National Income

Economic growth is the change –Increase or decrease in the value of goods and services produced by an economy. If it is positive, it means an increase in the output and the income of a country.

It is generally shown in percentage terms of real gross domestic product (GDP adjusted to inflation) or real GDP.
There are three ways of calculating national income they are

a) Income method
b) Expenditure method
c) Product method

Gross Domestic Product (GDP) – Monetary value of all final goods and services produced in the domestic territory of a country during a year.

Domestic territory includes country’s boundaries, Embassies/consulates, abroad military establishments; ships/aircrafts/Fishing vessels/oil rigs belongings to residents of the country.
Capital goods (e.g. machinery) are included in GDP, but intermediate goods (e.g. raw materials) are not. Same good can be final (you consuming milk) or intermediate (milk in the restaurant) depending on the usage.
Intermediate goods and services are not included to avoid double counting.
Will include the income generated by MNCs in India.

Gross National Product(GNP)
GNP is the total value of final goods and services by normal residents of India within an accounting year. GDP includes the contribution made by non-resident producers -who work in the domestic territory of other countries -by way of wages, rent, interest and profits.

For example, the income of all people working in Indian banks abroad is the factor income earned abroad. Net factor income from abroad is the difference between the income received from abroad for rendering factor services and the income paid for the factor services rendered by non-residents in the domestic territory of a country. GNP is, thus, the sum of GDP and net factor incomes from abroad.

In brief, GNP = GDP + NFIA (net factor income from abroad).
NFIA may be positive or negative. In case of India, it is negative; so our GDP > GNP
Net value = Gross –Depreciation

In the production process a country uses machines and equipments. When there is depreciation, we have to repair or replace the machinery. The expenses incurred for this are called the depreciation expenditure.

Net Domestic Product (NDP) = GDP –Depreciation
Net National Product (NNP) = GNP –Depreciation
NNP = NDP + NFIA (similar to the relation between GNP & GDP)

Theoretically ‘net’ is a better measure of the health of an economy than ‘gross’ but it is difficult to estimate net values –so GDP & GNP are commonly used measures.

National Income: (NI)
National income is calculated by deducting indirect taxes from net national product and adding subsides. National Income (NI) is the NNP at factor cost.

NI= NNP- Indirect taxes + subsidies.
Per Capita Income is per capita GDP: GDP divided by midyear population of the corresponding year.
Factor Cost (FC) vs. Market Price (MP)

FC includes rent, wages, interest and profit.
MP = FC + Net Indirect Taxes
a. Net Indirect Taxes = Indirect Taxes –Subsidies
b. Therefore, GDP at MP = GDP at FC + Net Indirect Taxes
Direct Taxes imposed on income and wealth of people and corporates (Income tax, wealth tax etc); indirect taxes on goods and services (sales tax, excise duty).
FC is used for estimating growth (e.g. our annual GDP numbers)
GDP at MP can increase merely by increasing the taxes, even without increase in production.

Current Prices vs Constant Prices
Current –Values estimated at prevailing (current) prices
GDP at current prices is called Nominal GDP
Government always gets its data in terms of Nominal GDP and then converts it to Real GDP
Constant -Values estimated at the prices of a base year
a. For India, the base year is 2011-12.
b. Growth is always estimated at constant price.
GDP at current price can increase because of inflation –not a true indicator of increase in production. So it is not used.
GDP at Constant Prices is called Real GDP–it cannot increase without a real
Converting Nominal to Real GDP–Two ways
Estimate inflation, deduct its impact on the nominal GDP – deflating the nominal GDP
a. Real GDP = (Nominal GDP/GDP Deflator) x 100
b. GDP Deflator is an index number used to represent inflation
Estimate the actual numbers of production –very tough to do.

Questions
1.National Income is the
a. Net National Product at market price
b. Net National Product at factor cost
c. Net Domestic product at market price
d. Net Domestic Product at factor cost

2.The accounting year of the reserve bank of India is
a. April-March b. July- june c. October – September
d. January-december

3.Economic survey in India is published officially, every year by the
a. Reserve Bank of India
b. Planning commission of India
c. Ministry of Finance, Govt of India
d. Ministry of industries, Govt of India

4.The growth rate of per capita income at current prices is higher than that of per capita income at constant prices, becauses the latter takes into account the rate of
a. Growth of population
b. Increase in price level
c. growth of money supply
d. Increase in wage rate.

5.The most appropriate measure of a country’s economic growth is its
a. Gross Domestic Product
b. Net Domestic Product
c. Net National Product
d. Per capita real income

By: Vittal Reddy
The writer is IAS mentor