EEIP IIPMB

1. National Income in India

2. The Importance of National Income
 To measure the level of country’s economic performance.
 To compare the economic growth in relation to previous year(s) and
also with the Rest of the World.
 To know the composition and structure of the national income in
terms of various sectors and the periodical variations in them.
 To make projections about the future development trend of the
economy.
 To help government formulate suitable development plans and
policies and targets for different sectors of the economy.
 To help producers in forecasting future demand for their products.

3. Introduction
 An economy can be defined as an integrated system of
production, consumption & Exchange
 In carrying out these economic activities, people are
involved in buying and selling of goods and services.
 It is useful to understand the mechanism of income &
expenditure flows
 How these flows are generated?
 How they make the system work?

4. Economic activities generate two kinds of flows:
- Real flow: factor flow and goods flow
- Money flow: factor payments
Factor payment take form of expenditure flow
on consumer goods and services
The entire economic system can therefore be
viewed as circular flows of income and
expenditure
Magnitude of these flows determine the size of
national income

5. Four sectors
- Household Sector
- Business Sector
- Government Sector
- Foreign Sector

6. Models of Circular Flows
 Two-Sector Model including Household and the
Business sector
 Three- Sector Model including household, business &
Government Sector
 Four-Sector Model including household, business,
Government & Foreign Sector

7. Two Sector Model
 An economy which consists of only households and firms operating
in a closed economy
Households:
• owner of all the factors of
production
• their income consists of wages,
interest, rent & profits
• they are consumers of all goods
and services
• they spend their entire income
and if they save any part of
income they invest it in the firm
Business Firms:
• Own no resources of there own
• Produce goods and services
only as much as demanded by
the households.
• Firms make payment to the
households in the form of rent ,
wages , interest & profits
• There is a closed economy
operating system

8. Two Sector Model
Households Producers
Goods & Services
Factor Payments (R+W+I+P)
Factor Services
Payment For Goods & Services

9. Withdrawals & Injections
 In reality, however, there are leakages from and
additions to the circular flows of income and
expenditure
 The leakages and additions are also called withdrawals
and injections, respectively.

10. Withdrawals
 Withdrawal is the amount that is set aside by the households
and the firms and is not spent on the domestically produced
goods and services over the period of time .
 Example a household sets aside a part of income for old age
or against the loss of job.
 Saving is a withdrawal.
 When savings are invested, they take a form of injections
 Firms may also withhold a part of their total receipts and may
not return it to the circular flows in the form of factor
payments in anticipation of depression
 Such withdrawals reduce the size of circular flows

11. Injections
 Amount that is spent by households and firms in
addition to their incomes generated within the regular
economy
 Injection by the household may be in the form of
spending inherited savings or the hoarding
 Firms can inject money by spending their retained
earnings or borrowing from outside
 Injections increase the size of circular flows

12. Two Sector Model With Savings
 Entire money income generated by firms flows back again to the
household as the factor payments and further to the firms .
Households Producers
Factor Services
Factor Payments
Goods & Services
Payment For Goods & Services
Capital
Market
Savings
Borrowings
Savings Borrowings

13. Three-Sector Model
Households Producers
Factor Payments
Payment For Goods & Services
Capital
Market
Savings
Borrowings
Savings Borrowings
Government
Savings
Borrowings

14. In a Three Sector Model
 Magnitude of flow between the households and the firms is
reduced because a part of income flows to the government sector
 The household income is claimed by the government in the form of
direct taxes
 A part of earnings of producers reaches in the form of corporate
taxes
 Government imposes indirect taxes
 Government spends a part of this revenue in the form of factor
payments and public expenditure and extends the subsidies
 Thus, money that flows to the government flows back to these
sectors

15. Circular Flow in A four Sector Model
 Foreign sector consists of two kinds of international
transactions
Exports & imports of goods and services
Inflow and outflow of capital

16. Four-Sector Model
Households Producers
Factor Payments
Payment For Goods & Services
Capital
Market
Savings
Borrowings
Savings Borrowings
Government
Savings
Borrowings
ROW
Paymentsfor
Exports
Paymentsfor
Imports
Payments for Exports
Payments for Imports

17. Definition of National Income
Money value of all final goods and services,
produced in an economy of a country,
during an accounting year, including net
factor income earned from abroad.

18. Methods of Calculating
National Income
Product or Value added method
Income method
Expenditure method

19. GDPMP
GDPFC NDPMP
GNPMP
GNPFC NNPMP
Relationship Between Macro Indicators

20. Some Related Concepts
• Personal Income : It is the income which an
individual earns from all the sources.
• Personal Disposable Income : Personal Income –
Direct Taxes
• Per Capita Income = National Income
Total Population

21. Items not included
 Unreported Income
 Illegal Activities
 Non Market Income

22. Pre-Independence Estimates of National Income:
 No official body in India to prepare National Income estimate
 Prepared by some eminent personalities in their personal capacity.
 Dadabhai Naoroji, prepared the first estimates of National income
in 1876.
 He estimated the national income by first estimating the value
of agricultural production and then adding a certain
percentage as non-agricultural production.
 However, such method can only been called as a non-scientific
method.

23.  The first person to adopt a scientific procedure in estimating the national income
was Dr. VKRV Rao in 1931.
 He divided the Indian Economy into two parts:
- Agricultural Sector which included agriculture, forests, fishing and
hunting.
- Corporate Sector which included industries, construction,
business, transport and public services.
 Two different methods were used for estimating the income in the
two sectors.
- Product method was used for estimating income in agricultural
sector.
- Income method was used for estimating income in the
corporate sector.
 Finally, Net Factor Income earned from abroad was added to the
sum of the above two to obtain national income.

24. Difficulties and Limitations
 No Government Agency: All estimates were
prepared at personal level.
 Incomplete and unreliable data
 Different methods: Choice of methods depended
upon the preference of the person concerned.
 Different geographical areas: The income of the
country was estimated on the basis of data
collected from different geographical areas.
 Based on the current prices

25. Estimates of National Income after Independence
 The Government of India appointed National Income
Committee in 1949.
 The committee was chaired by Prof. P.C. Mahalanobis. Prof D.R.
Gadgil and Dr. V.K.R.V. Rao were the members .
 The first report of the committee was presented in 1951.
 According to the first report, the National Income of India for
1948-49 was Rs. 8,710 crore.
 The report discussed
 Details of methods for the estimation of data on National
Income.
 Various sources and limitations of data on national income

26. Central Statistical Organization
 Prepares National Income estimates in India since 1955.
 National Income may be calculated on current prices or at constant
prices.
 Currently, the base year for measuring national income and per
income at constant prices is 2011-12, introduced in Jan 2015.
 It has divided economy into three basic sector for the purpose of
evaluation of various data. They are:
 Primary sector comprising agriculture, forestry, fishing, mining
quarrying.
 Secondary sector comprising manufacturing, power generation,
gas and water supply
 Tertiary sector comprising transport, communication and trade,
banking insurance, computer software, public administration,
defense and external trade.

27. Estimates of NI by CSO
1. Conventional Series:
 Between 1952-1967, same methods of national income
estimates were adopted as recommended by National
Income Committee.
 1948-49 was taken as base year
 After 1966, CSO discontinued the publication of conventional
series
2. First Revised Series
 In 1967, certain major changes introduced by CSO.
 1960-61 was taken as base year instead of 1948-49
 Economic activities were classified into three different sectors,
viz., Primary, Secondary and Tertiary Sector

28. 3. Second Revised Series
 CSO introduced this series in 1978
 1970-71 taken as base year instead of 1960-61
4. Third Revised Series
 CSO introduced this series in 1988
 1980-81 taken as base year instead of 1970-71
5. Fourth Revised Series
 Introduced in 1999
 1993-94 taken as base year
 Important methodological changes were introduced

29. 6. Fifth Revised Series
• Adopted in 2004-05
• Base year was 1999-2000
7. Sixth Revised Series
• Adopted in 2009-10
• Base year was 2004-05
8. New Series
• To present a more realistic picture of the economy,
the government has released a new series of national
accounts with 2011-12 as base year for computing
economic growth rate in January 2015.

30. Difficulties in Measuring National
Income in India
 Prevalence of Non-monetized Sector
 Due to illiteracy most of the producers do not maintain
any account of their income and expenditure.
 Production , both agricultural and industrial, is
unorganized and scattered
 Lack of Statistical Data
 https://www.youtube.com/watch?v=iNfNZ1mIGRE (real
GDP and GDP deflator)
 https://www.youtube.com/watch?v=iWsI48ZTz4E
(concepts of national income)