CSEET · Economic and Business Environment

National Income Accounting and Related Concepts: formula sheet

Full chapter guide

Key formulas

Two-sector equilibrium (simple): Y = C; With no saving, all income is spent on consumption. Income equals expenditure equals output.
Two-sector with saving and investment: Y = C + S (income side); Y = C + I (expenditure side); equilibrium when S = I; Saving is the leakage; investment is the injection.
Three-sector equilibrium: S + T = I + G; T is taxes (net of transfers in simple models), G is government expenditure.
Four-sector equilibrium: S + T + M = I + G + X; M is imports (leakage), X is exports (injection).
Aggregate expenditure, four sectors: Y = C + I + G + (X − M); (X − M) is net exports.
GNP from GDP: GNP = GDP + Net Factor Income from Abroad (NFIA); NFIA = factor income received from abroad − factor income paid abroad. It can be negative.
Net from gross: NDP = GDP − Depreciation; NNP = GNP − Depreciation; Depreciation is also called consumption of fixed capital.
Market price and factor cost: Market price = Factor cost + Net indirect taxes; Net indirect taxes = indirect taxes − subsidies. So factor cost = market price − net indirect taxes.
National income: National income = NNP at factor cost = NNP at market price − Net indirect taxes; Also written NNP at FC.
Full chain: NNP at FC = GDP at MP + NFIA − Depreciation − Net indirect taxes; Use this when the question gives many items.
Real GDP: Real GDP = Σ (base-year price × current-year quantity); Price is fixed at the base year, so only quantity changes the value.
GDP deflator: GDP deflator = (Nominal GDP ÷ Real GDP) × 100; Base-year value is 100. Real GDP = (Nominal GDP ÷ Deflator) × 100.
Value added: Value added = Value of output − Intermediate consumption; Value of output = sales + change in stock. Use gross or net depending on whether depreciation is deducted.
Product method: GDPmp = Σ Gross value added of all sectors; Gross value added at market price = value of output − intermediate consumption.
Income method: NDPfc = Compensation of employees + Operating surplus + Mixed income; Operating surplus = rent + interest + profit (including royalty).
Expenditure method: GDPmp = C + I + G + (X − M); C = private final consumption, I = gross investment, G = government consumption, X − M = net exports.
GDP at factor cost: GDPfc = GDPmp − Net indirect taxes; Net indirect taxes = indirect taxes − subsidies.
Net domestic product: NDP = GDP − Depreciation; Depreciation is also called consumption of fixed capital.
National income: NNPfc = NDPfc + Net factor income from abroad; Net factor income from abroad = factor income received from abroad − factor income paid abroad.
Net exports: Net exports = Exports − Imports; Can be negative.
Personal income: PI = National Income − Undistributed profits − Corporate tax − Social security contributions + Transfer payments; National Income here means NNP at factor cost. Transfer payments include pensions, scholarships and unemployment allowance. Some questions also ask you to add or subtract only the items given.
Disposable income: DI = PI − Personal direct taxes; Personal direct taxes mean taxes such as income tax. Some textbooks also deduct fines and fees paid to government, but deduct them only if the question gives them.
Uses of disposable income: DI = Consumption + Saving; Use this to find saving if consumption is given, or the reverse.
Per capita income: Per capita income = National Income ÷ Population; Keep units consistent. If income is in ₹ crore and population in lakh, convert before dividing.
Per capita income: Per capita income = National income ÷ Population; An average only. It does not show how income is shared among people.
Real GDP: Real GDP = (Nominal GDP ÷ Price index) × 100; Used to remove the effect of price changes when comparing years.

Quick revision

Circular flow: households supply factors to firms and receive income; firms supply goods and services and receive spending.
GDP is the value of final goods and services produced within a country's domestic territory in a year.
GNP = GDP + net factor income from abroad.
Net measures = gross measure − depreciation (consumption of fixed capital).
Market price to factor cost: subtract net indirect taxes (indirect taxes − subsidies).
National income is NNP at factor cost.
Product method adds value added at each stage, which avoids double counting of intermediate goods.
Income method adds factor incomes: wages, rent, interest and profit, plus mixed income.
Expenditure method adds consumption, investment, government spending and net exports.
Transfer payments such as pensions and scholarships and sale of second-hand goods are not counted in national income.
Per capita income = national income ÷ population.
Limitations include the informal sector, unpaid work, black money, and no measure of welfare or distribution.

Common mistakes

Treating saving as a leakage in the simple two-sector model with no saving. Fix: Check the assumptions. If households spend all income, there is no leakage and Y = C.
Calling imports an injection or exports a leakage. Fix: Think from the domestic economy. Exports bring foreign money in (injection). Imports send money abroad (leakage).
Saying GDP includes only income of Indian citizens. Fix: GDP is about location: produced within the territory. GNP is about residents. Remember GNP = GDP + NFIA.
Adding subsidies and subtracting only indirect taxes, or the reverse, when moving to factor cost. Fix: Buyers pay taxes on top and subsidies lower the price. So factor cost = market price − indirect taxes + subsidies, which is market price − net indirect taxes.
Adding the value of intermediate goods to final output Fix: Count only final goods, or use value added. Ask: is this used up in making another product?
Including transfer payments such as pension, scholarship or old-age allowance Fix: Leave out any payment made without a good or service in return. No new output is created.
Subtracting transfer payments instead of adding them to get personal income. Fix: Remember that transfers reach households without being earned from production, so they are added to national income.
Using GDP or NDP at market price as the starting point for PI. Fix: First convert to NNP at factor cost, which is national income, and then start the PI adjustments.
Writing only limitations when the question asks for uses, or the reverse. Fix: Underline the key word first and answer exactly that. Add a short balancing line only at the end.
Saying GDP measures welfare directly. Fix: State that GDP measures output, and is only a rough indicator of welfare because it ignores distribution and environment.

Exam tips

For a 'discuss' question, draw a neat diagram with arrows and label each flow. A clear diagram earns easy marks.
Always name leakages and injections for the model asked. Do not bring in sectors the question has not mentioned.
In numeric questions, show the sum of each side before comparing. Marks are given for steps.
Write the one-line equilibrium condition at the end, then state what happens to income if it is not met.
For the difference between GDP and GNP, write four points: basis (territory or residents), formula, treatment of NFIA, and an example.
In numericals, write the formula line first. Marks are often given for the method even if arithmetic slips.
Show net indirect taxes as a separate line before converting to factor cost.
Define nominal and real GDP with a small numeric example. It earns more than definitions alone.