Revision: National Income Economics ISC (Commerce) Class 12 CISCE

• "The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the true net annual income or revenue of the country or national dividend." - Marshall
• "National income is that part of the objective income of the community, including of course income derived from abroad, which can be measured in money." - Pigou
• "The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environments. Thus, a piano or an overcoat made for me this year is not a part of this year's income, but an addition to capital. Only the services rendered to me during this year by these things are income." - Fisher

• "National income estimate measures the value of commodities and services turned out during a given period, counted without duplication." - N.I.C. of India
• "National income is the sum of wages, rent, interest and profit or the sum of all goods and services produced by the economy during one income period." - Shapiro 

1. The circular flow of income is a model of an economy showing connections between different sectors of an economy.
2. It shows flows of income, goods and services, and factors of production between economic agents such as firms, households, government, and nations.
3. The circular flow analysis is the basis of national accounts and macroeconomics.

"Net National Product at market price is the market value of the net output of final goods and services produced by an economy during an accounting year and net factor income from abroad." – Peterson

"National income is the factor income accruing to the residents of the country during a year. It is the sum of domestic factor income and net factor income from abroad." – Dernburg

"The sum total of factor incomes earned within the domestic territory of a country during a year."

"The Net Domestic Product at Factor Cost is the sum total of net values added by all the producers in the domestic territory of the country during an accounting year." – Peterson

"The Gross Domestic Product at factor cost is the sum of net value added by all the producers in the domestic territory of the country and the consumption of fixed capital during an accounting year." – Hanson

• "Private income is the total of factor incomes from all sources and current transfers from the Government and rest of the world accruing to private sector." – C.S.O.
• Private income refers to the current income received from all the sources of private sector consisting of private enterprises and factor owners.
• Private income refers to the income obtained by private individuals from any source whether productive or unproductive.

NNP at Market Prices = GNP at Market Price – Capital Consumption Allowances
NNP_MP = GNP_MP – CCA

National Disposable Income = Net National Product at Market Prices + Other Current Transfers from the Rest of the World

NDP_FC = GDP_FC - Depreciation

GDP_FC ​= GDP_MP​ − Net Indirect Taxes

GNP at Factor Cost = GNP at Market Price - Indirect Taxes + Subsidies
Or
GNP at Factor Cost = GNP at Market Price - Net Indirect Taxes

1. Domestic Product Approach

Private Income = Factor income from NDP accruing to private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from rest of the world

2. National Income Approach (NNP at Factor Cost)

Private Income = NNP at FC − Government property & entrepreneurial income − Savings of non-departmental govt. enterprises + Interest on national debt + Net current transfers from government + Net current transfers from abroad

3. C.S.O. Approach (Alternative)

Private Income = National Income + Transfer payments + Interest on public debt − Social securities − Profits & surpluses of public undertakings

Or equivalently:

Private Income = Domestic Income + Net factor income from abroad + Net transfer payments − Government income

\[Per Capita Income=\frac{NationalIncome}{Population}\]

Real NNP = NNP for Current Year × `"Base Year Index" / "Current Year Index"`

National Income (NI) using this income method is expressed as:

NI = R + W + I + P + MI + (X − M) + (R − P)

Where:

• R: Rent (including imputed rent of owner-occupied houses and income from government property)
• W: Wages and salaries (compensation of employees)
• I: Interest
• P: Profits (including distributed, undistributed, and corporate tax)
• MI: Mixed income of self-employed (where labour and capital income cannot be separated)
• X−M: Net exports (exports minus imports of goods and services)
• R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)

In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.

\[\mathrm{GDP}\equiv\sum_{i=1}^N\mathrm{GVA}_i\]

\[GVA_i\equiv Q_i-Z_i\equiv V_i+A_i-Z_i\]

Where:

• \[Q_i\]​ = Value of output of firm \[i\]
• \[Z_i\] = Value of intermediate goods used
• \[V_i\] = Value of final goods sold
• \[A_i\]​ = Addition to inventories

Value of Gross Output – Intermediate Consumption – Depreciation – Net Indirect Taxes

Net Value Added at factor Cost (Net Value Added at factor cost of Primary Sector + Secondary Sector + Tertiary Sector) + Net Factor Income from Abroad

NNP_FC = GDP_MP − Depreciation − Net Indirect Taxes + NFIA

Where:

• Depreciation = Consumption of Fixed Capital
• Net Indirect Taxes (NIT) = Indirect Taxes − Subsidies
• NFIA = Net Factor Income from Abroad

OR (Direct Formula)

NI = C + I + G + (X − M) + (R − P)

Where:

• R − P (NFIA) = Net Receipts/Net Factor Income from Abroad

GDP_MP = C + I + G + (X − M)

Where:

• C = Private Final Consumption Expenditure
• I = Gross Domestic Investment Expenditure
• G = Government Final Consumption and Investment Expenditure
• X − M = Net Exports (Exports − Imports)

• Measures standard of living and economic welfare
• Shows inflationary & deflationary trends
• Explains economic structure (sector-wise contribution)
• Basis for economic planning and policy
• Helps in budget, taxation & borrowing policies
• Guides consumption–investment decisions
• Shows income distribution
• Helps in centre–state grants allocation
• Useful in international comparisons & quotas
• Important for analysing problems of underdeveloped countries

• Economy: Shows total income, output, and trade.
• Policies: Basis for planning jobs, industry, and farming.
• Planning: Helps in making economic plans.
• Research: Used for economic studies.
• Living Standard: Compares wellbeing across countries/time.
• Income Distribution: Shows income inequality.

• It shows the continuous flow of income, output and expenditure in an economy
• Production → Income → Expenditure → Production (repeats continuously)
• Households supply factor services and receive wages, rent, interest, profit
• Firms produce goods/services and receive expenditure from households
• Involves two flows: Real flow (goods & factor services) and Money flow (payments)
• Buyer’s expenditure = seller’s income

• Two sectors: Households & Firms
• Factor market (upper), Commodity market (lower)
• Households give factors → Firms
• Firms give goods & services → Households
• Money flow: Rent, wages, interest, profit
• Income becomes expenditure
• Flow is continuous due to unlimited wants

• Three sectors: Households, Firms & Government
• Government is added to the two sector model
• Government collects taxes from households & firms
• Government spends on public goods & services
• Income flows continuously among all three sectors

• National Disposable Income = NNP at Market Prices + Other Current Transfers from the Rest of the World.
• It represents the maximum income available to the domestic economy.
• "Other current transfers" include gifts, remittances, and aid from abroad.
• These transfers are received from the rest of the world and add to the domestic economy's spending capacity.

• Private income = income received by the private sector from all sources (factor incomes + transfer incomes).
• Derived from NNP at Factor Cost by deducting government income and adding transfer payments.
• Deduct: Government property/entrepreneurial income + savings of non-departmental government enterprises.
• Add: Interest on national debt + net current transfers from government + net current transfers from abroad.
• Three equivalent formulas — NCERT approach, NNP at FC approach, and C.S.O. approach — all yield the same result.
• Private income is a pre-tax measure; it does not equal personal income (further deductions are needed to arrive at personal income).

• GDP is not a perfect measure of welfare.
• Welfare depends on how GDP is distributed, not just its size.
• A rise in GDP may benefit only a few people while the majority become worse off.
• Barter exchanges and unpaid domestic services are excluded from GDP, causing underestimation.
• Negative externalities (e.g., pollution) reduce welfare but are ignored by GDP, leading to overestimation of welfare.
• Positive externalities increase welfare but are also ignored by GDP, leading to underestimation of welfare.

• Income Method measures National Income by adding all factor incomes earned during an accounting year.
• NDP at Factor Cost includes Compensation of Employees, Operating Surplus, and Mixed Income.
• National Income (NNP_FC) is obtained by adding NFIA to NDP_FC.
  Formula: NNP_FC = NDP_FC + NFIA
• Include only factor incomes. Exclude transfer payments, capital gains, windfall gains, second-hand goods, illegal income, gifts, and household services.
• Include imputed rent and undistributed profits. Avoid double counting.
• The main difficulties are mixed income, non-marketed production, imputed values, unreported income, and lack of data.
• Steps: Identify production units → Classify factor incomes → Calculate NDP_FC → Add NFIA to get NNP_FC.

• Output Method counts value of all final goods and services produced to measure national income.
• Two approaches: Final Product Approach and Value Added Approach - both yield the same result.
• Value Added at each stage = Output value − Intermediate input value.
• GDP is the sum of Gross Value Added across all firms in the economy.
• Inventories (stock changes) are included in GVA to capture production not yet sold.
• The key precaution is to avoid double counting - count only final goods or use the value-added method.
• Second-hand goods, intermediate goods, and imports are excluded from the calculation.

• Measures national income from the demand (expenditure) side of the economy.
• Based on the principle that National Income = National Expenditure.
• GDP_MP = C + I + G + (X − M) is the basic expenditure equation.
• NNP_FC = GDP_MP − Depreciation − Net Indirect Taxes + NFIA gives National Income.
• Exports are added and imports are deducted to measure domestic production.
• Only final expenditure is included to avoid double counting.
• In India, national income is mainly estimated using a combination of the Output Method and Income Method, while the Expenditure Method is used less due to practical difficulties.

• Second-hand goods: Already counted in the year of production.
• Shares, bonds, debentures: Financial transactions, not production.
• Illegal income / black money: Not officially recorded.
• Windfall & capital gains: No current production involved.
• Transfer payments: Scholarships, pensions, gifts, unemployment allowance, financial help, pocket money.
• Indirect taxes: Not factor income.
• Intermediate goods: Used in production (e.g., factory electricity, vegetables).
• Capital losses: Due to floods, earthquakes, etc.
• Housewives’ services & leisure activities: Non-market services.