Chapter - 3: MEASUREMENT OF NATIONAL INCOME

Q.1 Explain the meaning and features of national income.

Answer:-
National income of a country can be defined as the total market value of all
final goods and services produced in the economy during a given year.
Economists have defined national income as follows:
According to A. C. Pigou, "National income is that part of objective income
of the community, including of course income derived from abroad which
can be measured in money". According to him, only those goods and services,
that are actually sold for money should be included.
Simon Kuznets has defined national income as "the net output commodities
and services flowing during the year from the country productive system in
the hands of the ultimate consumers."
According to Paul Samuelson, GDP is the sum of the dollar values of
consumption (C), gross investment (1), government purchase of goods and
services (G) and net exports (X) produced within a nation during a given year.
In symbols: GDP = C + I + G + X.
A. Methods of Measuring National Income
The concept of national income has three interpretations. It represents:
a) Total value of goods and services produced
b) Total of income received
c) Total expenditure incurred in the economy
This implies that the value of all the goods and services produced in the economy
must be equal to the sum of total payments made to the factors of production in
the form of wages, rents, interest and profits. These incomes become the source
of expenditure.
It follows from the above that: National Income = National Product = National
Expenditure. Thus, there are three measures of national income of a country.
i) It is the sum of values of all final goods and services produced in a year.
ii) It is the sum of all incomes accruing to factors of production in a year.
iii) It is the sum of consumers expenditure, net investment expenditure and
government expenditure on goods and services.
The three measures of national income give rise to "triple identity." All of them
lead to the same result provided all the constituent items are treated consistently
in the three measures.
B. Features of National Income
1. Flow Concept: National income is a flow concept because it is the value of
goods and services produced over a period of time.
2. Value of final goods: Most goods and services pass through a series of
production stages before reaching the market. National income measures the
value of only final goods and services produced in an economy during a given
period. The intermediate goods and services are not included because their
inclusion may amount to double counting resulting in an overestimation of the
national income.
3. Macro economic concept: It is a macro economic concept because national
income reveals the income of the economy as whole rather than of an individual.
4. Monetary measure: National income is a monetary measure because the
value of goods and services are expressed in terms of money.
5. Adds net exports: In an economy which is open to international trade, net
exports, i.e. exports minus imports, should be added to arrive at national
income.
6. Measure of economic progress: National income accounting is a very
practical method of collecting information about the performance of the
economy. Thus, national income is a measure of economic progress. Economic
growth is generally associated with the increase in national income.
Q.2 Distinguish Between:
1. GNI and GDP
GNI GDP
(1) It is the total money value of goods and It is the total money value of goods and
services produced by the nationals during a services produced in the domestic
given year. territory of a country during a given
year.
(2) The income earned by nationals whether It does not include the income earned by
inside or outside the country. the nationals outside the country.
(3) The part of income produced in the All the income produced in the country
country but earned by foreigners is excluded by nationals or foreigners working in the
from GNI. country are included in GDP.
(4) GNI will be larger than GDP if the people country's production flows out of the
or firms of a country hold large amounts of country, i.e., R < P.
the stocks and bonds of firms or governments
of other countries and derive income from
them, i.e., R > P.
(5) GNI = C + I + G + (X-M) + (R-P) GDP = C + I + G + (X-M)

2. GNI and NNI

GNI NNI
(1) It is the sum of money value of final It is the net money value of final goods and
goods and services produced by the services produced by the country's factors
country's factors during a given year. during a given period.
(2) GNI = GDP + net factor income from NNI is calculated by subtracting
abroad. depreciation from GNI. Thus, NNI = GNI-
Depreciation.
(3) It does not give the correct picture of It gives the correct picture of the wealth of
the wealth of a nation. a nation.

3. NNI at Factor Cost and NNI at Market Price.

NNI at Factor Cost NNI at Market Prices
(1) It is the value of the final goods and It is the value of the final goods and
services produced during a year when services produced during a year when
valued at their cost of production. valued at market prices.
(2) It is the sum-total of all income It is the market value of all final goods
payments made to the factors of and services produced after providing for
production. depreciation.
(3) It shows the income actually earned by It shows the value of the goods produced
the factors of production and therefore at market prices which includes indirect
does not include indirect taxes. taxes.
 (4) The factor cost of the goods would be Subsidy reduces the market prices to be
equal to its market prices plus the subsidy less than the factor cost.
paid on it in the absence of indirect tax.
(5) NNI at factor cost = NNI at market NNI at market price = NNI at factor cost+
price - indirect taxes + subsidies indirect taxes - subsidies

4. GVA and GDP

Gross Value Added (GVA)
GVA is defined as the value of output less the value of intermediate
consumption. It is a measure of the contribution to GDP made by an individual
producer, industry or sector. GVA can be broken down by industry and sector.
The sum of GVA over all industries or sectors plus taxes on products minus
subsidies on products gives GDP.
● Intermediate consumption is a national accounts concept which measures the
value of the goods and services consumed or used up as inputs by a process
of production.
● Value added represents the contribution of labour and capital to production
process.
Thus, GDP represents the sum total of GVA, without discounting for CFC or
depreciation, in all sectors or industries during a given year, after adjusting
for product taxes and product subsidies.
GDP=GVA + Taxes on products - Subsidies on products
Or
GVA GDP-Taxes on products+ Subsidies on products
In India, GDP is estimated by the Central Statistics Office (CSO). In the
estimation of GDP projections, the GVA was given at factor cost. In the revision
of National Accounts statistics done by the CSO in January 2015, it was decided
that sector-wise estimates of GVA will be given at basic prices instead of at
factor cost.
Basic price: The amount receivable by the producer from the buy for a unit of a
product minus any tax on the product plus any subsidy on the product.
However, GVA at basic prices will include production taxes and exclude
production subsidies available the commodity.
Relationship between factor cost and basic price:
Basic price = Factor cost + Production tax - Production subsidy
Relationship between basic price and market price:
Market price = Basic price + Product tax - Product subsidy
Relationship between factor cost and market price:
Market price = Factor cost + Indirect taxes - Subsidies
It should be noted that market price includes both product tax as well as
production tax while excludes both product and production subsidies.
The relationship between GVA at basic prices, GVA at factor cost and GDP
at market prices:
1. GVA at Basic Prices = CE + OS / MI + CFC + (Production taxes-Production
subsidies) where,
CE = Compensation Employees
OS = Operating Surplus
MI = Mixed Income
CFC = Consumption of Fixed Capital
2. GVA at Factor Cost = GVA at basic prices - (Production taxes -Production
subsidies)
3. GDP at market prices = Ʃ GVA at basic prices + Product taxes - Product
subsidies
Q.3 Write notes:
(i) National income at current and constant price
Answer:-
All the above concepts of national income such as GNI, GDP, NNI and NDP at
both market prices and at factor cost can be valued at current prices and at
constant prices.
Current prices refer to the prices of goods prevailing in the market at any
given point of time.
The estimates of GNI and NNI at current prices, do not help to capture the real
growth of the economy. If in every year prices remain the same and if we find
that there is a continuous increase in the national income, it means that there is
economic growth. This rarely happens. The prices do change and infact, they
generally increase and hence national income at current prices will show an
increase even if there is no real overall increase in production of goods and
services. Such an increase in national income does not reflect real changes in
output of the economy or growth rate Therefore in order to know the real change
in GNI, GDP, NNI, etc., these measures have to be estimated for various years
by using a price deflator. That is, the measures of national income are calculated
at current prices and then they are deflated (brought down) by means of a
price index. The deflated NNI, GNI, etc. are called NNI or GNI at constant price.
To calculate national income concepts at constant price a reference year is
selected. This year is known as the base year and it should be a normal year and
free from natural calamities like flood, earthquakes, famine and war. The base
year is always revised from time to time.
(ii) Real and Nominal GNI
Answer:-
 Real GNI/GDP refers to GNI/GDP at constant prices. It help to capture the
real growth of the economy.
 Nominal GNI/GDP refers to GNI/GDP at current prices.
When prices rise even if there is no real increase in the production of goods and
services, the nominal GNI/GDP i.e. GNI/GDP at current prices will rise. Such an
increase in GNI/GDP is not real growth. Thus, in order to know the real change
in GNI/GDP, GNI/ GDP at current prices is deflated (brought down) by using
a price deflator (price index) or national income deflator. The deflated GNI is
called GNI at constant prices.
GNI/GDP Deflator: It is the price index that measures the GNI/ GDP by
adjusting the impact of changes in prices of goods and services to the true
value (real GNI/GDP) of goods and services produced locally in the economy.
Nominal GNI
GNI Deflator = × 100
Real GNI

India's GDI for 2020-21 is given below: (in Rupees crore)

 Year Current Prices (nominal) Constant Prices (real)
2020-21 19561348 13384612
19561348
GDI Deflator 2020-21 = x 100
13384612

= 146.15 (price index for 2021)

Similarly we can calculate the GNI/GDP deflator (price index) for 2021-22 and
then calculate the rate of inflation. (Refer Chapter 16. 16.3 for calculating rate
of inflation.)
(iii) NNI at factor cost and at market prices.
(iv) GVA
(v) Green GDP
(vi) Importance of national income analysis
(vii) National income and economic welfare
Q.4 Discuss the importance of national income analysis.
Answer:-
The analysis of national income is important for several reasons. Some of these
are as follows:
1. Measures economic performance of countries: In the absence of any
alternative measurement, the value of national output and its growth have become
standard performance indicators of countries. Countries are ranked on the basis
of the size and growth rates of their GDP.
2. Compare standards of living: Per capita income is an indicator of how a
country's national income is distributed among the people. It becomes a
measurement of income inequality and provides a basis for comparing standards
of living of different countries.
3. Sectoral contribution: Contribution to national income comes from the three
major sectors of an economy, namely, primary, secondary and tertiary. Analysis
of national income shows which sector's relative contribution is how much and
how these trends have changed over time. This is used to study occupational
structure, income distribution, production investment and consumption patterns.
4. Measurement of economic welfare: Changes in composition of national
income over time can be an indicator to assess economic welfare. For example,
if a large part of national income is generated due to defence production at the
cost of education and health services, it reflects negatively on economic welfare.
5. Changes in price level: National income statistics can be used to estimate
trends in price level and forecast future inflationary and deflationary trends. GDP
or GNP is measured at current prices and at constant prices. A comparison
between the two can help in estimating price level changes.
6. Business forecasts: Growth rate trends and other related national income
measures are used by businesses to forecast future business activities. Businesses
make decisions to enter markets in different countries based on those countries'
national and per capita income data. Data from different time periods help
businesses predict future trends and make decisions regarding investment. Banks
and non-banking financial institutions that make financial investments in
different countries use national income statistics for investment decisions.
7. Global income distribution: National income data of different countries are
used to determine global distribution of income and wealth. Along with HDI,
national income statistics are used to determine the level of development of
different nations. This knowledge is used by international development agencies
to put in place programmes to reduce global inequalities. This is done through
provision of economic aid.
8. Economic planning and policies: Most governments use national income data
to formulate long term plans and medium term policies. For example, India
adopted the Five-Year Plans to improve the growth of national income. In order
to improve per capita income, several policy initiatives like financial inclusion,
employment generation have been adopted.
Q.5 Explain the concept of green national income. Discuss the need for green
national income.
Q.6 Explain the calculation of GGDP and Discuss its drawback.
Answer:-
Green National Income measured as Green Gross Domestic Product or
GGDP is an index of economic growth that measures the environmental effects
on the growth of conventional GDP.
It takes into account the environmental impact on a country's economic growth.
For example, it measures, in terms of money, the loss of bio-diversity, the cost
of climate change and pollution in the process of production of goods and
services that are accounted for in the calculation of GDP. In other words, GGDP
is conventional gross domestic product figures adjusted for the
environmental costs of economic activities. It is a measure of how much a
country is prepared for sustainable economic development.
The concept of GGDP finds its origin in the works of economists like James
Tobin and William Nordhaus* who were among the earliest to develop a
growth model incorporating environmental changes. The United Nations first
proposed the concept of Green GDP in 1993 Eventually, the concept of GGDP
got accepted as a policy initiative by many governments Notable among these
are the USA, Norway, China and India.
In China, the first green GDP accounting report, for 2004, was published in
September 2006. It showed that the financial loss caused by pollution was $66.3
billion or 3.05 percent of the GDP. These efforts of incorporating GGDP took a
backseat during the financial crisis of 2007-08 and have not yet been revived.
India began its GGDP initiative in 2009. The Ministry of Statistics and
Programme Implementation set up an expert group in 2011 to work out a
framework for green national accounts in India. The committee presented its
report in 2013. The process of accounting that was supposed to have culminated
in 2015, is yet to be completed.
Need for Green GDP:
1. Conventional measurements of national income, like GDP and GNP suffer
from many limitations. These measurements can only calculate the gross output
produced in an economy but do not evaluate the wealth and assets that a nation
has.
2. A nation's wealth and assets are used up in the process of output
production, resulting in changes in the country's future potential to produce.
With the help of conventional measurements, there is no way of knowing whether
the income generated in an economy is sustainable in the future or not.
3. Natural capital, that includes geology, soil, air, water and living beings, are
not adequately considered as economic assets in traditional GDP measurement.
The cost of using these resources is not accounted for. The positive externalities
(benefits) of maintaining natural capital are also not considered, partly because it
is very difficult to give monetary value to these assets and partly because
governments fear that the resulting GDP data will reflect poorly on them. For
example, the benefits of maintaining forest land or coastal resources to the
economy cannot be easily given money value and hence are not accounted for in
the calculation of GDP.
4. It is argued that Governments and firms generally do not make adequate
provisions for the interest of the future generation in the process of creating
national wealth. In order to achieve rapid growth and short-term profits, they
cause rapid depletion of natural capital. Green GDP measurement can be used to
bring in accountability towards the interest of the future generations.
5. Due to several drawbacks of the conventional national income measurement,
it has become necessary to have a more comprehensive macroeconomic indicator
to indicate an economy's potential in sustainable development and social well
being. Conventional GDP has limited scope for indicating the state of social well
being of the people.
Calculation:
The calculation of GGDP involves natural capital accounting. It is the process
of calculating the total stocks and flow of natural resources and services in
a given ecosystem of a region.
The process of production results in consumption of natural capital (Net natural
capital consumption). Therefore, in the calculation of GGDP, natural capital
accounting is necessary. This process involves three steps:
1. Physical accounting determines the state, type and extent of resources over
space and time. Both quantitative and qualitative accounting is done. For
example, measuring forest cover and water resources in both quantitative and
qualitative terms is a part of natural capital accounting.
2. Monetary valuation of the natural capital is the next process. It is often a
difficult process because many components of natural capital are not traded. For
example, how does one put a monetary value to the bio-diversity existing in
mangroves located in urban areas?
3. The net change in natural capital in monetary terms is then incorporated
into the GDP to arrive at the GGDP. GGDP is measured using the following
formula:
GGDP = GDP- Cost of Net Natural Capital Consumption
Cost of Capital Consumption includes
(i) Costs of natural resource consumption
(ii) Costs of environmental depletion
Drawbacks/Criticisms
Though an extremely important concept that needs to be incorporated by policy
makers of every country, the concept of GGDP has some drawbacks. These
drawbacks make its practical application somewhat difficult.
1. It may be difficult to assign monetary values to some of the natural capital
components. However, with advancement of technology, more and more
accurate measurement is becoming possible.
2. GGDP measures are often not able to capture the economic and social
welfare aspect of GDP growth as it gives too much importance to environment
factors alone.
3. Some critics believe that the GGDP measures only account for depletion of
natural resources but these measures cannot indicate the sustainability of the
growth rate.
Q.7 Bring out the relationship between national income and economic
welfare.
Answer:-
Economic welfare is the level of prosperity and standard of living of either
an individual or a group of people. It is also defined as the utility gained
through achievement of material goods and services. Conventional
measurements of national income accounting have been traditionally used to
measure economic welfare. Economic welfare depends upon efforts made by
governments to improve people's quality of life. This is done through spending
on welfare through subsidies, investment in health, education, infrastructure
and rural development.
Around 1960s, the world began to face problems of environmental
degradation, global inequality and economic underdevelopment in many
countries. During this time many economists began to question the importance
given by governments and agencies to national income accounting for estimating
generation of economic welfare.
In 1972, William Nordhaus and James Tobin introduced their Measure of
Economic Welfare (MEW)* as an alternative to GDP MEW adjusted national
income to include the value of leisure time and the amount of unpaid work in
an economy, hence increasing the welfare value of GDP They also included the
value of the environment damage caused by industrial production and
consumption, which reduced the welfare value of GDP.
Relationship Between National Income and Welfare
Economic welfare increases with increase in welfare spending by the
government, provided the spending is distributed in the desired manner. An
increase in national income will generally lead to increased capacity of
governments to raise welfare spending and thus increase economic welfare. But
direct relationship between national income and economic welfare is subject to
the following conditions:
1. Change in size of national income: When the size of the national income
increases, people earn more income and consume more goods and services. This
has a positive impact on welfare. On the other hand, a decrease in the size of the
national income will have the opposite effect.
2. Change in price level: National income is the market value of final goods and
services produced. If the value of the national income rises due to inflation, it
becomes difficult to measure the real changes in economic welfare. If prices rise
without an increase in output, economic welfare will reduce because real income
or purchasing power will fall.
3. Per capita income: The analysis of national income is incomplete without
considering per capita income. If national income and population size change at
the same rate, then the per capita income will remain the same. In such a situation,
there may not be any increase in welfare spending by the government. Thus, even
though the national income has increased, economic welfare may not increase.
4. Expenditure pattern: With increase in national income, if people spend their
rising income to acquire necessities like food, essentials, housing, education,
transport services, then economic welfare will increase. If the increased income
is used to spend on luxury goods due to demonstration effect or for speculative
investments, then welfare generation will be negatively impacted.
5. Production pattern: An increase in national income should be analysed by
examining the production pattern. If the national income has increased due to
increased defence production or production of luxury goods as compared to the
production of essential goods and services, then economic welfare will be
negatively affected.
6. Changes in income distribution: Changes in national income bring about
changes in income distribution. Income is transferred from the people to the
government through taxes and from the government to the people through
welfare spending. If the rich are taxed more to increase welfare spending, it will
have a positive effect on economic welfare. Control of monopoly businesses,
nationalising essential services, imposing heavy duties on luxury goods will
increase economic welfare. On the other hand, if most of the share of national
income is generated through private sector profit and the rich enjoy tax benefits,
then economic welfare will be negatively affected. However, the government has
to maintain a balance between taxation and welfare spending. If the rich are taxed
very heavily, they may not invest in the country and take their wealth outside.
This will result in less production and job creation and will adversely affect
national income and welfare. Therefore, taxes on high-income groups need to be
rational in order to increase savings, investment, production and economic welfare.

OBJECTIVE QUESTIONS
A. Explain the following concepts:
(a) National income (b) GDP
(c) GNI/GNP (d) NNI
(e) NDP (f) Capital depreciation
(g) National income at constant price (h) National income at current price
(i) Real and nominal GNI (j) Gross Value added
(k) Basic Prices (l) Operating surplus and mixed incomes
(m) Personal Income (n) Disposable Income
(o) PPP Income (p) Per Capita Income
(q) GGDP (r) Natural capital
(s) GNP deflator (t) Measure of Economic Welfare
B. Select the correct answer from the alternatives provided:
1. What is the total money value of final goods and services produced within the
domestic territory of the country during a given year?
(a) GDP (b) GNI
(c) NNI (d) None of the above
2. What is the total money value of the goods and services produced by the
nationals during a given year?
(a) GNI (b) GDP
(c) NDP (d) None of the above
3. Which of the following measures the real growth of the economy?
(a) GDP at constant prices (b) GDP at current prices
(c) NDP at current prices (d) GNI
4. Which of the following is the sum of all income actually received by the people
in the country?
(a) Personal income (b) National income
(c) GDP (d) GNI
5. GNI in an open economy is equal to
(a) GDP+(X-M) (b) GDP+ (X-M) +R-P
(c) GDP+ (R-P) (d) C+1+G
6. Price deflator helps us to work out national income at
(a) Constant price (b) Current price
(c) Future price (d) Nominal price
7. Which of the following formulas is used to calculate GGDP?
(a) GDP+ Net factor income from abroad (b) GDP+C+I+G
(c) GDP- Depreciation
(d) GDP-Net Natural Capital Consumption
8. Which of the following will not result in increase in economic welfare when
the national income increases?
(a) Increase in subsidy spending by the government
(b) Increased production in the defence sector at the cost of other Sectors
(c) Reduction in price level
(d) Rational increase in taxes on the rich
9. Which of the following is not a drawback of GGDP?
(a) Provides an alternative to the conventional measures of national income
(b) Cannot measure economic sustainability
(c) Difficult to measure natural capital in terms of money
(d) Not able to capture the economic welfare aspects of GDP