National income shows the overall economic performance of a country. For a business manager, it is not only a “macro” concept—changes in GDP, inflation and employment directly affect demand, sales, costs, credit, and investment decisions.
This unit is often asked in exams as:
National income broadly means the total value of goods and services produced by a country (and/or total income earned by factors of production) in a given year.
Why it matters:
GDP is the total market value of all final goods and services produced within a country’s borders in a year.
GNP measures output produced by a country’s nationals (residents) wherever they are, in a year.
Relationship:
NNP is GNP after deducting depreciation (wear and tear of capital).
National income is often described as NNP at factor cost, i.e., income earned by factors of production (wages, rent, interest, profit).
Personal income (PI) is the total income actually received by individuals/households in a year.
It differs from national income because:
Disposable personal income (DPI) is the income available to households after paying personal taxes.
This matters for business because DPI strongly influences consumption demand.
Nominal GDP measures output at current year prices. If prices rise, nominal GDP may increase even if output is unchanged.
Real GDP measures output at constant/base year prices. It shows true growth in production.
The GDP deflator is a price index used to convert nominal GDP into real GDP.
Simple interpretation:
National income can be measured in three standard ways. In theory, all three give the same result (with proper data), because output, income and expenditure are linked.
We calculate the value of goods and services produced by each sector and add them, avoiding double counting.
Key idea: Value added = Value of output − Value of intermediate goods.
Where used:
We add factor incomes earned by households and firms:
Where used:
We add total final expenditure on goods and services:
Basic identity (conceptual):
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GDP vs GNP (any three points):
Thus, GDP is location-based, while GNP is nationality/residency-based.
In this method, we compute national output by summing value added at each stage of production.
Key points (any three):
Hence, value added method gives a correct measure of output without counting the same inputs repeatedly.
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National income shows the overall economic performance of a country. For a business manager, it is not only a “macro” concept—changes in GDP, inflation and employment directly affect demand, sales, costs, credit, and investment decisions.
This unit is often asked in exams as:
National income broadly means the total value of goods and services produced by a country (and/or total income earned by factors of production) in a given year.
Why it matters:
GDP is the total market value of all final goods and services produced within a country’s borders in a year.
GNP measures output produced by a country’s nationals (residents) wherever they are, in a year.
Relationship:
NNP is GNP after deducting depreciation (wear and tear of capital).
National income is often described as NNP at factor cost, i.e., income earned by factors of production (wages, rent, interest, profit).
Personal income (PI) is the total income actually received by individuals/households in a year.
It differs from national income because:
Disposable personal income (DPI) is the income available to households after paying personal taxes.
This matters for business because DPI strongly influences consumption demand.
Nominal GDP measures output at current year prices. If prices rise, nominal GDP may increase even if output is unchanged.
Real GDP measures output at constant/base year prices. It shows true growth in production.
The GDP deflator is a price index used to convert nominal GDP into real GDP.
Simple interpretation:
National income can be measured in three standard ways. In theory, all three give the same result (with proper data), because output, income and expenditure are linked.
We calculate the value of goods and services produced by each sector and add them, avoiding double counting.
Key idea: Value added = Value of output − Value of intermediate goods.
Where used:
We add factor incomes earned by households and firms:
Where used:
We add total final expenditure on goods and services:
Basic identity (conceptual):
Where used:
Common practical problems:
These issues can cause national income to be underestimated or inaccurate.
A business cycle is the periodic fluctuation in overall economic activity (output, employment, income, sales) over time.
Main features:
Simple diagram (concept):
Output
^
| Boom
| / \
| / \
| / \
| Recovery \ Recession
| \ \
| \ \
| \ Depression
+----------------------------> Time
Businesses and policymakers use indicators to identify the phase of the cycle.
Note: exact classification can vary by country/agency, but the idea is consistent.
National income and business cycles affect firm decisions in practical ways:
Thus, macro indicators help managers align business plans with economic conditions.
Product method (value added) Income method (factor incomes) Expenditure method (C+I+G+X-M)
\ | /
\ | /
------------------- Same aggregate (GDP/NI) ----------------
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National income (GDP/NI) can be measured using three standard approaches. In principle, all three should give the same aggregate because production creates income and income leads to expenditure.
Comparison table:
Conclusion: Each method uses a different angle, but all aim to measure the same total economic activity.