National income and inflation
National income is the money value of final goods and services an economy produces in a year. Inflation is a sustained rise in the general price level.
National income aggregates
| Aggregate | How to get it |
|---|---|
| GDP at market prices | Market value of all final goods and services produced within the domestic territory |
| GNP at market prices | GDP + net factor income from abroad (NFIA) |
| NDP at market prices | GDP − depreciation (consumption of fixed capital) |
| NNP at market prices | GNP − depreciation |
| NNP at factor cost (national income) | NNP at market prices − indirect taxes + subsidies |
| Personal income | National income − undistributed profits − corporate tax − social security contributions + transfer payments |
| Disposable personal income | Personal income − direct personal taxes |
| Per capita income | National income ÷ population |
Three methods of measuring national income
| Method | What is added | Watch out for |
|---|---|---|
| Product (value added) | Value added by the primary, secondary and tertiary sectors | Count only final goods, or value added, to avoid double counting |
| Income | Compensation of employees + rent + interest + profit + mixed income of the self-employed | Exclude transfer payments and capital gains |
| Expenditure | C + I + G + (X − M) | Exclude spending on second-hand goods and financial assets |
Worked example: from GDP to national income
For an economy (₹ crore): GDP at market prices 10,000; depreciation 800; NFIA −200; indirect taxes 1,200; subsidies 300. Find national income.
- GNPmp = GDPmp + NFIA = 10,000 + (−200) = 9,800.
- NNPmp = GNPmp − depreciation = 9,800 − 800 = 9,000.
- Net indirect taxes = 1,200 − 300 = 900.
- NNPfc = 9,000 − 900 = 8,100.
- Check by another route: NDPfc = 10,000 − 800 − 900 = 8,300; NNPfc = 8,300 + (−200) = 8,100.
National income (NNP at factor cost) = ₹8,100 crore.
Types of inflation
| Basis | Type | Meaning |
|---|---|---|
| Cause | Demand-pull | Too much money chasing too few goods; aggregate demand exceeds supply |
| Cause | Cost-push | Rising wages, input prices or profit margins push prices up |
| Cause | Structural | Supply bottlenecks in sectors such as farming or infrastructure |
| Speed | Creeping, walking, galloping, hyperinflation | From mild and slow to rapid and out of control |
| Special | Stagflation | High inflation with stagnant output and high unemployment |
| Special | Disinflation and deflation | Disinflation: the rate of inflation falls. Deflation: the price level itself falls |
| Special | Core and headline | Core leaves out volatile food and fuel; headline includes everything |
Worked example: inflation rate and real GDP
The CPI rises from 150 to 162 in a year. Separately, nominal GDP is ₹12,000 crore and the GDP deflator is 120. Find the inflation rate and real GDP.
- Inflation = (162 − 150) ÷ 150 × 100 = 12 ÷ 150 × 100 = 8%.
- Check: 150 × 1.08 = 162.
- Real GDP = nominal GDP ÷ deflator × 100 = 12,000 ÷ 120 × 100 = ₹10,000 crore.
- Check: 10,000 × 1.20 = 12,000.
Inflation = 8%; real GDP = ₹10,000 crore.
Measuring and controlling inflation in India
- WPI: compiled by the Office of the Economic Adviser, DPIIT (Ministry of Commerce and Industry).
- CPI (rural, urban, combined): compiled by NSO. CPI-IW for industrial workers: Labour Bureau.
- On the Urjit Patel Committee's advice (2014), RBI adopted CPI (combined) as its main inflation measure. Flexible inflation targeting was written into the RBI Act in 2016.
- A six-member Monetary Policy Committee sets the policy repo rate.
- Monetary tools: policy rates, CRR, SLR, open market operations. Fiscal tools: cut spending, raise taxes, reduce deficits. Direct tools: price controls and supply management.
- Phillips curve (A. W. Phillips, 1958): an inverse relation between unemployment and the rate of wage inflation.
NET asks you to derive NNP at factor cost from given aggregates, match inflation types with meanings, name the index and agency used in India, and judge statements on what is excluded from national income.
Typical MCQ: “Nominal GDP is ₹15,000 crore and the GDP deflator is 125. What is real GDP?” 15,000 ÷ 1.25 = ₹12,000 crore. Trap: multiplying by 1.25 instead of dividing.
Typical MCQ: “Are subsidies added or subtracted when converting market prices to factor cost?” Added: factor cost = market price − indirect taxes + subsidies. Trap: subtracting both taxes and subsidies.
Gross to net: minus depreciation. Domestic to national: plus NFIA. Market price to factor cost: minus taxes, plus subsidies.