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February 5, 2026

Chapter -2 National Income and Related Aggregates

Chapter -2 National Income and Related Aggregates

NOTES

Introduction to National Income

1️⃣ INTRODUCTION TO THE CHAPTER

This chapter deals with the measurement of National Income using the following methods:

  • Income Method
  • Expenditure Method
  • Value Added (Product) Method

Students must be able to perform the following conversions:

  • Convert Gross ↔ Net
  • Convert Market Price ↔ Factor Cost
  • Convert Domestic ↔ National

Students are also required to calculate:

  • Private Income
  • Personal Income
  • Personal Disposable Income
  • National Disposable Income (Gross & Net)

👉 This chapter is highly numerical and conversion-based.

Gross and Net Concept

2️⃣ GROSS AND NET CONCEPT

Meaning

  • Gross = Value including depreciation
  • Net = Value excluding depreciation

Depreciation

  • Expected decrease in value of fixed capital assets due to use
  • Result of the production process

Formula

Gross = Net + Depreciation


Net = Gross − Depreciation

Other Names of Depreciation

  • Consumption of Fixed Capital
  • Capital Consumption Allowance
  • Current Replacement Cost
National Income vs Domestic Income

3️⃣ NATIONAL INCOME vs DOMESTIC INCOME

National Income (NY)

  • Net money value of final goods and services
  • Produced by normal residents
  • During one accounting year

Domestic Income (DY)

  • Total factor income earned within domestic territory
  • By residents and non-residents

Difference → Net Factor Income from Abroad (NFIA)

NFIA = Income from abroad − Income paid to abroad


NY = DY + NFIA


DY = NY − NFIA

🔹 NFIA – ALL EXAM CASES

Case I: Income paid to abroad given
  • Income from abroad = 0
  • NFIA = 0 − Income paid to abroad (Negative)
Case II: Income from abroad given
  • Income paid to abroad = 0
  • NFIA = Income from abroad (Positive)
Case III: Both given
  • NFIA = Income from abroad − Income paid to abroad
Case IV: Net Factor Income Paid to Abroad (NFPA)
  • NFIA = − NFPA
Factor Cost vs Market Price

4️⃣ FACTOR COST vs MARKET PRICE

Factor Cost (FC)

  • Payment to factors of production
  • Includes wages, rent, interest, and profit

Market Price (MP)

  • Actual selling price in the market

Difference → Net Indirect Taxes (NIT)

NIT = Indirect Taxes − Subsidies


MP = FC + NIT


FC = MP − NIT

🔹 NIT – ALL NUMERICAL CASES

  • Only Subsidy given → NIT = − Subsidy
  • Only Indirect Tax (IT) given → NIT = IT
  • Both IT & Subsidy given → NIT = IT − Subsidy
  • Sales Tax + Excise Duty → Add both
  • Net Subsidy given → Reverse the sign
  • Net Subsidy + IT given → Ignore IT, reverse Net Subsidy
Aggregates of National Income

5️⃣ AGGREGATES OF NATIONAL INCOME

(1) GDP at Market Price (GDPMP)

  • Gross market value
  • Produced within domestic territory
  • Includes Net Indirect Taxes (NIT)
  • Includes depreciation

(2) GDP at Factor Cost (GDPFC)

GDPFC = GDPMP − NIT

(3) NDP at Market Price (NDPMP)

NDPMP = GDPMP − Depreciation

(4) NDP at Factor Cost (NDPFC)

NDPFC = GDPMP − Depreciation − NIT

👉 Also called Domestic Income

(5) GNP at Market Price (GNPMP)

GNPMP = GDPMP + NFIA

(6) GNP at Factor Cost (GNPFC)

GNPFC = GNPMP − NIT

👉 Also called Gross National Income

(7) NNP at Market Price (NNPMP)

NNPMP = GNPMP − Depreciation

(8) NNP at Factor Cost (NNPFC)

NNPFC = GNPMP − Depreciation − NIT

👉 NNPFC = National Income

Real vs Nominal Aggregates

6️⃣ REAL vs NOMINAL AGGREGATES

National Income at Constant Price

  • Measured at base year prices
  • Also called Real National Income

National Income at Current Price

  • Measured at current year prices
  • Also called Nominal National Income

GNP Deflator

GNP Deflator = (Nominal GNP / Real GNP) × 100

Green GNP

  • Green GNP = GNP − Environmental Degradation
  • Green GNP = GNP − Resource Depletion
Activities Excluded from GDP

7️⃣ ACTIVITIES EXCLUDED FROM GDP

(A) Financial Transactions

  • Sale of shares and bonds
  • Government transfer payments
  • Private transfers

(B) Sale of Second-hand Goods

  • Already counted earlier

(C) Non-market Services

  • Housewife services
  • Self-repair and kitchen garden

(D) Illegal Activities

  • Gambling
  • Black-marketing

(E) Leisure Activities

  • Painting as a hobby
  • Gardening for pleasure
Does GDP Measure Welfare?

8️⃣ DOES GDP MEASURE WELFARE? (LIMITATIONS)

  • Non-monetary services are excluded
  • Externalities are ignored
  • Positive externalities (e.g., flyover)
  • Negative externalities (e.g., pollution)
  • Income inequality is ignored
  • Nature of goods is ignored
    • Harmful goods included (e.g., liquor)

    👉 GDP ≠ Perfect measure of welfare

    Methods of Measuring National Income

    9️⃣ METHODS OF MEASURING NATIONAL INCOME

    THREE METHODS

    • Income Method
    • Expenditure Method
    • Value Added Method
    Income Method of Measuring National Income

    🔟 INCOME METHOD (MOST IMPORTANT)

    Concept

    • Production creates income

    Target Aggregate

    • NDPFC (Domestic Income)

    COMPONENTS OF INCOME METHOD

    (1) Compensation of Employees (COE)

    Includes:

    • Wages and salaries in cash
    • Dearness Allowance (DA), bonus, commission
    • Paid leave, gratuity
    • Wages in kind (house, meals, car)
    • Employer’s contribution to PF and pension

    Excludes:

    • Work uniforms
    • Reimbursed expenses
    • Employee’s contribution to PF

    (2) Operating Surplus (OS)

    OS = Rent + Interest + Royalty + Profit

    Income from Property

    • Rent (including imputed rent)
    • Interest (productive loans only)
    • Royalty

    ❌ Excludes:

    • Interest on national debt
    • Inter-firm interest
    • Income from entrepreneurship
    • Dividend
    • Retained earnings
    • Corporate tax

    (3) Mixed Income

    • Income of self-employed persons
    • Farmers, doctors, shopkeepers

    FORMULA

    NDPFC = COE + OS + Mixed Income


    NNPFC = NDPFC + NFIA

    STEPS (INCOME METHOD)

    • Identify producing units
    • Classify factor incomes
    • Estimate payments
    • Add to get NDPFC
    • Add NFIA → National Income

    PRECAUTIONS (VERY IMPORTANT)

    • Exclude transfer payments
    • Exclude capital gains
    • Include imputed rent
    • Include free services provided by owners
    Expenditure Method of Measuring National Income

    1️⃣1️⃣ EXPENDITURE METHOD

    Concept

    • Income creates expenditure

    Target Aggregate

    • GDP at Market Price (GDPMP)

    COMPONENTS

    (1) Government Final Consumption Expenditure (GFCE)

    • Government spending on health, defence, and education

    GFCE = IC + COE + Depreciation − Sale

    (2) Private Final Consumption Expenditure (PFCE)

    PFCE = Household Consumption + NPISH

    If PFCE is not given:

    PFCE = Personal Disposable Income − Saving

    (3) Gross Domestic Capital Formation (GDCF)

    (a) Gross Fixed Capital Formation

    • Business investment
    • Residential construction
    • Public investment

    (b) Change in Stock

    Change in Stock = Closing Stock − Opening Stock

    (c) Net Acquisition of Valuables

    (4) Net Exports

    Net Exports = Exports − Imports

    FINAL FORMULA

    GDPMP = GFCE + PFCE + GDCF + Net Exports

    National Income – 100 Board Level Numericals

    National Income Accounting
    Board-Level Numericals (Stepwise)

    PART A: Basic Conversions

    1. GDP at Market Price = ₹5,000 crore, Depreciation = ₹400 crore. Find NDPMP.
    Step 1: NDPMP = GDPMP – Depreciation
    NDPMP = 5000 – 400 = ₹4,600 crore
    2. GNP at Market Price = ₹7,200 crore, Net Indirect Taxes = ₹800 crore. Find GNPFC.
    Step 1: GNPFC = GNPMP – NIT
    GNPFC = 7200 – 800 = ₹6,400 crore
    3. GDP at Factor Cost = ₹6,000 crore, Net Indirect Taxes = ₹900 crore. Find GDPMP.
    Step 1: GDPMP = GDPFC + NIT
    GDPMP = 6000 + 900 = ₹6,900 crore
    4. NNPMP = ₹4,500 crore, Depreciation = ₹500 crore. Find GNPMP.
    Step 1: GNPMP = NNPMP + Depreciation
    GNPMP = 4500 + 500 = ₹5,000 crore
    5. Domestic Income = ₹8,000 crore. Income from abroad = ₹600 crore, Income paid to abroad = ₹900 crore. Find National Income.
    Step 1: NFIA = Income from abroad – Income paid to abroad
    Step 2: NFIA = 600 – 900 = –300
    Step 3: National Income = Domestic Income + NFIA
    National Income = 8000 – 300 = ₹7,700 crore

    PART B: NFIA and NIT Based Numericals

    6. Net Factor Income Paid to Abroad = ₹200 crore. Find NFIA.
    Step 1: NFIA = – NFPA
    NFIA = –200 crore
    7. Indirect Tax = ₹1,200 crore, Subsidy = ₹500 crore. Find NIT.
    Step 1: NIT = Indirect Tax – Subsidy
    NIT = 1200 – 500 = ₹700 crore
    8. Net Subsidy = ₹300 crore. Find Net Indirect Tax.
    Step 1: NIT = – Net Subsidy
    NIT = –₹300 crore
    9. Sales Tax = ₹800 crore, Excise Duty = ₹700 crore, Subsidy = ₹400 crore. Find NIT.
    Step 1: Total Indirect Tax = 800 + 700 = 1500
    Step 2: NIT = 1500 – 400
    NIT = ₹1,100 crore
    10. GDPMP = ₹10,000 crore, NIT = –₹200 crore. Find GDPFC.
    Step 1: GDPFC = GDPMP – NIT
    GDPFC = 10000 – (–200) = ₹10,200 crore

    PART C: Income Method Numericals

    11. COE = ₹4,000 crore, Operating Surplus = ₹2,500 crore, Mixed Income = ₹1,000 crore. Find NDPFC.
    Step 1: NDPFC = COE + Operating Surplus + Mixed Income
    NDPFC = 4000 + 2500 + 1000 = ₹7,500 crore
    12. NDPFC = ₹9,000 crore, NFIA = –₹300 crore. Find National Income.
    Step 1: National Income = NDPFC + NFIA
    National Income = 9000 – 300 = ₹8,700 crore
    13. Profit after tax = ₹900 crore, Corporate tax = ₹100 crore. Find Profit.
    Step 1: Profit = Profit after tax + Corporate tax
    Profit = 900 + 100 = ₹1,000 crore
    14. Wages in cash = ₹3,000 crore, Wages in kind = ₹500 crore, Employer’s PF contribution = ₹400 crore. Find COE.
    Step 1: COE = Wages in cash + Wages in kind + Employer’s contribution
    COE = 3000 + 500 + 400 = ₹3,900 crore

    PART D: Expenditure Method Numericals

    15. PFCE = ₹4,000 crore, GFCE = ₹3,000 crore, GDCF = ₹2,500 crore, Exports = ₹1,200 crore, Imports = ₹1,000 crore. Find GDPMP.
    Step 1: Net Exports = Exports – Imports = 1200 – 1000 = 200
    Step 2: GDPMP = PFCE + GFCE + GDCF + Net Exports
    GDPMP = 4000 + 3000 + 2500 + 200 = ₹9,700 crore
    16. Personal Disposable Income = ₹6,000 crore, Saving = ₹1,200 crore. Find PFCE.
    Step 1: PFCE = PDI – Saving
    PFCE = 6000 – 1200 = ₹4,800 crore
    17. Opening Stock = ₹800 crore, Closing Stock = ₹1,000 crore. Find Change in Stock.
    Step 1: Change in Stock = Closing Stock – Opening Stock
    Change in Stock = 1000 – 800 = ₹200 crore

    PART E: Mixed & Advanced Numericals

    18. GDPMP = ₹15,000 crore, Depreciation = ₹1,500 crore, NIT = ₹2,000 crore, NFIA = –₹500 crore. Find National Income.
    Step 1: NDPMP = 15000 – 1500 = 13500
    Step 2: NDPFC = 13500 – 2000 = 11500
    Step 3: National Income = 11500 – 500
    National Income = ₹11,000 crore
    19. Nominal GNP = ₹12,000 crore, Real GNP = ₹10,000 crore. Find GNP Deflator.
    Step 1: GNP Deflator = (Nominal GNP / Real GNP) × 100
    GNP Deflator = (12000 / 10000) × 100 = 120
    20. GDP = ₹20,000 crore, Environmental damage = ₹1,200 crore, Resource depletion = ₹800 crore. Find Green GDP.
    Step 1: Green GDP = GDP – (Environmental damage + Resource depletion)
    Green GDP = 20000 – (1200 + 800) = ₹18,000 crore

    ✔ End of Board-Level Numericals

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