NATIONAL INCOME

AND
RELATED AGGREGATES

PART - 4
 MACRO ECONOMICS
Macro Economics is that branch of
economics which studies economic problems relating
to economy as whole like level of output and
employment
 GOODS

Final Goods Intermediary Goods

Used up in production
Consumer Goods Capital Goods

Durable Goods that

help in the
Semi durable production of Goods meant for
Non durable other goods resale
 Final Goods
Final goods are those goods which are used
either for direct consumption or for investment. Milk
and bread are final goods purchased by a household
for consumption. Machines and equipments are final
goods bought by a firm for capital formation.
 Consumption Goods ( Consumer Goods)
Consumption goods are those goods that
satisfy the wants of consumers directly. For example:
Television, mobile phones etc.

Durable goods
Semi durable goods
NON DURABLE GOODS
 Capital goods
Capital goods are those final goods which help in the
production of other goods and services. For example:
Machines, tools and equipments. Inventories are also
considered a part of Capital Stock.
 Intermediate goods
Goods that are used up in production
process and goods that are bought for resale are
called intermediate goods.

WHEAT BOUGHT BY A BAKER. IT IS

USED UP GOODS MEANT FOR RESALE
 DIFFERENCE BETWEEN FINAL GOODS AND
INTERMEDIARY GOODS
Intermediate Goods Final Goods

Goods that are used up in Goods that are used for

production and goods that are consumption or for investment.
bought for resale.
They are not included in They are included in National
National Income Income

They are still in the production They crossed the production

boundary. boundary.

Example: Bread purchased by Bread purchased by a

a restaurant. household.
 STOCK AND FLOW VARIABLES

Stock Variables Flow Variables

Variable that is measured at a point of Variable that is measured during a

time period of time.

Static concept Dynamic concept

Not time flexible It is time flexible

Examples: (i) Number of births during the year

(i) Population of India on 20 March 2017
2017 (ii) National Income
(ii) National Wealth
 INVESTMENT
Investment refers to addition to the capital
stock of the economy.
Gross Investment: Total addition made to the capital
stock of an economy during a year is called Gross
Investment. Capital stock includes fixed assets and
unsold stock.
Net Investment: The actual addition made to the
capital stock of an economy during a year is called Net
Investment.
Net Investment = Gross Investment – Depreciation.
 DEPRECIATION
Depreciation refers to fall in the value of
fixed assets as result of normal wear and tear, passage
of time or expected obsolescence.
It is also called Consumption of fixed
Capital.
 Circular Flow of Income (Two Sector Model)
Circular Flow of Income is a
diagrammatic presentation of the interdependence
between different sectors of an economy.
Assumptions
(i) There are only two sectors, namely households and
firms.
(ii) It is a closed economy.
CIRCULAR FLOW OF INCOME
Real Flow (Physical Flow):
Households supply factor services like land, labour,
capital and organization to the firms.
The firms produce goods and services and supply them
to households. It is called Generation Phase. It does not
involve the use of money.
Money Flow (Nominal Flow):

Firms pay Rent, Wages, Interest and Profit (Factor

Payments) to the households. It is called Distribution
Phase.

Households pay it back to the firms in the form of

consumption expenditure. It is called Disposition or
Dispensation Phase. Here money flows between
sectors.
 Normal Residents
Normal Residents are those
individuals and institutions who normally reside in a
country for more than one year, and whose centre of
economic interest lies in that country.
 DOMESTIC TERRITORY
Domestic territory includes the following:
(i) Land within the borders of the country.
(ii) Ships and aircrafts owned and operated by normal
residents.
(iii) Fishing boats, oil and natural gas rigs and floating
platforms operated by the residents of a country in
the international waters where they have exclusive
rights of operation.
(iv)Embassies, consulates and military establishments
of a country located abroad.
 NET INDIRECT TAX

Net Indirect Tax is the

difference between Indirect Tax paid by the
firms to the Government and the Subsidies
paid by the Government to firms.
FACTOR INCOME TRANSFER INCOME

Income earned for providing Income earned without providing

factor services any productive service.

It is included in National Income It is not included in National

Income.

Example: Rent, Wages, Interest Unemployment allowance, Old

and Profit. age pension, Scholarship etc.
 Net Factor Income from Abroad (NFIA)
NFIA refers to the difference
between factor income received from the rest of
the world and factor income paid to the rest of
the world.
NFIA = Factor income earned from abroad – Factor
income paid to abroad.
 Components of NFIA
• Net Compensation to Employees:
Wages earned by Indian residents outside India -
Wages earned by foreign residents in India.
• Net Income from property and entrepreneurship:
Rent, interest and dividend earned by Indian
residents abroad - Rent, interest and dividend
earned by foreign residents in India.
• Net Retained earnings
Retained Earnings of Indian companies located
abroad – Retained earnings of foreign companies
located in India.
 National Income and Related Aggregates
Gross Domestic Product at Market Price (GDPMP): It is the market
value of all final goods and services produced within the
domestic territory of a country during a year. It includes Net
Indirect Taxes (NIT).

Goss Domestic Product at Factor Cost (GDPFC): It is the money

value of all final goods and services produced within the
domestic territory of a country during a year.
GDPFC = GDPMP – NIT.
• Net Domestic Product at Market Price (NDPMP): It is the
market value of all final goods and services produced within
the domestic territory of a country during a year after
deducting the value of depreciation.
• NDPMP = GDPMP – Depreciation.
• Net Domestic Product at Factor Cost (NDPFC): It is the money
value of all final goods and services produced within the
domestic territory of a country during a year after deducting
the value of depreciation.
• NDPFC = GDPFC – Depreciation
• Gross National Product at Market Price ( GNPMP): It is the
gross market value of all final goods and services produced
by the normal residents of a country during a year. It
includes Net Indirect Taxes (NIT).
GNPMP = GDPMP + NFIA

• Gross National Product at Factor Cost ( GNPFC): It is the gross

money value of all final goods and services produced by the
normal residents of a country during a year.
GNPFC = GNPMP - NIT
• Net National Product at Market Price (NNPMP): It is the net
market value of all final goods and services produced by the
normal residents of a country during a year. It includes Net
Indirect Taxes (NIT).
• NNPMP = GNPMP – Depreciation.
• Net National Product at Factor Cost (NNPFC ): It is the net
money value of all final goods and services produced by the
normal residents of a country during a year.
• NNPFC = NNPMP – NIT
• NNPFC is also called National Income.
 METHODS OF CALCULATING NATIONAL INCOME
1. Value Added Method
(Output Method or Product Method)
Step 1
Calculate GVA MP ( GDPMP).
Formula to calculate GVAMP is:
GVA MP = Total Sales – Intermediate Consumption + change in
Stock.
• Find out total sales. Total sales include exports. Only if
domestic sales are given, we need to add exports. Subtract
intermediate consumption from sales.
Intermediate consumption includes imports. Only if
domestic purchase is given, we need to add imports.
Intermediate consumption refers to expenditure on raw
materials, advertisement and electricity.
Then change in stock is to be added. Change in stock is the
difference between closing stock and opening stock.
• Step 2

From GVAMP (GDPMP), if we subtract depreciation, we

will get NVAMP (NDPMP).

NVAMP = GVAMP– Depreciation.

When we subtract NIT (Indirect Taxes – Subsidies) from

NVAMP, we will get NVAFC.

NVAFC = NVAMP - NIT

 1 . Calculate Net Value added at factor cost
(NVAFC)
S.No.` Items ` Crores

1 Goods and Services Tax 25

2 Consumption of Fixed Capital 5

3 Closing Stock 10

4 Corporate Tax 15

5 Opening Stock 20

6 Sales 540

7 Purchase of raw Materials 140

GVAMP = SALES – INTERMEDIATE CONSUMPTION + CHANGE IN STOCK

= 540 - 140 + (10 – 20)

= 540 - 140 + (-) 10
= 390
NVAMP = GVAMP – DEPRECIATION
= 390 – 5 = 385
NVAFC = NVAMP – NIT = 385 – 25

= 360 CRORES
2. Calculate Gross Value Added at Factor Cost
(GVAFC)
S.NO` ITEMS ` IN CRORES

1 GOODS AND SERVICES TAX 40

2 CONSUMPTION OF FIXED CAPITAL 15

3 CLOSING STOCK 20

4 SALES 700

5 SUBSIDY 5

6 INTERMEDIATE CONSUMPTION 400

7 OPENING STOCK 10
GVAMP = Sales – Intermediate Consumption + Change in Stock

= 700 – 400 + (20 – 10)

= 700 – 400 + 10
= 310
GVAFC = GVAMP – NIT
NIT = INDIRECT TAXES (GST) – SUBSIDIES
= 40 – 5 = 35
GVAFC = 310 – 35 = 275 CRORES
3. Calculate Gross Value Added at Market Price
(GVAMP)
S.NO ITEMS ` IN CRORES
.
1 GOODS AND SERVICES TAX 90

2 SALES 800

3 DEPRECIATION 50

4 NET CHANGE IN STOCK (-) 40

5 PURCHASE OF RAW MATERIALS 360

6 CORPORATE TAX 10
GVAMP = Sales – Intermediate Consumption + Change in Stock

= 800 – 360 + (-) 40

= 440 + (-) 40 = 400 CRORES

4. Calculate Value added by firm X and firm Y
S.NO. ITEMS ` IN LAKHS
1 CLOSING STOCK OF FIRM X 20

2 CLOSING STOCK OF FIRM Y 15

3 OPENING STOCK OF FIRM Y 10

4 OPENING STOCK OF FIRM X 5

5 SALES BY FIRM X 300

6 PURCHASES BY X FROM FIRM Y 100

7 PURCHASES BY Y FROM FIRM X 80

8 SALES BY FIRM Y 250

9 IMPORT OF RAW MATERIALS BY FIRM X 50

10 EXPORT BY FIRM Y 30
Value added by X = Sales – Intermediate Consumption + Change in
Stock

Sales of X = 300
Intermediate Consumption = Purchase from Y + Import of raw
materials
= 100 + 50 = 150
Change in Stock = Closing Stock – Opening Stock = 20 – 5 = 15
Value added by X = 300 - 150 + 15 = 165 LAKHS
Value added by Y = Sales – Intermediate Consumption +
Change in Stock
Sales = 250
Intermediate Consumption = Purchase from X = 80
Change in Stock = Closing Stock – Opening Stock
= 15 – 10 = 5
Value Added by Y = 250 – 80 + 5
= 175 Lakhs
5. Calculate value added by firm A and firm B from
the following data.
S.NO ITEMS ` LAKHS

1 PURCHASES BY FIRM B FROM A 40

2 SALES BY FIRM B 80

3 IMPORTS BY FIRM B 10

4 RENT PAID BY FIRM B 5

5 OPENING STOCK OF FIRM B 15

6 CLOSING STOCK OF FIRM B 20

7 PURCHASES BY FIRM A FROM FIRM B 20

8 CLOSING STOCK OF FIRM A 20

9 OPENING STOCK OF FIRM A 10

Value added by A = Sales – Intermediate
Consumption + Change in Stock
Sales by A = Purchases by B from A = 40
Intermediate Consumption = Purchase by from A
from firm B = 20
Change in Stock = Closing Stock – Opening Stock
= 20 – 10 = 10

Value Added by A = 40 – 20 + 10 = 30 Lakhs

Value added by B = Sales – Intermediate
Consumption + Change in Stock

Sales = 80
Intermediate Consumption = Purchase by firm B
from firm A + Imports by B
= 40 + 10 = 50
Change in Stock = Closing Stock – Opening Stock
= 20 – 15 = 5
Value Added by B = 80 – 50 + 5 = 35 Lakhs
6. Calculate Net Value Added at Factor Cost.

S.NO ITEMS ` CRORES

1 SUBSIDIES 5

2 SALES 500

3 INTERMEDIATE CONSUMPTION 200

4 CLOSING STOCK 40

5 CONSUMPTION OF FIXED CAPITAL 60

6 INDIRECT TAX 30

7 OPENING STOCK 50
 GVAMP = SALES – INTERMEDIATE CONSUMPTION + CHANGE IN
STOCK
= 500 – 200 + (40 – 50)
= 500 – 200 + (-) 10
= 300 + ( - ) 10
= 290
NVAMP = GVAMP – DEPRECIATION = 290 – 60 = 230
NVAFC = NVAMP – NIT
NIT = INDIRECT TAX – SUBSIDIES = 30 – 5 = 25
NVAFC = 230 – 25 = 205 CRORES
 Precautions that should be taken while calculating National
Income by output method (Value Added Method or Product
Method)
• i) The value of intermediate goods should not be included.
• ii) The value of second hand goods should not be included.
• iii) The value of illegal goods should not be included.
• iv) The value of leisure items and non market goods should
not be included.
• v) The value of transfer payments should not be included.
 INCOME METHOD

• Calculate NDPFC by using the formula:

NDPFC = Compensation of Employees + Operating

Surplus + Mixed Income of Self Employed.

• Compensation of Employees (COE) can be calculated by

adding Wages in cash, wages in kind, employers’ contribution

to social security schemes and pension on retirement. If COE is

given in the question, components can be ignored.

• Operating Surplus (OS) can be calculated by adding Rent

(actual rent and imputed rent) , Royalty, Interest ( Interest on

loans taken for productive services only) and profit (Profit =

Corporate tax + Dividend + Retained earnings).

• Mixed income of self employed refers to income of own

account workers (farmers, barbers etc) and unincorporated

enterprises (retail traders, small shop keepers etc)

• NNPFC = NDPFC + NFIA. NNPFC is called National

Income.
1. Calculate Gross National Product at Market Price (GNPMP) by
Income Method.

S.NO. Items ` Crores

I Rent 20
Ii Interest 30
Iii Dividends 45
Iv Undistributed Profits 5
V Corporate Tax 10
vi Compensation of Employees 400
vii Consumption of fixed capital 10
viii Net Indirect Tax 50
ix Net factor income from abroad (-) 10
NDPFC = COE + OS + MI

COE = 400

OS = Rent + Interest + Profit

Rent = 20 , Interest = 30

Profit = Dividends + Undistributed Profits + Corporate Tax

= 45 + 5 + 10 = 60

OS = 20 + 30 + 60 = 110

NDPFC = 400 + 110 + 0 = 510

GDPFC = NDPFC + Depreciation = 510 + 10 = 520

GDPMP = GDPFC + NIT = 520 + 50 = 570

2. Calculate national income by income method.
S.NO iTEMS ` CRORES

I Wages and Salaries 500

Ii Royalty 20

Iii Interest 40

Iv Change in Stock 10

V Indirect Tax 100

Vi Rent 50

vii Profit after tax 100

Viii Corporate tax 20

Ix Subsidies 30

x Net Factor Income from Abroad (-) 5

NDPFC = COE + OS + MI
COE = 500
OS = Royalty + Interest +Rent + Profit
Profit = Profit after tax + Corporate Tax =100 + 20 = 120
OS = 20 + 40 + 50 + 120 = 230
NDPFC = 500 + 230 + 0 = 730
NNPFC = NDPFC + NFIA = 730 + (-) 5 = 725 Crores
NNPFC is National Income
3. Calculate National Income from the following
data.
S.NO ITEMS ` CRORES

I Mixed Income of self employed 200

Ii Old age pension 20
Iii Dividends 100
Iv Operating Surplus 900
v Wages and salaries 500
vi Profits 400
vii Employer’s contribution to social security 50
schemes
Viii Net factor income from abroad (-) 10
Ix Consumption of fixed capital 50
x Net Indirect Tax 50
 NDPFC = COE + OS + MI
COE = Wages and salaries+ Employer’s contribution to
social security schemes
= 500 + 50 = 550
OS = 900
MI = 200
NDPFC = 550 + 900 + 200 = 1650
NNPFC = NDPFC + NFIA = 1650 + (-) 10 = 1640 Crores
4. Calculate National Income from the following
data.
S.NO ITEMS ` CRORES
I Rent 80

II Interest 100

III Profits 210

IV Tax on profits 30

V Employer’s contribution to social security schemes 50

VI Mixed Income of Self Employed 250

VII Net Indirect Tax 60

viii Employees contribution to social security schemes 25

ix Compensation of Employees 500

x Net factor Income from abroad (-) 20

NDPFC = COE + OS + MI
COE = 500
OS = Rent + Interest + Profit
= 80 + 100 + 210 =390
MI = 250
NDPFC = 500 + 390 + 250 = 1140
NNPFC = NDPFC + NFIA
= 1140 + (-) 20 = 1120 Crores
5. Calculate National Income from the following
data.
S.NO ITEMS ` CRORES

I Compensation of Employees 400

Ii Profit 200
Iii Rent 150
Iv Interest 100
V Dividends 120
Vi Employer’s contribution to social security schemes 40

vii Mixed Income of Self Employed 500

Viii Direct Tax 100
Ix Net factor income from abroad (-) 50
NDPFC = COE + OS + MI

COE = 400

OS = Profit + Rent + Interest

= 200 + 150 + 100 = 450

MI = 500

NDPFC = 400 + 450 + 500 = 1350

NNPFC = NDPFC + NFIA

= 1350 + (-) 50 = 1300 Crores

6. Calculate Gross National Product at Market
Price.
S.NO ITEMS ` CRORES
I Compensation of Employees 100
Ii Rent 20
Iii Profit 10
Iv Interest 10
V Consumption of fixed capital 20
Vi Net Indirect Taxes 30
vii Net factor income from abroad (-) 20
viii Change in Stock 10
ix Mixed Income 110
NDPFC = COE + OS + MI
COE = 100
OS = Rent + Interest + Profit = 20 +10+ 10 = 40
MI = 110
NDPFC = 100 + 40 + 110 = 250
GDPFC = NDPFC + Depreciation = 250 + 20 = 270
GDPMP = GDPFC + NIT = 270 + 30 = 300
GNPMP = GDPMP + NFIA = 300 + (-) 20
= 280 Crores
7.Calculate Gross National Product at Market Price.

S.NO ITEMS ` CRORES

I Rent 400
Ii Interest 200
Iii Profit 600
Iv Dividends 300
V Wages and salaries 225
Vi Net Indirect Tax 70
vii Consumption of fixed capital 30
Viii Compensation of Employees 250
Ix Mixed Income of Self Employed 100
x Net factor income from abroad (-) 10
 NDPFC = COE + OS + MI
COE = 250
OS = Rent + Interest + Profit
= 400 + 200 + 600 = 1200
MI = 100
NDPFC = 250 + 1200 + 100= 1550
GDPFC = NDPFC + Depreciation = 1550 + 30 = 1580
GDPMP = GDPFC + NIT = 1580 + 70 = 1650
GNPMP = GDPMP + NFIA = 1650 + (-) 10
= 1640 Crores
8. Calculate Gross Domestic Product at Market
Price by income method.
S.NO ITEMS ` CRORES
I Mixed Income of Self Employed 280

ii Compensation of Employees 240

iii Net factor income from the rest of the world (-) 5

iv Goods and Services Tax 90

v Change in Stock 35

vi Consumption of fixed capital 40

vii Subsidies 10

viii Rent, interest and profit 100

ix Interest on National Debt 10

NDPFC = COE + OS + MI
COE = 240
OS = 100
MI = 280
NDPFC = 240 + 100 + 280 = 620
GDPFC = NDPFC + Depreciation = 620 + 40 = 660
GDPMP = GDPFC + NIT
NIT = Indirect Tax – Subsidies = 90 – 10 = 80
GDPMP = 660 + 80 = 740 Crores
• Precautions that should be taken while calculating National
Income by Income Method
• a) Do not include Transfer Income. .

• b) The incomes illegal activities should not be included.

• c) The income earned by selling second hand goods should not be

included. Commission earned by a broker in the sale of second hand
goods can be included.
• d) The income earned from leisure time activities should not be
included.
• e) The income earned by selling shares should not be included. It is
considered as transfer income because only transfer of ownership
takes place.
 EXPENDITURE METHOD

GDPMP = PFCE + GFCE + GDKF + NET EXPORTS

• (i) Identify the sources of final expenditure and classify

them as Private Final Consumption Expenditure,

Government Final Consumption Expenditure, Gross

Domestic capital Formation and Net Exports.

• (ii) If Net Domestic Capital Formation is given, add

depreciation to it to get Gross Domestic Capital

Formation. If Domestic Fixed Capital formation is given,

add change in stock to get domestic capital formation.

• (iii) Add PFCE, GFCE, GDKF and Net Exports to get GDPMP.

• (iv) Subtract the value of depreciation from GDP MP, we will

get NDPMP.

• v) Subtract NIT from NDPMP, we will get NDPFC

• vi) Add NFIA to NDPFC, we will get NNPFC

1. Calculate Gross National Product at Market Price
by Expenditure Method.
S.No Items ` Crores

i Net Exports 10

ii Private Final Consumption Expenditure 400

iii Government Final Consumption Expenditure 100

Iv Net Domestic Capital formation 50

v Consumption of Fixed capital 10

vi Net Indirect tax 50

vii Net factor Income from Abroad (-) 10

GDPMP = PFCE + GFCE + GDKF+ Net Exports
PFCE = 400
GFCE – 100
GDKF = NDKF + Depreciation = 50 + 10 = 60
Net Exports = 10
GDPMP = 400 + 100 + 60 + 10 = 570
GNPMP = GDPMP + NFIA = 570 + (-) 10
= 560 Crores
2. Calculate National Income by Expenditure
Method.
S.No Items ` Crores
i Government Final Consumption Expenditure 120

ii Households Final Consumption Expenditure 600

iii Indirect Tax 100

iv Final Consumption Expenditure of private non profit 30

institutions serving households

v Gross Domestic Fixed Capital Formation 60

vi Net Exports (-) 20

vii Subsidies 30

viii Net Factor Income from Abroad (-) 5

ix Change in stock 10
GDPMP = PFCE + GFCE + GDKF + Net Exports
PFCE = Households Final Consumption Expenditure + Final Consumption
Expenditure of private non profit institutions serving households

= 600 + 30 = 630
GFCE = 120
GDKF = GDFKF + Change in Stock
= 60 + 10 = 70
GDPMP = 630 + 120 + 70 + (-) 20 = 800
NDPMP = GDPMP – Depreciation = 800 – 0 = 800
NDPFC = NDPMP – NIT = 800 – (100 – 30)= 730
NNPFC = NDPFC + NFIA = 730 + (-) 5 = 725
3. Calculate Gross National Product at Factor Cost
from the following data.
S.NO ITEMS ` CRORES

i Net Domestic Fixed Capital Formation 350

ii Closing Stock 100

iii Government Final Consumption Expenditure 200

iv Net Indirect Tax 50

v Opening Stock 60

vi Consumption of Fixed Capital 50

viii Net Exports (-) 10

Ix Private Final Consumption Expenditure 1500

x Net factor Income from Abroad (-) 10

GDPMP = PFCE + GFCE + GDKF + Net Exports
PFCE = 1500
GFCE = 200
GDKF = NDFKF + Change in Stock + Depreciation
= 350 + (100 – 60) + 50 = 440
Net Exports = (-) 10
GDPMP = 1500 + 200 + 440 + (-) 10
= 2130
GDPFC = GDPMP – NIT = 2130 – 50 = 2080
GNPFC = GDPFC + NFIA = 2080 + (-) 10
= 2070
4. Calculate Gross Domestic Product at Market Price
from the following data.
S.NO. ITEMS ` CRORES
I Consumption of fixed capital 50
ii Closing stock 40
iii Private Final Consumption Expenditure 500
iv Opening Stock 60
v Net Factor Income from Abroad (-) 35
vi Exports 25
vii Government Final Consumption Expenditure 200
viii Imports 40
ix Net Indirect Tax 100
x Net Domestic Capital Formation 300
GDPMP = PFCE + GFCE + GDKF + Net Exports
PFCE = 500
GFCE = 200
GDKF = NDKF + Depreciation
= 300 + 50 = 350
Net Exports = Exports – Imports = 25 – 40 = (-) 15
GDPMP = 500 + 200 +350 + (-) 15 = 1035 Crores
 5. Calculate Gross National Product at Market Price
by Expenditure Method.
S.NO Items ` Crores

i Private Final Consumption Expenditure 200

ii Government Final Consumption Expenditure 50

iii Gross Domestic Capital Formation 60

iv Net Imports 10

v Consumption of Fixed Capital 20

vi Net Indirect Tax 30

vii Net Factor Income From Abroad (-) 20

viii Change in Stocks 10

GDPMP = PFCE + GFCE + GDKF + Net Exports
PFCE = 200
GFCE = 50
GDKF = 60
Net Exports = (-) 10
GDPMP = 200 + 50 + 60 + (-) 10 = 300
GNPMP = GDPMP + NFIA = 300 + (-) 20 = 280 Crores
6. Calculate Gross Domestic Product at Market
Price by Expenditure Method.
S.NO ITEMS ` Crores

i Government Final Consumption Expenditure 75

ii Private Final Consumption Expenditure 510

iii Consumption of Fixed Capital 40

iv Gross Fixed Capital Formation 130

v Change in Stocks 35

vi Subsidies 10

vii Net Exports (-) 10

GDPMP = PFCE + GFCE + GDKF + Net Exports

PFCE = 510

GFCE = 75

GDKF = GFKF + Change in Stocks = 130 +35 = 165

Net Exports = (-) 10

GDPMP = 510 + 75 + 165 + (-) 10 = 740 Crores

• Precautions that should be taken while calculating
National Income by expenditure method
• a) The expenditure on intermediate goods should not
be included.
• b) The expenditure on second hand goods and scraps
should not be included but the expenditure made on
broker's service as commission can be included.
• c) The expenditure on transfer payments should not be
included.
• d) The expenditure on illegal goods should not be
included
• e) The expenditure on products produced through
leisure time activities and nonmarket activities should
not be included.
• NOMINAL GDP

Nominal GDP is the market value of all

final goods and services produced in a country in a

year. Increase in prices will lead to increase in

nominal GDP

• Nominal GDP = Output x Current year prices.

• REAL GDP
Real GDP refers to GDP at constant prices. It
is the value of goods and services produced in the
current year, taking base year prices in to
consideration.
Formula to calculate real GDP
Real GDP = X 100

Current Price Index = x 100

• P1 - Current Year Price P0– Base Year Price
• Real GDP is a better index of welfare. It takes price
rise in to consideration. Real GDP increases only
when production of goods and services increases.
Nominal GDP may increase just because of price
rise.
• GDP Deflator: The Gross Domestic Product (GDP)
deflator is a measure of general price inflation. It is
calculated by dividing nominal GDP by real GDP and
then multiplying by 100.

• GDP Deflator =
 The problem of Double Counting while estimating
National Income

The counting of the value of a commodity more than

once while calculating National Income is called
double counting.
If the value of intermediate goods is included, it leads
to double counting. For example: A Baker uses
wheat flour to make bread. If we include the value
of both wheat flour and bread, it leads to double
counting.
 Double counting can be avoided by using the
following methods.
• (i) Calculate only the value of final goods and
services. Do not include the value of intermediate
goods.

• (ii) Subtract intermediate consumption from the

sales by a firm while estimating National Income
by value added method.
 • GDP AND WELFARE
GDP is not a good indicator of welfare
(development)
• (i) Barter system still exists in our country. The
value of goods exchanged under barter system is
not counted in GDP.

• (ii) Increase in the production of cigarettes and

liquor will lead to increase in GDP. However, the
production of these harmful goods reduces
welfare.
• (iii) GDP ignores externalities.

• (iv) If population increases along with GDP,

welfare will not improve.

• (v) Increase in prices may lead to increase in GDP,

even if production does not increase.

• (vi) Unequal distribution of GDP will not improve

welfare.
 EXTERNALITIES

An economic activity can affect even

those people who are not connected with it. It is
called externality. There are negative externalities
and positive externalities.
• Negative externalities are the negative effects
and positive externalities are positive effects.
Suppose, many chemical factories come up in
an area. It will cause pollution. The entire
society will suffer. This will affect public
welfare. It is negative externalities.
• On the other hand, if many firms come
up in an area, transport, banking, health and
educational facilities will develop. It will
improve public welfare. It is positive
externalities.
Thank You