Determination of National Income for CA Foundation
How a country's income is measured, how the aggregates relate to each other, and how the Keynesian model explains the level of income and the multiplier.
Business EconomicsPaper 414 MCQs2 lessons2 flashcards3 memory tricks
Practise Determination of National Income free
What you'll learn
- National income aggregates and methods
Move between GDP, GNP, NDP and NNP at market prices and factor cost, and know the three methods. - Keynesian income determination and the multiplier
Use the consumption function, MPC, MPS and the multiplier.
Key formulas
| Gross to net | Net = Gross − depreciation |
|---|---|
| Domestic to national | National = Domestic + net factor income from abroad (NFIA) |
| Market price to factor cost | FC = MP − (indirect taxes − subsidies) |
| National income | NNP at factor cost |
| Disposable income | Personal income − direct taxes |
| Consumption function | C = a + bY (b = MPC) |
| Propensities | MPC + MPS = 1 |
| Investment multiplier | k = 1/(1 − MPC) = 1/MPS |
Concepts explained
National income aggregates and conversions
Three switches convert one aggregate into another: gross ↔ net (depreciation), domestic ↔ national (net factor income from abroad), market price ↔ factor cost (net indirect taxes).
What it means
- Net = Gross − depreciation.
- National = Domestic + NFIA.
- Factor cost = Market price − (indirect taxes − subsidies).
- National income = NNP at factor cost; GDP deflator = nominal ÷ real × 100.
- GDP_MP 1,000; depreciation 100; NFIA 20; net indirect taxes 70
- NNP_FC = 1,000 − 100 + 20 − 70
Answer: ₹850 crore
- Nominal 1,200, real 1,000
Answer: 120
Related terms
- NFIA: factor income earned by residents abroad minus that earned by non-residents here
- Real GDP: output valued at base-year prices
Exam tip: Write the three switches in a line before calculating; most errors are a missed switch.
Methods of measuring national income
National income can be measured by adding value added (product method), factor incomes (income method) or final expenditure (expenditure method); all three give the same answer.
What it means
- Product method: sum of value added at each stage; avoids double counting.
- Income method: wages + rent + interest + profit + mixed income.
- Expenditure method: C + I + G + (X − M).
- Excluded: transfer payments, second-hand goods, purely financial transactions, illegal activities.
- Farmer sells wheat ₹50, miller sells flour ₹80, baker sells bread ₹120
Answer: Value added = 50 + 30 + 40 = ₹120 (the final good's value)
- Old-age pension
Answer: Transfer payment: excluded
Related terms
- Intermediate goods: used up in producing other goods
- Final goods: for consumption or investment
Exam tip: Value added totals equal the value of final goods: a quick check on your answer.
Consumption function and the multiplier
Each extra rupee of income is partly spent (MPC) and partly saved (MPS), and spending becomes someone else's income: so an injection raises income by a multiple, k = 1/MPS.
What it means
- MPC + MPS = 1; APC + APS = 1.
- k = 1/(1 − MPC); ΔY = k × ΔI.
- Equilibrium where AD = AS, i.e. planned saving = planned investment.
- Paradox of thrift: a general rise in saving can lower income.
- MPC = 0.75
- k = 1/0.25
Answer: 4
- C = 100 + 0.8Y, I = 200
- 0.2Y = 300
Answer: Y = 1,500
Related terms
- Leakages: saving, taxes and imports reduce the multiplier
- Inflationary gap: AD above the full-employment level
Exam tip: Multiplier is 1/MPS, not 1/MPC.
Memory tricks
Gross − dep = net; domestic + NFIA = national; MP − NIT = FC. NI = NNP at FC.
k = 1/(1 − MPC) = 1/MPS; MPC 0.8 → 5, MPC 0.75 → 4.
Transfer payments are excluded from national income.
Try 3 CA Foundation-style questions
Q1. Net National Product at factor cost is also known as
- gross domestic product
- personal income
- national income
- disposable income
Show answer
Answer: (3) national income
NNP at factor cost (NNP_FC) is the standard measure called national income.
Q2. Personal disposable income equals
- national income plus transfers
- personal income plus indirect taxes
- personal income minus direct taxes paid by households
- GDP minus depreciation
Show answer
Answer: (3) personal income minus direct taxes paid by households
Disposable income is what households can actually spend or save after paying direct taxes such as income tax.
Q3. The value added method of measuring national income avoids
- counting of final goods
- double counting of intermediate goods
- counting depreciation
- counting exports
Show answer
Answer: (2) double counting of intermediate goods
Only the value added at each stage is counted, so the value of intermediate goods isn't counted again.
Practise all 14 questions Free · explanations for every option · see where you go wrong