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1. Buying and Selling of old items
2. Buying and selling of securities by the government
3. Buying and selling of shares, debentures
4. Illegal activities.

There are Two bases of calculation of National Income.

Based on country’s citizenship, the calculation of known national income is called gross national product (GNP).

2004-05 is considered as the base year of calculation of national income in India.

Nominal GNP is measured at current prices. Since this aggregate measures the value of goods and services at current year prices, GNP will change when volume of product changes or price changes or when both changes. 

Real GNP is computed at the constant prices. Under real GNP, value is expressed in terms of prices prevailing in the base year. This measure takes only quantity changes. Real GNP is the indicator of real income level in the economy. 

1) GDP_FC by Expenditure Method:

GDP_MP = Personal consumption expenditure + Govt. final consumption expenditure + Gross domestic capital formation + net exports. 

= 700 + 800 + 70 + 35

= 1605 Rs. in Crores.

GDP_FC = = GDP_MP – Indirect taxes + Subsides

= 1605 – 10 + 5

= 1610 – 10

= 1600 Rs. in Crores. 

2) GDP_FC by Income Method:

(i) GDP_FC = Rent + Interest + wages & salaries + employer’s contribution to social security schemes + profit + mixed income + consumption of fixed capital.

 100 + 12 + 700 + 100 + 63 + 600 + 25

= 1600 Rs. Crores.

∴ GDP_FC by Exp. method = 1600 Rs. Crores

GDP_FC by Income Method = 1600 Rs. Crores

The main function of money in an economic system is to facilitate the exchange of goods and services.

Net National Product at factor cost refers to expenditure made on the factors of production of goods/services in country. For example, wages, cost and interest of capital investment, cost -and rent of land used, cost and benefit of use of entrepreneurship, etc. is collectively known as total cost. Indirect taxes levied by the government are deducted and grants or subsidies provided by the government are added to calculate Net National Product at factor cost.
NNP_FC = NNP_MP – IT + S
IT = Indirect Taxes
S = Subsidy
Or NNP_FC = R + I + W + P
R = Rent
I = Interest
W = Wages
P = Profit

(a) Consumption Expenditure

Private Income – It is the sum total of factor income received by private sector from all sources, transfer income’received from government and transfer income received from rest of the world.

1. Through national income figures, information about of the structure of the economy is gained. .
2. National income is indicative of the economic progress of the country.

1. Classify the producing enterprises into industrial sectors like primary, secondary and tertiary. 

2. Estimate the following factor income paid out by the producing units in each sector i.e. 

*Compensation of employees 

*Operating surplus 

*Mixed income of self-employed 

3. Take the sum of the factor income by all the industrial sectors to arrive at the NDP_Fc (Which is called domestic income) 

4. Add net factor income from abroad to the net domestic product at factor cost to arrive at the net national product at factor cost.

1. Classify the producing units into industrial sectors like primary, secondary and tertiary sectors. 

2. Estimate the net value added at the factor cost.

3. Estimate value of output by sales + change in stock 

4. Estimate gross value added by value of output – intermediate consumption 

5. Deduct depreciation and net indirect tax from gross value added at market price to arrive at net value added at factor cost = NDP_Fc

6. Add net factor income received from abroad to NDP_Fc to obtain NNP_Fc which is national income

i) NNP_FC by income Method:

= Compensation of employees + Operating surplus + Mixed income of self- employed + Net factor income from abroad

= 250 + 360 + 16 + 25 

= 651 Rs. Crores.

ii) NNP_FC by Expenditure Method:

Step I: GDP_MP = Private final consumption exp. + Govt. final Consumption exp. + Gross fixed capital formation + changes in stock + Exports–Imports

= 200 + 250 + 75 + 60 + 130 – 64 

= 715 – 64 

= 651 Rs. in Crores

Step II: NNP_FC = GDP_MP - Depreciation + Net factor income from abroad – Indirect taxes + subsidies

 651 – 10 – 25 – 20 + 5

= 681 – 30 

= 651 Rs. in Crores.

Personal income is computed by deducting savings of corporations, corporation tax and net corporation savings of foreign companies from Private income.

1. Classify the economic units incurring final expenditure into distant groups like households, government, firms etc.

2. Estimate the following expenditure on final products by all economic units 

a. Private final consumption expenditure 

b. Government final consumption expenditure 

c. Gross domestic capital formation 

d. Net export (Sum total of above gives GDP_Mp 

3. Deduct depreciation, net indirect taxes to get NDP_Fc

4. Add net factor income from abroad to NDP_Fc to arrive at NNP_Fc.

1. Income from owner occupied house to be included. 

2. Wages & salaries in cash and kind both to be included. 

3. Transfer income should not be included 

4. Interest on loans taken for production only to be included. Interest on loan taken for consumption expenditure is non-factor income and so not included.

This is a transferable income, so it is not included in the national income.

The income that is received without providing any service or goods.

1. Avoid double counting of production, take only value added by each production unit. 

2. The output produced for self-consumption to be included 

3. The sale & purchase of second hand goods should not be included. 

4. Value of intermediate consumption should not be included 

5. The value of services rendered in sales must be included.

Personal income = undistributed profit – net interest paid by families – corporation tax + interim payments that government makes firms to give to families.

1. Transfer income
2. Income received by sale of old items.

Payments that are made without receiving any goods or services, such as old age pension.

This is a transferable income, so it is not included in national income.

(i) Bank is a production unit so this is a factor income and hence should be included.

(ii) It is a part of the profits of production units which is distributed to the owners so it is included.

(d) All of these

Correct answer is (d) Wages

 Reasons : 

(i) Expenditure on Fertilizers-It is intermediate cost for the farmer and deducted from the value of output while arriving at National income, Therefore, not included.

(ii) Purchase of Tractor-lt is included because it is capital formation / investment by the farmer

Reasons : 

(i) Expenditure on free services provided by Government should be included in the estimation of national income because expenditure on these services is a part of Government Final Consumption Expenditure.

(ii) Payment of interest by a Government firm should be included while estimating national income because it is a kind of factor payment

Reasons : 

(i) Free medical facilities by the employer are included in the estimation of national income because it is a kind of wages in kind and therefore, a part of the compensation of employees. 

(ii) Contribution to the provident fund by the employees is an integral component of income. It is paid out of income. It is, therefore, not separately added in the estimation of national income.

(i) Payment of interest by a firm to a bank-It is included in national income because it is assumed that loans received by a firm will be used for a production activity which will increase the income of the firm.

(ii) Payment of interest by a bank to an individual- Interest paid by banks on deposits by individuals is included in national income because banks are expected to have used individual, saving for productive Purpose.

(iii) Payment of interest by an individual to bank- Individual borrows to meet his consumption expenditure. Such borrowings is not used for production. Therefore, it is not a factor payment. lt is like a transfer payment, and so it is not included in national income.

Reasons: 

(i) Payment of excise duty only increases the market value of final goods and services. Therefore, this is not included in the estimation of national income. 

(ii) Payment of interest by a firm is included in the national income because a firm takes loans for productive purposes.

Reasons: 

(i) Interest paid by Banks-It will be included as it is a factor income. 

(ii) National Debt Interest-It will not be included as it is assumed that Government borrows for consumption Purpose. Therefore, it is treated as transfer income.

Reason:

(i) Included in National Income because it results in inflows of income through productive activities.

(ii) It is not included in the national income because it is a transfer payment.

(iii) It is not included in national income because it is unproductive.

NI = (iv) + (viii) + {(i)+ (ii)}-(iii)-(v) + (vi) - (ix) 

= 1,500 + 600 + 200 + (-30)-50-100+60-20

=Rs.2160 crore

NNDI=NI+(v)-(x)

=2,160+100-(-10)

=Rs.2,270 crore

(i) Expenditure by a firm on payment of fees to chartered accountants - It not included in national income because it is an intermediate cost for the firm.

(ii) Payment of corporate tax by a firm- It is a transfer payment by the firm to the Government. It is paid out of income and therefore, not to be separately added in the estimation of national income.

GDP_MP = Private Final Consumption Expenditure +Government Final Consumption Expenditure + (Net Domestic Capital Formation + Depreciation) + Net Exports

GDP_MP = 500+ 100+ (80+ 0) + (-20)

GDP_MP = Rs.660crore

NNP_MP= GDP_MP - Depreciation - Net Factor Income to Abroad

NNP_MP = 660-0-20

NNP_MP = Rs.640crore

Private Income = NNP_MP - Net Indirect Tax - Income Accruing to Government + Current tansfers from Government - Net Current Tlansfers to Abroad + National Debt Interest

Private Income = 640 - 120 - 60 + 30 - 10 + 70

Private Income =Rs. 550 crore

GDP_MP= Private Final Consumption Expenditure +Government Final Consumption Expenditure + (Net Domestic Fixed Capital Formation + Depreciation Change in Stock) - Net ImPorts

=900 + 200 + [120 + 0 + (-20)] -10

= 1,190

NNP_FC = GDP_MP + Net Factor Income from Abroad - Net Indirect Tax - Depreciation

= 1,790 + (-10) - 150- 0 = 1,030

Hence, National Income =Rs.1,030 crore

Now; Personai Disposable Income

= Private Income - Undistributed Profits - Corporate Tax - Personal Direct Taxes

= 1,000 - 50 - 100 -120 = 730

Thus, Personal Disposable Incorne = Rs.730 crore

NI = ii + iii - iv - vi + viii

=1000+20-100-250+60

Rs.730 Crore

PDI = ix - v - i - x

=800-200-70-150

=Rs.380 Crore

(i) Private Income 

=National debt Interest + current transfers by Government.

=15+8

=Rs. 23 Arab.

(ii) GDPFC

=(i) + (ii) + (iii) + (iv) + (v) + (vi) + (vii) + (x)

=15+8+30+(-6)+20+(-4)+10+12

=Rs. 85 Arab.

GDP_MP = Private Final Consumption Expenditure + Government Final ConsumPtion Expenditure + (Net Domestic Capital Formation+ Depreciation) - Net Imports

= 800 + 300 + (200 + 100) - 30 =1,370

GDP_MP=1,370crore

Now,

GNP_MP = GDP_MP - Net Factor Income to Abroad

=1,370 - (-10) = 1,380

Hence,

GNP_MP =Rs.1,380crore

Private Income : GNP_MP - Net Indirect Taxes - Depreciation - Income Accruing to Government + Current Tiansfers from Government - Net Current Tiansfers to Abroad + National Debt Interest

= 1,380 - 150 - 100 - 90 + 40 -20 + 50 =Rs. 1,120 crore

Hence,

Private Income =Rs.1,120 crore

GDP_fc= ii + ix - x - iv - vi + viii

=800+60-10+(-10)-170+30

=Rs.700 Crore

PDI= vii + iii - v - i

=600-50-20-100

=Rs.430

NDP_FC= COE + OS + MY 

=[(ii) + (xi)] + [(iv) + (x) + (vii)]+0

= 1,200 + 250 + 300 + 500 + 400 

=Rs. 2,650 crore

NNP_MP= NDP_FC + NIT - NFTA 

= 2,650 + 300 -20 

=Rs. 2,930 crore

PDY= (vi) - (v) - (iii) - (i) 

= 2,000 - 200 - 50 - 200

 =Rs.1,550 crore

NDP_FC= COE + OS + MI

= (v) + [(i) + (vii) + (viii) + (ix) + (iv)] + 0

= 900 + 200 + 400 + 50 + 250 + 100

=Rs.1,900 crore

Private Income = NDP_FC - Income accruing to Govetnment - NFIA + Current transfer by Government - Net current transfer to Abroad + National Debt Interest

= NDP_FC - (xi) - (x) + (vi) - (ii) + (iii)

= 1,900 - 120 - (- 10) + 150 - 10 +60

=Rs. 1,990 crore

Personal Income: Private Income - Corporate tax-Undistributed profit

=Private Income -(iv)-(iii)

=1,990-100-50

=Rs. 1840 crore

NDP_mp = i + iii + vii + ix + xi + vi

=4,000+8,000+800+1,500+700+1,000

= Rs.16,000 Crore

NNDI = NDPmp -v - x

=16,000-600-200

= Rs.15,200 Crore

(i) Net National Product at Market Price (NNPM_MP)

=Private final consumption expenditure + Government final consumption expenditure  + Net domestic fixed capital formation + Change in stock (Closing stock-opening stock) + Net Exports (Exports-Imports) - Net factor income to abroad

=600+100+80+(10-20)+50-60-30

=780-50

=Rs. 730 Arab

(ii) Gross National Disposable Income (GNDI)

=NNP_MP+Consumption of fixed capital -Net current transfers to abroad

=730+40-(-10)

=Rs. 780 Arab.

(i) NNP_MP = (i) + (ii) + (v) + (vi) + (ix) + (xi) + (iv) - (vii)

=700+100+50+300+60+400+70-(-20)

=Rs.1,700 crore

(ii) GNDI= GNP_MP - Net Current Transfers to Abroad

=NNP_MP+(viii) - (iii)

=1,700+120-10

=Rs.1,810 crore

GNP_fc = i + vi + vii + ii + xiii + ix - xi

=3,000+600+900+800+5000+850-300

= Rs.10,850 Crore

NNDI =GNP_fc + (v - viii) - ix + xii

=10,850+700-100-850+400

=Rs.11,000 Crore

(i) National Income 

(viii) + (vi) + (i) + (iii) - (x) - (ix) - (iv)

300+800+200+(-20)-(-50)-40-120

=Rs.1,170 crore

(ii) NNDI = National Income + NIT + Net current transfers to abroad

=[1,170+120]-(-10)

=Rs.1,300 crore

The conditions needed for the producer’s equilibrium are,

• MC=MR
• MC is greater than MR after the MC = MR output level