Introductory Macroeconomics Chapter 2 National Income Accounting

Meaning of macroeconomics — 'Macroeconomics is the study of overall averages and aggregates covering the whole economy and examines the interrelationship among various aggregates.' Simply put 'it is study of the economy as a whole'. It is that part of economic theory which deals with the behaviour of national aggregates. It studies not an individual economic units like a household or a firm or an industry (i.e. small group of firms) but deals with the study of broad economy-wide aggregates like total output, size of national income, level of employment, aggregate consumption, aggregate saving, aggregate investment, general price level, balance of payment, rate of inflation, size of poverty etc. It helps to solve the central problem of 'full employment of resources' in an economy.
Be it noted that macroeconomic theory is also called 'Theory of Income and Employment' because it tries to explain how level of income and employment is determined in an economy and how unemployment can be removed. Study of problem of unemployment in India or general price level is a macroeconomic study because they relate to Indian economy as a whole.
Let it be known that an English economist J.M. Keynes whose book titled 'General Theory of Employment, Interest and Money', published in 1936 brought about a revolution in economic thought is called the Father of Modern Macroeconomics.

Consumption Goods and Capital Goods
All final goods (i.e., goods ready for use by their final users) produced in the economy are either in the form of consumption goods or capital goods.
(i) Consumption goods. Goods which are consumed by the ultimate consumers or which meet the immediate needs of the consumers directly are called consumption (or consumer) goods. For example, food, shirt, shoes, cigarettes, T.V. set, radio, pen, etc. are all consumer goods because when used they satisfy the immediate needs of the consumers. Similarly services rendered to consumers by hotels, retailers, barbers, cobblers, etc. are consumer services So are the services of police, courts, parks, street lighting consumed collectively by the people. Consumption goods meet the basic objective of an economy, i.e., to sustain the consumption of entire population of the economy. Human beings must consume in order to survive and work. Remember, it is consumption of basic necessities of life-food, clothing and shelter — that make us function.
Consumer goods may be durable and non-durable. Cars, T.V. sets, home computers, fridge, etc. are durable consumer goods (called consumer durables) as they have relatively long life and undergo wear and tear with gradual use. Food, vegetables, clothes, shoes, etc. are non-durable consumer goods as their life time of use is comparatively small and are not of high value. Services such as rendered by hired servants, medical care, recreation and transport services availed by consumers are like non-durable/single use consumer goods.

(ii) Capital goods. Durable goods which are bought for producing other goods and not for meeting immediate needs of the consumer are called capital goods. Examples are tools, implements, plants, machines, buildings. These are used for generating income by production units. In this regard some points are worth noting (i) While capital goods make production of other goods possible, they themselves do not get transformed (or merged) in the production process. (ii) Capital goods gradually undergo wear and tear and need repaiis or replacement over time. (iii) They are crucial backbone of production process as they aid and enable production process to continue cycles of production. Capital goods are purchased by business enterprises either for maintenance or addition to their capital stock so as to maintain or expand flow of production.

Capital Formation (Investment). 'Capital formation is the net addition to the capital stock of an economy during a given period.' In a growing economy, all that is produced in a year is not consumed usually. And that part of production which is not consumed during a year is investment. In other words, excess of production over consumption is called capital formation or investment.

National Income at Current Prices and Constant Prices (Nominal NI and Real NI) National income can be measured in terms of money in two ways :
(a)    at current prices, and (b) at constant prices.
(a)    National income at current prices. If goods and services produced in a year are valued at current prices, i.e., prices prevailing in that particular year, we get national income at current prices. Current prices refer to the prices prevailing in the year in which goods and services are produced. For example, when goods and services produced during the year 2007-2008 are valued at prices of the same year, i.e., 2007-2008, it will be called national income at current prices for the year 2007-2008. Clearly in determining national income at current prices, not only physical output produced during the year is important but also the prices prevailing in that year are equally important. National income at current prices is called Nominal National Income.
(b)    National income at constant prices. If goods and services produced in a year are valued at fixed prices, i.e., prices of the base year, we get national income at constant prices. Constant prices refer to the prices prevailing in the base year. A base year is carefully chosen year which is a normal year free from price fluctuations. (Note that in India now 2004 - 2005 is treated as base year). For instance, if goods and services produced during the year 2006-2007 are valued at the prices of the base year (i.e., 2004-2005), it will be called national income at constant prices. Evidently it is change in volume of physical output produced during the year which affects national income at constant prices because prices remain fixed (constant). National income at constant prices is called Real National Income.
(c)    Significance of NI at constant prices (or Real National Income). (i) National income measured at constant prices truly reflects the real change in physical output of a country whereas national income at current prices does not. How? National income at current prices is affected by two factors namely (a) change in prices, and (b) change in physical output (amount of goods and services produced). If the current prices rise fastly, national income at current prices will also inflate even if there is no increase in the level of physical output. On the contrary, National income at constant prices is affected by only one factor namely, change in physical output. It can rise only when there is an increase in the level of physical output because here prices are kept constant or fixed. Since a country is interested in its physical output, it is considered proper and desirable to estimate national income at constant prices because it reflects truly the real change in physical output of a country.
(ii) Real national income (or for that matter GNP) enables us to make a year to year comparison of changes in the volume of output of goods and services.
(iii) Real national income is also helpful in making international comparison of economic performance of different countries.

Net indirect tax is the difference between indirect taxes and subsidies as explained below. Let us be clear about the concepts of indirect taxes and subsidies.
(a)    Indirect taxes. Taxes which are levied by the government on production and sale of commodities are called indirect taxes, e.g., excise duty, sale tax, custom duty, octroi, etc. The buyer of a taxed commodity pays the tax indirectly because the tax is included in the price which the buyer pays. What is the effect of indirect tax on the price of a commodity on which it is levied? The impact of indirect tax is that it increases the price of a commodity.
(b)    Subsidies. These are cash grants given by the government to the enterprises to encourage production of certain commodities or to promote exports or to sell goods at prices lower than the free market prices. Subsidies are opposite of indirect taxes.
What is the impact of a subsidy on the price of a commodity on which it is granted? The effect of subsidy is fall in the price of a commodity. For example, Delhi Milk Scheme sells 1 litre poly bag of toned milk for र 20.00 whereas the same costs it र 21.00. The difference or loss of र 1.00 is made good by the Government by giving subsidy of Re. 1.00 per litre of toned milk. Thus the market price of a subsidised commodity is lower than its factor cost.

Net Factor Income from Abroad (NFIA)
Simply put, NFIA is the difference between factor income received from abroad and factor income paid abroad. Simply put it is the difference between the factor income earned from abroad by normal residents of a country (say India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e. India). CSO defines it as 'Income attributable to factor services rendered by the normal residents of the country to the rest of the world, less factor services rendered to them by the rest of the world.' Symbolically:
NFIA = Factors income earned from abroad by residents - Factor income of non-residents in domestic territory
The normal residents of a country earn factor income not only within the domestic territory of a country but outside it also. Income from outside can be earned mainly in two ways, namely, (i) income from work, and (ii) income from property and entrepreneurship as shown below. Mind, it is a two-way affair since foreigners also earn similar income by working in domestic territory of other country.
(i)    Income from work (Compensation of employees). Income from work can be earned by working in the domestic territories of other countries earning thereby wages and salaries (or compensation of employees). For instance, suppose in 2006-2007, Indian resident scientists, engineers, doctors, dancers, masons, carpenters employed abroad earned factor income of र 10,000 crores whereas similar payments made to non-resident workers employed in domestic territory of India was to the tune of र 8,000 crores. Net compensation of employees from abroad to India would be र 2,000 (10,000 - 8,000) crores.
(ii)    Income from property and entrepreneurship (Rent, interest, profit). Factor income from abroad is also earned by owning property (like buildings, shops, factories, financial assets like bonds and shares in foreign countries) earning thereby rent and interest, Also profit is earned for undertaking entrepreneurial activities of producing goods and services. For instance suppose in 2006-2007, normal residents of India living temporarily abroad earned र 25,000 crores by way of rent, interest and profit and similar payments made to the rest of world were, say र 20,000 crores. Net income from property and entrepreneurship from abroad would be र 5,000 (25,000 - 20,000) crores.
(iii)    Net retained earning of resident companies abroad. This refers to the difference between retained earnings of foreign companies located in a country and the retained earnings of resident companies located abroad. Retained earning of a company is in fact its 'undistributed profit'. For instance suppose in 2006-2007, Indian companies working abroad, after paying profit tax and distributing dividend out of their total profits, retained the balance profit (known as Reserve fund or Undistributed profit) of र 50,000 crores and foreign companies in India retained similar profit of र 65,000 crores. Net retained earning of resident companies abroad would be र (-) 15,000 (= 50,000 - 65,000) crores.
From above-mentioned data, India's net factor income from abroad in 2006-2007 would be equal to र -8,000 [= 2,000 + 5,000 + (-15,000)] crores.
Components of net factor income from abroad. These are as under:
(i)    Net compensation of employees.
(ii)    Net income from property and entrepreneurship (rent, interest, profit).
(iii)    Net retained earning of resident companies abroad.
Significance. Net factor income from abroad is used to differentiate between National income and Domestic income. By adding NFIA to domestic income, we get national income. Symbolically:
National income = Domestic income + NFIA
Domestic income = National income - NFIA

(i) Value of output. The goods and services produced by an enterprise during an accounting year constitutes its output. (Output is also called gross output because it includes depreciation.) Value of output of an enterprise is the market value of all the goods and services produced by an enterprise during an accounting year. (Mind, value of output means value of gross output at MP unless stated otherwise.) Money value of output of an enterprise is obtained by multiplying its physical output of goods and services with its market price.
Symbolically:
Value of output = Quantity of output × Price
Alternatively value of output can be expressed as sum of sales and change in stock because output is either sold or accumulated as unsold stock.
Symbolically:
Value of output = Sales + Change in stock
In short value of output is money value of (i) Gross output calculated at (ii) Market prices. It includes values of intermediate goods like raw material,etc.
Remember, value of output is not the actual contribution of the enterprise in the production process, because this amount includes also the value of intermediate goods which the enterprise has purchased from other producing units. So a firm's actual contribution is its value added in the production process.
(ii) Value added. It refers to the addition of value to the raw material (intermediate goods) by a firm by virtue of its productive activities. Alternatively, value added is defined as the difference between value of output of a firm and value of its inputs bought from other firms. Thus value added is firm's contribution to the flow of final goods and services produced by it during a period of account. Alternatively, value added is a measure of firm's contribution to domestic product.
For production of goods and services a firm uses two types of inputs — factors inputs (services of land, labour, capital, enterprise) and non-factor inputs (i.e., intermediate goods like raw material). A firm purchases intermediate goods from other firms and hires factor services to produce goods and services. During production process, raw material purchased from other firms is completely used up. Thus a firm merely adds value to intermediate goods when it transforms available intermediate goods into final goods (output) with the help of factors of production. This is called value added by a firm. Hence to find out value added by a firm, value of intermediate inputs (i.e., intermediate consumption) should be deducted from value of firm's output because intermediate inputs are not produced by it but purchased from some other firms.
Symbolically:
Value added = Value of output - Intermediate consumption
Simply put, excess of value of output over value of intermediate inputs purchased from other enterprises is called value added.
(iii) Steps to get 'Net Value added at FC' from Value of output. Recall value of output is the market value of gross output produced by an enterprise in an accounting year. Being gross, it includes depreciation and being at MP, it includes net indirect taxes. Following steps are taken to derive net value added at FC from value of output. (Mind, output means gross output.)

Value of output = Output × Market price
Gross value added at MP = Value of output - Intermediate consumption
Net value added at MP = Gross value added at MP - Depreciation
Net value added at FC = Net value added at MP - Net indirect taxes
(Net value added at FC = Sum of factor incomes)
In short, by substracting intermediate consumption, depreciation and net indirect taxes from value of output, we get NVA at FC.

(i) Factor Payment. Payment made to a factor of production in return for rendering productive (or factor) services is called factor payment. This is reward or compensation to factors of production for productive services rendered by them in the production process and for them these are factor incomes. Examples are rent, wages, interest and profit. Income of land is rent, of labour wages, of capital interest and of enterprise profit. Without production we cannot conceive of factor income. All factor payments are included in national income.
Factor incomes earned by factors of production and factor payments made by an enterprise to factors for rendering productive service are, in fact, the same. The former is viewed from the side of factors of production and the latter from the side of an enterprise.
(ii) Transfer payment. Payment which is received without rendering any service or good in return is called transfer payment (or transfer income). These are unilateral payments which have no obligation of any return. For recipients these are unearned incomes. These are received for free, without having to make any present or future payments in return. Transfer payments are basically welfare-oriented expenditure of the government. This is a receipt concept as compared to factor income which is an earning concept. Thus transfer payment is the payment which one gets without adding anything to the current flow of goods and services. Examples are: old age pension, unemployment allowance, gifts in cash, scholarship amount, subsidies, taxes (compulsory transfer payment), etc. All transfer payments (incomes) are kept out (excluded) of national income because no corresponding goods and services are produced against such payments.
Mind, only factor payments (incomes) are included in estimation of national income.
Both factor payments and transfer payments are compared below.

(i) Furniture purchased by a school (D 2011) is a final product because it is purchased for investment.
(ii) Chalks purchased by a school (D 2011) is an intermediate product as it is meant to be used completely in the same year.

(i) Loss is a flow because losses are always with reference to a period of time.
(ii) Capital is a stock because it is measured at a point of time.
(iii) Production is a flow as it is always with reference to a period of time.
(iv) Wealth is a stock because it is always measured at a point of time.

Significance of Net Indirect Taxes. It is used to make distinction between MP and FC. To find out market prices (MP), indirect taxes are added and subsidies are subtracted from factor cost (FC). Algebraically:
MP = FC + Net indirect taxes

Circular flow of income. Circular flow of income refers to continuous circular flow of money income and flow of goods among major sectors of an economy. Flow of money is the aggregate value of goods and services either as factor payments or as expenditure on goods and services. It is circular in nature because it moves in a circle coming back to the starting point. Again it is circular becuase it has neither any beginning nor an end. How? Suppose in an economy, there are two sectors, namely, Household sector and Firm sector. Households supply factor services and spend their income on consumption. The firms hire/purchase factor services from households and produce goods and services. The households as owners of factors of production (land, labour, capital and enterprise) receive the payments in terms of money as reward for rendering productive services. The recipients of these incomes (i.e., households), in turn, spend their incomes on purchase of goods and services (produced by firms) to satisfy their wants. Expenditure by households implies income going back to firms (producers of goods and services) making the circular flow of income complete. In short, income is first generated by production units, then distributed among households for rendering productive services and ultimately comes back to production units by way of expenditure by the households. In this way there is circular flow of income as depicted by outer arrows in Fig(a). (An economy has two types of markets — (i) Product market which is for goods and services, and (ii) Factor market which is for factors of production.)
Principles in circular flow of income. It involves two basic principles:
(i)    In an exchange process, the seller (producer) receives the same amount which the buyer (or consumer) spends.
(ii)    Goods and services flow in one direction and the money payments to acquire them flow in the return direction giving rise to a circular flow.

 

Circular flow of money is of two types — real flow and monetary flow. Simply flow of goods and services is called real flow and flow of money (income) is called money flow.
(i)    Real Flows. Real flows refer to flows of goods and services. These are called real flows because they consist of actual goods and services. In the context of national accounting, real flow implies flow of factor services from household sector to the firm (or producing) sector and the corresponding flow of goods and services from firm sector to the household sector. Thus flows of goods and services between firm sector and household sector are real flows. Such flows are continuous and there is no beginning or end point in these flows. In Fig.(a), the inner two arrows indicate real flows.
(ii)    Money Flows. These refer to flows of money in the form of factor payments and consumption expenditure. The monetary flows occur because it is through money that various transactions are conducted bringing flows of money from one sector to another. When factor incomes (rent, wages, interest and profit) flow from firm sector to the households as reward for their factor services, these are called money flows. Similarly when households spend their incomes on purchase of goods and services produced by the firm sector, money flows back to the firm sector as household expenditure. These also indicate money flows. In short, flows of money between firm sector and household sector are monetary flows.
Based on the simplified model of two sectors (household and firm sectors), all these flow's are depicted in the following Fig.(a). The inner two arrows (anticlockwise) indicate real flows and the outer two arrows (clockwise) reflect monetary flows.

Fig.(a)
Dual role (of buyer and seller) of each sector perpetuates the circular flow between two sectors.

The structure of macroeconomy is given by circular flows of income and output. In fact national income accounting has its foundation in the model of circular flows which can be depicted in two-sector, three-sector and four-sector models as explained below.

(a) Circular Flow of Income in a Two-sector Economy. Let us start with a simplified model involving two sectors, namely, household sector and firm sector, assuming that there is no Govt. We further assume that the economy is a closed one having no exports or imports. Similarly there is no saving by the households, who spend all what they earn; and no investment by the firms. Such an economy has two types of markets — Product market and Factor market. Under these presumptions the firm sector hires factor services from households, who are owners of factors of production (land, labour, capital and enterprise), for producing goods and services and pays them remuneration (or compensation) in the form of money for rendering the productive services. For the factors of production, these are factor incomes known as rent, wages, interest and profit which have been generated in the production process. Thus money income flows from firm sector to the households. With this money the households purchase from the firms, manufactured goods and services to satisfy their wants with the result, the same money flows back from households to the firm sector. Thus entire income of economy comes back to firms in the form of sales revenue. Clearly one man's (or sector's) expenditure is other man's (or sector's) income. The counter flow of money from households to the firms leading to the circular flow of money between the two sectors is shown in the following Fig.(a).

Fig. (a)
Circular flow of income with capital market (Financial System). We bring the role of capital market consisting of financial institutions. Financial institutions are primary intermediaries between savers and investors (or lenders or borrowers). Households and Firms save part of their income and deposit in the capital market leading to money flows from households and firm to capital market. This constitute a leakage from the circular flow of money. Firms also borrow for purposes of investment. This becomes injection in circular flow as shown in Fig.(b).

Fig.(b).
Leakages and Injections. A leakage is the amount of money which is withdrawn from its flow of income. As against it, injections are the amount of money which is added to the flow of income in the economy. Thus seen, (i) savings and (ii) taxes by households and firms and (iii) imports constitute a leakage from the circular flow of income (money) whereas (i) investment, (ii) government expenditure, and (iii) export payments are injections into the circular flow of income (money).
(b) Circular flow of income in a three-sector economy. We now add government sector to the two-sector model of Household and Firm Sector. Government purchases goods from firms and labour services from households. It collects corporate taxes from firms and personal taxes (income tax, wealth tax) from households. Government makes transfer payments (like old age pension, scholarships) to households and grants subsidies to firms.
All these cause flow of money which are shown in Fig.(c).

Fig.(c).
But from macroeconomic point of view, there are four sectors, namely, 1. Households, 2. Firms, 3. Government, and 4. External sector.

(c) Circular flow of income in four-sector economy. Without introducing external sector (also called Rest of World — ROW), our model will remain incomplete. The domestic economy is connected with ROW through international trade (imports and exports) and capital flows. In case of imports, money flows to the ROW whereas in case of exports money flows in from ROW. Mind, imports are leakages and exports are injections into the circular flows of income in the economy. The four-sector model of the economy is fully depicted in Fig.(c).
Significance of circular flow of income (i) It reflects structure of an economy. (ii) It shows interdependence among different sectors. (iii) It gives information about injections and leakages from flow of money. (iv) It helps in estimation of national income and its related aggregates.

National income related aggregates are basically measures of value of production activity of a country. There are two main categories of national income aggregates — domestic income and national income (or domestic product and national product).
National income at the level of production of goods and services is called national product and at the level of distribution of income is called national income. Thus national product is synonymous to national income. Normally in practical estimates, domestic product is estimated first and then national product is derived from domestic product by adding NFIA.
Before we discuss the above aggregates, it will be useful to understand the following three formulae which are used for explaining the interrelationship of the above aggregates.
(a) Three Formulae. The following three concepts are used as formulae for deriving above-mentioned aggregates and their interrelationship.

1.    Depreciation (Net = Gross - Depreciation). The concept of depreciation (also called consumption of fixed capital) is used to differentiate between gross and net. The term 'gross' means that the value of product includes depreciation whereas 'net' excludes depreciation. Difference between gross and net is value of depreciation. Net is obtained after deducting depreciation from gross. If we add depreciation to net, we get gross, e.g.
Net Product = Gross Product - Depreciation
Net value added = Gross value added - Depreciation
Gross investment = Net investment + Depreciation

2.    Net Indirect Taxes (Market price = Factor cost + NIT). Net indirect tax is the difference between indirect taxes and subsidy. This concept is used to find out the difference between market price and factor cost. Market price (MP) is the price paid by the buyer of a commodity in the market whereas factor cost (FC) is the cost paid by the producer to the factors of production for their services rendered in the production of the commodity. Market price includes factor cost, indirect taxes and subsidies. To find out MP, indirect taxes are added and subsidies are subtracted from factor cost. Symbolically:
Market price = Factor cost + Indirect taxes - Subsidies = Factor cost + Net indirect taxes
Factor cost = Market price - Net indirect taxes
Gross Domestic Product at FC = GDP at MP - Net indirect taxes
Net value added at FC    = Net value added at MP - Net indirect taxes
Gross National Product at MP = GNP at FC + Net indirect taxes

3.    Net Factor Income from Abroad (National = Domestic + NFIA). It is used to differentiate between national and domestic. Briefly NFIA is the difference between factor income received from abroad and factor income paid abroad. By adding net factor income from abroad to domestic income, we get national income. And by subtracting NFIA from national income, we get domestic income, e.g.,
National Income = Domestic income + Net factor income from abroad
Domestic Income = National income - NFIA
Gross National Product = Gross Domestic Product + NFIA

(b) Meaning of Different Aggregates and their Interrelationship. Now with the help of above-mentioned three formulas, we are in a position to explain different aggregates related to national product (income) and their interrelationship. It may be noted that product aggregates and income aggregates are used interchangeably because they are the value of same physical products. There are generally eight aggregates (4 at MP + 4 at FC) which need to be distinguished from each other. Of the four aggregates at MP (or at FC), two pertain to domestic product and two to national product. Since the basis of all aggregates is the value of production within the domestic (economic) territory expressed as GDP, we start with the meaning of gross domestic product at market price. GDP is the primary measure which is used by economists to assess the rate of growth of an economy in a year. If we obtain value of GDP at MP, we can derive other aggregates with the help of above-mentioned three formulae.
(i)    Gross Domestic Product. "GDP at MP is the gross market value of all the final goods and services produced by all producing units located within the domestic territory of a country in an accounting year". Being gross it includes depreciation; being at MP it includes net indirect taxes and being domestic it includes value of output produced within domestic territory by all producers (residents and non-residents) regardless of ownership. The term product refers to value of output less value of intermediate consumption (i.e., value added). GDP is generally recognised as the primary measure because it is an indicator of growth of an economy. Once we estimate value of GDP_MP, we can easily derive national product (income) and other aggregates as shown below with the help of the above-mentioned three formulae.
(ii)    NDP_MP = GDP_MP - Depreciation
(iii)    GNP_MP = GDP_MP + Net factor income from abroad
(iv)    NNP_MP = GNP_MP - Depreciation
(v)    GDP_FC = GDP_MP - Net indirect taxes
(vi)    NDP_FC = GDP_FC - Depreciation
(vii)    GNP_FC = GDP_FC + Net factor income from abroad
(viii)    NNP_FC = GNP_FC - Depreciation
(In addition to the above-mentioned important aggregates, there are many other aggregates related to national income such as private income, personal income, personal disposable income, National disposable income, etc. 

Diagram showing interrelationship. The interrelationship among different aggregates has been shown with the help of three formulae in the following diagram.

GNP is the gross market value of all the final goods and services produced in the domestic (economic) territory of a country in a year plus net factor income earned from abroad. Alternatively GNP is defined as 'sum of GDP and net factor income from abroad'.
(i)  GDP = GNP - Net factor income from abroad (NFIA)
(ii) GDP at MP = NNP at FC + Depreciation - NFIA + Net indirect taxes
(iii) GDP at FC = NNP at MP + Depreciation - NFIA - Net indirect taxes
(iv) GNP at FC = NNP at FC + Depreciation
(v)  GNP at FC = GNP at MP - Net indirect taxes
(vi) GDP = NNP - NFIA + Depreciation
(vii) GNP at MP = NDP at FC + Depreciation + NFIA + Net indirect taxes
(viii) GDP can be greater than GNP when net income earned from abroad is negative (-).

Circular flow of production, income and expenditure
We can look at national income from three angles — as a flow of goods and services, as a flow of income or as a flow of expenditure.
Methods of Measurement. In fact methods of measurement of national income originate from three different phases in circular flow of national income. Corresponding to the above-mentioned three phases, there are three methods of measuring national income as shown below.
(i)    Value Added Method (Traditionally called Production Method)
(ii)    Income Method
(iii)    Expenditure Method.

Since the above three methods are only different view points of the same flow of goods and services, totals from each method should, therefore, be equal to each other. We now take up each method one by one and try to understand the procedure involved in each method. In every method, we first estimate Domestic Income and then derive National Income by adding net factor income from abroad to domestic income.

Value Added (Product) Method. Under this method, domestic income is first calculated by totalling 'net value added at FC' by all the producing units during an accounting year within the domestic territory. This total is called Net Domestic Product at FC or Domestic Income. Then by adding 'net factor income from abroad' to Domestic Income (NDP at FC), we get National Income (NNP at FC). In value added method national income is measured at the stage of production. Net value added at FC is derived by subtracting intermediate consumption, depreciation and net indirect taxes from value of gross output. Symbolically:
Net value added at FC = Gross output - Intermediate consumption - Depreciation - Net indirect taxes
Significance of value added method is that it avoids problem of double counting. What is the problem of double counting?
Problem of double counting. Double counting means counting value of the same commodity more than once. How? According to output method (an alternative to value added method) of calculating national income, value of only final goods and services produced by all the production units in the economy during a year should be taken. In other words value of intermediate goods should not be taken into account. But in actual practice, value of intermediate goods which have entered as inputs in production of final goods (e.g., wheat used in bread, raw cotton used in garments) also gets included separately because every producer treats sale of its commodity as final product irrespective of what happens to it after sale. As a result there occurs double counting leading to overestimation of national income. Two alternative ways of avoiding double countring are (i) Value of only final goods be included in estimating national income. (ii) Value added method be used in estimating national income.

Steps involved. Following steps are involved in estimating national income by Value added method.
(i)    Identify all the producing units located in the domestic economy and classify them into three industrial sectors such as primary, secondary and tertiary sectors on the basis of similarity of their activities. (Primary sector produces goods by exploiting natural resources like fishing mining, logging; secondary sector produces manufactured goods by transforming one type of commodity into another type of commodity like construction dectricting generation and tertiary sector produces services like educational, medical, banking etc.)
(ii)    Estimate net value added at FC by each producing unit. By deducting intermediate consumption, depreciation and net indirect taxes from value of output, we get net value added at FC.
(iii)    Estimate net value added of each industrial sector by summing up net value added at FC of all producing units falling in each industrial sector.
(iv)    Compute Domestic Income (NDP at FC) by adding up NVA at FC of all industrial sectors.
(v)    Estimate net factor income from abroad and add it to Domestic income for deriving National Income (NNP at FC).

Precautions (Item to be included/excluded). While calculating national income by value added method, value of following items should be included:
(i)    Imputed rent of owner occupied houses because all houses have rental value irrespective of its use by self or tenant.
(ii)    Imputed value of goods and services produced for self-consumption or for free distribution;
(iii)    Value of own-account production of fixed assets by enterprises, government and the households;
(iv)    Only value added and not value of output by production units should be included;
(v)    Do not include sale of second-hand goods as they are not fresh production activity. However, brokerage or commission paid to facilitate sale is included because it is a fresh production activity.
Since national income measures and reflects the current achievements of an economy during a year, value of following items should be excluded from its purview.
(i)    Sales and purchases of second-hand goods. They are not a part of production of the current year. Moreover, their value had already been included in national income of the year in which they were produced. However, if the transaction has been made through a broker, his commission or brokerage should be included because he has rendered productive service. Again services for self-consumption like those of housewives are not included as it is difficult to estimate their market value.
(ii)    Sale of bonds by a company. This is merely a financial transaction which does not contribute directly to the flow of goods and services. Again services for self consumption like those of house wife are not included as it is difficult to estimate their market value.
(iii)    Income of a smuggler. It is an illegal activity and all illegal activities (like smuggling, gambling, black marketing, etc.) are excluded from national income.
Let us briefly recall here concepts of Value Added.
(i)    Value of output = Sales + Change in stock (It is always at MP)(i.e. gross output).
(ii)    Value added = Value of output - Value of intermediate goods = Gross product = Gross Value Added at MP.
(iii)    NVA at MP = GVA at MP - Depreciation.
(iv)    NVA at FC = NVA at MP - Net indirect taxes = Sum of factor incomes.

GDP at MP = Value added by Primary sector + Secondary sector + Tertiary sector
                 = (2000 - 1000) + (1800 - 800) + (1400 - 600) = 2800 crores.

Gross value added = (i) + (iii - ii) - (iv)
= 500 + (20 - 30) - 300 = 190
Gross value added at FC = 190 + 40 subsidy = 230 thousands.

Gross value added = Value of output - Intermediate consumption
Intermediate consumption = Value of output (at MP) - Gross value added at MP
= 200 - (80 + 20 + 15 - 5) = र 90 lakhs.

Gross value added at MP = Sales + Change in stocks - Intermediate consumption
Sales = (NVA at FC + Depreciation + Indirect tax) - Change in stocks + Intermediate consumption
         = (300 + 30 + 20) - (-50) + 200
        = र 600 lakhs.

(a) Gross value added by sector A = 1000 + 50 - 100 - 500 = 450
     Gross value added by sector B = 2000 - 200 - 600 = 1200
    (Sales include exports also)
    Total = 450 + 1200 = 1650 crores
(b) National income (NNP_FC) = 1650 - Indirect tax - Dep. + NFIA
                                              = 1650 - 120 - 180 + 20 = 1370 crores

Net value added at FC = (ii) + (vi) - (i) - (iv) - (v)
= 750 + (-30) - 500 - 60 - 100 = 60 crore.
(Note: Sales include exports and purchase of intermediate goods includes imports.)

Income Method. Income method measures national income from the side of payments made to factors of production in the form of rent, wages, interest and profit for their productive services in an accounting year.
Under income method, national income is calculated by adding up factor incomes generated by all the producing units located within the domestic economy during a period of account. The resulting total is called Domestic Income or Net Domestic Product at FC (NDP_FC). Further by adding 'net factor income from abroad' to domestic income, we get National income (NNP_FC). In income method, national income is measured at the stage when factor incomes are paid out by enterprises to factors of production. Since net value added by an enterprise is the result of services of factors of production, therefore, the same is distributed as factor income in the form of rent, wages, interest and profit among factors. Thus factor income and value added are one and the same thing.

Steps involved. Following are the main steps involved in estimating national income by income method.
(i)    Identify enterprises which employ factors of production (land, labour, capital and enterprise).
(ii)    Classify factor payments into various categories like rent, wages, interest, profit and mixed income (or classify factor payments into compensation of employees, mixed income and operating surplus).
(iii)    Estimate amount of factor payments made by each enterprise.
(iv)    Sum up all factor payments made within domestic territory to get Domestic Income (NDP at FC).
(v) Estimate net factor income from abroad which is added to Domestic Income to derive National Income.

Precautions. For correct computation of national income by income method, following precautions need to be taken.
1.    Only factor incomes which are earned by rendering productive services are included. All types of transfer income like old age pension, unemployment allowance etc. are excluded.
2.    Sale and purchase of second-hand goods are excluded since they are not part of production of current year but commission paid on sale of secondhand goods is included as it is reward for rendering productive services. Likewise sale proceeds of shares and bonds are not included.
3.    Imputed rent of owner occupied dwellings and value of production for selfconsumption are included but value of self-consumed services like those of housewife is not included.
4.    Income from illegal activities like smuggling, black marketing, etc. as well as windfall gains (e.g., from lotteries) are excluded.
5.    Direct taxes such as income tax which are paid by the employees from their salaries are included. Likewise corporate tax which is paid by the joint stock company from its profit is included. But wealth tax and gift tax are excluded since they are deemed to be paid from past savings and wealth. Similarly indirect taxes like sale tax, excise duties which tend to increase market prices are not included.

Each component is explained below.
1.    Compensation of Employees (traditionally called Wages). This is the reward or compensation paid to employees (labour) for rendering productive services. It includes (i) Wages and salaries paid both in cash and kind, and (ii) Employer's contribution to social security schemes. Remuneration in cash includes wages and salaries, dearness allowance, bonus, city compensatory allowance, house rent allowance, leave travelling allowance, etc. whereas in kind (i.e., in the form of goods and services) includes rent-free quarter, free water and electricity, free uniform, free services of vehicles (car, scooter), amount of interest on interest-free loans, etc. Employer's contribution to social security schemes consists of contribution to life insurance, casualty insurance, provident fund, pension schemes, etc. Mind, old age pension is a transfer payment but retirement pension is a part of compensation of employees.
Note: Compensation to injured worker, employee's contribution to social security schemes, T.A. relating to business promotion, amount of loan etc., are not included in compensation of employees.

2.    Rent and Royalty. It is a factor income earned from lending the services of land, building and subsoil assets. It may be noted that domestic income included not only rent but imputed rent also. The rent of owner-occupied houses is called imputed rent. When the owner of a house, instead of renting out to a tenant, himself stays in it, he is assumed to have paid rent to himself. Thus market rent of self-occupied house is labelled as imputed rent which is included in national income. Similarly royalty which is amount receivable by a landlord for granting leasing rights of subsoil assets (deposits of coal, iron, natural gas, etc.) and for use of patents, copy rights, etc. is also included in rent.

3.    Interest. Interest is the price for the funds borrowed. It is the amount that the debtor becomes liable to pay to the creditor over a given period of time. In other words, it is the reward or payment which the borrower makes to the lender of the money capital for using his capital for a certain period of time. Interest is included in national income since it is a compensation for the productive service rendered by the factor of production called capital (money capital). With borrowed money, a firm purchases capital goods like machinery and thereby increases its productive capacity and income.

It is important to note that interest paid by the government on public debt (loan taken from public) is not included in domestic (or national) income because loans taken by the government are conventionally treated as consumption borrowing (i.e., loan for consumption purposes and not for production). Similarly interest paid by consumers is not included in national income for the same reason. However such interest are included in personal income of the lenders of money capital.

Profit is the residual factor payment to owners of production units. Thus profits is the income of the factor input called entrepreneurship for organising production and undertaking attendant risks. It is reward that owners of firms get for being in business and taking risk involved therein. Reward of other factors of production (land, labour, capital) is of contractual nature but of entrepreneur is of residual nature. It should be kept in mind that profit of a corporation (joint stock company) is used mainly for three purposes-corporate (or profit) tax, dividend and undistributed profit — items which frequently appear in numerical questions. Thus profit can be taken as sum of corporate profit, dividends and undistributed profit. Therefore, instead of mentioning profit, its three parts are shown as components. Once profit is included in the estimation of national/domestic income, none of its three parts should then be included separately.

4.    Corporate (Profit) Tax. The net profit of a corporate enterprise is used mainly for three purposes — (i) corporate tax, (ii) dividend, and (iii) reserve fund (undistributed profit). Profit tax is the direct tax levied by the Government on the profit of a company. The company pays it out of its total profit. Profit tax, thus, is a part of domestic income since it is actually earned by the company. Profit tax is also called corporate tax.

5.    Dividend. It is that part of profit of a corporate enterprise which it pays to its shareholders in accordance with the number of shares held by the latter. By virtue of owning shares, the shareholders become owners of the company. The returns on these shares are called dividend. It is another matter that the dividend income depends upon the profitability of the company. Dividend is also a part of domestic income since it is paid by the company out of its total profit. Mind, dividend paid by one firm to another firm is not included since it is already included in the profit of the firm which pays. Similarly money received from sale of shares is not included because this has changed only ownership of shares and not contributed to the flow of goods and services.

6.    Undistributed Profit. A company (or a firm), after paying profit tax and distributing dividend out of its total profit, keeps the balance as reserve fund which is known as undistributed profit (or corporate savings). The reserve fund is maintained and augmented to meet unexpected contingencies, to expand the size of production and to provide social security benefits to its employees. Income of public sector (explained in last paragraph) if not shown separately is treated as a part of undistributed profit.

7.    Mixed Income. Income of own account workers (like farmers, doctors, barbers, etc.) and unincorporated enterprises (like small shopkeepers, repair shops retail traders, etc.) is known as mixed income. They do not maintain proper accounts. They do not generally hire factor services from the market rather use their own resources like land, labour, funds, etc. As a result it becomes difficult to classify their income distinctly among rent, wages, interest and profit. Even self-employed people do not distinguish labour income from property income. Hence such incomes are treated as mixed income because they are mixture of rent, wages, interest and profit. In India this is known as an unorganised sector. When some producers consume a large part of their own produce, imputed value of production for self-consumption should also be included.

Note: Sum or total of all the above-mentioned seven components gives us the value of Domestic Income (NDP at FC). By adding to it 'net factor income from abroad' we get national income (NNP at FC). The eighth component 'Income of government sector' is shown separately on the assumption that it is not included in 'undistributed profit.'

Income of Public (Govt.) Sector. Domestic income (NDP_FC) has two parts — income of private sector and income of public sector. The above-mentioned seven items of domestic income represent income of both the sectors because undistributed profit includes 'income of government sector' also. But when incomes of private and government sectors are to be shown separately as in numerical sums, then 'income of government sector' is not included in 'undistributed profit', but shown separately. Hence there is need to explain it explicitly. What is income of public (Govt.) sector?

According to CSO, public sector comprises (i) Government administrative department, (ii) Departmental enterprises, (like Railways, Post and telegraph), and (iii) Non-departmental enterprises (like HMT, Indian Oil Corporation). Income of government administrative departments and departmental enterprises is called 'income from property and entrepreneurship accruing to government administrative departments' and of non-departmental enterprises is called 'savings of non-departmental enterprises.' Thus income of government sector has two components as shown below.

 
Different aggregates estimated by income method are Domestic Income, National Income, Private Income, Personal Income, Personal Disposable Income, income from domestic product accruing to private and public sectors, etc. We, therefore, take up these aggregates one by one.

The income of a country may be stated in the context of (i) its territory, and (ii) its residents. The concept of domestic product is based on production units located within domestic (economic) territory operated by both residents and non-residents. In comparison the concept of national product is based on residents and includes their contribution to production both within and outside the domestic territory.

(a)    Domestic Income. 'It is the sum total of factor incomes generated by all the production units located within domestic (economic) territory of a country during an accounting year'. The point to be noted is that factor incomes should be generated within the domestic territory of a country irrespective of the fact whether producers are normal residents (citizens) or non-residents (i.e., foreigners). It is a territorial concept since it is defined with reference to domestic (economic) territory. For example, many non-residential companies and foreign banks operate within domestic territory of India. Income generated by them is included in India's domestic income.

(b)    National Income. 'It is the sum total of factor incomes accruing to the normal residents both from within and outside the country during an accounting year'. The point to be noted is that national income includes factor incomes earned by normal residents within and outside the country. It is an economic concept since it is defined with reference to productive efforts of normal residents.

Difference. Simply put, income generated by residents and non-residents within domestic territory of a country is called domestic income and income generated by normal residents within and outside the country is called national income. The difference between the two is net factor income from abroad which is added to domestic income to get national income. Symbolically:
National Income = Domestic Income + Net factor income from abroad
In short, domestic income or product is attributed to all the producers within domestic territory of a country whether they are resident producers or non-resident producers. National income or product is attributed to only normal residents of the country within the country or outside.

Private Income. 'Private income is the total of factor incomes and transfer incomes received from all sources by private sector within and outside the country'. Clearly it includes net factor income from abroad. Private sector consists of private enterprises and workers (factor owners). Thus private income consists of not only factor incomes earned within the domestic territory and abroad but also all current transfers from government and ROW. In this way it is the sum of earned incomes and transfer incomes received by private sector. Thus concept of private income is broader than that of personal income because private income consists of personal income + profit tax + undistributed profit. Again it should be kept in mind that conventionally 'net factor income from abroad' is allocated to private sector and not to government sector. Put in the form of equations:
Private Income = Income from domestic product accruing to private sector + Net factor income from abroad + All current Transfers.
= National Income - Income from domestic product accruing to Government Sector + Transfer incomes
= Personal income + Corporate tax + Undistributed profit.
Difference between Private income and Private sector income. Both are different. Private sector income includes only factor income earned within domestic territory by private sector whereas private income includes private sector income, NFIA and all current transfers from within and outside the country. Symbolically:
Private income = Private sector income + NFIA + All Transfer incomes
Three main forms of transfer income used in numericals are: (i) interest on national debt, (ii) current transfers from government administrative departments, and (iii) net current transfer from rest of the world.

Private income = (i) + (iii) + (iv) + (v) - (ii)
= 254 + 10 + 10 + (-3) - 4
= 267 crores

Private income = (i) + (iii) + (v) + (vi)
                        = 4000 + 150 + 50 + (-40)
                        = 4160 crores

(a) Private income = (iv) + (v) + (vi) + (ix)
                            = 4,500 + 200 + (-50) + 80 = 4,730 crores
(b) PDI = 4,730 (Private income) - 80 - 150 - 500 = 4,000 crores.

Private income = GNP at MP - (vi) + 30 + 20 + (-10) - 40 - 70
= 400 - 50 + 30 + 20 - 10 - 40 - 70 = 280 crores

(a) Private income = Private sector income + NFIA + All transfers
                              = 3500 + (- 30) + (40 + 100) = 3610 crores
(b) PDI = Private Income - Corporation tax - Savings of corporate sector - Personal taxes
             = 3610 - 150 - 500 - 110
             = 2850 crores

Private income = (ii) + (iii) + (iv) + (v)
                       = 150 + 50 + 25 + 5
                       = 230 crores

(i) NDP at FC = (ii) + (iv) + (v) + (vii) + (ix) + (x) + (xi)
                     = 1000 + 100 + 130 + 50 + 200 + 100 + 20 = 1600 crore.
(ii) Private income = NDP at FC - (i) - (iii) + (vi) + (viii) + (xii)
                           = 1600 - 300 - (-20) + 30 + 40 + (-0) = र 1390 crore.

Personal Income. 'Personal income is the sum of earned income and transfer income received by persons (households) from all sources within and outside the country'. The point to be noted here is that personal income includes not only factor incomes which are earned from productive services but also transfer incomes (or Payments) which are received without rendering any productive service. Thus personal income is the sum of earned incomes and current transfer incomes. In other words, it is a receipt concept as compared to national income which is an earning concept.
It may be pointed out that national income is not the sum total of personal incomes since the former includes only earned incomes whereas the latter includes earned incomes as well as transfer incomes. Again personal income is different from private income because two components of private income, namely, corporate tax and undistributed profit of corporate enterprise are not included in personal income. The reason is that corporate tax goes to the government and undistributed profit is retained by the company, i.e., these two items are not received by households. Put in the form of equations:
Personal Income = Private income - Corporate tax - Undistributed profit
= National income - Income of govt. (public) sector - Corporate tax -Undistributed profit + All types of transfer incomes
= Domestic income - Income from domestic product accruing to Govt. sector - Corporate tax - Undistributed profit + NFIA + All types of transfer incomes

Personal income =    (1) - (4) - (2) - (3) + (5) + (6)
=    54,500 - 1,680 - 1,520 - 3,500 + 700 + (1,200 + 300)
=    54,500 - 6,700 + 2,200
=    50,000 crores

Personal income = (1) + (2) + (3) + (4) - (5) - (6)
= 224 + 3 + 9 + 8 -1 -3 = 240 crores

(a)    Private Income = 300 + (20 - 30) + 15 + 40 + 5 = 350 crores.
(b)    Personal Income = 350 - 25 - 80 = 245 crores.
(c)    Personal Disposable Income = 245 - 20 = 225 crores

(a)    Private Income = (iii) + NFIA (ix - xi) + (vii) + (viii)
                                 = 500 + 5 - 15 + 10 + 20 = 520 crores
(b)    Personal Income = Private income - (iv) - (v)= 520 - 30 - 65 = 425 crores
(c)    Personal Disposable Income = 425 - 20 = 405 crores

NNDI = (ii) + (iii) + (viii)
= 2500 + 180 + 20 = 2700 crores.
Personal Income = (ii) - (iv) - (v) - (ix) + (vii) + (viii) + (x)
= 2500 - 500 - 80 - 70 + 100 + 20 + 30
= 2000 crores.

 Personal Disposable Income. It is that part of personal income which is available to the households for disposal (or spending) as they like. Disposable income refers to income actually available for use as consumption expenditure and savings. Thus it is the income which remains with individuals after deduction of taxes, fees and miscellaneous receipts of the government. In other words, it is the income which the households can spend on consumption or can save as they please. Since households utilise personal disposable income for personal expenditure and personal savings, therefore, PDI is also equal to personal expenditure + personal savings. Personal disposable income can be arrived at by deducting personal taxes (like income tax, property tax, fire tax, etc.) and other miscellaneous items (like fines, fees, etc. received by Govt, administrative deptt.) from personal income. Thus:
Personal Disposable Income = Personal Income - Personal Taxes - Miscellaneous Receipts of the Govt.
This can be further clarified with the help of an example. Suppose annual income of an individual is र 50,000 and the income (direct) tax levied on him is र 5,000. His personal disposable income will be र 45,000 (50,000 - 5,000) which is at his disposal to use it for personal consumption or for saving.

(a) Personal disposable income = 3000 - 600 - 350 - 300
                                                  = 1750 crores
(b) National income (NNP at FC) = 800 + 900 + (- 50) + 350 + 600 + 450 = 3050 crores

(a) National Income = 1200 + 400 + 800 + 1000 + (- 50) + 250 = 3600 crores
(b) Personal disposable income = Personal income - Taxes paid by households 
                                                  = 3300( = 3600 - 200 -100) -150 = 3150 crores.                                                               

(a) Private income = 4500 + 200 + (- 50) + 80 = 4730 crores
(b) PDI = 4730 (Private income) - 80 - 150 - 500 = 4000 crores.

PDI = 600 - 10 - 100 + 50 + (- 20) + 30 - 60 = 490 crores.

(a) Private income = Private sector income + NFIA + All transfers
                              = 3500 + (-)30 + (40 + 100) = 3610 crores.
(b) PDI = Private income - Corporation tax - Savings of private corporate sector - Personal taxes
             = 3610 - 150 - 500 - 110 = 2850 crores.

(a)    GNP at MP = 900 + 100 - 20 + 50
        (= 1050 - 1000 depreciation)
         = 1030 crores.
(b) Personal disposable income = 700 - 110 - 40 - 90 - 30 = 430 crores.

Components of different Aggregates of National Income

 When shown separately from income of private sector.
**Note: Main forms of transfer income are : (i) Interest on national debt, (ii) current transfers from government administrative departments, and (iii) Net current transfers from rest of the world.
Now it is easy to distinguish among different types of incomes on the basis of their components as shown above. For instance:
(a) Domestic Income = Rent + Wages + Interest + Mixed income + Profit tax + Dividend + Undistributed profit + Surplus of Govt, sector (if shown separately).
OR
= Compensation of employees + Operating surplus + Mixed income. 

(b) National Income = Domestic income + Net factor income from abroad.
(i)    Private Income = National income - Surplus of government sector + All types of transfer income including national debt interest.
(ii)    Personal Income = National Income - Surplus of government sector - Corporate tax - Undistributed profit + All types of transfer income including national debt interest.
(iii)    Personal Income = Private income - Corporate tax - Undistributed profit.
(iv)    Personal Disposable Income = Personal income - Personal taxes (including miscellaneous receipt of the government).
(v)    Personal Disposable Income = Private income - Corporate tax - Undistributed profit - Personal taxes.
(vi)    Personal Disposable Income = National income - Surplus of Govt, sector - Corporate tax - Undistributed profit + All type of transfer income - Personal taxes.
(vii)    Private Income = Income from domestic product accruing to private sector + Net factor income from abroad + All types of transfer income including national debt interest.

Meaning of NDI. NDI is defined as net national product at market prices (NNPMP) plus net current transfers from rest of the world.
Symbolically: National disposable income = National income + Net indirect taxes + Net current transfers from rest of the world. Current transfers are gifts in cash and kind (like consumer goods and even military equipment).
Simply put, Net Disposable Income is the income which is at the disposal of the nation as a whole for spending or disposal. Main idea behind NDI is to know what is the maximum amount of goods and services the domestic economy has at its disposal. Net indirect taxes are included as it is transfer earnings of the government which it is free to use the way it likes. Similarly net current transfer from ROW is also included since it impacts purchasing power of the country. But current transfers within the domestic territory cancel each other, and therefore, not included as they do not impact NDI. Thus national disposable income is the maximum available income (earned and transfer incomes) from all sources that a nation can spend on consumption and saving without disposing off its assets to finance its expenditure. National Disposable Income for a country is in the same way as Personal Disposable Income (Personal Income - Personal taxes) is for an individual. It is in fact, net national disposable income. Symbolically:
National disposable income = NNP at MP + Net current transfers from rest of the world
= National income + Net indirect taxes + Net current transfers from rest of the world.
National Disposable Income (NDI) can be gross and net.

Difference between Net National Disposable Income and Gross National Disposable Income. Gross NDI includes depreciation (or current replacement costs) whereas net NDI is exclusive of depreciation. Net National Disposable Income is the sum of NNP at MP and net current transfers from rest of the world. As against it Gross National Disposable Income is the sum of Gross National Product at MP (GNP at MP) and net current transfers from rest of the world. The difference between the two is consumption of fixed capital at national level (i.e., national depreciation). Symbolically:
Gross NDI = GNP at MP + Net current transfers from ROW
Net NDI = NNP at MP + Net current transfer from ROW
= Gross NDI - Depreciation or current replacement costs.

Difference between National Income (NI) and National Disposable Income (NDI).
(i) NI includes only factor incomes whereas NDI includes both factor incomes and current transfers from ROW, and (ii) NI is always at factor cost whereas NDI is at market price.
The following extract from statement-4 of Government of India NAS, 2007 further clarifies the concept of NDI.
Relationship of National Income with NDI (Year 2005-2006)

Gross National Disposable Income
= GNP at FC + Indirect taxes - subsidies + Current transfer from rest of world
= 400 + 50 - 10 + 25 = 465 crores

GNDI = NNP at FC + NIT + Depreciation + Net current transfers from ROW
= National income + Net indirect taxes + Depreciation + Net current transfer from ROW
Set I = 2,000 + 250 + 100 + 200 = 2,550 crores
Set II = 3,000 + 250 + 150 + 300 = 3,700 crores
Set III = 1,000 + 80 + 100 + 150 = 1,330 crores

NNDI = GNP at FC - Depreciation + Net indirect tax + Net current transfers
Set I = 800 - 60 + 70 + 50 = 860 crores
Set II = 1,000 - 100 + 120 + 50 = 1,070 crores
Set III = 1,500 - 100 + 120 - 30 = 1,490 crores

GDP at MP (Exp. method) = 400 + 120 + 100 + 20 + 30 -40 = 630 crores
GNDI = GDP_MP + NFIA + Net current transfer from ROW
         = 630 + (-10) + (-5) = 615 crores.

(a) Domestic Income = (ii) + (iv) + (vi)
= 400 + 200 + 500
= 1100 crores
National income (NNP at FC) = 1100 + (- 50)
= 1050 crores
NNDI = National income + Net indirect taxes + Net current transfers from abroad
= 1050 + 90 + (- 20) = 1120 crores
(b)    Private income = National income - (viii) - (x) + All transfer income
= 1050 - 40 - 30 + (70 + 60 - 20) = 300 = 1090 crores

GDP at MP (Exp. method) = 500 + 150 + 100 + 50 + dep (0) = 800
GNP at MP = 800 + (- 20) = 780
NNDI = 780 + (- 10) = 770 crores.

GDP at MP (Exp. method) = 400 + 100 + 80 + 50 + 40 = 670
GNDI = GDP at MP + NFIA + Net current transfers from ROW
= 670 + (- 10) + 20 = 680 crores.

(i) NDP at FC = (ii) + (iv) + (viii) + (vi) - (ix - vii)
                      = 250 + 50 + 30 + (-10) - (20 - 10)
                      = 310 crores
(ii) GNDI = NDP at FC + (iii) + (ix - vii) + (i) + (v)
= 310 + 15 + (20 - 10) + (-5) + 25
= 355 crores

(i) NDP at FC = (iii) + (iv) + (v) + (vii) - (viii) - (x)
= 2000 + 6000 + 800 + 50 + (-50) - 700
= 8100 crores
(ii) GNDI = NDP at FC + Depreciation + (ii) - (i) + (x)
= 8100 + (950 - 800 - 50) + (-40) - (-60) + 700
= 8100 + 100 - 40 + 60 + 700 = 8920 crores.

GDP at MP = 600 + 100 + (150 + 40) + (60 - 10) + 50 = 990
(i) National Income (NNP at FC)
= GDP at MP - Depreciation - NIT + NFLA
= 990 - 40 - (80 + 20) + (-10) = 880
(ii) GNDI = National Income + Dep. + NTT + Net current transfer to rest of world
               = 880 + 40 + (80 - 20) - (-5) = 985 crores

NNDI = (ii) + (iii) + (viii)
= 2500 + 180 + 20 = 2700 crores.
Personal Income = (ii) - (iv) - (v) - (ix) + (vii) + (viii) + (x)
= 2500 - 500 - 80 - 70 + 100 + 20 + 30
= 2000 crores.

(a) GDP at MP (Expenditure method)
= 500 + 200 + {120 + 20 + (- 20)} + (- 30) = 790
National income (NNP at FC) = 790 - 20 - 100 - (- 10) = 670 + 10 = 680 crore
(b)    GNDI = NNP at FC + dep + NIT - Net current transfers to ROW
= 680 + 20 + 100 - (- 5) = 800 + 5 = 805 crore.

National Income = Rent + Wages + Interest + Mixed income + Profit tax + Dividend + Undistributed profit + Surplus of public sector + Net assets income from abroad.
= 5,000 + 30,000 + 8,000 + 4,000 + 2,000 + 12,000 + 3,000 + 15,000 + 7,000
= 86,000
Domestic Income = National income - Net assets income from abroad
= 86,000 - 7,000 = 79,000
Personal Income = National income - Profit tax - Undistributed profit - Surplus of public sector + Transfer payment by government + Transfers from abroad
= 86,000 - 2,000 - 3,000 - 15,000 + 1,000 + 2,500
= 69,500
Personal disposable income = Personal income - Personal tax
= 69,500 - 15,00 = 68,000