National income measures the value of what an economy produces in a year. The idea is simple; the accounting is not, because the same output can be counted from three completely different directions:
All three must give the same answer, because every rupee of output is somebody’s income and somebody’s expenditure. That is not a convention — it is an identity, and it is the reason a set of national accounts can be checked.
If three independently compiled estimates disagree, the difference is measurement error, and statistical agencies publish it as a discrepancy rather than hiding it.
Double counting. A miller buys wheat and sells flour. If you add the value of the wheat and the value of the flour, the wheat is counted twice — once on its own and once inside the flour.
Each method avoids it in its own way, and knowing which is which is most of the subject:
Given: the output and intermediate consumption of a three-sector economy. Asked: GDP at market prices.
| Sector | Value of output | Intermediate consumption | Value added |
|---|---|---|---|
| Agriculture | 2,400 | 900 | 1,500 |
| Industry | 5,200 | 2,600 | 2,600 |
| Services | 8,600 | 1,900 | 6,700 |
| Total | 16,200 | 5,400 | 10,800 |
Step by step: Agriculture \( 2400 - 900 = 1500 \); Industry \( 5200 - 2600 = 2600 \); Services \( 8600 - 1900 = 6700 \). Adding the three, GDP = 10,800.
Why not just add the output column? That gives 16,200, which counts the farmer’s wheat again inside the miller’s flour and again inside the baker’s bread. The difference, 5,400, is precisely the intermediate consumption — the double counting that value added removes.
Now add up what the factors of production earned, plus the two items that separate factor cost from market prices.
| Item | Amount |
|---|---|
| Compensation of employees | 5,400 |
| Operating surplus (rent, interest, profit) | 2,400 |
| Mixed income of the self-employed | 1,100 |
| Net domestic product at factor cost | 8,900 |
| Add: consumption of fixed capital (depreciation) | 700 |
| Add: net indirect taxes | 1,200 |
| GDP at market prices | 10,800 |
\( 5400 + 2400 + 1100 = 8900 \) of net domestic product at factor cost. Adding depreciation \( 700 \) makes it gross; adding net indirect taxes \( 1200 \) moves it from factor cost to market prices. Total 10,800 — the same as the production method.
Two definitions worth getting exactly right, because they are the hinge of every conversion in section 6:
Mixed income exists because a shopkeeper’s earnings cannot be split into wages for his labour and profit on his capital, so the accounts do not try.
Only final expenditure, by the four groups that buy final output.
| Item | Amount |
|---|---|
| Private final consumption expenditure (C) | 6,300 |
| Gross domestic capital formation (I) | 2,100 |
| Government final consumption expenditure (G) | 1,900 |
| Exports (X) | 1,400 |
| Less: imports (M) | (900) |
| GDP at market prices | 10,800 |
Why imports are subtracted: not because imports are bad, but because C, I and G already include spending on imported goods, and those were produced abroad. Subtracting M removes them, leaving only domestic production.
GDP at market prices is the starting point. Each step below changes exactly one thing.
| Step | Adjustment | Result |
|---|---|---|
| GDP at market prices | — | 10,800 |
| Add net factor income from abroad (−300) | domestic → national | 10,500 |
| Less depreciation (700) | gross → net | 9,800 |
| Less net indirect taxes (1,200) | market price → factor cost | 8,600 |
8,600 is the national income — net national product at factor cost. That is the definition the syllabus means by the term, and the four steps above are the route to it.
Net factor income from abroad is negative here, at −300. That is the normal case for an economy that hosts more foreign-owned capital than it owns abroad: more factor income flows out than in, so GNP is smaller than GDP.
Per capita income divides national income by population. With a population of 100, \( 8600 / 100 = 86 \). It is an average and says nothing about distribution — which is what Unit 6 is about.
A national income figure rises when output rises and when prices rise. To separate them, deflate:
\[ \text{Real income} = \frac{\text{Nominal income}}{\text{Price index}} \times 100 \qquad\qquad \text{GDP deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 \]The deflator is the broadest price index an economy has, because it covers everything in GDP rather than a fixed basket. The site’s Index Numbers unit builds Laspeyres, Paasche and Fisher indices and tests them; this is where they are used.
The value-added table of section 3 says what each sector produced but not who bought it. An input–output table shows that: each row is a sector’s sales, each column its purchases.
| Selling ↓ Buying → | Sector A | Sector B | Final demand | Total output |
|---|---|---|---|---|
| Sector A | 300 | 500 | 1,200 | 2,000 |
| Sector B | 400 | 200 | 900 | 1,500 |
| Value added | 1,300 | 800 | — | 2,100 |
| Total input | 2,000 | 1,500 | — | — |
Read a row across: Sector A sold 300 to itself, 500 to B, and 1,200 to final buyers — total output 2,000.
Read a column down: Sector A bought 300 from itself and 400 from B, and added 1,300 of its own value — total input 2,000.
The two agree, for both sectors, and they must: what a sector produces is exhausted by what it sells, and what it sells is worth what its inputs cost plus what it added. That is the accounting identity of section 1 written out sector by sector.
Two more checks worth doing: total final demand is \( 1200 + 900 = 2,100 \), and total value added is \( 1300 + 800 = 2,100 \). Equal, as they have to be — final demand is GDP, and so is the sum of value added.
What the table is for. It makes inter-sectoral dependence visible. If final demand for B rises, B buys more from A, so A must produce more, so A buys more from itself and from B — and the table lets that chain be computed rather than guessed. That is the basis of Leontief's input–output analysis, and of every “what does a rupee of construction demand pull along with it” question.
National accounts are not estimated by whoever needs them; they are compiled centrally, to one method, so that one year compares with the next and one country with another.
The UGC NET unit on the Indian statistical system covers these organisations at exam level, and the ISS Paper II map shows where official statistics sits in that syllabus.
The examinable point is the pattern: anything that is not a payment for current, final, newly produced output is excluded — which disposes of transfer payments, second-hand sales and financial transactions in one rule.