National Income: Indicator, Determinant

National income is the total income earned by the citizens of a country in one year through participation in economic activities. This includes only the income that comes from contributing to the production of goods and services.

What is National Income Accounting?

National income accounting is the method used by the government to measure the country’s economic activity – how much is being produced, how much is being earned, and how much is being spent.

The main indicators used are:

• GDP (Gross Domestic Product)
  
• GNP (Gross National Product)
  
• NNP (Net National Product)
  
• Personal and Disposable Income

Key Concepts

1. GDP (Gross Domestic Product)

GDP is the total value of all final goods and services produced within a country’s borders in one financial year (in India, from April 1 to March 31).

2. NDP (Net Domestic Product)

NDP = GDP – Depreciation (wear and tear of machines)

3. GNP (Gross National Product)

GNP = GDP + Income earned by citizens abroad – Income earned by foreigners in the country

4. NNP (Net National Product)

NNP = GNP – Depreciation

• NNP at Factor Cost: Income calculated based on cost of production.
  
• NNP at Market Price = NNP at Factor Cost + Indirect Taxes – Subsidies.

Other Important Terms

Domestic Income

Income earned within the country from its own resources, without including foreign income.

Private Income

Income earned by private individuals and companies, including gifts, pensions, remittances, and lottery winnings.

Personal Income

The total income individuals receive before paying taxes. It’s always less than private income because it excludes undistributed profits.

Disposable Income

The actual income left with individuals after paying direct taxes.
Disposable Income = Personal Income – Direct Taxes

Real Income

Real income removes the effect of inflation. It tells us the actual buying power of income using a fixed base year’s prices.

Formula:
Real NNP = (Nominal NNP × 100) / Price Index of the Current Year

Per Capita Income

It is the average income per person in a year.
Per Capita Income = National Income / Population

Nominal and Real GDP

• Nominal GDP: Measured at current prices.
  
• Real GDP: Measured at constant (base year) prices. This gives a clearer picture of growth.

GDP Deflator

A price index that shows how much of the GDP increase is due to rising prices.
GDP Deflator = (Nominal GDP / Real GDP) × 100

Why National Income is Important

• Policy Making: Helps the government make economic policies.
  
• Economic Planning: Provides data for development plans.
  
• Research and Analysis: Used by economists to understand trends.
  
• Income Distribution: Shows how wealth is distributed and where inequalities exist.
  
• Compare Growth: Helps compare growth between countries or regions.
  

Methods of Estimating National Income 

National Income refers to the total income earned by the people of a country in one year through productive activities. It helps us understand the overall economic performance of a nation.

There are three main methods to calculate national income:

1. Product Method (Output Method or Value Added Method)

This method calculates national income by adding up the value of all final goods and services produced in the country during a year.

Steps in Product Method:

1. Classify all enterprises into:
   
   • Primary Sector: Uses natural resources (e.g., farming, fishing, mining).
     
   • Secondary Sector: Converts raw materials into products (e.g., factories).
     
   • Tertiary Sector: Provides services (e.g., education, banking, transport).
     
2. Classify Output into:
   
   • Consumer Goods: Goods used by people (like food, clothes).
     
   • Capital Goods: Used to produce other goods (like machines).
     
   • Government Goods: Services provided by the government (like roads, defence).
     
   • Net Exports: Exports minus imports.
     
3. Calculate Value of Output:
   
   • Multiply the quantity of final goods produced by their market prices.
     
   • Value of Final Output = Value of Output – Value of Intermediate Goods
     
4. Deduct Depreciation (wear and tear of machines) to get Net Domestic Product (NDP).
   
5. Add Net Factor Income from Abroad (NFIA) to get National Income (NNP).
   

Formula:

GDP at Market Price = Output of Primary + Secondary + Tertiary Sectors

NNP at Market Price = GDP – Depreciation + Net Factor Income from Abroad

2. Expenditure Method

In this method, national income is calculated by adding up all expenditures made to buy final goods and services in the country during a year.

Major Components of Expenditure:

• C = Private Consumption (by households)
  
• I = Investment (by businesses)
  
• G = Government Spending
  
• NX = Net Exports (Exports – Imports)
  

Formula:

GDP = C + I + G + (X – M)

This method shows the total demand (aggregate demand) in the economy. The GDP calculated here is Nominal GDP. To know the actual growth, we adjust it for inflation to get Real GDP.

3. Income Method

This method measures national income by adding up all incomes earned by individuals and businesses for providing land, labour, capital, and entrepreneurship.

Types of Incomes Included:

• Rent – for using land
  
• Wages – for labour
  
• Interest – for using capital
  
• Profit – for entrepreneurship
  

Steps in Income Method:

1. Identify all production units using land, labour, capital, and enterprise.
   
2. Classify incomes into:
   
   • Compensation of Employees (wages and salaries)
     
   • Operating Surplus (rent, interest, profit)
     
   • Mixed Income (for self-employed people)
     
3. Add up all factor incomes to get Net Domestic Product at Factor Cost (NDPFC).
   
4. Add Net Factor Income from Abroad to get National Income (NNPFC).
   

Incomes Not Included in National Income:

• Old-age pensions, scholarships, donations (Transfer payments)
  
• Second-hand goods sales (but commission is included)
  
• Illegal income (like black marketing)
  
• Windfall gains (like lottery)
  
• Unpaid services (like housework by homemakers)
  
• Gifts and inheritance taxes (paid from savings)
  

Summary of National Income Methods:

Method	Based On	Key Formula
Product	Value of final goods/services produced	GDP = Output – Intermediate Goods
Expenditure	Spending on goods/services	GDP = C + I + G + (X – M)
Income	Incomes earned by factors of production	NNP = Rent + Wages + Interest + Profit

Determinants of National Income (Current and Constant Prices) – Class 12 Economics

What Affects National Income?

As people (households) and companies (firms) become more active in the economy—producing and buying more—national income usually increases. But sometimes, it’s not just the quantity of goods and services that increases; prices may rise too. This makes a difference in how we measure national income.

Nominal vs. Real National Income

Nominal National Income (Current Prices):

• This is the value of all goods and services at the prices of the same year in which they are produced.
  
• It is also called national income at current prices.
  
• Formula:
  👉 Nominal Income = Quantity of Output × Market Price in the same year
  

For example, if 1,000 pens are sold at ₹10 each in 2024, the nominal value is ₹10,000.

But here’s the catch – if prices go up (due to inflation), nominal income increases even if the actual quantity of goods stays the same.

Real National Income (Constant Prices):

• Real income shows the true increase in production by removing the effect of rising prices.
  
• It is measured using prices from a fixed year called the base year.
  
• This helps us know whether the economy is really growing or just facing price hikes.
  

Why is this important?
Sometimes, nominal income increases only because of inflation (rise in prices), not because of more production. Real income gives us the correct picture.

Why Nominal Income Can Be Misleading

• When demand increases too quickly, firms raise prices due to limited resources.
  
• Labour wages also go up because more workers are needed.
  
• So, higher wages + higher prices = increase in nominal income, but not necessarily in real output.

Problems in Measuring National Income

1. Too Many Goods & Services:
   
   • It’s very hard to correctly measure everything a country produces because there are thousands of goods and services.
     
   • This can lead to inaccurate national income estimates.
     
2. Double Counting:
   
   • This happens when the same product or service is counted more than once.
     
   • For example, if we count the value of wheat and then count the value of bread made from that wheat, the wheat gets counted twice.
     
   • This gives a wrong (higher) national income.

Summary:

Term	Meaning
Nominal Income	National income calculated using current year’s prices
Real Income	National income adjusted for inflation, using base year prices
Base Year	A fixed year used to compare real growth in income or output
Double Counting	Counting the same output more than once, leading to incorrect results