National Income and GDP – UPSC Economy Notes

Study National Income and GDP for UPSC with simple notes on GDP, GNP, GVA, nominal and real GDP, GDP deflator, PPP, national income and business cycles.

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National Income, GDP and Others#

Factors of Production#

It refers to the factors or the inputs that go towards production in a economy are are follows:

Land:- Refers to the area on which production take place an d a rent is paid to the land owner.
Labour:- Refers to the human resource required in the production and wages are paid to the labour.
Capital:- It is the amount required in the process of production either to buy machinery or to buy raw materials. The money that is required to buy the machinery, the tools, etc are known as fixed capital, where as the cost of raw materials refers to working capital.
The Entrepreneur:- The entrepreneur is a person or individual who brings other factors of production together to earn a profit on the same.

Gross Domestic Product (GDP)#

The GDP refers to sum of the total monetary value of all goods and services produced within the territory of a country by its residents in a given financial year (1^st April to 31^st March).
The GDP measure the where of production not by whom of production. which means even a German resident doing business in India will contribute of India's GDP.
The GDP consider only the final goods and services produced which could not be entering the successive phase of production.
In the GDP, the territory includes all the land area, exclusive economic zone, enclaves in the foreign countries like embassy or military bases as well as moving vessels like ships and aircrafts.
The GDP is estimated on a quarterly bases as well as annual bases by National Statics Office (NSO) under the Ministry of Statics and Programme Implementation (MoSPI).
In the estimation of GDP the data is collect from different agencies such as the Directorate of Statics and Economics under the Ministry of Agriculture for the data on Agriculture, for mining data from Bureau of Mines is used, for manufacturing data from annual survey of industries as well as Ministry of Cooperate Affairs is taken. The data from RBI, SEBI and other regulators is collected for data on financial services.
For the financial year 2024-25 India GDP at the current prices stood at 331 lac crore or 4.3 trillion dollars. As per IMF, world biggest GDP are USA (30 trillion), China (19.5 trillion), Germany (4.9 trillion) and India (4.3 trillion). In 2025 India now as world fourth largest GDP after beating Japan.
As per IMF India's GDP had double from 2015-2025 form 2.1 trillion dollars to 4.3 trillion dollars.
The government estimate to make 30 trillion GDP by 2047.

Cost and Prices#

Different types of cost and prices are taken which are:-

The Factor Cost:- The factor cost involves the cost of production which will be including the cost of rent, wages, interest and the profits. The GDP calculated at factor cost is GDP_FC
Basic Price:- The basic price refer to the price obtained after adding the production taxes and adjusting the production subsidies to the factor cost.

Basic Price = Factor Cost + Production Taxes - Production Subsidies The basic price can be seen as minimum price which are to be collected by producer. The production taxes are the taxes paid during the beginning of the production process such as on purchase of land, installation e.g. Stamp duty, etc. 3. **Market Price:-** The market prices are the prices at which goods and services are available in the market (outside the factory premise). The market price are obtained after adding the product taxed and adjusting the product subsidies. Market Price = Basic Price+ Product Taxes - Product Subsidies The product taxes are the indirect taxes levied on the unit of product or the volume of product such as GST, VAT, etc. ### Gross Value Added The GVA or the gross value added refers to value addition made by enterprise during their process of production of goods and services. The GVA is calculated by subtracting the cost of intermediate consumption from the output value. GVA =Output value - Cost of Intermediate Goods The GVA at basic prices is used to measure the GDP at market prices through following equation GDP_MP = GVA_BP + Indirect Taxes - Subsidies ### Nominal and Real GDP The GDP estimated at current year prices is known as nominal GDP e.g. GDP_MP(2026-27) = Quantity_2026-27 * Prices_2026-27 GDP_{current prices} = Nominal GDP The Real GDP is the GDP for a given year calculated at the bases year prices or constant price. Real GDP = Quantity_2026-27 * Prices_2022-23 ### GDP Growth Rate The rate at which GDP of a given year changes with respect to previous year is known as GDP growth rate. It is also seen as rate of economic growth. The GDP growth rate can be measured by taking both nominal and real GDPs but in the growth rate using nominal GDP effect of inflation is also there. Therefore the real GDP growth rate is more preferred. For financial year 2024-25 the nominal GDP growth rate is 9.9%. The real GDP growth rate is 6.5%. ### GDP Deflator GDP Deflator is the ratio of nominal GDP to real GDP. GDP Deflator = Nominal GDP/Real GDP ### Potential GDP The potential GDP is a GDP obtained at full employment. Ideally, the potential GDP is expected to be higher than nominal GDP. However, in some cases the nominal GDP is found to more than potential GDP. The output GDP when nominal GDP exceed potential GDP is known as inflation Gap. Inflationary Gap = Nominal GDP - Potential GDP ### Gross National Product GNP stands for the sum of total monetary value of all final goods and services produced by nationals of a country in the world in a given financial year. The GNP can be seen as output value of all the nationals of a country irrespective of whatever they reside or live. It is obtained from the following equation. GNP = GDP - Factor income of foreigners in India + Factor income of Indians living abroad GNP = GDP + NFI (Net Factor Income) #### Relation between GDP and GNP - GDP is about where production takes place, whereas GNP is about who owns the factors of production. - The GDP is a quantitative aspect whereas GNP is both quantitative and qualitative. - For the close economy GDP is equal to GNP. - For a open economy GDP can be either more than GNP if a country receives technology and capital, the GDP can be less than GNP if the country is poor and its people earn abroad and GDP can also be equal to GNP. #### Net National Product The NNP is the value of production by nationals after adjusting GNP with deprecation. Net = Gross - Deprecations NNP = GNP - Deprecations NDP = GDP - Deprecations ## National Income The national income is the income earned by the national of a country. It is estimated to understand the standard living of the person of that country based on which the policies are to be formed. the measurement of national income is done through measuring Gross domestic production in the country because the production process generates income in the economy and therefore a country's GDP is calculated. ### Per Captia Income Per capita income is national income divided by population. India's 2024-25 per capita income is $2,500. ### World Bank Classification

GDP at PPP#

The purchasing power refers to the power or capacity of a currency to buy a given amount of goods and services. The purchasing power parity refers to the comparison of currencies on the basis of their capacity to buy a similar value of goods and services. Example: if one food product costs $6 in the USA and ₹96 in India, then, on the basis of purchasing power,$ 1 = ₹16

If the GDP of a country is estimated at the purchasing power parity exchange rate, it is known as GDP_PPP. The GDP_PPP can be seen as a real comparison of the economic strength of two or more countries.

India's GDP_PPP is $9 trillion, which means if the economic strength of the USA and India is compared, then the USA is$ 30 trillion and India is $9 trillion. India ranks third in the world after China and the USA.

Green GDP#

The green GDP refers to the GDP obtained after adjusting the economic cost or loss to the country due to the loss of the environment from the nominal GDP.

Green GDP = GDP - economic cost of the loss to the environment

The green GDP is a sustainable and environmentally friendly way of estimating the GDP.

Approaches to Measure GDP#

GDP can be measured through three approaches, which may be used in different circumstances.

The product approach or value added approach#

In this approach, the value addition at each stage is added to measure the GDP.

Value-added approach = ΣGVA ### Income approach

In this approach, the income earned through wages, rent, interest, or profit is added to estimate the GDP.

GDP = Rent + Wages + Profit + Interest ### Expenditure approach

The income that has been earned will be eventually spent towards consumption and investment. The consumption will be made by households or the government towards food, transport, electricity, salary, pension, and other items. Part of their income will be invested towards fixed capital, such as machinery, building, land, improvements, and others.

The foreigners in India could also consume from the income in India, known as the export and the consumption of foreign goods from the foreign incomes, known as imports, which has to be subtracted. Therefore, through the expenditure approach, the components will be:

the total household consumption (C), 60% of the GDP
government consumption (G), 10% of the GDP
net consumption and exports (X), 22% of the GDP
gross investment (I), 32% of the GDP
the consumption of foreign goods and services not produced in India (-M), 24% of the GDP

Therefore, the GDP through the expenditure approach becomes

GDP = C + G + X + I - M ## Business Cycles The business cycle refers to the various ups and downs that an economy faces. Any economy does not grow in a linear fashion but progresses through the stages of growth, slowdown, recession or depression, followed by recovery and growth. The continuous sequence of this event in a cycle is known as business cycle. Its components are as follows:- - Growth - In growth phase, the economy expands and GDP grows at a healthy rate and is followed by a rise in employment, household consumption and investment. - Slowdown - In this phase, the economy grows with a positive rate of growth. GDP expands but growth rate is lower than before. - Example: If earlier the economy was growing at a rate of 7%, it may now grow at a rate of 3% to 4%. - Recession - In this scenario, the GDP contracts consistently for the two quarters. The recession is said to have taken place when the GDP growth rate is negative for two quarters or six months. - India had a recession in 2021, as the quarter 1 growth rate was -2% and the quarter 2 growth rate was -8%. - Depression - The depression is a situation which occurs when the GDP is given a year-on-year contract of 10% or more as compared to the previous financial year. - Example: the Great Economic Depression of 1929, when the US economy contracted by nearly 30%. - Recovery - It refers to the bounce back of the economy, or the GDP, after a phase of slowdown, recession, or depression. ### Types of recovery Recovery stands for the bounce-back of the economy after a brief phase of contraction, recession, or depression. The recovery in the economy is achieved by increasing government spending through subsidies and cheap loans, so that the demand increases, which will increase production, jobs, and subsequent recovery. The various types of recovery are - V-Shape Recovery - In this recovery, the economy first sinks, then bounces back. When this contraction and recovery are plotted against time, it looks like a V, hence known as a V-shaped recovery. - W-Shape recovery - A type of recovery having two consecutive weak recoveries occurs because the first recovery was not strong enough. As a result, the economy contracted further, leading to a W-Shape recovery. - U-Shape Recovery - In this type of recovery, the recovery is delayed, and therefore the shape looks like a U. - K-Shape Recovery - In recovery different sections of the population do not recover in the same manner. Some sections of the population, having access to government support or access to banking or the formal sector, may recover but others in the unorganised sector, lacking government support and not having stability, may fall further. When such recovery is plotted it looks like a K shape, known as a K-Shape recovery. ## Change in GDP calculation approach since 2015

Before 2015	After 2015
Earlier, GDP was calculated at the factor cost.	Now, JDB at the market price is estimated from gross value added at base price
Base year was 2004-05	Base year is 2022-23.
Data found in the annual survey of industries having the record of 2 lakh factories	That is taken from the Ministry of Corporate Affairs, which has data of more than 3.25 lakh companies.
The finance sector was limited.	The financial sector was broadened and had wider coverage from RBI, SEBI, IRDA is taken.
Agricultural data was limited to crops.	The agricultural data also include the contribution of animal husbandry along with crops.

These changes were adopted to align India's GDP calculation with the United Nations System of National Accounts 2008. It gives a better estimate of India's GDP, along with better comparison between the countries.

Private Income, Personal Income and Personal Disposable Income#

Private income
- The income of the private sector, through its contribution towards national income, is known as private income. It is obtained after subtracting the income of the government sector or the other public sector.
Personal income
- The personal income refers to the income of an individual or a household. It is obtained after subtracting the income retained by the corporation from the national income.
- The corporation retains some amount of pay. Corporation takes excess money, keeps some undistributed profits, and may keep some savings. The remaining is distributed forming the personal
Personal disposable income - That part of the income of a person which can be used to make consumption is known as personal disposable income. It is obtained after subtracting the income tax and adding government transfer to the personal income.

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