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Chapter: 12th Economics : National Income

Basic concepts of national income

The following are some of the concepts used in measuring national income.

Basic concepts of national income


The following are some of the concepts used in measuring national income.

1. GDP

2. GNP

3. NNP

4. NNP at factor cost

5. Personal Income

6. Disposable Income

7. Per capita Income

8. Real Income

9. GDP deflator


1. Gross Domestic Product (GDP)

GDP is the total market value of final goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices.

GDP by expenditure method at market prices = C + I + G + (X – M)

Where C – consumption goods; I – Investment goods;

G – Government purchases;

X – Exports; M – Imports

(X – M) is net export which can be positive or negative.

a) Net Domestic Product (NDP)

NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes outdated each year during the production process. husT

Net Domestic Product = GDP - Depreciation.


2. Gross National Product (GNP)

GNP is the total measure of the flow of final goods and services at market value resulting from current production in a country during a year, including net income from abroad. GNP includes five types of final goods and services :

(1) value of final consumer goods and services produced in a year to satisfy the immediate wants of the people which is referred to as consumption (C);

(2) gross private domestic investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods which is called as gross investment (I) ;

(3) goods and services produced or purchased by the government which is denoted by (G) ; and

(4) net exports of goods and services, i.e., the difference between value of exports and imports of goods and services, known as (X-M) ; Net factor incomes from abroad which refers to the difference between factor incomes (wage, interest, profits ) received from abroad by normal residents of India and factor incomes paid to the foreign residents for factor services rendered by them in the domestic territory in India (R-P);

(5) GNP at market prices means the gross value of final goods and services produced annually in a country plus net factor income from abroad (C + I + G + (X-M) + (R-P)).

GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad.


3.  Net National Product (NNP) (at Market price)

Net National Product refers to the value of the net output of the economy during the year. NNP is obtained by deducting the value of depreciation, or replacement allowance of the capital assets from the GNP. It is expressed as,

NNP = GNP – depreciation allowance.

(depreciation is also called as Capital Consumption Allowance)


4.  NNP at Factor cost

NNP refers to the market value of output. Whereas NNP at factor cost is the total of income payment made to factors of production. Thus from the money value of NNP at market price, we deduct the amount of indirect taxes and add subsidies to arrive at the net national income at factor cost.

NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.


5.  Personal Income

Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in a year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income. Personal income is derived from national income by deducting undistributed corporate profit, and employees’ contributions to social security schemes and adding transfer payment.

Personal Income = National Income – (Social Security Contribution and undistributed corporate profits) + Transfer payments


6. Disposable Income

Disposable Income is also known as Disposable personal income. It is the individuals income after the payment of income tax. This is the amount available for households for consumption.

Disposable Income = Personal income – Direct Tax.

As the entire disposable income is not spent on consumption,

Disposal income = consumption + saving.


7. Per Capita Income

The average income of a person of a country in a particular year is called Per Capita Income. Per capita income is obtained by dividing national income by population.


8. Real Income

Nominal income is national income expressed in terms of a general price level of a particular year in other words, real income is the buying power of nominal income. National income is the final value of goods and services produced and expressed in terms of money at current prices. But it does not indicate the real state of the economy. The real income is derived as follows:

National Income at constant price = National Income at current price ÷ P1 / P0


9. GDP deflator

GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.

GDP deflator = [Nominal GDP/Real GDP] x100

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