National Income

National income accounting is a branch of macroeconomics of which estimation of national income and related aggregates is a part. The concepts of economic territory and residents are crucial for accurate national income estimation, as they define what and who are included in the calculation. These definitions affect how national income aggregates are determined.

The economic territory includes:

1. Political frontiers (land, territorial waters, airspace).
2. Foreign embassies, consulates, military bases abroad (but not within the country).
3. Ships and aircraft operated by residents between countries.
4. Fishing vessels, oil rigs, etc., operated by residents in international waters or areas under the country’s jurisdiction.

Implications for National Income: National income aggregates measure production activity. There are two types:

• Domestic product: Measures the value of production within the economic territory, regardless of who produces it (residents or non-residents).
• National product: Includes the production by residents, both inside and outside the economic territory.

Concept of Resident: A resident is anyone whose economic activities are centered in a country's economic territory. Residency is based on economic activities, not citizenship. A person can be a citizen but not a resident of the country (e.g., NRIs).

National Vs Domestic Product

• Domestic Product: Includes production within the country’s economic territory, regardless of whether the producer is a resident or non-resident.
• National Product: Includes production by residents, both within and outside the economic territory.

National Product = Domestic Product + Net Factor Income from Abroad (NFIA)
NFIA = Factor income received from abroad - Factor income paid to abroad

Industrial Classification: National income is estimated by grouping production units into sectors:

1. Primary Sector: Involves exploitation of natural resources (e.g., agriculture, fishing, mining).
2. Secondary Sector: Includes manufacturing and construction (e.g., factories, power generation).
3. Tertiary Sector: Involves services (e.g., transport, trade, education, healthcare).

Basic Aggregates of National Income

National income aggregates are used to measure the value of goods and services produced within an economy, expressed in monetary terms. There are eight key aggregates:

1. Gross Domestic Product at Market Price (GDPMP)
   GDPMP refers to the total market value of all final goods and services produced within a country’s domestic territory in a year. It includes depreciation and accounts for indirect taxes but excludes subsidies.

2. Gross Domestic Product at Factor Cost (GDPFC)
   GDPFC is the total market value of final goods and services produced within the domestic territory, excluding indirect taxes and adding subsidies. It is calculated as:
   GDPFC = GDPMP – Net Indirect Taxes

3. Net Domestic Product at Market Price (NDPMP)
   NDPMP is the market value of final goods and services produced within the domestic territory, adjusted for depreciation. It is calculated as:
   NDPMP = GDPMP – Depreciation

4. Net Domestic Product at Factor Cost (NDPFC)
   NDPFC refers to the net value of all final goods and services, adjusted for depreciation and indirect taxes. It is also known as Domestic Factor Income or Domestic Income.
   NDPFC = GDPMP – Net Indirect Taxes – Depreciation

   Relationship between the four Domestic Aggregates (GDPMP GDPFC NDPMP and NDPFC)

   

5. Gross National Product at Market Price (GNPMP)
   GNPMP is the total market value of all final goods and services produced by a country’s residents in a year.
   Formula:
   GNPMP = GDPMP + Net Factor Income from Abroad (NFIA)

   If NFIA is negative, GNPMP is less than GDPMP; if NFIA is positive, GNPMP is greater than GDPMP.

6. Gross National Product at Factor Cost (GNPFC)
   GNPFC is the total value of final goods and services produced by a country’s residents, calculated at factor cost.
   Formula:
   GNPFC = GNPMP – Net Indirect Taxes

7. Net National Product at Market Price (NNPMP)
   NNPMP is the market value of final goods and services produced by a country’s residents, adjusted for depreciation.
   Formula:
   NNPMP = GNPMP – Depreciation

8. Net National Product at Factor Cost (NNPFC)
   NNPFC is the money value of all final goods and services produced by a country’s residents, adjusted for depreciation and indirect taxes.
   Formula:
   NNPFC = GNPMP – Net Indirect Taxes – Depreciation NNPFC is also referred to as National Income.

   Relationship between (GNPMP NNPMP NNPFC GNPFC)

   

Methods of Calculating National Income

National income can be calculated using three primary methods:

1. Value Added Method / Product Method
2. Income Method
3. Expenditure Method

Value Added Method

The Value Added Method calculates National Income by considering the value added at each production phase in the economy's circular flow.
Each production unit contributes value at each stage of the production process. Enterprises add value to a final product by purchasing intermediate goods from other firms for production.
The value added by each firm to the final product is summed up to calculate the total National Income.

Alternative Names:

• Product Method
• Inventory Method
• Commodity Service Method
• Industrial Origin Method
• Net Output Method

Formula:
GDPMP = ∑GVAMP

Where:

GDPMP = GVAMP of Primary Sector + GVAMP of Secondary Sector + GVAMP of Tertiary Sector

The formula for calculating National Income is:

NNPFC = GDPMP - Depreciation - Net Indirect Taxes + NFIA

Where:

• NNPFC: Net National Product at Factor Cost
• GDPMP: Gross Domestic Product at Market Prices
• NFIA: Net Factor Income from Abroad

Income Method

The Income Method calculates National Income based on the incomes earned by individuals and firms for providing productive services during a year.
The total income generated in an economy is distributed among factors of production—land, labor, capital, and entrepreneurship—in the form of profits, wages, interest, and rent.

Alternative Names:

• Distributive Share Method
• Factor Payment Method

Formula:
National Income = Profits + Wages + Interest + Rent

Expanded formula:
NNPFC = NDPFC + NFIA

Where:

NDPFC = Compensation of Employees + Rent and Royalty + Interest + Profit + Mixed Income

Expenditure Method

The Expenditure Method calculates National Income based on the total final expenditures in an economy. These expenditures are made by various sectors for purchasing goods and services produced by firms.
The factor income earned by production factors is spent by households, governments, foreigners, and business firms on goods and services.

Alternative Name:

• Income Disposable Method

Formula for GDPMP:
GDPMP = ∑ Final Expenditure

Or:

GDPMP = PFCE + GFCE + GDCF + (X - M)

Where:

• PFCE: Private Final Consumption Expenditure
• GFCE: Government Final Consumption Expenditure
• GDCF: Gross Domestic Capital Formation (Domestic Investment)
• X - M: Net Exports (Exports - Imports)

National Income (NNPFC) is then calculated as:

NNPFC = GDPMP - Depreciation - Net Indirect Taxes + NFIA

Where:

• Depreciation: The loss in value of capital goods over time.
• Net Indirect Taxes: Taxes minus subsidies.
• NFIA: Net Factor Income from Abroad.