National Income Accounting – Class 12 (CBSE 2025)
What is National Income?
National Income is the money value of all final goods and services produced by the normal residents of a country during an accounting year.
• Normal residents: Individuals/institutions staying in a country for more than one year.
• Final goods: Goods meant for final use—not for resale or further processing.
Basic Terms You Must Know
Domestic Territory
Includes:
• Political boundaries of India
• Indian embassies, consulates abroad
• Ships and aircraft operated by Indian companies
• Indian military bases abroad
Normal Residents
People or institutions residing in a country for more than one year.
Factor Income
Income earned by providing factor services—wages, rent, interest, and profit.
Domestic Income vs National Income
Concept Full Form Meaning
Domestic Income Net Domestic Product at Factor Cost (NDPFC) Income within domestic territory
National Income Net National Product at Factor Cost (NNPFC) Income by normal residents
Conversion Formula:
“National Income (NNPFC)”=”Domestic Income (NDPFC)”+”Net Factor Income from Abroad (NFIA)”
NFIA = Factor Income from Abroad – Factor Income to Abroad
Market Price vs Factor Cost
Term Meaning
Market Price (MP) Price paid by consumers (includes indirect taxes, excludes subsidies)
Factor Cost (FC) Price received by producers (excludes indirect taxes, includes subsidies)
Conversion:
“Factor Cost (FC)”=”Market Price (MP)”-“Net Indirect Taxes (NIT)”
NIT = Indirect Taxes − Subsidies
Methods of Calculating National Income
A. Value Added Method
“NNPFC”=Σ(“Value Added by all firms”)+”NFIA”-“Depreciation”-“NIT”
Value Added = Value of Output – Intermediate Consumption
B. Income Method
“NNPFC”=”Compensation of Employees”+”Rent”+”Interest”+”Profit”+”Mixed Income”+”NFIA”-“Depreciation”-“NIT”
C. Expenditure Method
“National Income (at MP)”=C+I+G+(X-M)
To convert to FC: Subtract NIT
Where:
C = Consumption by households
I = Investment
G = Government expenditure
X = Exports, M = Imports
Components to Remember for Exams
Included in National Income
• Wages and salaries
• Employer’s contribution to social security
• Rent, interest, profit
• Mixed income of self-employed
• Value added of all final goods
Not included:
• Transfer incomes (pension, scholarship, gifts)
• Windfall gains (lottery, inheritance)
• Intermediate goods
• Sale of second-hand goods
Super-Important Formulas (Most Asked)
“GDPMP”=C+I+G+(X-M)
“NDPFC”=”GDPMP”-“Depreciation”-“NIT”
“NNPFC”=”NDPFC”+”NFIA”
“National Income”=”NNPFC”
Common Mistakes Students Make
• Adding transfer incomes
• Including second-hand goods
• Confusing domestic territory with only political boundary
• Treating profit earned by foreign companies in India as national income (it’s domestic income, not national)
