National Income

• It is the value of total goods & services produced in an economy over a given period of time.

National Income = C + I + G + (X – M)
Where,
C = Total Consumption
Expenditure
I = Total Investment Expenditure
G = Total Government
Expenditure
X = Export, M = Import

• It can be measured by Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI). Net National Product (NNP), Net National Income (NNI) and Per-Capita Income (PCI).

1.1 NATIONAL INCOME AND ITS RELATED AGGREGATES

• Various national income aggregates are estimated either at factor cost or at market price.
  

  Factor Cost

• Factor cost refers to the cost of factors of production viz, rent of land, interest of capital, interest of capital wages for compensation of employees for labour and profit for entrepreneurship.

FC = MP – Indirect taxes + Subsidies

Market Price

• Market Price is the price that customers actually pay. It includes the component of indirect taxes and of subsidies. Accordingly, when indirect taxes are deducted and subsides added to the market price, we get the value of national income at factor cost.

MP = FC + Indirect taxes – Subsidies

GDP (Gross Domestic Product)

• It is the monetary value of all final goods and services produced in a country in a year.

GDP = C + I + G + NX
Where
C = Consumption
I = Investment
G = Government Expenditure
NX = Net Export

• GDPMP = GNPMP – (X – M)
• GDPFC = GNPFC – (X – M)

Where X is the export and M is
import of a country,

Nominal GDP

• It is the market value of all final goods and services produced within the country.

Real GDP

• It is a measurement of the value of the output economy adjusted for price changes.

GNP (Gross National Product)

• It is the market value of all products and services produced in one year of a country (i.e., by labour and property).

GNP = GDP + X – M.

Net National Product (NNP)

•  It is the value of GNP after deducting depreciation of plant and machinery.

NNP = GNP – Depreciation

National Income (NI) = NNP – Indirect Taxes + Subsidies

Per-Capita Income (PCI)

• It is the average income (per person) of a country.

Per−Capita Income=National Income

Personal Income (PI)

• It is the income of the residents (individuals) of a country. To calculate personal income, transfer payments to individuals are added to national income, while social security contributions, corporate tax and undistributed profits are subtracted.

Personal = National Income +
Income Transfer payments –
(Social security contributions
+Undistributed profits of Corporate)

Difference between GDP and GNP

• In GDP, goods and services produced in a country are added, whether it is produced by residents of the country or foreigners.
•  In GNP, the production of foreigners in the country is not included, while the production of nationals outside the country is included.

Disposable Income (DI)

•  It is the income of individuals at their disposal after paying direct tax liabilities.

Disposable = Personal Income –
income Direct taxes (e.g., Income Tax)

Green Economy

This is the economy which deals with the environmental risks and ecological scarcity and also an economy that aims for sustainable development without degrading the environment.

Green GDP

• It is the calculation of net natural consumption (i.e., resource depletion, environmental degradation, protective and restorative environmental initiatives).

1.2 METHODS OF CALCULATING NATIONAL INCOME

• According to Simon Kuznets, National Income can be calculated by three methods.
  (i) Product Method In this method, net value of final goods and services produced in a country during a year is obtained, which is called final product.
  (ii) Income Method In this method, a total of net income earned by working people in different sector and commercial enterprises is obtained. By this method, NI is obtained by adding receipts as total rent, total wages, total interest and total profit.

(iii) Consumption Method It is also called expenditure method. Income is either spent on consumption or saving. Hence, NI is the addition of total consumption and total saving.

1.3 PROBLEMS IN CALCULATING NATIONAL INCOME

Black Money

•  Illegal activities like smuggling and unreported income due to tax evasion and corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate GDP estimates.

Non-Monetisation

In most of the rural economy considerable portion of transaction occurs informally and they are called as non-monetised economy. This keeps the GDP estimates at lower level than the actual.

Growing Service sector

• Many Services like BPO, value addition in legal consultancy, health services, financial and business services and service sector as a whole is not based on accurate reporting and hence, national income is underestimated.

Double Counting

• It is also a hurdle to accurately measure GDP estimates. Though, there are some corrective measures, but it is difficult to eliminate it.

1.4 NATIONAL INCOME ESTIMATIONS IN INDIA

•  The first attempt to calculate national income of India was made by Dadabhai Naoroji in 1867 – 68, who estimated per capita income to be ₹ 20.
• The first scientific method was made by Professor VKRV Rao in 1931-32, but was not very satisfactory.
• The first official attempt was made by National Income Committee headed by Professor PC Mahalanobis in 1949.
• According to the National Income Committee Report (1954), National Income of India was ₹ 8710 crore and Per Capita Income was ₹ 225 in 1948 – 49.
• In India, Central Statistical Organisation (1949) now renamed as Central Statistical Office (CSO) has been formulating National Income.

Gross Fixed Capital Formation (GFCF)

•  It refers to net additions of capital stock such as equipment, buildings and other intermediate goods. A nation uses capital stock in combination with labour to provide services and produce goods.
• To grow at a faster rate, a nation needs high levels of capital formation, so that it can grow its aggregate income as well as per capital income. This is because higher levels of capital stock enable an economy to produce more goods and services.
• To achieve a high level of capital formation, a nation should also achieve high levels of domestic savings (both households and firms), so that capital formation can be funded without relying on external debt.
• In GFCF, the term gross signifies that adjustments due to depreciation of capital stock (e.g., machinery) are not made. When such an adjustment is made, it is called Net Fixed Capital Formation.
• The term fixed signifies that only fixed capital is counted and financial assets, stocks of inventories etc are excluded.
• GFCF also excludes land sales and purchases.

Incremental Capital Output Ratio (ICOR)

•  ICOR is used to assess a country’s level of production efficiency. ICOR equals Annual Investment/Annual Increase in GDP. Higher levels of ICOR mean that capital is not being used efficiently to increase production. Generally, for most countries ICOR is around 3.

1.5 ORGANISATIONS IN INDIA RELATED TO NATIONAL INCOME ACCOUNTS
Central Statistical Organisation

• Central Statistical Office (CSO), was set-up in 1949. It is one of the two wings of the National Statistical Organisation (NSO), along with National Sample Survey Office (NSSO), responsible for coordination of statistical activities in the country and for evolving and maintaining statistical standards
• Its activities include compilation of national accounts, conduct of annual survey of industries and economic census, compilation of index of industrial production, as well as consumer price indices.
•  It also deals with various social statistics, training, international cooperation, industrial classification etc.

National Sample Survey Office (NSSO)

• NSSO was set-up in 1950, for conducting large scale sample surveys to meet the data needs of the country, for the estimation of national income and other aggregates.
• It was recognised in 1970, by bringing together all aspects of survey work under a single agency known as NSSO.
•  NSSO undertakes the fieldwork of Annual Survey of Industries in the whole country except Jammu and Kashmir.

UPSC PREVIOUS YEAR QUESTIONS

1. The national income of a country for a given period is equal to the __? (CSE 2013)
a) Total value of goods and services produced by the nationals
b) Sum of total consumption and investment expenditure
c) Sum of personal income of all individuals
d) Money value of final goods and services produced
2. In the context of Indian economy, consider the following statements. (CSE 2011)
1. The growth rate of GDP has steadily increased in the last five years.
2. The growth rate in per capita income has steadily increased in the last five years.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) neither 1 nor 2

3. Which of the following pairs about India’s economic indicator and agricultural production (all in rounded figures) are correctly matched? (CSE 2008)
1. GDP per capital : Rs. 37,000 Current prices
2. Rice : 180 million tons
3. Wheat : 75 million tons
Select the correct answer using the code given below
a) 1, 2 and 3
b) 1 and 2 only
c) 2 and 3 only
d) 1 and 3 only
ANSWERS:
1. (d) 2. (a) 3. (d)