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(a) Problem of double counting: The greatest difficulty in calculating the national income is that of double counting, which arises from the failure to distinguish properly between a final and an intermediate product. There always exists the fear of a good or a service being included more than once. If it so happens, the national income would work out to be many times the actual.

(b) Illegal activities: Income earned through illegal activities such as gambling, illegal extraction of wine, hoarding and black marketing is not included in national income. While calculating national income, such earnings are left out, so the national income works out to less than the actual.

(c) Change in price: Another difficulty in calculating national income is that of price changes which fail to keep stable the measuring rod of money for national income. When the price level in the country rises, the national income also shows an increase even though the production might have fallen and vice versa. Thus due to price-changes the national income cannot be adequately measured.

(d) Illiteracy: In developing countries, we find crores of people as illiterates. They do not keep proper accounts about the production and sales of their products. Under such circumstances, the estimates of production and earned incomes are simply a guess work.

(e) Non-availability of Data: Adequate and correct production and cost data are not available. The data relating to crops, forestry, fisheries, animal husbandry and the activities of petty shop keepers, small enterprises, etc., are not counted. For estimating national income by the income method, data on unearned incomes and on persons employed in the service sector are not available.

1. Value added 

2. GNP 

3. NNP

4. NNP_FC

If the government introduced sophisticated methods and technology instead of giving the mines on lease, I feel better.

The reasons are:

1. The private people may not take the safety measures. 

2. Their attitudes may cause ‘0’ (zero) minerals to the future citizens. 

3. The right percentage of royalty may not reach the government properly. 

4. The unused mines may not be closed in view of expenditure.

So I support the government regulation only.

Minerals usually occur deep in the earth.

A New National Mineral Policy was announced in 1993.

As a result, there has been a boom in mining.

GDP deflator = Current year GDP / Base year 

GDP x 100 

= 1800/1200 × 100 

= 1.5 × 100 

= 1.5 (in percentage terms 150)

Nominal National Income: When the national income is expressed in the prices prevailing , in the year in which it is calculated it is called nominal national income. For example, if the national income of the year 2014 – 15 is calculated as per the prices of 2014-15, it becomes nominal national income.

Defects of Nominal National Income:

• Nominal national Income does not give a clear picture of an economy. If there is rise in prices of goods and services due to scarcity, the nominal national income shows growth in GDP. But it is not true. 
• Difficulty in monitoring the changes in the price of all the goods and services. 
• Existence of non-monetary transaction hinders in the correct calculation of national income.

Real National Income: As the nominal national income does not provide correct picture of an economy, the concept of real national income is developed. The real national income is expressed in terms of base year prices. While calculating National income, a particular year is taken as base year. The price level is assumed to be as 100 for the base year. 

The formula to calculate real national income is as follows:

Real National = Nl for year X Base year price index(100)/Current year price index.

1. Purchase of second hand goods – excluded 

2. operating surplus – included 

3. old age pension – excluded 

4. Production for self consumption – excluded 

5. interest – included 

6. windfall gains and loses – excluded

Measurement of National Income Respected teachers and dear friends, The topic of my seminar paper is ‘measurement of national income or the methods of measuring national income’. The concept of national income occupies an important place in economic theory. 

National income is the aggregate money value of all goods and services produced in a country during an accounting year. In this seminar paper, I would like to present various methods of measuring national income.

Content: 

National income can be measured in different ways. Generally there are three methods for measuring national income. 

They are

1. Value-added method 

2. Expenditure method 

3. Income method

1. Value-added method: 

The term that is used to denote the net contribution made by a firm is called its value-added. We have seen that the raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’. 

Therefore the value-added of a firm is the value of production of the firm – value of intermediate goods used by the firm. The value-added of a firm is distributed among its four factors of production, namely, labor, capital, entrepreneurship, and land. 

Therefore wages, interest, profits, and rents paid out by the firm must add up to the value-added of the rm. Value-added is a ow variable.

2. Expenditure Method: 

An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method. The aggregate value of the output in the economy by expenditure method will be calculated. 

In this method we add the final expenditures that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

3. Income Method: 

As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). 

This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings, and rents. 

That is GDP = W + P + In + R

Conclusion: 

Thus it can be concluded that there are three methods for measuring national income. These methods are value-added method, income method and expenditure method. Usually in estimating national income, different methods are employed for different sectors and sub sectors.

Minerals can be taken out for use by humans through a process of mining.

The residents of mining areas are the owners of those lands. The lands are confiscated from them by force. So they should be rehabilitated.

GDP = C + I + G + (X – M) = C + S + T 

Budget deficit = G – T 

Trade deficit = M – X

(a) Gross Domestic Product(GDP): GDP is the aggregate of the final goods and services produced in the domestic territory of a country during an accounting year.

(b) Net Domestic Product ( NP): NDP refers to the market value of all final goods and services turned out in an economy during a given period of time after making allowance for depreciation charges. lt is obtained by subtracting depreciation from GDP. NDP = GDP – Depreciation.

In simple words we can say that NDP is the net market value of final goods and services produced by its residents and nonresidents within the domestic territory of a country in a year.

(c) Gross National Product (GNP): It is the most important concept in N.I accounting. It is a National concept. GNP is defined as the total market value of all final goods and services produced in a country in a year’s time.

No allowance for wear and tear cost i.e., depreciation is made. While calculating the GNP, the money value of only the goods and services which are finally consumed by the people are to be taken into account. Hence, the value of all intermediary goods and inputs are to be excluded in order to avoid double or multiple counting.

The income received from foreign investment and from other factor services rendered abroad should be added to the gross domestic product of a country. Similarly, the income generated by the foreigner in a given country should be deducted from the GDP for the purpose of computing the GNP.

GNP = GDP + X – M

X= income earned by nationals abroad . 

M= Income earned by foreigners in the given country.

GNP includes:

• The value of all consumption goods which are currently produced. 
• The value of all capital goods currently produced. 
• Total government expenditure on buying various goods and services. 
• Net export value. 
• Net amount earned abroad.

GNP = (C+I+G) + (X-M) + (R-P)

(d) Net National Product (NNP): Net national product is the market value of the net output of final goods and services produced by the country during the relevant income period.

NNP = GNP – Depreciation.

(a) ₹100

(b) Gross primary deficit = Gross fiscal deficit – net interest liabilities.

Stocks and flows

There are differences between the concepts of stocks and flows. Stock is a variable measured at appoint of time, whereas, flow is a variable measured over a period of time. Wealth, capital etc are variables which can be measured at a point of time. Therefore, they are stock variables. At the same time, income, output, profits etc are concepts that make sense only when a time period is specified. These are called flows because they occur in a period of time. Therefore we need to delineate a time period to get a quantitative measure of these.

Net Investment -> Flow

Capital -> Stock

Nowadays cheques are widely used for making payments and receiving money. When you want to give money to someone, you write a cheque on that person’s name. When you want to send money to someone who lives in a different place, you can send a cheque to her by post. You can also use your cheque to transfer money electronically into the other person’s account through a bank. For business purposes, where money is frequently received and paid, cheques are very important as a medium for transactions.

Thus cheques have made exchange of money more convenient.

Flow of goods and services from firms to households is called real flow. Factors of production receive reward for their services in the form of money. Households use this money to buy goods and services produced by firms. This ow of money from firms to households and back to firms is called money flow.

Similarities:

1. Both are minerals.

2. Both are under government supervision. 

3. Detonators are used for blasting purpose in both the places. 

4. For quality, the minerals are collected from deep layers. 

5. Necessary steps are taken for the safety of the workers.

Differences:

a. Stock 

• Wealth 
• Inventories 
• Capital 
• Money supply

b. Flow 

• Income of a household 
• Consumption 
• Capital formation 
• Saving of a household

GNP = GDP + Net factor income from abroad GNP

= 65,665 + 750 = 66415 Crores

NDP = GDP – depreciation (Consumption of fixed capital)

NDP = 65665-2250 = 63415 Crores

1. There will be a mismatch between the real flow and money ow in the circular flow. In other words, the flow will be broken. 

2. As a corrective measure, the financial system can be introduced. 

3. The leakages is the difference between the income generates and household spending. 

This is saving. The injection are the savings that the households, firms and the government take from the financial institutions as borrowings.

GDP deflator = Current year GDP / Base year GDP x 100

= 1800/1200 x 100 = 1.5 x 100

= 1.5 (in percentage terms 150)

If a large number of account – holders do not wish to keep their money in the bank. 

This affects the reserves of a bank. The bank cannot lend loans to customers. This affects their income. As a result it is impossible to run a bank.

There will be no problems in keeping money in a bank. But there may be problems due to computers, ATMs and the negligence of employes, 

e.g :

1. Many problems may arise while withdrawing amount from ATMs. 

2. Deducting the EMis of loans twice a month by overlook. 

3. Blocking the accounts.

GDP deflator = Current year GDP / Base year GDP x 100

= 1800/1200 x 100

= 1.5 x 100

= 1.5 (in percentage terms 150)

Stock variables

• wealth
• capital stock

flow variables

• income
• consumption
• investment
• expenditure

Correct answer is (a) export

The income actually received from all the sources of individuals and families.

Correct answer is (d) 1949

Estimates of national income of India are being issued regularly from 1956.

Money kept at home does not earn interest. But, money kept in a bank account does. If you keep money in the bank it wili grow. In the villages, poor peoples incomes are irregular and unpredictable. You have to cope with a bad crop season, loss of employment, illness or death in the family. You also need money for marriages and festivals. Saving money in a bank account helps you smoothen your income.

Money is safe in bank, please check, if the bank in which you intend to keep your hard earned money is licensed, please do not share bank account details with anybody. Protecting your bank acount is as important as opening and using it.

Creating or enhancing utility in objects.

An increase in indirect taxes increases the price of the item, and decrease in indirect taxes reduces the price of goods.

National Income – National income is the sum total of the values expressed in that country’s currency at the prevailing market price of the final consumption of the final consumed goods and services produced by the inhabitants of the country during a financial year. Here, final consumption items and services are those items and services which are used by a consumer or a producer. National income is being estimated since 1956, every year, by the Central Statistical Organization. After achieving independence, a national income committee was constituted under the chairmanship of Prafulla Chandra Mahalanobis for the estimation of national income. Committee Adviser was Prof. Simon Kuznets.

Following are the characteristics of national income:

(a) National Income is concerned with a particular country. For example, national income of India, Pakistan, etc.
(b) National income relates to a fixed time period, normally a financial year. In India, it is from 1st April to 31st March of each year.
(c) National income is concerned with economic activities of residents of a country. But presently, economic activities of residents and non-residents of the geographical area of a country is also included.
(d) National income is related with productive economic activities, i.e. non-productive activities are not included in the calculation of national income.
(e) Production of final goods and services is included in the calculation of national income. It means that production of interim, i.e. semi-finished goods and services, is not included in the calculation of national income.
(f) National Income is calculated at current market prices.
(g) National income is expressed in currency terms of that country.
(h) National income is the money aggregate of goods and services.
(i) National income is a type of flow and not a stock.
(j) National income is calculated in net form, i.e. depreciation is deducted from gross national income/output.

National income estimates in India is published every year by Central Statistical Organization.

Match the following.

Money is a thing which performs four function –

(a) a units of value 

(b) a medium of exchange 

(c) a standard of deferred payments and 

(d) a store of value

1. National Income is a holistic idea.
2. National income is a flow which is related to time.

1. Goods and services Tax
2. Excise duty

Correct answer is (c) NNPMC

It is the total value of all the final goods and services produced by all the enterprises (both resident and non-resident) within the domestic territory of a country in a particular year. GDP is considered as one of the best indicators of judging the economic performance of a country.

National Income = Domestic Income + Net Factor Income from abroad 

= Rs. 600 – Rs. 6 

= Rs. 594 crores.

At market value, after subtracting the indirect taxes from the net national product, and adding financial support, the amount that remains is called ‘net national income at factor cost’.

In the production of products and services, fixed capital is used. During the production process, machines get depreciated, or sometimes they get damaged due to wear and tear, and because of innovations, old machines become useless. Capital instruments get depreciated due to continuous use during the production process and some of them have also to be replaced. This depreciated value and replacement cost has to be deducted from Gross National Product for obtaining Net National Product at Market Price (NNP_MP).
NNP_MP – GNP_MP – D
D = Depreciation
NNP_MP = GNP_MP – Depreciation

Interest on national debt is included in national income but not in private income.

Gross Domestic Product = Gross consumption expenditure + Gross private investment + Government investment
= Rs. 1000 + Rs. 400 + Rs. 600
= Rs. 2000 Crores

The calculation of known national income on a domestic basis is called gross domestic product (GDP).