National Income Accounting

Why this chapter matters for UPSC: "National Income Accounting" is Chapter 2 of NCERT's Introductory Macroeconomics (Reprint 2026-27). It builds the measuring kit that every GS3 economy answer uses: final and intermediate goods, stocks and flows, the circular flow, the three methods of calculating GDP, the switch from factor cost to basic prices to market prices, the ladder from GDP down to personal disposable income, real GDP and the price indices, and the limits of GDP as a measure of welfare. This page follows NCERT's text in order, works every numerical example and all twelve exercises, corrects the two appendix tables, and sets India's own national accounts beside the book, each figure with its date and source. India's figures come from MoSPI's National Accounts Statistics 2026 (31 August 2026), the latest official vintage for 2025-26.

🧠 First Principles — Read This First

One flow, measured at three points. In NCERT's simple economy, households sell the services of land, labour, capital and entrepreneurship to firms, and spend all their income on the firms' output. The same money goes round and round. Measure it where households spend (expenditure method), where firms produce (product method) or where firms pay the factors (income method), and you get the same number. "No matter how complicated an economic system may be, the annual production of goods and services estimated through each of the three methods is the same."

Count contributions, not turnover. If you add the value of wheat to the value of the bread made from it, the wheat is counted twice. The product method therefore adds only each producer's value added: output minus the intermediate goods used up. Whether a good is final or intermediate depends on its use, not on what it is: tea leaves bought for home are final; the same leaves bought by a restaurant are an input.

Every aggregate is GDP with three switches. Move from domestic territory to the nation's normal residents (add net factor income from abroad: GDP to GNP). Move from gross to net (subtract depreciation: GNP to NNP). Move from market prices to factor cost (subtract indirect taxes, add subsidies: NNP at market prices to National Income). India now publishes a halfway house between the last two, basic prices, which NCERT's section 2.2.4 explains.

PART 1 — Quick Reference

The Chapter at a Glance

India's National Accounts, Dated (record, not NCERT)

All figures are for 2025-26 at current prices unless marked, from MoSPI's National Accounts Statistics 2026 (NAS 2026, released 31 August 2026), Statement 8.17.1. They are provisional estimates on the new series with base year 2022-23. Rows marked "derived" are arithmetic on MoSPI's figures, not published numbers.

How the 2025-26 Estimate Has Moved

National accounts are revised in a fixed sequence, and each release replaces the last. Quote the latest and name it.

The same NAS 2026 release labels 2024-25 a First Revised Estimate; 2025-26 will move to that status in a later release. Real growth was revised up and nominal GDP down between June and August because the new price indices lowered the deflator. The Q1 2026-27 estimate, released the same day, put April-June 2026 growth at 7.8 per cent: a different period, not the same number twice.

PART 2 — Concepts & Narrative

2.1 Some Basic Concepts of Macroeconomics

Consumption goods, capital goods, consumer durables. Final goods split into consumption goods (food, clothing, services such as recreation), consumed when the final consumer buys them, and capital goods (tools, implements, machines), which are not consumed in production, serve over many cycles and undergo gradual wear and tear. Durable goods bought by consumers, such as television sets, automobiles or home computers, last a long time and wear out slowly like capital goods; NCERT calls them consumer durables.

Intermediate goods. Goods used up in producing other goods (steel sheets used for making automobiles, copper used for making utensils) are intermediate goods. They are not counted separately in final output because their value is already inside the value of the final good; counting them again is double counting.

Money as the measuring rod. Metres of cloth, tonnes of rice and numbers of automobiles cannot be added together. "Our common measuring rod is money": since each commodity is produced for sale, the sum of their money values measures final output.

Stocks and flows. Income, output and profits make sense only for a stated period: "Flows are defined over a period of time." Capital goods and consumer durables last across periods: "Stocks are defined at a particular point of time." A change in a stock over a period (machines added this year) is a flow. NCERT's example: water flowing into a tank from a tap per minute is a flow; the water in the tank at a moment is a stock.

Gross and net investment. The part of final output that consists of capital goods is gross investment. Part of it only replaces worn-out capital, so:

Net investment = Gross investment − Depreciation

Footnote 1 matters for answers: economists' investment is not buying shares, property or an insurance policy. "Investment for us is always capital formation, a gross or net addition to capital stock."

Depreciation. A machine with a twenty-year life is treated as if one twentieth of its value is used up each year: depreciation is "an annual allowance for wear and tear" of a capital good, its cost divided by the years of its useful life. It excludes sudden destruction by accidents or calamities (footnote 2) and assumes a constant rate on original value (footnote 3). "Notice here that depreciation is an accounting concept": no spending need occur in a given year, but across thousands of firms actual replacement spending roughly matches the depreciation accounted for.

The trade-off and time. In any one year, more capital goods means fewer consumer goods. But capital raises labour's productivity (a weaver once took months for a sari; machines make thousands of garments a day), so more capital goods now means more consumer goods later. There is no contradiction: "What is important here is the element of time."

2.2 Circular Flow of Income and Methods of Calculating National Income

The four factors and their rewards. NCERT lists four kinds of contribution to production: human labour (wage), capital (interest), entrepreneurship (profit) and fixed natural resources called land (rent). In the simple economy households do not save, there is no government and no foreign trade, so households spend all their factor income on the firms' output. "There is no leakage from the system."

Fig. 2.1 and the three points. The two upper arrows are the goods market (spending flows from households to firms; goods and services flow back). The two lower arrows are the factor market (factor services flow to firms; factor payments flow back). Measure the flow:

Spending more raises income. If households decide to spend more (borrowing to do so), firms produce more and must pay the factors more, by exactly the value of the extra output, so households end up with the income to support the extra spending. "This may seem a little paradoxical at first." It shows how one household (whose spending is limited by its own income) differs from the economy as a whole. Chapter 4 develops this as the multiplier.

A macroeconomic model. A story describing an imaginary economy is "a macroeconomic model": it highlights essential features and leaves out detail, and the economist's job is to judge which model fits which situation. Adding savings does not change the conclusion that the three methods give the same total.

2.2.1 The Product or Value Added Method

Wheat and bread. Farmers grow wheat worth Rs 100 using only labour, and sell Rs 50 of it to bakers, who use it all to make bread worth Rs 200. Adding Rs 100 and Rs 200 gives Rs 300, but that counts the Rs 50 of wheat twice: once as wheat and again inside the bread. The bakers' own contribution is Rs 200 − Rs 50 = Rs 150, so the economy's output is Rs 100 + Rs 150 = Rs 250.

Table 2.1: Production, Intermediate Goods and Value Added (NCERT)

Value added = value of production of the firm − value of intermediate goods used by the firm. It is distributed among the four factors as wages, interest, profits and rents, and it is a flow.

Gross and net value added. Depreciation is also called consumption of fixed capital. Including it gives gross value added; deducting it gives net value added. A firm producing Rs 100 a year, using Rs 20 of intermediate goods and Rs 10 of capital consumption, has GVA = Rs 80 and NVA = Rs 70.

Inventories. Unsold finished goods, semi-finished goods or raw materials carried from one year to the next are inventory. "Inventory is a stock variable", while the change in inventories over a year is a flow:

Change in inventories of a firm during a year ≡ Production of the firm during the year − Sale of the firm during the year

Since production ≡ value added + intermediate goods used, change in inventories ≡ value added + intermediate goods used − sales. Example: opening stock Rs 100, production Rs 1,000, sales Rs 800, so the change in inventories is Rs 200 and closing stock is Rs 300. NCERT notes the sign "≡" marks an identity, true for all values (2 + 2 ≡ 4), unlike an equation (2 × x = 4 holds only for x = 2).

Inventories are investment. Inventories are treated as capital, and an addition to capital is investment. NCERT names three categories of investment: the rise in inventories; fixed business investment (machinery, factory buildings, equipment); and residential investment (housing).

Planned and unplanned inventory change (NCERT's shirt examples). A firm starts the year with 100 shirts and expects to sell 1,000.

Equations. Gross value added of firm i:

GVA_i ≡ Sales (V_i) + Change in inventories (A_i) − Intermediate goods used (Z_i) … (2.1)

Sales include exports. Net value added of firm i ≡ GVA_i − depreciation D_i. Summing over all N firms:

GDP ≡ GVA₁ + GVA₂ + … + GVA_N = Σ GVA_i … (2.2)

NCERT's box on the summation sign Σ gives three students' pocket money as Rs 200, 250 and 350 and then writes the third value as 300; use one figure consistently (the point is only the notation).

India's product side, 2025-26. MoSPI groups GVA into three sectors (NAS 2026, Statement 8.17.2; shares of GVA at basic prices, current prices, derived):

2.2.2 Expenditure Method

In the wheat-bread economy, the Rs 50 of wheat bought by bakers is intermediate, so final expenditure is Rs 200 (received by bakers) + Rs 50 (received by farmers for wheat sold for final use) = Rs 250, the same as the product method.

Firm i receives four kinds of final expenditure: consumption C_i (mostly by households), investment I_i (other firms buying its capital goods), government G_i and exports X_i. Investment is included while intermediate purchases are not, because capital goods stay with the firm while intermediate goods are used up. NCERT is explicit that "the final expenditure incurred by the government includes both the consumption and investment expenditure".

Part of the economy's aggregate C, I and G is spent on imports (C_m, I_m, G_m), so firms at home receive C − C_m, I − I_m and G − G_m. With M ≡ C_m + I_m + G_m:

GDP ≡ C + I + G + X − M … (2.4)

"Out of the five variables on the right hand side, investment expenditure, I, is the most unstable."

India's expenditure side, 2025-26 (NAS 2026, current prices, shares of GDP). MoSPI splits the same identity into more parts:

Two differences from the book matter. NCERT's G includes government investment, but MoSPI's GFCE is consumption only; government capital formation sits inside GFCF. And MoSPI shows a line for discrepancies: India's GDP is estimated from the production side (GVA + net product taxes), the expenditure components are estimated from separate data, and the gap is printed rather than hidden. The three methods agree in theory; in measurement they agree only up to this line.

2.2.3 Income Method

Firms' revenues are paid out to the factors as wages and salaries, profits, interest and rents. With W, P, In and R for the economy's wages, gross profits, interest and rents received:

GDP ≡ W + P + In + R … (2.5)

Taking the three methods together:

GDP ≡ Σ GVA_i ≡ C + I + G + X − M ≡ W + P + In + R … (2.6)

In identity 2.6, "I stands for sum total of both planned and unplanned investments undertaken by the firms": an unsold shirt is counted as the firm's investment in its own inventory, which is why expenditure always equals output after the fact.

Firms A and B: one GDP, three ways (NCERT). Firm A uses no raw material and grows cotton worth Rs 50, which it sells to firm B. B makes cloth and sells it to consumers for Rs 200. A pays Rs 20 in wages and keeps Rs 30 as profit; B pays Rs 60 in wages and keeps Rs 90.

Table 2.2: Distribution of GDP for firms A and B

Table 2.3: Distribution of factor incomes of firms A and B

• Product method (phase of production): 50 + 150 = Rs 200.
• Expenditure method (phase of disposition): final expenditure is consumers' spending on cloth = Rs 200.
• Income method (phase of distribution): wages 80 + profits 120 = Rs 200.

NCERT's footnote 4 adds that rent and interest were left out for simplicity: after wages, the rest of value added is split among rent, interest and profits, "together called operating surplus".

2.2.4 Factor Cost, Basic Prices and Market Prices

India long highlighted GDP at factor cost. "In its revision in January 2015 the CSO replaced GDP at factor cost with the GVA at basic prices, and the GDP at market prices, which is now called only GDP, is now the most highlighted measure." (The CSO's national-accounts work is now done by MoSPI's National Statistics Office, the name on its 2026 press notes.)

The distinction rests on two kinds of indirect tax:

"Factor cost includes only the payment to factors of production, it does not include any tax." Market prices include all indirect taxes less subsidies. "The basic prices lie in between": they include net production taxes but not net product taxes. So:

GVA at factor cost + Net production taxes = GVA at basic prices

GVA at basic prices + Net product taxes = GVA at market prices (= GDP)

India, 2025-26 (NAS 2026, current prices): GVA at basic prices ₹313.95 lakh crore + net taxes on products ₹31.42 lakh crore = GDP ₹345.37 lakh crore. MoSPI publishes these two steps; it does not publish GVA at factor cost in this statement.

2.3 Some Macroeconomic Identities

GNP. GDP counts production within the domestic territory, but not all of it accrues to the country's own people. NCERT's example: an Indian citizen working in Saudi Arabia earns a wage that is part of Saudi GDP, "But legally speaking, she is an Indian." Symmetrically, the profits of the Korean-owned Hyundai car factory in India must be subtracted. So:

GNP ≡ GDP + Net factor income from abroad (NFIA)

NFIA = factor income earned by domestic factors employed in the rest of the world − factor income earned by the rest of the world's factors employed in the domestic economy

Residence, not passport. NCERT's own Table 2.4 defines GNP by the "normal residents" of India, "whether they are located within the national boundary or abroad". National accountants classify a worker by where she normally lives and works, so an Indian who has settled in Saudi Arabia is a resident there. The money she sends home does not enter India's NFIA; it is a current transfer. RBI's balance-of-payments releases record "Personal transfer receipts under secondary income account, mainly representing remittances by Indians employed overseas".

India's NFIA is negative. In 2025-26 India's GNI (₹341.06 lakh crore) was below its GDP (₹345.37 lakh crore), so NFIA was about −₹4.31 lakh crore (NAS 2026, derived). The balance of payments shows why: on the primary income account (interest, profits, dividends and compensation of employees, the factor incomes that make up NFIA) India received US$55.0 billion and paid US$103.2 billion in 2025-26, a net outflow of US$48.2 billion; NCERT's Hyundai example is one part of it. Remittances sit in secondary income, where India's net receipts were US$143.6 billion (RBI, BoP release of 8 June 2026). In April-June 2026, net primary income was −US$10.5 billion and personal transfers US$42.9 billion (RBI, 1 September 2026). Remittances therefore lift India's disposable income (GNDI exceeds GNI by about ₹11.97 lakh crore), not its GNP.

NNP. "Naturally, depreciation does not become part of anybody's income."

NNP ≡ GNP − Depreciation

All of these are at market prices.

National Income. Market prices include indirect taxes, which go to the government, and are lowered by subsidies ("in India petrol is heavily taxed by the government, whereas cooking gas is subsidised"). Deducting net indirect taxes gives the part of NNP that accrues to the factors:

NNP at factor cost ≡ National Income (NI) ≡ NNP at market prices − (Indirect taxes − Subsidies)

Personal Income (PI). The part of NI received by households:

PI ≡ NI − Undistributed profits − Net interest payments made by households − Corporate tax + Transfer payments to the households from the government and firms

Undistributed profits and corporate tax never reach households; households receive interest on loans they made to firms and government and pay interest on what they borrowed, so the net payment is deducted; pensions, scholarships and prizes are added.

Personal Disposable Income (PDI).

PDI ≡ PI − Personal tax payments − Non-tax payments

Non-tax payments are items such as fines. "Personal Disposable Income is the part of the aggregate income which belongs to the households"; they consume part of it and save the rest.

National Disposable Income and Private Income. Two more aggregates used in India:

• National Disposable Income = NNP at market prices + other current transfers from the rest of the world (gifts, aid and the like). It shows the most goods and services the economy has at its disposal.
• Private Income = factor income from net domestic product accruing to the private sector + national debt interest + net factor income from abroad + current transfers from government + other net transfers from the rest of the world.

Table 2.4: Basic National Income Aggregates (NCERT, condensed). NCERT's footnote 5 says India moved to these aggregates following the UN's System of National Accounts 2008.

The prose in NCERT's box for item 2 says "less net product taxes" while its formula subtracts all net indirect taxes (NIT); the formula, which matches item 4, is the one to learn.

India's new series. MoSPI released the new series of national accounts, with base year 2022-23 replacing 2011-12, on 27 February 2026. It chose 2022-23 because it "represents a recent normal year (after COVID)" with robust data. Among the changes it lists: double deflation in agriculture and manufacturing (output and inputs deflated separately) with volume or single extrapolation elsewhere; better coverage of the unincorporated sector through annual surveys; proportional Denton benchmarking for quarterly estimates; PFCE on the COICOP 2018 classification; wider use of GST and other administrative data; and less discrepancy through integration with Supply and Use Tables. From 31 August 2026 manufacturing is deflated with a new series of output Producer Price Indices (base 2022-23).

2.4 Nominal and Real GDP

If GDP doubles, either output doubled or only prices did. Nominal GDP values output at current prices; real GDP values it at a constant set of base-year prices, so a change in real GDP is a change in volume.

NCERT's bread example. A country produces only bread. In 2000 it made 100 units at Rs 10 (GDP Rs 1,000). In 2001 it made 110 units at Rs 15.

• Nominal GDP 2001 = 110 × Rs 15 = Rs 1,650
• Real GDP 2001 at 2000 prices (2000 is the base year) = 110 × Rs 10 = Rs 1,100
• GDP deflator = nominal GDP ÷ real GDP = 1,650 ÷ 1,100 = 1.50, or 150 per cent: bread prices rose 1.5 times, from Rs 10 to Rs 15.

The same ratio for GNP gives the GNP deflator.

Consumer Price Index. CPI is the cost of a fixed basket bought by a representative consumer in the current year, as a percentage of its cost in the base year. NCERT's example: 90 kg of rice and 5 pieces of cloth a year.

CPI = 1,950 ÷ 1,400 × 100 = 139.29.

WPI and PPI. Many goods have a retail price and a wholesale price (the price in bulk trade), differing by traders' margins; the wholesale index is the Wholesale Price Index. "In countries like USA it is referred to as Producer Price Index (PPI)." India now has a new series of output PPI (base 2022-23), used since August 2026 in its national accounts.

Why CPI differs from the GDP deflator (NCERT's three reasons).

1. Consumers' goods are not all the goods produced; the deflator covers all goods and services produced.
2. CPI includes the prices of imported goods the representative consumer buys; the deflator does not.
3. CPI weights are constant; deflator weights vary with each good's production level.

India, 2025-26. Nominal GDP grew 8.6 per cent and real GDP 7.8 per cent, so the GDP deflator rose only about 0.7 per cent (106.4 against 105.6 in 2024-25, 2022-23 = 100; NAS 2026, derived). MoSPI's 31 August note explains one reason: under double deflation the manufacturing deflator "may decline, or even show a negative growth rate despite an increase in both output and input prices" when input prices rise faster than output prices.

Comparing countries: exchange rates and purchasing power. International comparisons convert GDP into dollars, either at market exchange rates (nominal) or at purchasing power parity (PPP), which adjusts for price levels. IMF World Economic Outlook database, April 2026 (US$ billion, 2025):

In the same vintage, India's 2026 nominal GDP is projected at US$4,153 billion (still 6th, behind the UK's 4,265) and its 2027 figure at US$4,579 billion, just above Japan (4,562) and the UK (4,466). These are projections. At PPP, this vintage has India passing Japan in 2009.

2.5 GDP and Welfare

Higher income buys more goods, so it is tempting to treat real GDP as an index of well-being. NCERT says "there are at least three reasons why this may not be correct".

1. Distribution of GDP. In 2000 an imaginary country has 100 people earning Rs 10 each: GDP Rs 1,000. In 2001, 90 people earn Rs 9 and 10 earn Rs 20: GDP = 90 × 9 + 10 × 20 = Rs 810 + Rs 200 = Rs 1,010. GDP rose by Rs 10, yet 90 per cent of people saw their income fall by 10 per cent: "90 per cent of the people are worse off though the GDP of the country has gone up."
2. Non-monetary exchanges. Domestic work done by women at home is not paid for; barter exchanges in the informal sector use no money. Neither is counted. "This is a case of underestimation of GDP."
3. Externalities. Benefits or harms caused to others without payment or penalty. An oil refinery's value added enters GDP, but if it pollutes a river, harming those who use the water and the fishermen who lose their catch, GDP ignores that cost and "we shall be overestimating the actual welfare". With positive externalities, GDP underestimates welfare.

Broader measures add what GDP leaves out. UNDP's Human Development Report 2025 combines income with health and education: India's Human Development Index was 0.685 in 2023, rank 130 of 193.

Appendix Tables 2.5 and 2.6, Corrected

NCERT's appendices give India's data for 2024-25 from the RBI's Annual Report 2024-25 (Handbook of Statistics on Indian Economy). Three printing problems need fixing before you use them:

• Table 2.5 is titled "at constant (2024-25) prices", but the figures are at 2011-12 prices (Table 2.6's own title says "(2011-12) Constant Prices", and both tables give the same GDP). Its row 2 reads "Net production taxes"; NCERT's own section 2.2.4 adds net product taxes to GVA at basic prices. (Footnote 6, "provisional estimates released by the CSO in 2018", is a leftover from an earlier edition.)
• Table 2.6 prints net exports as 161292 and discrepancies as 292131. Both are negative: the column adds up to GDP only as −161,292 and −292,131.
• Table 2.6 prints GDP as "187955"; the figure is 18,796,955, as in Table 2.5.

These are old-series (2011-12 base) numbers that have since been replaced. The new series' 2024-25 figures (NAS 2026, First Revised Estimates at constant 2022-23 prices) are set beside them. The levels cannot be compared across the two bases; the shares can.

Table 2.5, corrected: GVA and GDP, 2024-25 (₹ crore, constant prices)

Table 2.6, corrected: components of GDP, 2024-25 (₹ crore, constant prices; share of GDP in brackets)

NCERT's Summary

The macroeconomy works in a circular way: firms employ inputs supplied by households and sell goods and services to them, so aggregate output can be calculated by the income, product or expenditure method. The product method deducts intermediate goods "to avoid double counting". Goods bought for investment add to productive capacity. The aggregates GDP, GNP, NNP at market price, NNP at factor cost, PI and PDI differ by whom the income accrues to; the GDP deflator, CPI and WPI track prices; and "it may be incorrect to treat GDP as an index of the welfare of the country".

PART 3 — UPSC Integration

Three Frameworks

1. One flow, three meters. Any question on the methods of measuring national income is answered from Fig. 2.1: points A, B and C measure the same flow, intermediate goods are excluded to avoid double counting, and unplanned inventories keep the identity exact. In India's data the three agree up to a printed "discrepancies" line.

2. Three switches and a halfway house. Domestic to national (NFIA), gross to net (depreciation), market prices to factor cost (net indirect taxes), with basic prices between the last two. Apply the switches to India and two facts follow that answers often get wrong: GNI is below GDP (NFIA is negative), and MoSPI's NNI is at market prices.

3. An estimate has a vintage. The 2025-26 growth figure was 7.6, then 7.7, then 7.8 per cent in six months, and nominal GDP moved the other way. Cite the release and its date, and say whether the figure is real or nominal.

Confused Pairs

Exam Strategy

• Prelims: the final-versus-intermediate test (use, not nature); stock-flow pairs; the three categories of investment; which taxes are production taxes and which are product taxes; the ladder formulas, especially PI and PDI with their full terms; CPI-versus-deflator differences; the three welfare limits and which way each biases GDP; India's dated figures (7.8 per cent real, ₹345.37 lakh crore nominal, NFIA negative).
• Mains: for "GDP and welfare", use NCERT's three reasons with its numbers and close with broader measures such as the HDI. For questions on India's growth data, explain the new 2022-23 series, the revision sequence and the gap between nominal and real growth.
• Numericals: write the formula first, put in the figures, state any assumption (as in Exercises 8 and 10 below).

Practice Questions

Prelims (UPSC-pattern, not past papers)

1. Farmers grow wheat worth Rs 100 using no inputs and sell Rs 50 of it to bakers, who use all of it to make bread worth Rs 200. The value of aggregate output is: (a) Rs 300 (b) Rs 250 (c) Rs 200 (d) Rs 150 Answer: (b). 100 + (200 − 50); NCERT ch 2 p. 9.

2. Which of the following is a stock? (a) Net investment (b) Change in inventories (c) Capital (d) Depreciation during a year Answer: (c). The other three are measured over a period.

3. A firm starts the year with 100 shirts, expects to sell 1,000, produces 1,000 and sells 600. This is: (a) planned accumulation of 400 (b) unplanned accumulation of 400 (c) unplanned decumulation of 400 (d) planned decumulation of 75 Answer: (b). NCERT p. 11.

4. Consider the following statements:

   1. GVA at basic prices includes net production taxes.
   2. GVA at basic prices includes net product taxes.
   3. Excise duty is a product tax, while land revenue is a production tax. Which of the statements given above are correct? (a) 1 only (b) 1 and 3 only (c) 2 and 3 only (d) 1, 2 and 3 Answer: (b). NCERT s. 2.2.4.

5. An economy produces 110 units in the current year at Rs 15 each; the base-year price was Rs 10. The GDP deflator is: (a) 0.67 (b) 1.10 (c) 1.50 (d) 1.65 Answer: (c). 1,650 ÷ 1,100.

6. Which of the following prices enter the Consumer Price Index but not the GDP deflator? (a) Prices of capital goods (b) Prices of imported goods (c) Prices of exported goods (d) Prices of government services Answer: (b). NCERT's second reason; (a), (c) and (d) are in the deflator.

7. Consider the following statements about India's national accounts for 2025-26 (National Accounts Statistics 2026):

   1. Gross national income was lower than GDP.
   2. Remittances by Indians employed overseas are recorded in the balance of payments as primary income.
   3. MoSPI's net national income equals gross national income minus consumption of fixed capital. Which of the statements given above are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 Answer: (c). Remittances are secondary income (transfers).

8. A refinery's output is counted in GDP, but it pollutes a river used by fishermen. Taking GDP as a measure of welfare will: (a) overstate welfare (b) understate welfare (c) leave it unaffected (d) understate GDP itself Answer: (a). A negative externality; NCERT p. 23.

NCERT's exercises, worked

1. Four factors and their remunerations. Land: rent. Labour: wages. Capital: interest. Entrepreneurship: profit.
2. Why aggregate final expenditure equals aggregate factor payments. Final expenditure is the firms' revenue from final goods. Firms' value added, summed, equals the value of final goods (intermediate purchases cancel out), and value added is wholly paid out as wages, interest, rent and profit, with profit as the residual. In the circular flow the spending at A equals the factor payments at C.
3. Stock and flow; net investment and capital. A stock is measured at a point of time, a flow over a period. Capital is a stock; net investment is a flow, the addition to capital in a period. In NCERT's tank, capital is the water in the tank and investment is the water flowing in from the tap per period; if the tank also leaks (depreciation), net investment is the inflow minus the leak.
4. Planned and unplanned inventory accumulation. Planned: the firm deliberately raises its closing stock (produces 1,100 to end with 200 shirts). Unplanned: sales fall short of expectations (sells 600 of 1,000 and ends with 500). Relation: change in inventories ≡ value added + intermediate goods used − sales.
5. The three identities. Product: GDP ≡ Σ GVA_i. Expenditure: GDP ≡ C + I + G + X − M. Income: GDP ≡ W + P + In + R. They agree because value added at each stage sums to the value of final goods (what final buyers spend) and is distributed in full as factor incomes; unsold output counts as the firm's investment in inventories, so production and expenditure match.
6. Budget deficit and trade deficit. Budget deficit = government expenditure − tax revenue (G − T); trade deficit = imports − exports (M − X). From Y = C + I + G + X − M and Y = C + S + T: (I − S) + (G − T) = (M − X). So 2,000 + (−1,500) = Rs 500 crore of trade deficit. (Here X and M cover goods and services; NCERT ch 6 reserves "balance of trade" for goods.)
7. Depreciation. NI = GDP_MP + NFIA − Depreciation − (Indirect taxes − Subsidies), so 850 = 1,100 + 100 − D − 150, giving D = Rs 200 crore.
8. Transfer payments. PI = PDI + personal taxes = 1,200 + 600 = 1,800. PI = NI − undistributed profits − net interest paid by households − corporate tax + transfers, so 1,800 = 1,900 − 200 − 0 − corporate tax + transfers. The question gives no corporate tax; taking it as zero, transfers = Rs 100 crore.
9. PI and PDI. NI = NDP_FC + NFIA = 8,000 + 200 = 8,200. Net interest paid by households = 1,200 − 1,500 = −300. PI = 8,200 − 1,000 − 500 − (−300) + 300 = Rs 7,300 crore. PDI = 7,300 − 500 = Rs 6,800 crore.
10. Raju the barber. (a) GDP (at market prices) = Rs 500 (no intermediate inputs are given). (b) NNP at market prices = 500 − 50 = Rs 450. (c) NNP at factor cost = 450 − 30 sales tax = Rs 420. (d) Personal income = 420 − 220 retained (treated as undistributed profit) = Rs 200. (e) PDI = 200 − 20 income tax = Rs 180. Check: 200 + 220 = 420.
11. GNP deflator. 2,500 ÷ 3,000 × 100 = 83.33 per cent. Below 100, so the price level has fallen since the base year.
12. Limits of GDP as an index of welfare. Distribution (GDP can rise while most people lose: Rs 1,000 to Rs 1,010 with 90 per cent worse off); non-monetary exchanges such as unpaid domestic work and barter (GDP underestimated); externalities (negative ones make GDP overstate welfare, positive ones understate it).

Mains (UPSC-pattern, not past papers)

1. Why is India's gross national income lower than its GDP, even though Indians abroad send home large remittances? Explain with reference to the national accounts and the balance of payments. (150 words)
2. "A rising GDP need not mean rising welfare." Discuss with NCERT's three reasons and India's experience. (250 words)

📦 Revision Capsule

Sources

• NCERT, Introductory Macroeconomics (Class XII), ch. 2 "National Income Accounting", Reprint 2026-27, including Appendices 2.1-2.2: ncert.nic.in PDF.
• MoSPI (National Statistics Office), National Accounts Statistics 2026, released 31 August 2026: publication page; Statement 8.17.1, provisional estimates of national income and other macroeconomic aggregates, 2025-26: xlsx; Statement 8.17.2, provisional estimates of GVA by economic activity, 2025-26: xlsx.
• MoSPI, Press Note on GDP Estimates for Q1 2026-27, 31 August 2026 (NAS 2026 revisions, double deflation, output PPI): mospi.gov.in PDF.
• MoSPI, Press Note on Provisional Estimates of Annual GDP for 2025-26 and Quarterly Estimates of GDP for Q4 (January-March) 2025-26, 5 June 2026.
• MoSPI, press note releasing the new series of national accounts (base year 2022-23) with the Second Advance Estimates for 2025-26, 27 February 2026: PIB PDF.
• RBI, "Developments in India's Balance of Payments during the Fourth Quarter (January-March) of 2025-26", 8 June 2026 (Press Release 2026-2027/412), and "... First Quarter (April-June) of 2026-27", 1 September 2026 (Press Release 2026-2027/1015).
• IMF, World Economic Outlook database, April 2026: nominal GDP, GDP at PPP.
• UNDP, Human Development Report 2025: hdr.undp.org.