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National Income Accounting – GDP Calculation & Per Capita Income

National Income Accounting - RBI Grade B Study Notes

Reserve Bank of India being the central bank of the country is a great organisation to work for. Every year Lakhs of aspirants apply for the RBI Grade B posts as it offers great career opportunities as well as impressive perks & allowances to its officers. The Grade B recruitment notification is expected to be announced in the month of June-July 2019 most probably. It is highly advisable to start with your preparations from now on itself so that when you are suddenly notified of the recruitment notification, you have already covered a prominent portion of the syllabus. The Grade B Exam is conducted in three stages namely Phase I, Phase 2 and the Interview round.

Toppers of the exam have always suggested to carry on the preparations and study for both Phase 1 and Phase 2 simultaneously because the syllabus of the Phase 2 of RBI Grade B is vast and requires thorough knowledge and persistence in studies. The subjects asked in the Phase 2 Exam are Economics & Social Issues, Finance & Management and Descriptive English. So to give you a helping hand in your studies for the Grade B Exam, we at Oliveboard would be providing you study notes on important topics from the syllabus of Phase 2. In this blog we will cover the topic of National Income Accounting – RBI Grade B Study Notes.

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National Income Accounting – RBI Grade B Study Notes

National Income is one of the most important topics for RBI Grade B or for any other competitive Examination. National Income finds it importance of the various stake holders be it IMF, World Bank or foreign investors or governments.

National Income

Economic Growth – Every country measures its growth and performance using certain indicators and mechanisms. Economic Growth is more of a quantitative concept where the numbers obtained are compared with the previous ones or with the numbers of another country. Economic Growth is the capacity of a nation to produce Goods and Services in a year.

Economic Development – Development differs from Growth. Development is a qualitative concept whereas Growth is a quantitative concept.

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National Income is one of the most followed criteria among almost all the countries in the world.
As an Income of a person or entity can be measured the Income of a Country can also be calculated although it can be more difficult or complex.

National Income is measures in 3 ways.

  1. Product/Output method
  2. Income Method
  3. Expenditure Method

Read a brief introduction about all the three.

1. Product/ Output Method

Here the final value of total goods and services produced in a year are calculated. The value is calculated at market prices.

2. Income Method

The flow of factor incomes is calculated here. The factors of production include Land, Labour, Capital and entrepreneurship.

3. Expenditure Method

The flow of total expenditure is calculated here. It includes Private Expenditure, Government Expenditure, Gross Capital Formation and Net Exports.

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Some Important Definitions

Four ways have been developed to measure National Income GDP, NDP, GNP, NNP. Through product method.

  1. Gross Domestic Product
  2. Net Domestic Product
  3. Gross National Product
  4. Net National Product

1. Gross Domestic Product

It is the monetary value of the final goods and services produced in the territory of the country in a year.  It is used by the IMF and World Bank in comparative analysis of its member Nations.

It is a quantitative concept and here one year in India is calculated from April to March.

2. Net Domestic Product

NDP is the monetary value of the final goods and services produced in the territory of the country in a year minus depreciation. It considers Depreciation. It is the net form of GDP.

  • NDP = GDP- Depreciation
  • NDP is always less than GDP
  • NDP is mostly used for domestic purposes like calculating historic depreciation.
  • As it deals with depreciation it gives to analyse Research and Development.

3. Gross National Product

It takes into account additionally the net income from abroad. Income from Abroad includes Trade balance, interest from external loans, private remittance. The final output from Net income may be positive or negative.

GNP= GDP+ Net Income from Abroad

  • In case of India this component is always negative.
  • Hence GNP= GDP- Net Income from Abroad
  • This is the National Income which IMF considers for ranking economies on Purchasing Power Parity.
  • This indicates both domestic and external factors.

4. Net National Product

It is the GNP after considering Depreciation.

NNP= GNP – Depreciation.

This is the purest form of income of a nation and is called NATIONAL INCOME.

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Per-Capita Income

Per capita income is often used to measure a country’s standard of living. It is usually expressed in terms of a commonly used international currency such as the euro or United States dollar, and is useful because it is widely known, is easily calculable from readily available gross domestic product  and population estimates, and produces a useful statistics for comparison of wealth between sovereign territories.

This helps to ascertain a country’s development status. It is one of the three measures for calculating the Human Development Index of a country.

  • This is the total income divided by the population of the country.
  • When we divide NNP by the Population we get the Per-capita Income.

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Factor Cost & Market Price

The Value of the goods and Services are to be calculated at a cost and Price. National Income is calculated at factor cost and Market Price.

Factor Cost –  Factor cost is the cost of the production of the goods and it is defined as the price of the product at the factory. Hence its is also known as Factor price.

Market Price – This includes taxes and any subsidies by the government to the product.

National Income at Factor cost = National Income at Market Price – Indirect Taxes + Subsidies

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Constant Prices & Current Prices

  • National Income is calculated at Constant and Current Prices.
  • The difference between the two is that current prices take Inflation into consideration.
  • Constant Prices are the prices prevailed in the base year.

Changes in GDP Calculation

Central Statistical Organization (CSO) releases the GDP data every quarter and recently in 2015 some changes have been done.

  • Base year is changed from 2004-05 to 2011-12.
  • National Income is now GDP at Constant Market Price instead of GDP at Constant Factor Cost.
  • Gross value now will be given at basic prices instead of factor cost.

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Sample Questions:

Q. The value of income adjusted for Direct Taxes?

  1. Per capita income
  2. Disposable income
  3. Inflation rate
  4. Real national income

Answer: (2)

Q. What is Real national income?

  1. Nominal national income adjusted for population change
  2. Nominal national income adjusted for unemployment
  3. Nominal national income adjusted for inflation
  4. Nominal national income adjusted for exchange rates

Answer: (3)

Q. Which of the following is/are correct with respect to GDP?

  1. It is value of all final goods & services produced within country over the period of one year
  2. It is value of all final goods & services produced within country and outside country over the period of one year
  3. It is value of all final goods & services produced within country after considering the effect of depreciation
  4. None of these

Answer: (1)

Q. Which of the following is/are correct regarding GNP?

  1. GNP = GDP – Depreciation
  2. GNP = GDP + Taxes – Subsidies
  3. GNP = NNP + Depreciation – Income from Abroad
  4. GNP = GDP + Income from Abroad

Select the correct answer from following options:

  1. Only a
  2. b and c
  3. b, c and d
  4. c and d

Answer: (4)

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Th topic “National Income Accounting – RBI Grade B Study Notes” needs to be read comprehensively because of the depth of the topic. Aspirants always find difficulty in answering the questions as all the terms seem both easy and similar. Hence a thorough revision along with practice of sample questions is the key to answer these questions correctly. RBI has always asked questions from this section both in FM and ESI Papers.

This was all from us in this blog of “National Income Accounting – RBI Grade B Study Notes“. We hope that the you find the information given above in the blog of National Income Accounting – RBI Grade B Study Notes useful. For more study notes for RBI Grade B, stay tuned to Oliveboard.

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