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# National Income Accounting
Chapter 6 · Determination of National Income · Unit 1 · Exam-focused Revision Notes
### Crux First
- National Income = NNP at Factor Cost (NNP FC ) .
- 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) .
### 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 (GDP MP ) .
- 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.
### 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 .
- 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.
### 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.
- If NFIA is positive, then GNP > GDP .
- GDP is a domestic concept; GNP is a national concept.
### 9. Net National Product at Market Price (NNP MP )
- NNP at Market Price is GNP after deducting depreciation.
- It can also be obtained by adding NFIA to NDP at market price.
### 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.
#### Basic Price
- Basic price excludes product taxes and includes product subsidies.
- It is the subsidised price without tax.
- 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.
### 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.
### 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.
- 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.
#### Disposable Personal Income (DI)
- Disposable personal income is the amount available to individuals for consumption or saving .
- 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)
#### Gross National Disposable Income (GNDI)
#### Private Income
- Private income is income accruing to the private sector from all sources, both factor income and transfer income.
### 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.
- 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.
### 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
- Primary sector
- Secondary sector
- Tertiary or service sector
- Own account production of fixed assets
- Production for self-consumption
- Imputed rent of owner-occupied houses
- Change in stock
- 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
- Compensation of employees
- Operating surplus
- Mixed income of self-employed
- NFIA
#### Compensation of Employees includes
- Wages and salaries
- Bonus
- Dearness allowance
- Commission
- Employer's contribution to provident fund
- Compensation in kind
#### Operating Surplus includes
- Rent
- Interest
- Profit
#### 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 .
#### 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
- 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
- Income distribution and inequality
- Non-market production
- Leisure
- Pollution, crime and congestion
- Volunteer work
- Externalities
- Social and political well-being factors
- 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
- Absence of proper income records
- Lack of occupational classification
- Difficulty in estimating depreciation correctly
### 25. Formula Sheet – Must Memorise
### 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
- 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.
### National Income Accounting notes built for concept clarity and exam recall.
This chapter page is written for CA Foundation Business Economics students who want quick understanding first and revision support later. Use it to revise definitions, logic, distinctions, traps, and answer-writing points before moving to objective practice.
- Meaning, definitions and core concepts in simple language
- Important distinctions and exam-oriented traps
- Quick revision support before classroom tests or self-study
- Direct bridge from theory revision to chapter-wise MCQ practice
### What students should be able to answer after revising this topic.
- Explain the meaning and importance of National Income Accounting.
- Identify the most common conceptual differences linked to this unit.
- Write short exam answers using the right terminology and logic.
- Solve chapter-wise objective questions without confusion on keywords.
#### Related chapters for stronger internal revision
- Business Cycles
- The Keynesian Theory of Determination of National Income
- Price-Output Determination Under Different Market Forms