National

income
Indian Economy
Economy

• The economy refers to the system by which a country or region

organizes the production, distribution, and consumption of goods and
services. It includes all activities related to:
• Production: The creation of goods and services (e.g., farming,
manufacturing, construction).
• Distribution: The movement of goods and services from producers to
consumers (e.g., transportation, trade).
• Consumption: The use of goods and services by individuals, businesses,
or governments.
Two levels of study

• An economy operates through a complex interaction of factors

such as labor, capital, resources, and technology. It can be
studied at various levels, such as:
• Microeconomy: Focuses on individual markets, businesses, and
households.
• Macroeconomy: Focuses on looks at the economy as a whole,
focusing on aggregate outcomes and large-scale economic
factors, like growth, inflation, and unemployment.
The three common types of economies are:

• Market Economy: Decisions are driven by supply and demand with

minimal government intervention. Private ownership and competition
determine prices. Example: USA.
• Command Economy: The government controls production, distribution,
and prices. Limited consumer choice, with a focus on government
priorities. Example: North Korea.
• Mixed Economy: Combines market and government control. Businesses
operate in a market, but the government regulates key sectors. Example:
India, UK.
• The economy has three sectors:
• Primary Sector: Involves extraction of natural resources (e.g.,
agriculture, mining).
• Secondary Sector: Focuses on manufacturing and processing. It
involves transforming raw materials into finished goods or
products (e.g., construction, production of goods).
• Tertiary Sector: Involves services. It involves providing services
rather than goods. (e.g., retail, healthcare, finance).
Distribution of gross domestic product (GDP) across economic sectors
Distribution of the workforce across economic sectors
The four factors of production are:
Land: This includes Labor: This refers to the
natural resources like human workforce,
minerals, forests, water, including their skills,
and climate. abilities, and education.

Capital: This encompasses Entrepreneurship: This is

physical capital (like the ability to combine
machinery, equipment, and the other factors of
buildings) and financial production to create new
capital (like money and goods and services. They
investments). take business risks and
innovate
 Factor incomes - it's the income earned by
individuals or businesses for providing the
resources necessary for production.
Factor • Land: Rent
• Labor: Wages and salaries
incomes
• Capital: Interest and dividends
• Entrepreneurship: Profits
 • National income is a measure of the total
economic activity in a country.
• It represents the monetary value of all
final goods and services produced within a
National country's borders over a specific period of
time, typically a year.
Income • The Central Statistics Office (CSO) of
India's Ministry of Statistics and Program
Implementation is responsible for
calculating India’s national income
 The 1. Gross Domestic Product (GDP)
important 2. Gross National Product (GNP)
concepts 3. Net National Product (NNP) at
Market Prices
of national 4. Net National Product (NNP) at
income: Factor Cost or National Income
Gross Domestic Product (GDP):
• Gross Domestic Product (GDP) is the total market
value of all final goods and services currently
produced within the domestic territory of a country
in a particular time period usually a year.
• Domestic territory includes the territorial waters,
Indian embassies and military establishments
abroad
India’s GDP
GDP is a simpler measure of a nation’s income that’s relatively easy to compute
Four things to note

1. It measures the market value of annual output of goods and services currently
produced. This implies that GDP is a monetary measure.
2. To avoid double counting, GDP ignores the transactions involving
intermediate goods.
3. GDP includes only currently produced goods and services in a year. Second
hand goods not included
4. GDP refers to the value of goods and services produced within the domestic
territory of a country by nationals or non-nationals.
India’s nominal GDP- rank (2023-IMF)
Purchasing Power Parity measurement
• Purchasing power parity is used worldwide to compare the
income levels in different countries.
• For example Rs.75 can buy a decent meal in India. But it might
cost 10 dollars in the US. It simply means that goods are cheaper
in India than in the US and GDP measurement has to consider
this.
• So, PPP adjusts for this price difference or difference in
purchasing power.
India’s PPP GDP (2021-IMF)
GDPs of India and the US
GDPs of US, China and India
GDPs of BRICS and the US
GDPs of India and its neighbours
GDP per capita
GDP per capita
Depreciation

• The capital undergoes wear and tear

• A part of production actually is spent on that too
• Depreciation is the decrease in the value of capital assets,
such as buildings, machinery, and vehicles, used to
produce goods and services
Uses of Net Domestic Product (NDP)

• Measures True Output: Reflects the economy's actual production

after accounting for depreciation.
• Economic Health Indicator: Highlights capital depreciation trends and
investment needs.
• International Comparisons: Standardizes comparisons by excluding
varying depreciation.
• Investment Decisions: Shows net income for businesses after capital
costs.
Gross National Product (GNP):

Gross National Product (GNP) is the total market value of all

goods and services produced by the residents of a country in a
given time period (usually a year), including income earned
abroad.
Key Points:
• Includes: Income earned by nationals abroad (e.g., profits from
foreign investments, wages of citizens working overseas).
• Excludes: Income earned by foreign nationals within the
country.
Gross National Product (GNP):

• GNP includes net factor income from abroad whereas GDP does
not. Therefore,
• GNP = GDP + Net factor income from abroad (Income earned by
residents abroad - Income earned by foreigners domestically).
• Net factor income from abroad = factor income received by
Indian nationals from abroad – factor income paid to foreign
nationals working in India.
Gross National Product (GNP):

• Example:
• If an Indian company earns profits from its branch in the U.S.,
that profit is included in India’s GNP, but not its GDP.
• As of 2024, India's Gross Domestic Product (GDP) is
approximately $3.7 trillion, while its Gross National Product
(GNP) is about $3.51 trillion. This means that India's GDP is
larger than its GNP
Net National Product (NNP)

• NNP is the market value of all final goods and services after
providing for depreciation.
• Therefore
• NNP = GNP – Depreciation
• Depreciation is the consumption of fixed capital or fall in the
value of fixed capital due to wear and tear.
Factor Cost and Market Price

• Factor cost is the total amount which the manufacturer had to

invest in the production of a good or commodity. It doesn't
include any taxes imposed on the final product.
• Market price is the final cost at which the manufacturer sells
the goods to customers. And these are inclusive of all the
applicable taxes.

Market Price = Factor Cost + Indirect Taxes – Subsidies

Or Market Price = Factor Cost + Net Indirect taxes
Crucial differences between National Income concepts

Difference between Difference between Difference between

DOMESTIC and NATIONAL GROSS and NET= MARKET PRICE AND
= NET FACTOR INCOME DEPRECIATION FACTOR COST=
FROM ABROAD NET INDIRECT TAXES
Net National Product (NNP) at Factor Cost (National
Income)

• Net National Product (NNP) at Factor Cost is generally considered one of

the best assessments of national income. It provides a comprehensive
measure of a country's economic output by accounting for the following:
• Factor Income: It includes all income earned by factors of production (labor,
capital, land, and entrepreneurship) within the country.
• Indirect Taxes: It subtracts indirect taxes (like sales tax, excise duty) from the
Gross National Product (GNP) to exclude the government's share of revenue.
• Depreciation: It subtracts depreciation (the wear and tear of capital goods)
to reflect the consumption of capital in the production process.
What is real and nominal GDP?
Nominal GDP is calculated at current prices so it doesn't take
inflation into consideration. Real GDP is GDP adjusted for
inflation.
Current Prices and Constant Prices
Current Prices measures GDP using the actual prices making no
adjustment for inflation. Constant prices (real) adjust for inflation
using a base year.
What is a “base year”?

• Base year helps to enable inter-year comparisons.

• It gives an idea about changes in purchasing power and allows
calculation of inflation-adjusted growth estimates.
• The new series has changed the base to 2011-12 from 2004-05.
• Base effect: when the base year’s GDP is low, subsequent year’s GDP
will appear to be relatively higher.
What Is the GDP Deflator?

• The GDP deflator measures the change in prices of all new, domestically
produced goods and services in an economy.
• Increases in GDP may simply be due to inflation. The GDP deflator takes away
the inflation component.

• Significance: Unlike other inflation measures (like the Consumer Price Index),
the GDP deflator includes all goods and services produced in an economy,
providing a more comprehensive view of inflation trends.
GDP and
GVA
 Gross Value Added

• Gross Value Added (GVA) is a measure of the economic value generated

by a specific sector, industry, or area of production within an economy. It
represents the contribution of labour and capital to the production
process.
• Definition: GVA is calculated as the difference between the value of goods
and services produced (output) and the value of goods and services used
in production (intermediate consumption). It can be expressed as:
GVA = Output − Intermediate Consumption
8 broad categories of GVA

The sectoral classification provides data on eight broad

categories that span the range of goods and services in the
economy.

These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3)

Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services;
5) Construction; 6) Trade, Hotels, Transport, Communication and Services
related to Broadcasting; 7) Financial, Real Estate and Professional Services;
8) Public Administration, Defence and other Services.
 GVA gives a picture of the state of economic
What is activity from the producers’ side or supply side

the GDP gives the picture from the consumers’

side or demand perspective.
difference Both measures need not match - difference in
between treatment of net taxes.

the two? GDP = GVA + Taxes − Subsidies

Types of Taxes and Subsidies

• Production tax – Tax not dependent of units of produce – Eg:

land revenue, stamp duty, registration fee, professional tax
• Production subsidy – These subsidies are given to help offset
production costs or losses. Eg: interest subsidy, tax breaks,
railway subsidies
• Product Tax – tax based on the units produced or quantity – Eg:
GST, excise duty, export duty
• Product subsidy – subsidies are received per unit of product Eg:
food, fertiliser, fuel subsidy
Basic prices
• The basic price is the amount that producers receive for bringing the
product to the market, covering the costs of production, including
production taxes (such as taxes on labor or land) but excluding taxes
directly applied to the product itself, like VAT or sales taxes.
• This price reflects the pure value of a product as received by the producer.
• Basic Price = Market Price − Taxes on Products + Subsidies on Products
• Alternatively, Basic Price = Factor cost + Production Taxes – Production
subsidies
 Basic prices
• GDP is calculated at Market price which includes all taxes and subtracts
subsidies at the product level
• India used to calculate GVA at Factor cost, but in 2015 we shifted to
calculating GVA at Basic prices – meaning, it includes production tax net of
subsidies but not the product tax or subsidies
• The shift to basic prices aligns India’s calculation methods with global
standards like the System of National Accounts (SNA), which is used by
international organizations.
To summarise
• The market price is the final price that consumers pay for goods and services. It
includes all taxes levied on the product and excludes any subsidies provided.
• The basic price is the price received by producers for their goods and services
before taxes on products (like excise duty) are added, but including subsidies on
products.
• Basic Price = Market Price − Product Taxes + Product Subsidies
• The factor cost represents the cost of production from the producer's
perspective. It includes the costs of factors of production (labor, land, capital,
etc.), but excludes taxes imposed on products by the government and includes
subsidies provided to the producer.
• Factor Cost = Basic Price − Production Taxes + Production Subsidies
Why did policy makers decide to also give
weight to GVA?
• Sector-wise breakdown - better help to decide which sectors need
incentives/stimulus.
• Sharp increase in the output, only due to higher tax collections which could
be on account of better compliance or coverage, may distort the real
output situation.
Which of the two measures is considered more appropriate gauge of the
economy?
• GVA is useful for understanding the economic performance of specific
sectors or industries.
• GDP provides a comprehensive overview of a country’s overall economic
activity.
Problems with GDP as a measure of income
• It doesn’t consider inequality
• It doesn’t consider Human development fully
• It doesn’t consider environmental sustainability. Even rebuilding
after an earthquake becomes part of GDP.
• Even if the government spends wastefully, it increases GDP
• It misses home production and black markets.
• Treating the replacement of depreciated capital the same as the
creation of new capital
Personal Income

It is the sum of all incomes actually received by all individuals in the

economy in a year.
In National Income there are some incomes, which is earned but not
actually received by households such as Social Security contributions,
corporate income taxes and undistributed profits.
• On the other hand, there are incomes (transfer payment), which is
received but not currently earned such as old age pensions,
unemployment doles, relief payments, etc.
Personal Income

• Thus, in moving from national income to personal income we must

subtract the incomes earned but not received and add incomes
received but not currently earned. Therefore,
• Personal Income = National Income – Social Security contributions
– corporate income taxes – undistributed corporate profits +
transfer payments.
• Transfer payments (a payment made or income received in which no
goods or services are being paid for, such as a benefit payment or
subsidy)
Disposable Income

From personal income, if we deduct personal taxes like income taxes,

personal property taxes etc. what remains is called disposable income.
Thus,
✓Disposable Income = Personal income – personal taxes.
✓Disposable Income can either be consumed or saved. Therefore,
✓Disposable Income = consumption + saving.
So, people’s consumption or savings increase only if disposable
income increases.