenditure Method
  3. Production or Gross Value Added (GVA) Method

In India we use Income method and Production or Gross Value Added method.

Income Method

(Wages + Rent + Interest + Profit) at Factor Cost + Taxes – Subsidy

To adjust the Inflation:

GDP at Constant Market Price.

(Wages + Rent + Interest + Profit) at Current Market Price + Taxes – Subsidy

 

Expenditure Method

= C + I + G + (X – M)

 

Production (GVA) Method

Total sale value – Cost of Intermediate Goods

Activities excluded from calculation of GDP and National Income

GDP doesn’t cover:

  • Underground Economy
  • No-marketed activities (i.e., Household works)
  • Barter exchange not counted.
  • ‘Negative’ externalities (harm to environment)
  • Opportunity cost (child labour) (It is a factor in Human Development Index)
  • Income Inequality (it is measured by Gini’s coefficient)


Activities excluded from the estimation of National Income

  • Intermediate Goods and Services
  • Non-Economic Activities
  • Transfer Payments –
    • Unemployment incentives
    • Payment on welfare schemes
    • Scholarships, etc
  • Capital Gain
  • Illegal Activities

CSO and NSSO

Central Statistical Organisation (CSO)

In 1951, Central Statistical Organisation (CSO) was established.

Its headquarter is in Delhi.

It functions under the Ministry of Statistics and Program Implementation

Its main function is to collect, estimate and publish data of National Income.

Every year it presents its report – ‘National Accounts Statistics’ also known as White Paper.


CSO has divided the whole economy in 3 sectors, these are:

  1. Primary Sector – Agriculture Sector
    • Forests, Fisheries, Mining etc.
    • Primary sector has approximately 14% contribution to GDP
  2. Secondary Sector – Manufacturing Sector
    • Manufacturing, Construction, Electricity etc
    • It has approximately 28% contribution to GDP
  3. Tertiary Sector – Service Sector
    • Insurance, Banking, Transportation, Telecom, Trade, Hotels, etc
    • It has approximately 58% contribution to GDP


National Sample Survey Organisation (NSSO)

  • It was established in 1950, but was reorganised in 1970.
  • Its main function is to collect samples of data for Unorganised Sector of economy.
  • On the basis of its report, Government prepares developmental scheme for the related sectors.