National Income Accounting
National income is the total income earned by all individuals of a country in a year. The key concepts are GDP, GNP, NNP, NI, PI, DI and PCI. Nepal's GDP in FY 2080/81 was about Rs 5381.34 billion. GDP is measured in three ways — product, income, and expenditure — and the expenditure identity is Y = C + I + G + (X − M). Real GDP removes price-change effects via the GDP deflator.
In this chapter
Meaning of National Income
National income (NI) is the total income earned by all individuals of a country during one year. It includes wages, rent, interest and profit earned by every citizen — whether they live inside the country or abroad. National income is the money value of all final goods and services produced by the residents of a country in a year. If a Nepali worker in Qatar sends remittance home, that income is part of Nepal's national income (counted as NFIA) — even though the work was done abroad.
National income = sum of all individual incomes
Concepts of National Income
Seven Key Concepts (from GDP to PCI)
- GDP (Gross Domestic Product) — market value of all final goods & services produced within the domestic territory in a year.
- GNP (Gross National Product) — GDP + Net Factor Income from Abroad (NFIA).
- NNP (Net National Product) — GNP − Depreciation (wear-and-tear of capital).
- NI (National Income) — NNP at factor cost (i.e., net of indirect taxes and subsidies).
- PI (Personal Income) — NI minus corporate taxes and undistributed profits, plus transfer payments.
- DI (Disposable Income) — PI minus direct (personal) taxes — what households actually have to spend or save.
- PCI (Per Capita Income) — NI ÷ Population — average income per person.
GDP → GNP → NNP (D = depreciation)
National income, personal income, disposable income, per capita income
National income concepts — formula and meaning
| Concept | Formula | What it Measures |
|---|---|---|
| GDP (Gross Domestic Product) | Σ P_i × Q_i | Output produced inside the country |
| GNP (Gross National Product) | GDP + NFIA | Output by residents, anywhere in the world |
| NNP (Net National Product) | GNP − Depreciation | Net output after replacing worn capital |
| NI (National Income) | NNP at factor cost | Total income of residents (wages + rent + interest + profit) |
| PI (Personal Income) | NI − corp. tax − undist. profit + transfers | Income actually received by households |
| DI (Disposable Income) | PI − direct taxes | Income available to spend or save |
| PCI (Per Capita Income) | NI ÷ Population | Average income per person |
Real GDP vs Nominal GDP
Nominal GDP is calculated using current-year prices — so it rises if either output rises or prices rise. Real GDP is calculated using base-year prices — so it changes only when output changes, removing the inflation illusion. Nepal's base year for national accounts is currently FY 2074/75. The GDP deflator is a price index that links the two: it tells us how much of nominal GDP growth is just price inflation.
GDP deflator and conversion to real GDP
Nominal GDP vs Real GDP
| Basis | Nominal GDP | Real GDP |
|---|---|---|
| Prices used | Current-year prices | Base-year (constant) prices |
| Effect of inflation | Rises with inflation (overstates growth) | Removes inflation effect (true growth) |
| Comparability over years | Not directly comparable | Directly comparable across years |
| Used for | Current-size estimates | Growth rate, welfare comparison |
| Relation | Nominal = Real × Deflator / 100 | Real = Nominal × 100 / Deflator |
Circular Flow of Income
Measurement Methods of National Income
Three methods of measuring national income
| Method | Approach | Formula / Identity |
|---|---|---|
| Product (Value Added) Method | Sum of value added by every producing unit in the economy. | GDP = Σ Gross Value Added = Σ (Output − Intermediate consumption) |
| Income Method | Sum of all factor incomes (wages + rent + interest + profit) earned in production. | NI = W + R + I + Π (wages + rent + interest + profit) |
| Expenditure Method | Sum of all final spending on goods & services. | Y = C + I + G + (X − M) |
Expenditure method of measuring GDP (open economy)
Nepal Example — GDP and Remittance
In FY 2080/81, Nepal's GDP at current prices was about Rs 5381.34 billion. Nepal's remittance inflow was about Rs 1007.31 billion — a major part of NFIA, which raises GNP above GDP. This is why, for Nepal, GNP is a better measure of the income actually received by Nepalis than GDP. The Central Bureau of Statistics (CBS) is the official agency that computes Nepal's national accounts.
Practice Problem
Given for a country (in Rs billion): GDP at market price = 5000, Net Factor Income from Abroad (NFIA) = 1000, Depreciation = 500, Indirect taxes − Subsidies = 200, Population = 30 million. Calculate (a) GNP at market price, (b) NNP at market price, (c) National Income (NNP at factor cost), (d) Per Capita Income.
Practice Problem
Nepal's nominal GDP in a year is Rs 5381 billion and the GDP deflator (with base FY 2074/75) is 130. (a) Calculate real GDP. (b) If the previous year's real GDP was Rs 4000 billion, calculate the real GDP growth rate. (c) What does a deflator of 130 tell us?
Quick Revision
- National income = total income earned by all residents in a year.
- GDP = Σ P_i Q_i (output inside the country); GNP = GDP + NFIA.
- NNP = GNP − Depreciation; NI = NNP at factor cost.
- PI = NI − corp. tax − undist. profit + transfers; DI = PI − direct taxes; PCI = NI / Population.
- GDP Deflator = (Nominal GDP / Real GDP) × 100.
- Three measurement methods: product, income, expenditure.
- Expenditure identity: Y = C + I + G + (X − M).
- Nepal FY 2080/81: GDP ≈ Rs 5381.34 billion; remittance ≈ Rs 1007.31 billion.