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TNPSC Free Notes Economy In English – National Income

இந்தக் கட்டுரையில், TNPSC குரூப் 1, குரூப் 2, குரூப் 2A, குரூப் 4 மாநிலப் போட்டித் தேர்வுகளான TNUSRB, TRB, TET, TNEB போன்றவற்றுக்கான  முறைகள் இலவசக் குறிப்புகளைப் பெறுவீர்கள்.தேர்வுக்கு தயாராவோர் இங்குள்ள பாடக்குறிப்புகளை படித்து பயன்பெற வாழ்த்துகிறோம்

                               National Income

Economic Growth and Development
 As per the economist Amartya Sen, economic growth is one aspect of economic
 Also, United Nation said “Economic development focuses not only on man’s
materialistic need but it focuses on overall development or rise in its living standards.
Economic Growth
 It is the quantitative measure which considers the rise in the output produced in an
economy or nation in a particular period in its monetary value.

 The key parameters of economic growth in any economy are its Gross Domestic Product
(GDP) and Gross National Product (GNP) which helps in measuring the actual size of an
 For example, we say GDP of India is 2.8 trillion USD and ranked 6 th in the globe whereas
GDP of the United States of America is 19.3 trillion USD and ranked one.
 It shows how much the production of goods and services has increased compared from
last year in a quantitative manner.
 It has many parameters to measure and few of them are human Resources.
 They are Natural Resource, Advancement in technology, Capital formation, Political and
social-economic factors.
Economic Development
 Economic development projects a broader picture of an economy which takes into
account an increase in production level or output of an economy along with an
improvement in the living standard of its citizens.
 It focuses more on socioeconomic factors rather than the just quantitative increase in
 Economic development is a qualitative measure which measures improvement in
technology, labour reforms, rising living standards, broader institutional changes in an
 Human Development Index (HDI) is an apt tool to measure the real development in an

Differences between Economic Growth and Economic Development
Comparison between
Economic Growth and
Economic Development

Economic Growth Economic Development

Definition / Meaning It is the positive quantitative
change in the output of an
economy in a particular time

It considers the rise in the
output in an economy along
with the advancement of HDI
index which considers a rise
in living standards,
advancement in technology
and overall happiness index
of a nation.

Concept Economic growth is the
“Narrower” concept

Economic development is the
“Broader” concept
Nature of Approach Quantitative in nature Qualitative in nature
Scope Rise in parameters like GDP,


Rise in life expectancy rate,
infant, improvement in
literacy rate, infant mortality
rate and poverty rate etc.
Term / Tenure Short term in nature Long-term in nature
Applicability Developed nation Developing economies
Measurement Techniques Increase in national income Increase in real national
income i.e. per capita income
Frequency of Occurrence In a certain period of time Continuous process
Government Aid It is an automatic process so
may not require government
support/aid or intervention

Highly dependent on
government intervention as
it includes widespread
policies changes so without
government intervention it is
not possible

Wealth Distribution Economic growth does not
emphasize on the fair and
equal distribution of
wealth/income among all its

It focuses on a balanced and
equitable distribution of
wealth among all individual
and tries to uplift the
downgrade societies.

Basic concepts of national income
Gross Domestic Product (GDP)
 GDP is the total market value of final goods and services produced within the country
during a year. This is calculated at market prices and is known as GDP at market prices.
 GDP by expenditure method at market prices = C + I + G + (X – M)
 C – consumption goods
 I – Investment goods
 G – Government purchases
 X – Exports
 M – Imports
 (X – M) is net export which can be positive or negative.
Gross National Product (GNP)

 GNP is the total measure of the flow of final goods and services at market value
resulting from current production in a country during a year, including net income from
 GNP includes five types of final goods and services:
1. The value of final consumer goods and services produced in a year to satisfy the
immediate wants of the people which is referred to as consumption (C);
2. gross private domestic investment in capital goods consisting of fixed capital
formation, residential construction and inventories of finished and unfinished goods
which is called as gross investment (I)
3. goods and services produced or purchased by the government which is denoted by
(G) and
4. net exports of goods and services, i.e., the difference between value of exports and
imports of goods and services, known as (X-M) ; Net factor incomes from abroad
which refers to the difference between factor incomes (wage, interest, profits )
received from abroad by normal residents of India and factor incomes paid to the
foreign residents for factor services rendered by them in the domestic territory in
India (R-P);
5. GNP at market prices means the gross value of final goods and services produced
annually in a country plus net factor income from abroad (C + I + G + (X-M) + (R-P)).

GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad
Net Domestic Product (NDP)
 NDP is the value of net output of the economy during the year. Some of the country’s
capital equipment wears out or becomes outdated each year during the production
 Net Domestic Product = GDP – Depreciation.
Net National Product (NNP) (at Market price)
 Net National Product refers to the value of the net output of the economy during the
year. NNP is obtained by deducting the value of depreciation, or replacement allowance
of the capital assets from the GNP. It is expressed as,
 NNP = GNP – depreciation allowance.
(depreciation is also called as Capital Consumption Allowance)
NNP at Factor cost
 NNP refers to the market value of output. Whereas NNP at factor cost is the total of
income payment made to factors of production.

 Thus from the money value of NNP at market price, we deduct the amount of indirect
taxes and add subsidies to arrive at the net national income at factor cost.
 NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.
Personal Income
 Personal income is the total income received by the individuals of a country from all
sources before payment of direct taxes in a year.
 Personal income is derived from national income by deducting undistributed corporate
profit, and employees’ contributions to social security schemes and adding transfer
 Personal Income = National Income – (Social Security Contribution and undistributed
corporate profits) + Transfer payments
Disposable Income
 Disposable Income is also known as Disposable personal income.
 It is the individuals income after the payment of income tax.
 This is the amount available for households for consumption.
 Disposable Income = Personal income – Direct Tax.
As the entire disposable income is not spent on consumption, Disposal income =
consumption + saving
Per Capita Income
 The average income of a person of a country in a particular year is called Per Capita
 Per capita income is obtained by dividing national income by population.

Real Income
 Nominal income is national income expressed in terms of a general price level of a
particular year in other words, real income is the buying power of nominal income.
 National income is the final value of goods and services produced and expressed in
terms of money at current prices.
 But it does not indicate the real state of the economy. The real income is derived as

 P1 – Price index during current year; P0 – Price index during base year
GDP deflator

 GDP deflator is an index of price changes of goods and services included in GDP.
 It is a price index which is calculated by dividing the nominal GDP in a given year by the
real GDP for the same year and multiplying it by 100.

Methods of Measuring National Income
 All goods and services produced in the country must be counted and converted against
money value during a year.
 Accordingly, there are three methods that are used to measure national income.
1. Production or value added method
2. Income method or factor earning method
3. Expenditure method
Product Method
 Product method measures the output of the country. It is also called inventory method.
 Under this method, the gross value of output from different sectors like agriculture,
industry, trade and commerce, etc., is obtained for the entire economy during a year.
 The value obtained is actually the GNP at market prices. Care must be taken to avoid
double counting.
 The value of the final product is derived by the summation of all the values added in the
productive process.
 To avoid double counting, either the value of the final output should be taken into the
estimate of GNP or the sum of values added should be taken
Income Method (Factor Earning Method)
 This method approaches national income from the distribution side.
 Under this method, national income is calculated by adding up all the incomes
generated in the course of producing national product.

w = wages, r = rent, i = interest, π = profits, R = Exports and P = Imports
The Expenditure Method (Outlay method)
 Under this method, the total expenditure incurred by the society in a particular year is
added together.

 To calculate the expenditure of a society, it includes personal consumption expenditure,
net domestic investment, government expenditure on consumption as well as capital
goods and net exports. Symbolically,

C – Private consumption expenditure
I – Private Investment Expenditure
G – Government expenditure
X – M = Net exports
Importance of National Income Analysis
National income is of great importance for the economy of a country. Nowadays the national
income is regarded as accounts of the economy, which are known as social accounts. It enables
 To know the relative importance of the various sectors of the economy and their
contribution towards national income; from the calculation of national income, we
could find how income is produced, how it is distributed, how much is spent, saved or
 To formulate the national policies such as monetary policy, fiscal policy and other
policies; the proper measures can be adopted to bring the economy to the right path
with the help of collecting national income data.
 To formulate planning and evaluate plan progress; it is essential that the data pertaining
to a country’s gross income, output, saving and consumption from different sources
should be available for economic planning.
 To build economic models both in short – run and long – run.
 To make international comparison, inter – regional comparison and inter – temporal
comparison of growth of the economy during different periods.
 To know a country’s per capita income which reflects the economic welfare of the
country (Provided income is equally distributed)
 To know the distribution of income for various factors of production in the country.
 To arrive at many macro-economic variables namely, Tax – GDP ratio, Current Account
Deficit – GDP ratio, Fiscal Deficit – GDP ratio, Debt – GDP ratio etc.

Difficulties in Measuring National Income
In India, a special conceptual problem is posed by the existence of a large, unorganized and non
– monetised subsistence sector where the barter system still prevails for transacting goods and
services. Here, a proper valuation of output is very difficult.
Transfer payments

 Government makes payments in the form of pensions, unemployment allowance,
subsidies, etc.
 These are government expenditure. But they are not included in the national income.
Because they are paid without adding anything to the production processes.
 During a year, Interest on national debt is also considered transfer payments because it
is paid by the government to individuals and firms on their past savings without any
productive work.
Difficulties in assessing depreciation allowance
 The deduction of depreciation allowances, accidental damages, repair and replacement
charges from the national income is not an easy task.
 It requires high degree of judgment to assess the depreciation allowance and other
Unpaid services
 A housewife renders a number of useful services like preparation of meals, serving,
tailoring, mending, washing, cleaning, bringing up children, etc. She is not paid for them
and her services are not directly included in national income.
 Such services performed by paid servants are included in national income.
 Similarly, there are a number of goods and services which are difficult to be assessed in
money terms for the reason stated above, such as rendering services to their friends,
painting, singing, dancing, etc.
Income from illegal activities
 Income earned through illegal activities like gambling, smuggling, illicit extraction of
liquor, etc., is not included in national income.
 Such activities have value and satisfy the wants of the people but they are not
considered as productive from the point of view of society.
Production for self-consumption and changing price
 Farmers keep a large portion of food and other goods produced on the farm for self
 National income by product method is measured by the value of final goods and
services at current market prices. But prices do not remain stable. They rise or fall.
 To solve this problem, economists calculate the real national income at a constant price
level by the consumer price index.
Capital Gains

 Capital gains arise when a capital asset such as a house, other property, stocks or
shares, etc. is sold at higher price than was paid for it at the time of purchase.
 Capital gains are excluded from national income.
Statistical problems
 Great care is required to avoid double counting.
 Statistical data may not be perfectly reliable, when they are compiled from numerous
sources. Skill and efficiency of the statistical staff and cooperation of people at large are
also equally important in estimating national income.
 Therefore, national income estimates in our country are not very accurate or adequate.
 There is at least 10 per cent margin of error, i.e., national income is overestimated or
underestimated by at least 10 per cent. That is why the GDP estimates for India varies
from 2 trillion US dollar to 5 trillion US dollar.


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