Concepts of national income: GDP, GNP, NNP, NI, PI and DPI
Economic Theory and Public Finance · Unit I · Topic 2 of 17 · 5 min read
On this page
Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Gross Domestic Product (GDP)
GDP is the market value of all final goods and services produced within the domestic territory of a country in a year, whoever produces them. Output of a foreign-owned factory in Bengaluru is part of India’s GDP; income of an Indian engineer working in Dubai is not.
Domestic territory includes the political frontier, territorial waters, ships and aircraft operated by residents, fishing vessels and oil rigs in the exclusive economic zone, and Indian embassies abroad. Foreign embassies in India are excluded.
2. Gross National Product (GNP)
GNP = GDP + Net Factor Income from Abroad (NFIA)
NFIA is factor income earned by residents abroad (wages, interest, profits, rent) minus factor income earned by non-residents in the country. GNP is therefore based on residents, not territory. For India NFIA is usually negative, because interest and profits paid to foreign investors exceed factor income received, so GNP is slightly below GDP. Remittances by Indians who have settled abroad are current transfers, not factor income, and so do not enter NFIA.
3. Net National Product (NNP)
NNP = GNP − Depreciation
Depreciation (consumption of fixed capital) is the wear and tear and obsolescence of machinery, buildings and equipment during the year. NNP is the output available for consumption and net addition to capital without running down the capital stock. It is a better measure of the year’s performance than GNP, but depreciation is hard to estimate, which is why GDP is the headline figure.
4. Market price and factor cost
Market price includes indirect taxes and is reduced by subsidies. Factor cost is what the factors of production actually receive. So:
Factor cost = Market price − Indirect taxes + Subsidies, that is, market price minus net indirect taxes.
Current Indian practice reports Gross Value Added (GVA) at basic prices by sector and then GDP = GVA + product taxes − product subsidies. Basic prices sit between factor cost and market price because they include production taxes (such as land revenue) that are not linked to the quantity sold.
5. National Income (NI)
NI = NNP at factor cost = NNP at market price − Net indirect taxes
This is national income in the strict sense: the sum of factor incomes (wages, rent, interest, profit, mixed income) earned by residents in a year. When the question says “NNP at factor cost and NI”, the answer is that they are the same thing, approached from the product side and the income side.
6. Personal Income (PI)
Not all national income reaches persons, and persons receive some income that is not earned in production.
PI = NI − Undistributed corporate profits − Corporate tax − Social security contributions + Transfer payments
Transfer payments include old-age pensions, unemployment allowances, scholarships and interest on public debt treated as a transfer.
7. Disposable Personal Income (DPI)
DPI = PI − Personal direct taxes (income tax, fines and fees paid to government)
DPI is what households can actually spend or save: DPI = Consumption + Saving. It is the income variable in Keynes’s consumption function.
8. Related measures
- Per capita income = National income ÷ population. The common rough index of living standards; it hides distribution.
- Nominal and real income. Nominal income is valued at current prices; real income at constant prices of a base year. Real GDP = Nominal GDP ÷ GDP deflator × 100. Only real figures show whether output has grown.
- Green GDP adjusts for depletion of natural resources and environmental damage. It is discussed but not officially compiled as a headline series in India.
9. A worked numerical
From the following data (Rs. crore) calculate GNP, NNP at market price, national income, personal income and disposable personal income.
| Item | Rs. crore |
|---|---|
| GDP at market prices | 10,000 |
| Net factor income from abroad | −200 |
| Depreciation | 800 |
| Indirect taxes | 1,100 |
| Subsidies | 300 |
| Undistributed corporate profits | 400 |
| Corporate tax | 300 |
| Social security contributions | 200 |
| Transfer payments | 500 |
| Personal direct taxes | 600 |
| Step | Working | Rs. crore |
|---|---|---|
| GNP at market prices | 10,000 − 200 | 9,800 |
| NNP at market prices | 9,800 − 800 | 9,000 |
| NI (NNP at factor cost) | 9,000 − 1,100 + 300 | 8,200 |
| Personal income | 8,200 − 400 − 300 − 200 + 500 | 7,800 |
| Disposable personal income | 7,800 − 600 | 7,200 |
If households consume Rs. 6,500 crore, personal saving is 7,200 − 6,500 = Rs. 700 crore.
How this is examined
As Q.9(a) “Concepts of national income” (January 2026, 100-mark) or the June 2025 essay “Define national income? Explain concepts of national income.” Write each concept as a one-line formula followed by two lines of explanation, in the order GDP, GNP, NNP, NNP at factor cost, PI, DPI, then per capita and real income. A short flow chart (GDP → +NFIA → GNP → −Dep → NNP → −NIT → NI → adjustments → PI → −direct taxes → DPI) is quick to draw and examiners like it. The methods of estimation are in the previous note.
Now try the real questions: Economic Theory and Public Finance past question papers.