Importance of National Income Analysis Economics

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Revised Estimates are a review of Advanced Estimates taking into account the actual trend of expenditure, not past trend. Using private corporate sector for estimating the manufacturing sector GVA, by discarding the earlier usage of Index of Industrial Production and Annual Survey of Industries . Estimating GDP of private corporate sector directly from the audited balance sheets, following an enterprise approach replacing the earlier used establishment approach. Because the money circulates, it leads to the following methods of GDP calculations. Thus, the saving which is a leakage in the system also flows back into the system through investment by a firm which acts as injections. National Income Accounting refers to the practice of calculating the output of an economy.

The final investment expenditure incurred by other firms on the capital goods produced by a firm. The final consumption expenditure made by the firms on the goods and services produced by other firms. Under this method, the aggregate value of all goods and services produced in a year, are calculated by looking on the expenditure made by different sectors.

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All are specially concerned with counting the total quantity of products and providers produced within the economic system and by varied sectors. The boundary is normally outlined by geography or citizenship, and it’s also defined as the entire earnings of the nation and in addition prohibit the goods and providers which are counted. For occasion, some measures count only items & companies which might be exchanged for money, excluding bartered goods, whereas different measures could attempt to incorporate bartered goods by imputing monetary values to them. A good measure of a country’s financial well-being is its whole production of goods and services. The most generally reported measure all through the world of a nation’s financial performance is gross home product .

When Households save, their expenditure on purchase of goods and services decline. The decline in the purchase will result in a decline in money received by firms. This will result in less money flow to the household as the firms will reduce hiring and production operations.

GDP could also be the usual method for gauging the scale of a specific country or region’s financial system, nevertheless it doesn’t account for all of the wealth generated by that nation. A more accurate indicator of a country’s economic output is its gross national earnings, or GNI. Students and lecturers of economics are more conversant in the term gross nationwide product than they’re with GDP. GDP measures the market worth of all ultimate goods and providers produced within the domestic territory of India, regardless of who owns the productive assets. In that context we will refer to some conceptual and sensible difficulties related to the measurement of national revenue.

The firms again use this revenue to pay for factor services and thus the loop continues again. In case of changes in the level of prices, we need to use the index numbers that have their inherent limitations. Labor, capital, land and entrepreneurship are the four important production components. The Government pays back to households and firms in the form of provision of public goods like health, education, Policing, National Defence etc. The main components of government intervention are in the form of taxes, spending and borrowings. Information about the existence of inflationary and deflationary gaps in the economy.

Understanding National Income

Measuring national income is also important to chalk out the future course of the economy. In this methodology, nationwide income is measured as a flow of expenditure. Government consumption expenditure, gross capital formation and web exports (Export-Import).

But, the facilities given in kind are calculated as the supplements of wages and salaries on the income side. It includes wages, interest, rent, profit, received by factors of production like labour, capital, land and entrepreneurship of a nation. National income studies show how national expenditure is divided between consumption expenditure and investment expenditure. It enables us to provide for reasonable depreciation to maintain the capital stock of a community. Too liberal allowance of depreciation may prove harmful as it may unnecessarily lead to a reduction in consumption. It provides a more precise picture of a nation’s actual rate of economic growth.

  • Depreciation is the certain amount of capital which is consumed due to wear and tear.
  • The expenditure incurred by the government on the final goods and services produced by firm.
  • National income estimates help us to divide the national product between defence and development purposes.
  • In Indiathe combinationof Product method and Income methods is used for calculating the National Income.

They are also helpful in importance of national income accountingulating anti-inflationary and anti-deflationary policies. In Indiathe combinationof Product method and Income methods is used for calculating the National Income. In August 1949 the Government of India appointed the National Income Committee. Instead they formulated other measures of welfare like Human Development Index .

Individual get pension, unemployment allowance and interest on public loans, but these payments creates difficulty in the measurement of national income. These earnings are a part of individual income and they are also a part of government expenditures. Only final goods and services should be included in the national income accounting. But, it is very difficult to distinguish between final goods and intermediate goods and services. The difference between final goods and services and intermediate goods and services depends on the use of those goods and services so there are possibilities of double counting.

Advantages of Measuring National Income

13.2.2 The NAS is a framework that provides an internally consistent description of National macro economy based on the processing of data generated by the entire National statistical system. The estimates of National income and related aggregates and accounts are derived statistics that draw on basic data available from different primary sources. For certain newly emerging activities such as software, where official statistical system is not currently in place, NAS also draws on selective non-official sources. The accuracy and quality of the National account estimates depend on geographical coverage and quality of primary data; and the methods, procedures and approximations used in translating the primary data into NAS framework. The national income of any country means the entire value of the commodities and services produced by any country throughout its financial year.


For example, fishing boats operated by Indian fishermen in the international waters of the Indian Ocean. GDP is the measure of the value of goods and services that are being produced within a country’s borders, by the citizens and the non-citizens. While GNP determines the value of goods and services that are being produced by the country’s citizens in the domestic and abroad spectrum. While, the United States eliminated the use of GNP in the year 1991, thereby adopting GDP as the measure to compare their economy with other economies. Gross National Product is an estimated value of all goods and services produced by a country’s residents and businesses. GNP does not include the services used to produce manufactured goods because its value is included in the price of the finished product.

Traditional Definition of National Income-

No National Income is the total value of all services and goods that are produced within a country while Gross Domestic Product is defined as the value of the goods and services generated within a country. There are various concepts of National Income including GDP, GNP, NNP, NI, PI, DI, and PCI which explain the facts of economic activities. National Income is an interesting and important topic from Indian Economy which is almost every year asked in various competitive exams. Take a look at the definition of National Income, its measurement and the factor sit depends on in the article below.

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Modern governments try to prepare their budgets within the framework of national income data and try to formulate anti-cyclical policies according to the facts revealed by the national income estimates. Even the taxation and borrowing policies are so framed as to avoid fluctuations in national income. Revenues earned by the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents. The aggregate economic performance of a nation is calculated with the help of National income data. The basic purpose of national income is to throw light on aggregate output and income and provide a basis for the government to formulate its policy, programs, to maximize the national welfare of the people.

Product/ Value Added Method of National Income Measurement

Two, Centrally carried out sample surveys with uniform survey methods have possibly come in the way of innovative experimentation in survey methods to capture the regionally unique features. Eliciting cooperation of the States in carrying out requisite State level sample surveys and type studies would not only improve the quality of regional accounts but would also improve the reliability of National estimates. This appears to be a cost-effective strategy for improving the methods of compilation as well as database.

Some of the most standard identities used are GDP, GNP, National Income, etc. The distinction between the value of material outputs and material inputs at every stage of production is Value added. Macro variables, such as aggregate consumption, aggregate investment, and aggregate saving, etc.

The national income is estimated using this method as a flow of goods and services. There are three methods of measurement of the national income of a country. In this article, let us look at the concept of national income, its salient features, measurement methods, objectives, advantages, challenges and important facts of national income for the UPSC IAS Exam. First, the concept of factor cost, basic prices, and market prices is introduced. The sum of income received by all the factors of production taken together is same as the value of final goods produced.

The Planning Commission in India also kept in view the national income estimates before formulating the five-year plans. National Income is one of the important subject matter of macro economics. In real terms, national income is the flow of goods and services produced in an economy during a year. The main problem is whether to include the income generated within the country or even generated abroad in national income and which method should be used in the measurement of national income. The first problem in National Income accounting relates to the treatment of non-monetary transactions such as the services of housewives to the members of the families.

The degree of approximation in this context critically depends on the sensitivity of the indicator in reflecting year-to-year variations in the concerned economic activity. Indirect estimates mostly relate to households (including non-profit institutions serving households) and constitute the residual ‘unorganized’ sector or segment of the economy. This is the essential national accounting measure of the entire output or mixture provide of goods and services. Gross National Product is outlined as the total market value of all final goods and companies produced in a year in a rustic.

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Central Statistical Organization calculates the national income in India. Internationally some countries are wealthy, some countries are not wealthy and some countries are in-between. Under such circumstances, it would be difficult to evaluate the performance of an economy. Performance of an economy is directly proportionate to the amount of goods and services produced in an economy.


There a 3 methods to calculate the National income.These methods are given by Simon Kuznets. This report is considered to be a landmark in the history of India as this is the first time that it provided a comprehensive data of National Income for the whole India. For instance, some measures depend only goods & providers which might be exchanged for cash, excluding bartered goods, while different measures may attempt to incorporate bartered items by imputing financial values to them. The boundary is often defined by geography or citizenship, and it is also defined as the total income of the nation and also limit the goods and companies which are counted.

In a continental country like India, regional diversities in public administration and the importance given to collection, maintenance and dissemination of statistics also influence their quality. Data used for Central fund allocation to States create their own problems of reliability when they are generated by the concerned administrative departments. National Sample Survey Organisation has been carrying out periodic surveys that provide input into the National income estimation. While the surveys give reasonably good estimates at the all-India level, they have to grapple with the basic character of the Indian economy while collecting information about employment, incomes, trade and profit margins.

These 4 inputs are land, labor, capital, and entrepreneurship and are known as factors of productions. Another problem is whether the public services like general administration, police, army services, should be included in national income or not. TheNational wealthmeasures the stock of commodities held by the nationals of a country at a given point of time.

  • National Income Accounting refers to the practice of calculating the output of an economy.
  • On the basis of these estimates, the government makes future plans and policies for the development and growth of the country.
  • But their contribution to the Indian economy is mostly unknown as they mostly don not files their returns and audited balance sheets with Registrar of Companies.

In this method, we add net income payments received by all citizens of a country in a particular year. Net incomes that result in all the factors of production like net rents, wages, interest, and profits are all added together, but income received in the form of transfer payments are omitted. For timely anti-inflationary and deflationary policies, we need aggregate data of national income. If expenditure increases from the total output, it shows inflammatory gaps and vice versa.

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