National Income Definition: 34 important points!

Hello aspirants, National Income Definition and related Aggregates is the most important topic in the Indian Economy as from this topic many questions are being asked every year.

In this Indian Economy notes series, we are going to share a short but important note on National Income Definition and related Aggregates.

This will be helpful for aspirants who are preparing for Government jobs such as SSC CGL, SSC CHSL, JPSC, JSSC, etc.

This note on National Income we are going to cover the following topics-

What is National Income Definition?-Introduction

  • National Income Definition: National Income is/refers to “the measurement of the production power of an economy.”
  • National Income is the purest form of income of an economy/nation.

National Income Estimates

  • In 1868, Dadabhai Naoroji made his first attempt to calculate the National income of India in his book “Poverty and Un-British rule in India.”
  • He estimated the per capita income to be Rs 20.
  • In 1932, The first scientific attempt to calculate NI was made by prof. VKRV Rao.
  • In 1949, under the chairmanship of Prof. PC Mahalanobis, a National Income Committee was set up.

Also Read Five Year Plans: Economic planning in India.

National Income Accounting

Methods of measuring National Income: National Income is measured using three methods-

  1. Product Method
    • In this method, the net value of final goods and services produced in a country is obtained during a year.
    • This method is also known as “GDP”.
  2. Income Method
    • In this method, the total net income earned by working people in different sectors and commercial enterprises is obtained.
    • Here, both categories of taxpayers and non-taxpayers incomes are calculated to obtain National Income.
  3. Consumption method
    • This method works on the principle of consumption or expenditure method, ie, income earned is either spent for consumption or saved.
    • This method is also known as the “Expenditure method.”

National Income Aggregates

National Income includes four ways/ideas to calculate the production power of an economy (i.e, National Income) –

  • GDP (Gross National Product.)
  • NDP (Net Domestic product.)
  • GNP (Gross National Product.)
  • NNP (Net National Product.)
national-Income:-definition-and-related -aggregates

Gross Domestic Product (GDP)

  • GDP (Gross National Product.) is the total value of all the final goods and services produced by an economy (domestic territory) in one year.
  • GDP is a “Quantitative concept“. it is always calculated in terms of percentage.
  • GDP indicates the internal strength of an economy.

Net Domestic Product (NDP)

  • NDP (Net Domestic product.) is the GDP calculated after subtracting the value of “depreciation.”
  • NDP is used to understand and analyze the degree of loss due to depreciation to the economy.
  • This is also used to show the achievements of the economy in the field of research and development.
NDP = GDP-DEPRECIATION

Gross National Product (GNP)

  • Gross National Product (GNP) of a country is GDP + “Net Income from abroad”.
  • What does Net income from Abroad mean? It means that Foreign companies generating income Minus the domestic companies generating income in a country (Foreign income – Domestic income).
  • For example, Hyundai (foreign company) and TATA motors (domestic company) are both car manufacturing companies, so ” Net Income from abroad” in this case will be: Hyundai motors – TATA motors.
GNP = GDP + " Net Income from abroad"

NOTE: In the Indian economy case, GNP is always lower than GDP because Foreign companies are generating more income/revenue than domestic companies. So,

GNP (in case of Indian economy) = GDP - " Net Income from abroad"

Significance of GNP (Gross National Product)

  • GNP indicates both “qualitative” as well as the “quantitative” aspect of an economy.

Net National Product (NNP)

  • This is the purest form of income of a country/economy, hence this is the “NATIONAL INCOME” of a nation.
  • What is National Income Formula:
NNP = GNP - DEPRECIATION
  • NATIONAL INCOME or NNP (factor cost) = NNP (market cost) – Net indirect tax. (Net indirect tax = indirect tax – subsidies)

Also, Read: Indian Economy Basics in Hindi – Must Know facts!

Personal Income (PI)

  • It is that income that is actually obtained by the individuals/nationals.
Personal Income = National Income - Undistributed profits - Corporate Tax - Net interest payments made by households + Transfer payment to households by the government.
  • Undistributed profits (UP) mean that income/profits earned by the firm/ the government are not transferred to the factors of production (in this case, the labourers/employees).
  • Corporate tax is also not paid by the households, so we subtract this from NI.
  • Net interest payments made by households – are the interests that the households have to pay in case they have borrowed (loan) money from firms/government.
  • Transfer payment to households by the government – these are the payments made by the government/firms in the forms of scholarships, pensions, prizes etc.

Personal Disposable Income (PDI)

  • Personal Disposable Income or Disposable income are those income where personal direct tax are subtracted from Personal income.
PDI = Personal Income (PI) - Direct tax

National Disposable Income (NDI)

  • When the current transfer from the world such as in the form of grants, aid, is added to the Net National Product or NI of a country then this is called the National Disposable Income (NDI).
  • National Disposable Income (NDI) gives an idea of the maximum amount of goods and services in an economy.

Real GDP vs Nominal GDP

  • Real GDP: When the goods and services in an economy are evaluated at a constant set of prices i.e. base year, then it is called as Real GDP of an economy.
  • Nominal GDP: When the goods and services in an economy are evaluated at the current market price then it is called as Nominal GDP of an economy.

GDP Deflator

GDP Deflator is a way to measure the changes in prices over the years in an economy.

GDP Deflator = Nominal GDP/Real GDP

Consumer Price Index CPI meaning

The Consumer Price Index CPI meaning: CPI is the measurement of the average change in prices over a period of time that households/consumers pay for goods and services.

CPI is the most widely used method to measure inflation and its economic policy and effectiveness.

CPI Formula: CPI = Market cost (Given year)/Market cost (base year) x 100%

Wholesale Price Index (WPI)

The wholesale price index (WPI) measures the changes in the price of goods that are sold in bulk and traded between entities or businesses before they reach households/consumers.

Wholesale price indexes (WPIs) are used to track a country’s level of inflation.

In this Indian Economy notes series we have covered 34 important points on National Income Definition and related aggregates. Hope you have enjoyed it!!

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