Economics Lecture 3 – Class Notes 1

Economics Lecture 3 – Class Notes 1

National Income – Total value of final goods and services produced by the normal residents during an accounting year, after adjusting depreciation.

•    It is Net National Product (NNP) at Factor Cost (FC)

•    It does not include taxes, depreciation and non-factor inputs (raw materials)



Domestic Income - Total value of final goods and services produced within a domestic territory during an accounting year, after adjusting depreciation.

•    It is NDP at FC

•    Both NNP and NDP can be measured at constant prices (real income) or market prices(nominal income)

•    Domestic Income + NFIA = National Income


Measurement of National Income can be done by three methods

1.   Income Method – Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed income of self-employed.

•    In India, one-third people are self-employed

• This is the ‘domestic’ income, related to the production within the borders of the country


2.   Production (Value Added) Method – Estimated by adding the value added by all the firms

•    Value added = Value of Output – Value of (non-factor) inputs

•    This gives GDP at Market Price (MP) – because it includes depreciation (therefore‘gross’) and taxes (therefore ‘market price’)

•    To reach National Income (that is, NNP at FC)
i.   Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
ii.   Subtract Depreciation: NNP at MP = GNP at MP – Dep
iii.   Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT


3.   Expenditure Method
• Y = C + I + G + (X-M), where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X = Exports, I = Imports, X-M = Net Exports

Any of these methods can be used in any of the sectors – the choice of the method depends on the convenience of using that method in a particular sector

Sectors of Indian Economy

1.   Primary Sector – Agriculture and allied activities, Mining and Quarrying
•    Production Method used here
2.   Secondary Sector – Manufacturing, Electricity, Gas and Water Supply, Construction
• Production Method used for all segments except construction (where expenditure method is used)
3.   Tertiary Sector – All services

•    Income Method used here

Sometimes another classification is used, where Indian Economy is divided into three segments –

1.   Agriculture – This includes agriculture and allied activities
2.   Industry – This includes Mining and Quarrying, Manufacturing and Electricity
o In IIP, this classification is used to refer to ‘industry’
3.   Services – This includes construction and all services

Items  not  included  in  National  Income  –  Intermediate  goods,  Transfer  payments  (unilateral payments made without expectations of return; like gifts, unemployment allowance, donations etc), sale and purchase of old goods and existing services (shares are not included, unless they are through an IPO), windfall gains (lottery income), black money (cannot be estimated), work done by
housewives

Items included in National Income (NI) – Goods produced for self-consumption, estimated rent of self-occupied property

Quick Facts

First rough estimate of NI was done by Dadabhai Naoroji for 1867-68; published in his book

Poverty and Unbritish rule in India (famous for its Drain of Wealth theory) First scientific estimate made by Prof V K R V Rao (1931-32)

GoI estimated the NI for the first time in 1948-49 through the Ministry of Commerce

National Income Committee was set up in 1949 (Chairman – Dr P C Mahalanobis)

o P C Mahalanobis was also the chairman of Indian Statistical Institute
Currently, Central Statistical Organization (est 1950) estimates NI (since 1956)

o It publishes National Accounts Statistics annually

o Under the Ministry of Statistics and Programme Implementation

o Now,  CSO  has  been  merged  with  National  Sample Survey  Organization to  form