National Income Accounting

National Income Accounting

Notes

National income is the total value of goods and services produced by a country's residents in a year, net of depreciation. It is the main measure of an economy's performance.

Concepts and relationships

• GDP: production within the domestic territory.
• GNP = GDP + NFIA (net factor income from abroad).
• NNP = GNP - Depreciation (Consumption of fixed capital).
• National Income (NNP at factor cost) = NNP at market prices - Net indirect taxes (indirect taxes less subsidies).
• Personal Income = National income - undistributed profits - corporate tax - social security contributions + transfer payments.
• Disposable Income = Personal income - personal direct taxes.
• Per capita income = National income / population.

Methods of measurement

1. Product (value-added) method: adds up the value added by each sector (primary, secondary, tertiary).
2. Income method: adds up factor incomes (wages, rent, interest, profit, mixed income).
3. Expenditure method: C + I + G + (X - M).

India uses a combination: the product method for agriculture and manufacturing, and the income method for services such as trade, banking and transport.

History in India

• Dadabhai Naoroji (1868) made the first estimate (per capita income of about ₹20). Others: William Digby (1899), Findlay Shirras, and V.K.R.V. Rao (1931), the first scientific estimate.
• National Income Committee (1949) under P.C. Mahalanobis (with D.R. Gadgil and V.K.R.V. Rao) produced the first official estimates. The Central Statistical Organisation (CSO), 1951, was merged into the NSO (MoSPI) in 2019.
• Base years: 1948-49, 1960-61, 1970-71, 1980-81, 1993-94, 1999-2000, 2004-05, 2011-12 (current).

Limitations: non-market activities (household work), the underground (black) economy, double counting, the problem of depreciation, and the failure to count the environmental costs (leading to green GDP proposals). The UN System of National Accounts (SNA) provides the international framework.

Key Points

• GNP = GDP + NFIA; NNP = GNP - depreciation.
• National income = NNP at factor cost.
• Three methods: product, income, expenditure.
• National Income Committee (1949), P.C. Mahalanobis; Naoroji made the first estimate.
• Current base year: 2011-12; NSO under MoSPI compiles.

MCQs

Q1. The first official estimates of national income in India were made by the:
(a) V.K.R.V. Rao Committee
(b) National Income Committee (1949) headed by P.C. Mahalanobis
(c) Planning Commission
(d) Dadabhai Naoroji
Ans: (b) .

Q2. National income is equal to:
(a) GDP at market prices
(b) NNP at factor cost
(c) GNP at market prices
(d) Personal income Ans:
(b) .

Q3. The first estimate of India's per capita income was made by:
(a) V.K.R.V. Rao
(b) Dadabhai Naoroji
(c) William Digby
(d) P.C. Mahalanobis
Ans: (b) . In 1868.