National Income - Exam Notes

Economics: Social science of production, distribution, and consumption of goods/services.
Macroeconomics: Focuses on aggregate economy behavior.
Microeconomics: Focuses on individual consumers and businesses.
Economy: Interrelated production and consumption activities that allocate scarce resources.
Market Economy: Prices determined by unrestricted competition.
Non-market Economy: Government intervention allocates resources and sets prices.
Mixed Economy: Combines private property with government intervention.
National Income (NI) Accounting: Essential for a country's economic well-being.
Circular Flow of Income: Economic exchange where money and goods/services flow in opposite directions.

National Income (NI): Aggregate of factor incomes earned by normal residents in a country during an accounting year.
Includes wages, salaries, rent, interest, and profit.
Flow concept measured over a period (April 1 to March 31).
Measured in terms of Gross Domestic Product (GDP) and its variants such as NDP, GNP and NNP.
$GDP = \text{Sum total of Gross Value Added (GVA) of all the firms in the economy}$

First attempt to estimate NI: Dadabhai Naoroji in 1868, PCI was ₹20.
First scientific method: Dr. V.K.R.V. Rao in 1931-32, PCI was ₹62.
First official attempt: P.C. Mahalanobis led National Income Committee, report in 1951, NI of India for 1948-49 was ₹8,710 crore and the PCI was ₹225.
Task transferred to Central Statistics Office (CSO), now National Statistical Office (NSO) under MoSPI.
NSO divides economy into primary, secondary, and tertiary sectors.

Primary: Agriculture, forestry, fishing, animal husbandry.
Secondary: Mining, manufacturing, utilities, construction.
Tertiary: Trade, hotel, transport, finance, public administration.
Sector-wise Contribution in the Indian GDP:
- 1950-51: Primary (55%), Secondary (15%), Tertiary (30%)
- 2019-20: Primary (20%), Secondary (26%), Tertiary (54%)
- 2020-21 (P): Primary (18%), Secondary (27%), Tertiary (55%)

Domestic/Economic Territory: Geographical territory administered by the government with free movement of persons, goods, and capital.
- Includes embassies, military establishments abroad, and ships/aircraft operated by residents.
Market Price (MP): Price paid by consumer including indirect taxes and subsidies.
Factor Cost (FC): Cost of factors of production (salaries, rent, interest, profit).
- $Factor Cost = Market Price - Net Indirect Taxes$
- $Net Indirect Taxes = Indirect Taxes - Subsidies$
Depreciation: Loss in value of fixed assets due to wear and tear.
- $NDP = GDP - Depreciation$
Net Factor Income from Abroad (NFIA): Difference between factor income earned by residents abroad and factor income earned by non-residents in India.
- $NFIA = \text{Factor Income from ROW - Factor Income to ROW}$
- $NNP = NDP + NFIA$
Transfer Payments: Unilateral payments without exchange of goods/services (gifts, pensions).
- Not included in NI but included in Personal Income and are taxable.

Resides in India, and
Whose center of economic interest lies in India.
A person residing for one year or more in India is considered as ordinarily residing in India.

Real GDP: Inflation-adjusted value of goods/services produced in constant prices.
Nominal GDP: Market value of goods/services produced in current prices.
$GDP Deflator = \frac{Nominal GDP}{Real GDP} \times 100$
Real GDP better indicator of economic growth.
Base year for GDP calculation is currently 2011-12. GDP Deflator preferred over CPI and WPI because it covers the entire range of goods and services produced in the economy. CPI is not preferred because:
- All goods and services produced are not consumed by the retail consumers.
- It assigns fixed proportion to the goods in the index instead of dynamic weightage based on level of consumption.
- Imported consumption goods are also counted in CPI.
  WPI is not preferred because:
- Services inflation (which contributes more than 50% in GDP) is not considered here.
- WPI considers the intermediate wholesale prices, and not the final market prices.

Potential GDP: Highest level of output an economy can sustain at a constant inflation rate.
Major challenges for India in achieving Potential GDP:
- Gender inequality.
- The issue of unemployment and under-employment.
- Use of old age production methods to produce goods.
- Need for a user-friendly regulatory framework in terms of easy entry and exit policy for corporates.
Net Domestic Product (NDP): GDP adjusted for depreciation.
Gross National Product (GNP): Total value of final products/services by a country's residents.
Net National Product (NNP): Monetary value of finished goods/services produced by a country's citizens.

Personal Income (PI): Sum of all factor incomes received by households, including transfers.
- $PI = NNP_{FC} - \text{Undistributed profits} - \text{Net interest payments} - \text{Wage accruals} + \text{Transfer payments} + \text{Personal interest and dividend income}$
Personal Disposable Income (PDI): Income remaining after direct taxes.
- $PDI = PI - \text{Direct taxes} - \text{Miscellaneous fees and fines}$
National Disposable Income (NDI): Income available for consumption/saving.
- $NDI = NNP_{FC} + \text{Net indirect taxes} + \text{Net current transfers from ROW}$
Gross National Disposable Income (GNDI): Measures the income available to the total economy for final consumption and gross saving.
- $GNDI = GNP + \text{current transfers receivable} - \text{current transfers payable}$
Net National Disposable Income (NNDI):
- $NNDI = GNDI - \text{Depreciation}$

Advance Estimate (AE): Released ~2 months before financial year end.
Provisional Estimate (PE): Released ~2 months after financial year end.
First Revised Estimate: Released ~10 months after financial year end.
Second & Third Revised Estimates: Released 1 year 10 months and 2 years 10 months after the closure of the financial year, respectively.

Product (Value Added) Method: GVA or $GDP_{MP}$
* $GVA = \text{Value of Output} - \text{Intermediate Consumption}$
Income (Distribution) Method: $NDP<em>{FC}$ * $NDP</em>{FC} = \text{Compensation to Employees} + \text{Operating Surplus} + \text{Mixed Income}$
Expenditure (Total Outlay) Method:
* $GDP_{MP} = C + I + G + (X - M)$

$\text{GVA at Basic Prices} = \text{GVA at Factor Cost} + \text{Net Production Taxes}$
$\text{Net Production Taxes} = \text{Production Taxes} - \text{Production Subsidies}$
Production Taxes: Land Revenue, Stamp & Registration fees
Production Subsidies: Subsidies to railways, input subsidies to farmers, subsidies to village and small industries
Product Taxes: GST, Custom duty
Product Subsidies: food subsidy, petroleum and fertiliser subsidies
$GDP_{MP} = GDP \text{ at Basic Prices } + \text{Product Taxes - Product Subsidies}$

$\text{Nominal PCI} = \frac{NNP_{FC} \text{ at Current Prices}}{Total Population}$

Measure domestic economic performance only; it does not measure the social welfare.
It does not capture the non-market transactions like the service of the homemakers, barter-based activities.
It does not take into account the negative externalities of economic growth where there is a usual trade-off between economic growth and environmental degradation.
Inclusion or exclusion of certain items in NI accounting can lead to erroneous results.
Difficulties in data collection lead to more approximation error.