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Class 12 National Income Accounting: cheat sheet
CBSE Social Science. Measuring an economy’s output: final and intermediate goods, value added, the three methods, GDP, GNP, NNP and national income, real and nominal GDP, the deflator and the CPI.
Key ideas
- Only final goods are counted in GDP; counting intermediate goods too would count their value twice.
- Value added is the value of output minus the value of intermediate goods used, and adding every firm’s value added gives GDP.
- GDP can be measured by the product (value added), expenditure and income methods, which give the same total.
- Income is a flow (over a period); capital and wealth are stocks (at a point of time).
- Depreciation is the wear and tear of capital; net investment is gross investment minus depreciation.
- Nominal GDP uses current prices; real GDP uses base-year prices and shows changes in output only.
- GDP is not a full measure of welfare: it ignores how income is shared, unpaid work such as housework, and externalities such as pollution.
Remember
| Expenditure method | GDP = C + I + G + X − M |
| GNP | GDP + net factor income from abroad |
| NNP at market prices | GNP − depreciation |
| National income (NNP at factor cost) | NNP at market prices − net indirect taxes |
| Value added | value of output − intermediate goods; the sum over all stages = value of the final good |
| GDP deflator | nominal GDP ÷ real GDP × 100 |
| Growth rate of real GDP | (new − old) ÷ old × 100 |
| CPI | cost of the basket now ÷ cost in the base year × 100 |
Watch out
- Adding the sales at every stage (double counting) instead of only the final value.
- Adding imports in the expenditure method: they are subtracted.
- Subtracting depreciation to go from GDP to GNP (that step adds net factor income from abroad).
- Using nominal GDP to measure growth in output when prices have changed.
Worked example
Suppose GDP at market prices is ₹19,690 crore, net factor income from abroad ₹190 crore, depreciation ₹740 crore and net indirect taxes ₹800 crore. Find GNP at market prices, NNP at market prices and national income.
Working: GNP = GDP + NFIA; NNP = GNP − dep; NI = NNP − net indirect taxes
Answer: GNP ₹19,880 crore, NNP ₹19,140 crore, NI ₹18,340 crore
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