National Income and Its Measurement
The National Income and Its Measurement domain tests aggregate concepts, the three measurement methods and adjustments that avoid double counting. Expect calculations of GDP, GNP, NNP and real versus nominal income.
Core rules and concepts
- GDP at market price is the value of final goods and services produced within a country in a year.
- GNP = GDP + net factor income from abroad (NFIA).
- NNP = GNP − depreciation. National income is usually NNP at factor cost.
- GDP deflator = (nominal GDP ÷ real GDP) × 100.
- Product method: sum value added, not sales. Income method: sum factor incomes. Expenditure method: C + I + G + (X − M).
- Exclude intermediate goods, transfer payments, second-hand sales and financial transactions.
Worked example
GDP at market price is ₹1,000 crore, NFIA is −₹50 crore, depreciation is ₹80 crore, and net indirect taxes are ₹70 crore. GNP = 1,000 + (−50) = ₹950 crore. NNP = 950 − 80 = ₹870 crore. NNP at factor cost = 870 − 70 = ₹800 crore. The sequence is: add NFIA, subtract depreciation, then remove net indirect taxes.
Traps that cost marks
Do not add intermediate goods to GDP; count value added. Do not include pensions unless they are earned by current productive service. Do not confuse real GDP with nominal GDP: real GDP uses constant prices. NFIA can be negative, so GNP may be less than GDP.