Pariksha SaathiLesson 1 of 10 · Indian Economy
National Income: GDP, GNP, NNP and the Three Sectors of the Economy
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What national income measures
National income accounting measures the value of all final goods and services an economy produces in a year. It is a flow, measured over a period, not a stock held at a point in time. Only final goods are counted, because adding intermediate goods such as the steel inside a car or the flour inside bread would count the same value twice (double counting). The safest way to avoid this is to add the value added at each stage of production, which is the value of output minus intermediate consumption. Second-hand sales, transfer payments such as old-age pensions and scholarships, and purely financial deals such as buying shares are left out, because they create no new output in that year.
Domestic versus national, gross versus net
Domestic product (GDP) counts what is produced inside the economic territory of a country, whoever produces it, so the output of a foreign-owned factory in India is part of India's GDP. Economic territory also includes Indian embassies abroad and ships and aircraft run by Indian residents, while foreign embassies in New Delhi are excluded. National product (GNP) counts what is produced by the normal residents of a country wherever they are, so GNP = GDP + net factor income from abroad (NFIA), where NFIA is the factor income residents earn abroad minus the factor income non-residents earn in India. Gross figures include depreciation, the wear and tear of machines and buildings (consumption of fixed capital); net figures subtract it. So NDP = GDP - depreciation and NNP = GNP - depreciation.
Market prices, factor cost and basic prices
A value at market prices includes the indirect taxes on goods and is reduced by subsidies, so it is what buyers actually pay. Factor cost is what the factors of production (land, labour, capital and enterprise) receive as rent, wages, interest and profit. The link is: factor cost = market price - indirect taxes + subsidies. National income in the strict sense is NNP at factor cost. In January 2015 the CSO released a new series that shifted the base year from 2004-05 to 2011-12 and measured sector-wise output as gross value added (GVA) at basic prices, which is GVA at factor cost plus production taxes minus production subsidies; GDP is then GVA at basic prices plus product taxes minus product subsidies.
Real, nominal and per capita
Nominal GDP values output at the prices of the current year, so it rises even when only prices rise. Real GDP values the same output at the prices of a fixed base year, so its growth shows the change in actual quantities. The ratio (nominal GDP / real GDP) x 100 is the GDP deflator, the broadest measure of price change because it covers every good and service in GDP. The base year is revised from time to time so that prices and the weights of sectors stay representative of the present economy. Per capita income is national income divided by population; being an average, it hides how unequally income is shared.
Three methods of measurement
The production or value-added method adds the value added by every producing unit in each sector. The income method adds the factor incomes generated in production: compensation of employees, rent, interest, profit and the mixed income of the self-employed. The expenditure method adds final spending: private consumption (C), investment (I), government consumption (G) and net exports (X - M). In theory all three give the same total, because one person's spending is another's income. India's estimates rely mainly on the production method, combined with the income method for sectors whose output is hard to value; the expenditure side is estimated separately and the gap is shown as discrepancies.
Who measures it, and a little history
Dadabhai Naoroji made the first estimate of India's per capita income, Rs 20 per head for 1867-68, in Poverty and Un-British Rule in India (1901). V.K.R.V. Rao made the first scientific estimate, for 1931-32. After independence the National Income Committee of 1949, chaired by P.C. Mahalanobis, laid the groundwork for official estimates. The Central Statistical Organisation (CSO), set up in 1951, compiled the national accounts, and the National Sample Survey (NSS), started in 1950 and later run by the National Sample Survey Office (NSSO), ran household surveys. In 2019 the CSO and the NSSO were merged into the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), which now releases the GDP estimates.
The three sectors
The primary sector uses natural resources directly: agriculture, forestry, fishing, and mining and quarrying. The secondary sector transforms materials: manufacturing, construction, and electricity, gas and water supply. The tertiary or service sector serves the others and households: trade, hotels, transport, communication, banking, insurance, real estate, public administration, education and health. As economies develop, the share of the primary sector in output falls and that of the other two rises. India's path is unusual: services became the largest part of GDP while agriculture still employs the largest share of workers, so output per worker on farms is low and much farm labour is disguised unemployment.
Key facts
- GNP = GDP + net factor income from abroad (NFIA); NFIA = factor income earned by residents abroad minus factor income earned by non-residents at home.
- Net = gross - depreciation (consumption of fixed capital): NDP = GDP - depreciation; NNP = GNP - depreciation.
- Factor cost = market price - indirect taxes + subsidies; National Income = NNP at factor cost.
- GDP deflator = (nominal GDP / real GDP) x 100; it covers all goods and services in GDP, unlike WPI or CPI.
- Three methods: production (value added), income (wages, rent, interest, profit, mixed income) and expenditure (C + I + G + X - M).
- Not counted in GDP: intermediate goods, second-hand sales, transfer payments such as pensions and scholarships, and purchases of shares.
- Dadabhai Naoroji gave the first per capita income estimate (Rs 20 for 1867-68); V.K.R.V. Rao the first scientific one (1931-32).
- National Income Committee 1949 chaired by P.C. Mahalanobis; the CSO (1951) and the NSSO (which ran the NSS, begun in 1950) merged into the NSO under MoSPI in 2019.
- The January 2015 series moved the base year from 2004-05 to 2011-12 and introduced GVA at basic prices for sector-wise output.
- Sectors: primary (agriculture, forestry, fishing, mining), secondary (manufacturing, construction, utilities), tertiary (services); services lead in GDP, agriculture in employment.
Quick revision
National Income = NNP at factor cost; GNP = GDP + NFIA; net = gross - depreciation; factor cost = market price - indirect taxes + subsidies; GDP deflator = nominal / real x 100; methods: production, income, expenditure (India mainly production + income); Naoroji 1867-68, V.K.R.V. Rao 1931-32, Mahalanobis committee 1949; CSO 1951 + NSSO (NSS from 1950) = NSO 2019 (MoSPI); 2015 series: base 2011-12, GVA at basic prices; services lead GDP, agriculture leads jobs.