National Income (NI) is a fundamental concept in economics, acting as a key metric for gauging a country’s economic performance. As an important economic metric of a nation, it influences policy decisions, investment considerations, and socio-economic planning. This article of NEXT IAS aims to study in detail the concept of National Income (NI), its measures including Gross Domestic Product (GDP) and Gross National Product (GNP), methods employed to compute it, and other related concepts.
It refers to the aggregate value of all the final goods and services produced in a country in a particular period of time (usually one financial year).
It is a bookkeeping system that a national government uses to measure the level of the country’s economic activity in a given time period.
Understanding the concepts of National Income (NI) and National Income Accounting requires understanding some related concepts. These concepts are dealt with in the sections that follow.
The circular flow of income is a model of the economy in which major exchanges are represented as flows of money, goods, services, etc. among the economic agents. As per this model, money and goods & services flow in the opposite direction but move in a closed circuit.
Production, consumption, and investment are important economic activities of an economy. In carrying out these economic activities, people make transactions between different sectors of the economy. Because of these transactions, income and expenditure move in a circular form. This is called the circular flow of income.
It refers to the geographical territory administered by the Government of India within which the person, goods, and capital can circulate freely.
Note: Foreign embassies located in India are NOT a part of domestic/economic territory. However, Indian embassies located abroad are a part of domestic/economic territory.
Factor Cost (FC) = Market Price – Indirect Taxes + Subsidy
The market price of any good or service in the current year is called the Nominal Price or Current Price. Since inflation is included in the current market price, the Nominal Price or Current Price changes as per the current level of inflation.
In order to compare the National Income of various years, it is calculated with reference to a particular year. This reference year is called the Base Year, and the market price of any good or service in the base year is called the Base Price or Constant Price.
Depreciation, also known as the Consumption of Fixed Capital, refers to the loss in value of fixed assets due to wear and tear, accidental damages, and obsolescence.
Net Factor Income from Abroad (NFIA) is equal to the difference between factor income (rent, wages, interest, and profit) earned by normal residents of India temporarily residing abroad and factor income earned by non-residents temporarily residing in India.
NFIA = Factor Income from Abroad to India – Factor Income from India to Abroad
Capital Output Ratio (COR) refers to the amount of capital (investment) needed to produce one unit of output.
Capital Output Ratio (COR) = Capital/Output
Capital Output Ratio (COR) reflects the level of efficiency in an economy. The higher the COR, the more capital is required to produce, and hence less efficiency is there in the economy, and vice versa.
Incremental Capital Output Ratio (ICOR) refers to the additional unit of capital (investment) needed to produce an additional unit of output.
Incremental Capital Output Ratio (ICOR) = Incremental Capital/Incremental Output.
There are various metrics for measuring the NI, such as:
These measures are discussed in detail in the sections that follow.
Gross Domestic Product (GDP) measures the aggregate production of final goods and services taking place within the domestic economy during a year.
Two key phrases here are:
GDP at Market Price (GDPMP) is the market value of all final goods and services produced within a domestic territory of a country during one financial year.
GDP at Market Price (GDPMP) includes indirect taxes but excludes subsidies.
GDP at Factor Cost (GDPFC) refers to the aggregate value of income earned from the factors of production i.e. Land, Labor, Capital, and Entrepreneurship.
GDP at Factor Cost (GDPFC) excludes indirect taxes but includes subsidies.
GDP at Factor Cost (GDPFC) = GDP at Market Price (GDPMP) – Indirect Taxes + Subsidies
Gross national product (GNP) is an estimate of the total value of all the final products and services produced in a given period by the production owned by a country’s citizens.
Two key phrases here are:
Thus, GNP = GDP + Factor Income from Abroad to India – Factor Income from India to Abroad.
= GDP + Net Factor Income from Abroad (NFIA)
The major difference between GDP and GNP lies in how the two concepts define the economy. While GDP defines the economy in terms of territory, GNP defines it in terms of citizens.
Thus, GDP measures the aggregate production of final goods and services taking place within the domestic economy. On the other hand, GNP measures the total value of all the final products and services produced by the citizens of a country.
Real GDP refers to the total value of all goods and services produced by an economy in a given year, expressed in constant prices or base year’s prices.
Thus, Real GDP = GDP at Constant Price.
Nominal GDP refers to the total value of all goods and services produced by an economy in a given year, expressed in current market prices.
Thus, Nominal GDP = GDP at Current Price.
It is to be noted that Nominal GDP includes inflation, while Real GDP does not.
The GDP Deflator refers to the ratio of Nominal GDP to Real GDP.
Thus, GDP Deflator = Nominal GDP/Real GDP
As a ratio of the NI calculated at the Current Price and that at a reference price, the GDP Deflator is an economic measure of inflation.
Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. It represents the contribution of labor and capital to the production process. Thus, the value of GVA can be derived from the GDP as follows:
GVA = GDP – Indirect Taxes + Subsidies
| GVA | GDP |
|---|---|
| Value of all the goods and services produced within a country after deducting the value of intermediate goods and services. | Market value of all the final goods and services produced within the country. |
| Gives insight into the economy from the input or supplier side. | Gives insight into the economy from the output or consumer side. |
| Generally, calculated on a sector-wise approach. e.g. GVA for the Primary Sector, Secondary Sector, etc. | Calculated for the whole economy. (GDP of economy = GVA of all the sectors) |
| Generally, calculated at Basic Prices. | Generally, calculated at Market Prices. |
Net National Income (NNI) refers to Gross National Income minus the Depreciation of fixed capital assets. Thus, it takes into account the losses due to depreciation.
Prominent metrics for measuring the Net National Income (NNI) are:
Net Domestic Product (NDP) is arrived at by deducting the depreciation from GDP. Thus,
Net Domestic Product = GDP – Depreciation.
Net National Product (NNP) is calculated by subtracting the depreciation from GNP. Thus,
Net National Product = GNP – Depreciation.
National Income (GDP or GNP) can be calculated by 3 methods: Income Method, Expenditure Method, and Production Method.
Under this method, NI is obtained by summing up the incomes of all individuals in an economy.
Individuals earn incomes by contributing their own services and the services of their property such as land and capital to the national production.
Thus,
National Income (NI) = Employee compensation + Corporate profits + Proprietors’ Income + Rental income + Net Interest
This is also called “Output Method”.
Under this method, NI is computed by adding the values of output produced or services rendered by the different sectors of the economy during the year.
It is to be noted that while computing the values of output figures, only the value added by each firm in the production process is taken into account. Thus, this method makes use of the concept of Value-added.
It is also called ‘Total Outlay Method’.
This method assumes that the income earned by an individual is either spent on consumer goods/services or saved and invested.
Thus,
National Income (NI) = Personal Consumption Expenditure (C) + Investments (I) + Government Expenditure (G) + Exports (X) – Imports (I)
The Ministry of Statistics and Programme Implementation (MoSPI) launched a new series of GDP in 2019.
Major changes that have been made to the methodology of GDP calculation are as follows:
These changes have led to a significant change in the GDP figures. For example, India’s GDP growth rate for the financial year 2013-14 was 4.7% as per the old methodology, and 6.9% as per the new methodology.
Major problems faced while estimating NI can be studied under two heads – Conceptual Difficulties and Statistical or Practical Difficulties.
The conceptual problem relates to how and what is to be included and what is not in the measurement of National Income (NI). Though the concept of NI implies that everything that is produced should be reckoned, by definition, we consider only those things that are exchanged for money or carry some price.
In order to mitigate these difficulties, certain guidelines have been laid down about the process of National Income estimation, and about what components have to be included.
GDP, as an indicator of economic growth, faces some shortcomings as explained below:
Due to shortcomings of GDP to measure the welfare and well-being of the people, several other indicators have been proposed and are being used. Some of these indices are discussed below.
Green GDP is a term used generally for expressing GDP after adjusting for environmental damages such as biodiversity loss, climate change impacts, etc. Thus, it is an indicator of economic growth with environmental factors taken into consideration.
In conclusion, much more than just a numerical figure, National Income (NI) is a comprehensive reflection of a country’s economic vitality. Though the current measures of NI have some shortcomings, they play a crucial role in guiding governments, businesses, and individuals in making informed economic decisions. As we strive for a more holistic understanding of progress, research & development should be carried out to develop more comprehensive measures of National Income (NI) that encompass social well-being and environmental sustainability.
It is calculated by summing up the values of all the final goods and services produced in an economy during a financial year.
The National Statistical Office (NSO), under the Ministry of Statistics and Program Implementation (MoSPI), calculates the NI in India.
