Introduction

National income is the sum total of factor incomes earned by all normal residents of a country during the period of one year. According to Central Statistical Organization, “National income is the sum total of factor incomes earned by normal residents of a country in the form of wages, rent, interest and profit in an accounting year."
In 1876, DadaBhai Naoroji was the first person to prepare estimates of national income and per capita income for the year 1867-68. DadaBhai Naoroji estimated national income at Rs 340 crore and per capita income of Rs 20. Professor V.K.R.V. Rao estimated National Income for the year 1931-32 at Rs 1689 crore and per capita income at Rs 62. Ministry of Commerce (Govt. of India) estimated national income at Rs 6234 crore and per capita income at Rs 198 for the year 1945-46. Presently Central Statistical Organization measures the national income of the country.

Some basic definitions

Gross Domestic Product - GDP
Gross Domestic Product at Market Price
Gross Domestic Product at Factor Cost
Net Domestic Product
Gross National Product at Market price
Net National Product
National Income

Gross Domestic Product - GDP

It is the money value of all final goods and services produced in the domestic territory of the country during an accounting year.

Gross Domestic Product at Market Price

GDP at market price is defined as the market value of the output of final goods and services produced in the domestic territory of a country by all the producers during an accounting year.

Gross Domestic Product at Factor Cost

It is the sum of net value added by all the producers in the domestic territory of the country and a consumption of fixed capital during an accounting year

Net Domestic Product

NDP at Market Price or Net domestic income is the market value of final goods and services produced by all the producers in the domestic territory of a country exclusive of depreciation during a year.
NDPmp = GDPmp - Depreciation

Gross National Product at Market price

The market value of final goods and services produced within the domestic territory of a country, including net factor income received from abroad.
GNPmp = GDPmp + Net factor income from Abroad.

GNP includes both earnings from net exports as well as net factor earnings. It is the measure of the current output of economic activity in the country.

Net National Product (NNP)

The market value of final goods and services after providing for depreciation. The consumption of fixed capital or fall in the value of capital due to wear and tear is called depreciation.
NNPmp = GNPmp – Depreciation

National Income

National income means the sum of all incomes earned by resource suppliers for their contribution of land, labour, capital and entrepreneurial ability which go to intake year’s net production.
NNPfc = NNPmp - Indirect Taxes + Subsidies

Private Income

Private income means the income earned by private individuals from any source whether productive or unproductive. It can be arrived at from NNP at factor cost by making certain additions and deduction. The additions include (a) transfer earnings from Govt, (b) interest on national debt (c) current transfers from rest of the world. The deductions include (a) Income from property and entrepreneurship (b) savings of the non- departmental undertakings (e) social security contributions. In order to arrive at private income the above additions and subtraction are to be made to and from NNP at factor Cost.
[Private Income = NNP at FC + transfer payments + Interest on public debt - social securities - profits and surpluses of public undertakings]

Personal Income

Personal Income is the total income received by the individuals of country from all sources before direct taxes. Personal income is not the same as National Income, because personal income includes the transfer payments where as they are not included in national income. Personal income includes the wages, salaries, interest and rent received by the individuals. Personal income is derived by excluding undistributed corporate profit taxes etc. from National Income.
[Personal Income = Private Income - Saving of Private enterprise - Corporate tax]

Disposable Income

Disposable income means the actual income which can be spent on consumption by individuals and families. It refers to the purchasing power of the house hold. The whole of disposable income is not spent on consumptions; a part of it is paid in the form of direct tax. Thus disposable income is that part of income, which is left after the exclusion of direct tax.
[Disposable Income = Personal Income - Direct tax]

COST AND PRICE OF NATIONAL INCOME

While calculating national income the issues related to 'cost' and 'price' also needs to be decided. Basically, there are two sets of costs and prices; and an economy needs to choose at which of the two costs and two prices it will calculate its national income

(i) Cost: Income of an economy, i.e., value of its total produced goods and services may be calculated at either the 'factor cost' or the 'market cost'

(ii) Price: Income can be derived at two prices constant and current. The difference in the constant and current prices is only that of the impact o finflation

Differences between National Income at Current Prices and National Income at Constant Prices 

The main differences between national income at current prices or monetary national income and national income at constant prices or real national income are as follows

National income at current prices is the sum total of market value of final goods and services produced by the normal residents of a country during the year and estimated at current prices of the current year. On the other hand, national income at constant prices is the sum total of market value of the final goods and services produced by the normal residents of a country during the year, but estimated at the prices of the base year.
(2) National income at current prices can increase even when there is no increase in the flow of goods and services in the economy, but only prices happen to increase. In contrast, national income at constant prices will increase only when there is an increase in the flow of goods and services.
The national income at constant prices is a more appropriate index of the growth of an economy like Indian economy than the national income at current prices. It is because national income at constant prices refers to the flow of goods and services.
I GDP at Current Prices refers to the market value of goods and services, estimated by using prices prevailing during the year of estimation. Here, income changes when either output changes or price changes. This is also known as Nominal GDP.
GDP at Constant Prices refers to the market value of goods and services estimated by using prices prevailing during the base year, the year of comparison. Here, income changes only when output changes. This is also known as Real GDP.

Significance of Real GDP 

Following discussion highlight the significance of real GDP or GDP at constant prices (in relation to GDP at current prices).
(1) Knowledge of Change in Availability of Goods and Services:
Only real GDP shows a change in the availability of goods and services to the people of a country. Because any change in real GDP imp1ies a corresponding change in the flow of goods and services in the economy.
(2) Knowledge of Change in Level of Economic Activity: Real GDP shows change in the level of economic activity in the country. Increase in real GDP implies increase in the level of economic activity (in terms of increase in the level of production).
(3) Facilitates Inter-regional and International Comparison: Real GDP facilitates inter-regional and inter1lational comparison of the level of production or the level of economic activity. Nominal GDP does not serve this purpose.

GNP Deflator

The GNP deflator measures the average level of the prices of all the goods and services that make up GNP. GNP deflator is measured as the ratio of nominal GNP to real GNP, multiplied by 100. GNP deflator shows change in the GNP because of change in price level. In other words, GNP deflator refers to change in price index for GNP.

GNP Deflator =
Example:- Using hypothetical figures, GNP deflator is calculated as under:-
GNP deflator current year
=
Like GNP deflator we can also find GDP deflator as under :
GDP deflator for current year
Other Indices of Price Change CPI (Consumer Price Index) This shows percentage change in price level with reference to some base year (the year of comparison) considering a basket of goods often bought by the consumers.The cost of buying the basket of
goods is calculated for the current year as well as for the base year. Current year cost is related to the base year cost as a percentage of the latter to find consumer price index number for the current year. Example: A, B, C are three goods in the basket of a representative consumer. In the year 2005 the consumer buys 10, 15, and 20 units of A, Band C at a price of 50, 40 and 30 rupees per unit, respectively. Total expenditure is (10 × 50) + (15 × 40) + (20 × 30) = 1700 rupees. In the year 2006, prices increase to 60, 50 and 45 rupees for A,B and C respectively. Buying the same quantity of A, B and C would now cost (10×60) + (10×60) +(15×50) + (20×45) = Rs. 2250
(approx.)
Implying nearly 33% increase in the price level in 2006 compared to the price level in 2005.

Taxes & National Income

While accounting/calculating national income the taxes, direct and indirect, collected by the governments, needs to be considered. In the case of India, to the extent the direct taxes (individual income tax, corpoarate income tax, i.e., the corporate tax, divident tax, interest tax, etc.) are concerned, there is no need of adjustment whether the national income is accounted at factor cost or market cost. This is so because at both the 'costs' they have to be the same; besides these taxes are collected at the incomes of the concerned person or group.
But the amount of indirect taxes (cenvat, customs, central sales tax, sales tax/vat, state excise, etc.) needs to be taken care of if the national income is accounted at 'factor cost' (which is the case with India). If the national income is calculated at factor cost then the corpus of the total indirect taxes needs to be deducted from it. Why so? This is because, they have been added twice: once in the hands of the people/group who pay them (because they pay for it from their 'disposable income' while puchasing things) and other in the hands of the governments (as their income receipts). Collection/source of indirect taxes are the 'disposable income'(which individuals and companies have with them after paying their direct taxes-from which they do any purchasing and finally, the indirect taxes reach the various governments). Thus, if the national income is calculated at factor cost, the formula to seek it will be:
National Income at Factor Cost NNP at Market Cost-Indirect Taxes
However, if the national income is being derived at 'market cost', the indirect taxes do not need to be deducted from it. In this case, the governments need not add their income accruing from indirect taxes to the national income either. It means, that the confusion in the case of national income accounting at factor cost is only related with indirect taxes.

Subsidies & National Income

Similar to the indirect taxes, the various subsidies which are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in case of India. Subsidies are added in the national income at market cost to derive the national income at factor cost . This is because the price at which the subsidised goods and services are made available by the governments are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services) otherwise we will have a distorted value (which will be less than its real value). Thus the formula will be:
National Income at Factor Cost = NNP at Market Cost + Subsidies
If the national income is derived at the market cost and governments forward no subsidies there is no need of adjustments for the subsidies, but after all there is not a single economy in the world today which does not forward subsidies in one or the other form.
Putting 'indirect taxes' and 'subsidies' together, India's National Income will be derived with the following formula (as India does it at factor cost):
National Income at Factor Cost = NNP at Market Cost-Indirect Taxes+ Subsidies