Crux First
Most important recall points before solving MCQs
- National Income = NNP at Factor Cost (NNPFC).
- GDP means production within domestic territory; GNP means income of normal residents.
- Gross - Net = Depreciation.
- Domestic - National = Net Factor Income from Abroad (NFIA).
- Market Price - Factor Cost = Net Indirect Taxes.
- Three methods of measurement: Value Added Method, Income Method, Expenditure Method.
- Transfer payments, second-hand goods and sale of shares/bonds are excluded from national income.
- Inventory change and capital formation are included.
- GDP Deflator measures inflation: Nominal GDP / Real GDP × 100.
- Personal Income is income received; National Income is income earned.
1. National Income Accounting – Meaning
- National Income Accounting is the system of macro-economic accounts which tracks production of goods and services, generation of income and final expenditure in the economy.
- It helps us understand how production, income and expenditure are interlinked.
- It was pioneered by Simon Kuznets and Richard Stone.
- In India, national accounts are compiled at the central level by the Central Statistical Organisation (CSO) under the Ministry of Statistics and Programme Implementation (MoSPI).
National income accounting is a macro concept. In MCQs, do not confuse it with accounting of individual firms.
2. Usefulness and Significance of National Income Estimates
- Helps businesses forecast future demand for products.
- Shows composition and structure of the economy sector-wise.
- Assists government in sector-specific development policies.
- Useful for macroeconomic analysis, modelling and policy evaluation.
- Helps in studying income distribution and inequality.
- Useful for international comparison of income and living standards.
- Combined with monetary data, it helps frame growth and inflation policies.
MCQ Trap
- National income estimates are not just for income measurement; they are also used for policy, forecasting and comparison.
3. Different Concepts of National Income
| Concept |
Main Meaning |
Key Difference |
| GDP |
Final goods and services produced within domestic territory |
Domestic concept |
| GNP |
Output/income of normal residents |
GDP + NFIA |
| NDP |
GDP after deducting depreciation |
Net concept |
| NNP |
GNP after deducting depreciation |
Net national concept |
| NNP at FC |
National Income |
Final factor income measure |
4. Gross Domestic Product (GDP)
- GDP is the value of all final goods and services produced in the country during a given period.
- It includes production of goods such as houses, machines, mobiles and services such as telecom, healthcare and insurance.
- Since valuation is done at market prices, it is called GDP at Market Price (GDPMP).
GDPMP = Value of all final goods and services produced within domestic territory
MCQ Trap
- GDP includes only final goods, not intermediate goods.
- GDP is based on location of production, not nationality.
5. Nominal GDP and Real GDP
Nominal GDP
- Measured at current prices.
- It changes because of changes in both output and prices.
Real GDP
- Measured at constant prices of a base year.
- It removes the effect of price changes and shows the real change in production.
Real GDP = Nominal GDP / GDP Deflator × 100
In MCQs, Nominal GDP = current prices and Real GDP = constant prices is a standard direct question.
6. GDP Deflator
- GDP deflator is a price index used to convert nominal GDP into real GDP.
- It shows the current level of prices relative to the base year.
- In the base year, GDP deflator is always 100.
GDP Deflator = (Nominal GDP / Real GDP) × 100
Real GDP = (Nominal GDP / GDP Deflator) × 100
Inflation Rate = [(Deflator in current year - Deflator in previous year) / Deflator in previous year] × 100
MCQ Trap
- If GDP deflator is greater than 100, price level is higher than base year.
- If GDP deflator is less than 100, price level is lower than base year.
- If nominal GDP and real GDP are equal, GDP deflator = 100.
7. Net Domestic Product (NDP)
- Capital used in production wears out. This wear and tear is called depreciation or consumption of fixed capital.
- NDP is GDP after deducting depreciation.
- It shows the net addition to production after maintaining capital stock.
NDPMP = GDPMP - Depreciation
Gross = Net + Depreciation
Net = Gross - Depreciation
8. Gross National Product (GNP)
- GNP is the market value of all final goods and services produced by normal residents of a country during an accounting year, including income from abroad.
- It includes income earned by residents abroad and excludes income earned by foreigners within India.
GNPMP = GDPMP + Net Factor Income from Abroad (NFIA)
GDPMP = GNPMP - NFIA
National = Domestic + Net Factor Income from Abroad
MCQ Trap
- If NFIA is positive, then GNP > GDP.
- GDP is a domestic concept; GNP is a national concept.
9. Net National Product at Market Price (NNPMP)
- NNP at Market Price is GNP after deducting depreciation.
- It can also be obtained by adding NFIA to NDP at market price.
NNPMP = GNPMP - Depreciation
NNPMP = NDPMP + NFIA
NNPMP = GDPMP + NFIA - Depreciation
10. Market Price, Factor Cost and Basic Price
Market Price vs Factor Cost
- Market price includes net indirect taxes.
- Factor cost is the amount actually received by factors of production.
Market Price = Factor Cost + Net Indirect Taxes
Market Price = Factor Cost + Indirect Taxes - Subsidies
Factor Cost = Market Price - Net Indirect Taxes
Basic Price
- Basic price excludes product taxes and includes product subsidies.
- It is the subsidised price without tax.
Basic Price = Factor Cost + Production Taxes - Production Subsidies
Market Price = Basic Price + Product Taxes - Product Subsidies
MCQ Trap
- The difference between market price and factor cost is net indirect taxes.
- Do not confuse product tax and production tax.
11. GDP at Factor Cost and NDP at Factor Cost
- GDP at factor cost is GDP at market price minus net indirect taxes.
- NDP at factor cost is the sum of domestic factor incomes earned by factors of production.
GDPFC = GDPMP - Indirect Taxes + Subsidies
GDPFC = Compensation of Employees + Operating Surplus + Mixed Income + Depreciation
NDPFC = NDPMP - Net Indirect Taxes
NDPFC = Compensation of Employees + Operating Surplus + Mixed Income
12. National Income = NNP at Factor Cost
- National Income is the factor income accruing to normal residents of the country during a year.
- It is the sum of domestic factor income plus net factor income from abroad.
NNPFC = National Income = Domestic Factor Income + NFIA
National Income = Compensation of Employees + Operating Surplus + Mixed Income + NFIA
Remember for MCQ: National Income = NNP at Factor Cost, not GDP, not GNP, not NDP.
13. Per Capita Income
- Per Capita Income is obtained by dividing national output or income by population.
- It is used as an indicator of standard of living.
Per Capita Income = GDP / Population
MCQ Trap
- In the chapter, GDP per capita is described as a measure of economic output per person.
14. Personal Income and Disposable Personal Income
Personal Income (PI)
- Personal income is the income actually received by the household sector and Non-Profit Institutions Serving Households.
- It includes transfer payments.
- It excludes undistributed profits, corporate taxes, contributions to social security and certain other items not actually received.
PI = NI + Income received but not earned - Income earned but not received
PI = NI - Undistributed Profits - Net Interest Payments by Households - Corporate Tax + Transfer Payments
Disposable Personal Income (DI)
- Disposable personal income is the amount available to individuals for consumption or saving.
DI = PI - Personal Income Taxes - Non-tax Payments
MCQ Trap
- National income is not equal to personal income because transfer payments are excluded from NI but included in PI.
15. Other Concepts
Net National Disposable Income (NNDI)
NNDI = Net National Income + Other Net Current Transfers from Rest of the World
Gross National Disposable Income (GNDI)
GNDI = NNDI + Consumption of Fixed Capital
Private Income
- Private income is income accruing to the private sector from all sources, both factor income and transfer income.
Private Income = Private Sector Factor Income + NFIA + National Debt Interest + Current Transfers from Government + Other Net Transfers from Rest of the World
16. Circular Flow of Income
- Circular flow of income means the continuous circulation of production, income generation and expenditure in the economy.
- Three interlinked phases:
- Production phase – Firms produce goods and services using factor services.
- Income/Distribution phase – Rent, wages, interest and profit flow to households.
- Expenditure/Disposition phase – Income is spent on consumption and investment, leading to further production.
Same economy can be viewed as a flow of output, a flow of income and a flow of expenditure. This is the base of the three methods of measuring national income.
17. Methods of Measuring National Income
| Method |
What is Added |
Main Focus |
| Value Added / Product Method |
Net value added by all producing units |
Contribution of production units |
| Income Method |
All factor incomes |
Contribution of factor owners |
| Expenditure Method |
All final expenditures |
Consumption and investment flow |
18. Value Added Method / Product Method
- This method measures contribution of each producing enterprise.
- It avoids double counting by subtracting intermediate consumption.
- Producing units are classified into:
- Primary sector
- Secondary sector
- Tertiary or service sector
Gross Value Added at MP (GVAMP) = Value of Output - Intermediate Consumption
Value of Output = Sales + Change in Stock
Net Value Added at MP (NVAMP) = GVAMP - Depreciation
Net Value Added at FC (NVAFC) = NVAMP - Net Indirect Taxes
National Income = NVAFC + NFIA
Also include:
- Own account production of fixed assets
- Production for self-consumption
- Imputed rent of owner-occupied houses
- Change in stock
MCQ Trap
- Intermediate goods are deducted to avoid double counting.
- If domestic sales are separately given, exports must be added in value of output.
- If only domestic purchases are given, imports used as inputs must be added.
19. Income Method
- National income is calculated by adding all factor incomes paid by production units.
- It is also called Factor Payment Method or Distributed Share Method.
- It includes:
- Compensation of employees
- Operating surplus
- Mixed income of self-employed
- NFIA
NDPFC = Compensation of Employees + Operating Surplus + Mixed Income
NNPFC or National Income = Compensation of Employees + Operating Surplus + Mixed Income + NFIA
Compensation of Employees includes
- Wages and salaries
- Bonus
- Dearness allowance
- Commission
- Employer's contribution to provident fund
- Compensation in kind
Operating Surplus includes
Mixed Income
- Income of self-employed where labour income and capital income cannot be separated.
Excluded under Income Method
- Transfer payments like pension, scholarship, unemployment allowance
- Capital gains and windfall gains
- Sale of second-hand goods
- Sale of financial assets like shares and bonds
- Interest on public debt
- Interest on consumption loans
- Interest paid by one firm to another
20. Expenditure Method
- Under this method, national income is measured as total final expenditure in the economy during an accounting year.
- It is also called Income Disposal Approach.
GDPMP = Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports
GDPMP = C + I + G + (X - M)
Main Components
- Private Final Consumption Expenditure (PFCE)
- Government Final Consumption Expenditure (GFCE)
- Gross Domestic Capital Formation including fixed capital formation, change in stock and valuables
- Net Exports = Exports - Imports
GNPMP = GDPMP + NFIA
GNPFC = GNPMP - NIT
NNPFC = GNPFC - Depreciation
MCQ Trap
- Government transfer payments like pension and scholarship are not included in government final consumption expenditure.
- Land and residential buildings purchased by households are treated as capital formation, not PFCE.
- Net imports mean imports exceed exports, so net exports become negative.
21. What is Included and Excluded in National Income?
| Included |
Excluded |
| Final goods and services |
Intermediate goods |
| Capital goods |
Transfer payments |
| Inventory changes |
Second-hand goods |
| Imputed rent of owner-occupied houses |
Sale of shares and bonds |
| Production for self-consumption |
Lottery winnings and windfall gains |
| Commission/brokerage on sale of second-hand goods |
Pure financial transactions |
Top MCQ Traps from this Area
- Sale of second-hand goods is excluded, but commission on their sale is included.
- Shares and bonds are excluded because they are only paper claims, not current production.
- Inventory accumulation is included because it is part of current year's production.
22. System of Regional Accounts in India
- Regional accounts provide data on transactions in the regional economy.
- State income is called Net State Domestic Product (NSDP).
- Per capita state income = NSDP / mid-year projected population of the state.
- State income estimates are prepared by State Directorates of Economics and Statistics.
- Some activities like railways, communications, banking, insurance and central government administration are supra-regional sectors and are allocated across states using relevant indicators.
23. GDP and Welfare
- GDP is not a perfect measure of welfare.
- GDP measures output, but not complete well-being.
- GDP ignores:
- Income distribution and inequality
- Non-market production
- Leisure
- Pollution, crime and congestion
- Volunteer work
- Externalities
- Social and political well-being factors
MCQ Trap
- Higher GDP does not always mean higher welfare.
- Expenditure on police due to more crime can raise GDP, but it does not mean people are better off.
24. Limitations and Challenges of National Income Computation
Conceptual Difficulties
- Lack of universally agreed definition of national income
- Difficulty in distinguishing final goods from intermediate goods
- Treatment of transfer payments
- Valuation of services of durable goods
- Difficulty in incorporating income distribution
- Valuation of new goods at constant prices
- Valuation of government services
Practical Difficulties
- Inadequate and unreliable data
- Large non-monetised sector
- Production for self-consumption
- Absence of proper income records
- Lack of occupational classification
- Difficulty in estimating depreciation correctly
25. Formula Sheet – Must Memorise
GDP Deflator = (Nominal GDP / Real GDP) × 100
NDPMP = GDPMP - Depreciation
GNPMP = GDPMP + NFIA
NNPMP = GNPMP - Depreciation
GDPFC = GDPMP - Indirect Taxes + Subsidies
NDPFC = NDPMP - Net Indirect Taxes
NNPFC = National Income = NDPFC + NFIA
Market Price = Factor Cost + Indirect Taxes - Subsidies
Factor Cost = Market Price - Indirect Taxes + Subsidies
PI = NI + Income received but not earned - Income earned but not received
DI = PI - Personal Income Taxes - Non-tax Payments
GDPMP = C + I + G + (X - M)
26. High-Yield MCQ Traps
- Resident unit means unit having predominant economic interest in economic territory for one year or more.
- GDP includes depreciation; NDP excludes it.
- GNP = GDP + NFIA, not GDP - NFIA.
- NNP at FC = National Income.
- Mixed income means combined factor payment which cannot be separated into wages, rent, interest and profit clearly.
- Transfer payments are excluded from national income but included while moving from NI to PI.
- Second-hand goods are excluded; only service charges on sale are included.
- Indirect taxes - subsidies = Net Indirect Taxes.
- Inventory addition is included in GDP.
- Government final consumption expenditure excludes pensions and scholarships.
Final Quick Revision
1-minute recall before exam or MCQ practice
- GDP = final goods and services produced within domestic territory.
- Real GDP = output at constant prices; Nominal GDP = output at current prices.
- GDP Deflator = Nominal GDP / Real GDP × 100.
- Gross - Net = Depreciation.
- National - Domestic = NFIA.
- Market Price - Factor Cost = Net Indirect Taxes.
- NDP = GDP - Depreciation.
- GNP = GDP + NFIA.
- NNP = GNP - Depreciation.
- National Income = NNP at Factor Cost.
- Three methods: Product, Income, Expenditure.
- Transfer payments, second-hand goods, shares and bonds are excluded.
- Capital formation and inventory change are included.
- Personal Income is received income; Disposable Income = PI - direct taxes.
- GDP is not a full measure of welfare.
