National Income: The Concepts

Net factor income from abroad (NFIA) is the income Indian residents earn abroad, as wages, interest, rent and profit, minus the income foreigners earn in India. For India NFIA is normally negative, because the profits, interest and dividends flowing out to foreign owners of capital in India exceed the factor income Indian residents earn abroad. So India's GNP is normally a little smaller than its GDP.

A common confusion to name in an answer: remittances sent home by Indian workers abroad are not factor income if the worker is a resident of the foreign country; they are a transfer and appear in the current account of the balance of payments rather than in GNP. Only the earnings of Indian residents count as NFIA.

4. Net National Product (NNP). GNP minus depreciation.

NNP = GNP minus depreciation = NDP plus net factor income from abroad.

NNP at factor cost is what is properly called national income. When a textbook or an examiner says national income without qualification, this is what is meant.

5. Per Capita Income (PCI). National income divided by population.

PCI = National income divided by the population.

It is the standard measure for comparing living standards across countries and across time, and its weakness is that it is an average that says nothing about distribution. India's per capita income can rise in a year in which most households are worse off, if the gains go to a few.

6. Gross Value Added (GVA). The value of output minus the value of intermediate consumption, measured at basic prices. It is the contribution of an industry or a sector to output, before the taxes on products that buyers pay are added.

GVA at basic prices plus product taxes minus product subsidies = GDP at market prices.

Why India uses GVA, which is worth knowing. Since the base year revision of 2011-12, the Ministry of Statistics and Programme Implementation publishes GVA at basic prices by industry of origin as the production side headline, and GDP at market prices as the demand side headline. GVA is the better measure of what producers actually did, because it is not disturbed by a change in tax rates: a rise in the rate of tax on a product raises GDP at market prices without a single extra unit being made. The Economic Survey 2025-26 reports both, and for FY26 the First Advance Estimates of the Ministry of Statistics and Programme Implementation place real GDP growth at 7.4 per cent and real GVA growth at 7.3 per cent.

7. Green GDP. GDP adjusted for the depletion of natural resources and the cost of environmental degradation. It has a chapter of its own, [Green GDP and What GDP Leaves Out], because MU names it separately and because the reason it is hard to compute is itself examinable.

The relations, as a single ladder

This is the block an examiner most often asks to be reproduced, and it should be learned as a chain.

And along the other axis:

A worked chain with round numbers, so the arithmetic is visible.

Suppose for a year: GDP at market price 300 lakh crore; depreciation 30; net factor income from abroad minus 4; indirect taxes 40; subsidies 15; population 145 crore.

• NDP at market price = 300 minus 30 = 270
• NNP at market price = 270 plus (minus 4) = 266
• Net indirect taxes = 40 minus 15 = 25
• NNP at factor cost, national income = 266 minus 25 = 241 lakh crore
• Per capita income = 241 lakh crore divided by 145 crore people = about 1.66 lakh rupees a year

Three more distinctions that carry marks

Nominal against real. Nominal GDP, also called GDP at current prices, values output at the prices of the year being measured. Real GDP, or GDP at constant prices, values it at the prices of a fixed base year, which for India is 2011-12. Nominal GDP rises when prices rise even if nothing more is produced, so only real GDP measures growth. The ratio of the two, multiplied by 100, is the GDP deflator, a measure of the general price level covering the whole economy, unlike the consumer price index which covers a basket.

Market price against factor cost. The difference is net indirect taxes. A shirt selling for 800 with 100 of tax in it contributes 800 to GDP at market price and 700 to GDP at factor cost. Factor cost is what the factors of production actually received.

Domestic against national. Domestic is a boundary of territory. National is a boundary of residence. Toyota's Bengaluru plant is in India's GDP and not in its GNP to the extent the profit goes abroad; an Indian resident's earnings from a business in Dubai are in India's GNP and not in its GDP.

A worked example: Aisha's bakery and the boundary questions

The facts. Aisha runs a bakery in Pune. In a year she buys 12 lakh rupees of flour, sugar and fuel, pays 6 lakh in wages and 2 lakh in rent, spends 1 lakh on repairs to an oven that is wearing out, and sells bread for 26 lakh. She pays 2 lakh of goods and services tax on the sales.

Her gross value added. Output 26 lakh minus intermediate consumption 12 lakh equals 14 lakh rupees of gross value added. Note that the flour is not counted separately: it appears in the miller's value added, and counting it again here would be double counting.

Where the tax sits. If the 26 lakh includes 2 lakh of tax, then at basic prices her output is 24 lakh and her GVA at basic prices is 12 lakh. The 2 lakh appears in GDP at market prices as a product tax.

Net value added. 14 lakh gross minus 1 lakh of depreciation on the oven equals 13 lakh net value added.

How that 13 lakh is distributed. 6 lakh in wages, 2 lakh in rent, and the remainder as interest and Aisha's own profit. That is the income method seeing the same 13 lakh, which is the circular flow of the previous chapter in one small business.

The boundary questions.

• If Aisha is an Indian resident, all of it is in both GDP and GNP.
• If the bakery were owned by a company registered in Singapore, the value added would still be in India's GDP, because it was produced here, but the profit repatriated would be deducted in arriving at India's GNP.
• If Aisha bakes bread for her own family and does not sell it, it is not counted at all, because it is not marketed. That is the non monetised output problem of [The Difficulties of Measuring National Income in India].

What beginners get wrong

"GDP counts everything produced." It counts final goods and services produced for the market. Household work, subsistence output and the black economy are largely outside it.

"GNP is bigger than GDP." Not for India. India's net factor income from abroad is normally negative, so GNP is normally a little smaller than GDP.

"Rising GDP means people are better off." GDP can rise because of activity nobody wants: an epidemic raises medical spending; an accident raises repair spending; cutting a forest raises output and destroys an asset. That last point is the whole argument of [Green GDP and What GDP Leaves Out].

"National income means GDP." Strictly, national income is NNP at factor cost. In casual use GDP has taken over the phrase, but an examination answer should define it correctly.

"Transfer payments are income for national income purposes." A pension, a scholarship or an unemployment benefit is a transfer, not a payment for current production, and is excluded. So is the sale of a second hand good, which was counted in the year it was made, and so is a purely financial transaction such as buying a share.

Limits of these aggregates

They measure quantity, not welfare. A country can raise its GDP by producing more weapons and less food.

They ignore distribution. Per capita income is an average and can conceal deepening poverty.

They ignore what is not sold. Unpaid domestic work, overwhelmingly done by women, is a large part of real production in India and appears nowhere.

They ignore quality change. A phone today and a phone in 2011 are counted with the same rupee, though they are not the same thing.

They ignore leisure and environment. More output bought with longer hours and dirtier air is recorded as an unqualified gain.

Quick revision

1. The four choices that generate every aggregate: domestic or national; gross or net; market price, basic price or factor cost; total or per head.
2. GDP: final goods and services produced within the territory, before depreciation. NDP = GDP minus depreciation.
3. GNP = GDP plus net factor income from abroad. For India NFIA is normally negative, so GNP is a little below GDP.
4. NNP = GNP minus depreciation. NNP at factor cost IS national income.
5. PCI = national income divided by population.
6. GVA = output minus intermediate consumption, at basic prices. GDP at market price = GVA at basic prices plus product taxes minus product subsidies. India publishes GVA by industry of origin as the production side headline since the 2011-12 base revision.
7. Nominal against real: real is at constant prices, base year 2011-12 for India, and only real GDP measures growth. GDP deflator = nominal divided by real, times 100.
8. Excluded: transfer payments, second hand sales, purely financial transactions, and non marketed output.
9. India, FY26 First Advance Estimates: real GDP growth 7.4 per cent, real GVA growth 7.3 per cent, MoSPI, reported in the Economic Survey 2025-26.

Test yourself

1. Define GDP, GNP, NDP and NNP and state the relations between them. GDP is the money value of all final goods and services produced within the geographical boundary of a country during an accounting year, before deducting depreciation. GNP is the same measured for the residents of the country wherever they are, so GNP equals GDP plus net factor income from abroad. NDP is GDP minus depreciation, and NNP is GNP minus depreciation, which is also NDP plus net factor income from abroad. NNP at factor cost is what is properly meant by national income.

2. What is gross value added, and why does India publish it? Gross value added is the value of an industry's output minus the value of the intermediate goods and services it used up, measured at basic prices. GDP at market prices equals GVA at basic prices plus taxes on products minus subsidies on products. India has published GVA at basic prices by industry of origin as the production side headline since the base year revision to 2011-12, because GVA measures what producers actually did without being disturbed by changes in tax and subsidy rates, which can raise GDP at market prices without any change in output.

3. Distinguish nominal from real GDP and define the GDP deflator. Nominal GDP, or GDP at current prices, values the year's output at that year's prices, so it rises when prices rise even if output does not. Real GDP, or GDP at constant prices, values the same output at the prices of a fixed base year, which for India is 2011-12, so changes in it reflect changes in quantity alone. Only real GDP measures growth. The GDP deflator is nominal GDP divided by real GDP multiplied by one hundred, and it is a price index covering the whole economy rather than a fixed consumer basket.

4. Why is India's GNP usually smaller than its GDP? Because India's net factor income from abroad is normally negative. Foreign owners of capital operating in India earn more in profit, interest and dividends than Indian residents earn abroad in wages, rent, interest and profit, so the outflow exceeds the inflow. Since GNP equals GDP plus net factor income from abroad, a negative figure makes GNP a little smaller than GDP. Remittances from Indian workers settled abroad do not correct this, since a worker who is a resident of another country sends a transfer rather than factor income.

5. From the following, calculate national income and per capita income. GDP at market price 300; depreciation 30; net factor income from abroad minus 4; indirect taxes 40; subsidies 15; population 145 crore, all values in lakh crore rupees. NDP at market price is 300 minus 30, that is 270. NNP at market price is 270 plus minus 4, that is 266. Net indirect taxes are 40 minus 15, that is 25. National income, being NNP at factor cost, is 266 minus 25, that is 241 lakh crore rupees. Per capita income is 241 lakh crore divided by 145 crore, which is approximately 1.66 lakh rupees a year.

6. What is excluded from national income, and why? Transfer payments such as pensions, scholarships and subsidies to households, because they are not payments for current production. Sales of second hand goods, because the goods were counted in the year they were produced and counting them again would be duplication, although the commission earned by the dealer is counted as a current service. Purely financial transactions such as the purchase of shares or bonds, since no good or service is produced. The value of intermediate goods, because it is already contained in the value of the final good. And most non marketed output, including unpaid domestic work and subsistence production, because there is no price at which to value it.

7. "Per capita income is a good measure of the standard of living." Discuss. It is a useful first approximation and it is the figure used for international comparison, since it adjusts total income for the size of the population. But it is an average and says nothing about distribution, so it can rise while most households become poorer. It is measured in money and therefore ignores changes in the price level unless real figures are used, and it ignores differences in the cost of living between countries unless purchasing power parity is used. It also excludes non marketed production, unpaid work and leisure, and takes no account of the quality of the environment, of health or of education. Composite measures such as the human development index were designed to answer exactly these limitations.