National Income and Its Measurement
Domain 7 covers the circular flow, GDP and GNP, nominal and real income, and the output, income, and expenditure methods. The exam tests what is included in national income and how to avoid double counting.
Core rules and concepts
- GDP is the market value of final goods and services produced within a country in a year.
- GNP = GDP + net factor income from abroad; NNP = GNP − depreciation; national income is NNP at factor cost.
- The expenditure method sums C + I + G + (X − M); the income method sums factor incomes; the value-added method sums value added at each stage.
- Transfer payments, intermediate goods, second-hand sales, and financial transactions are excluded.
- Real GDP = nominal GDP ÷ GDP deflator × 100.
Worked example
A farmer sells wheat for ₹500, a miller sells flour for ₹800, and a baker sells bread for ₹1,200. The value added is ₹500 at the farm, ₹300 at the mill, and ₹400 at the bakery, so GDP is ₹1,200 - the value of the final good, not the sum of ₹2,500, which would double count. If nominal GDP is ₹200 crore and the deflator is 125, real GDP is ₹200 ÷ 125 × 100 = ₹160 crore.
Traps that cost marks
Do not add intermediate sales to GDP. Do not include pensions, scholarships, or unemployment allowances as current output. Do not subtract depreciation when moving from GDP to GNP; subtract it when moving from GNP to NNP. Do not mix up the deflator and the CPI.