National income tells us the total value of goods and services an economy produces in a year. Terms like GDP, GNI, per capita income and HDI appear in Lok Sewa papers, the budget speech and the Economic Survey every year. This note explains each term, the three methods of measuring national income and how Nepal’s economy is divided into sectors.
1. Key concepts
| Term | Meaning |
|---|---|
| GDP (Gross Domestic Product) | Market value of all final goods and services produced within the country’s borders in a year, by citizens and foreigners |
| GNP / GNI (Gross National Product / Income) | GDP + net factor income from abroad (income of citizens abroad minus income of foreigners in the country) |
| NNP (Net National Product) | GNP minus depreciation |
| National income | NNP at factor cost |
| Per capita income | National income divided by total population; shows average income per person |
| Depreciation | Wear and tear of capital goods during production |
Simon Kuznets is known as the father of national income accounting. In Nepal, national accounts are prepared by the National Statistics Office (formerly the Central Bureau of Statistics).
2. Nominal and real GDP
- Nominal GDP is measured at current prices, so it rises with inflation.
- Real GDP is measured at constant prices of a base year, so it shows actual growth in output.
- GDP deflator = (Nominal GDP ÷ Real GDP) × 100; it measures the general price level.
- Economic growth rate is the yearly percentage increase in real GDP.
- GDP at market price includes indirect taxes; GDP at factor cost = market price − indirect taxes + subsidies.
3. Methods of measuring national income
| Method | How it works |
|---|---|
| Production (value added) method | Adds the value added by every sector: output minus intermediate goods. Avoids double counting. |
| Income method | Adds incomes earned by factors of production: rent + wages + interest + profit |
| Expenditure method | Adds spending on final goods: GDP = C + I + G + (X − M), i.e. consumption, investment, government spending and net exports |
Only final goods are counted; counting intermediate goods again causes double counting. Transfer payments such as pensions and old-age allowance are not part of GDP.
4. Sectors of the economy
| Sector | Activities | Nepal |
|---|---|---|
| Primary | Agriculture, forestry, fishing, mining | About a quarter of GDP but employs the largest share of workers |
| Secondary | Manufacturing, construction, electricity, water | Small share; manufacturing is weak |
| Tertiary (service) | Trade, transport, tourism, banking, education, health, government | Largest share of GDP |
Remittance from Nepalis working abroad is a big part of national income: it adds to GNI and household spending, though not to GDP.
5. Human Development Index (HDI)
- HDI is published by the UNDP in the Human Development Report, first released in 1990.
- It was developed by Mahbub ul Haq with Amartya Sen.
- It measures three things: health (life expectancy), education (years of schooling) and standard of living (GNI per capita).
- The value lies between 0 and 1; higher is better.
- Bhutan is known for measuring Gross National Happiness (GNH).
- The Economic Survey, released by the Ministry of Finance just before the budget, reports Nepal’s latest GDP, growth and per capita income.
6. Worked example
| Step | Working | Result |
|---|---|---|
| GDP | Given | Rs 100 billion |
| Add net income from abroad | 100 + 5 | GNP Rs 105 billion |
| Subtract depreciation | 105 − 10 | NNP Rs 95 billion |
7. Problems in measuring national income in Nepal
- A large informal sector with no written records.
- Farm output used at home is hard to value.
- Remittance and other income are not always recorded correctly.
- Lack of up-to-date data at local level.
8. How this topic is asked in the exam
Objective questions ask the difference between GDP, GNP and NNP. Numerical questions ask GNP or NNP from given figures. Subjective questions ask about the difficulties of measuring national income.
📌 Key points to remember
- GDP: value of final goods and services produced inside the country in a year.
- GNI = GDP + net factor income from abroad; NNP = GNP − depreciation.
- Per capita income = national income ÷ population.
- Nominal GDP uses current prices; real GDP uses constant base-year prices.
- Three methods: production (value added), income, expenditure (C + I + G + X − M).
- Count only final goods to avoid double counting.
- Service sector has the largest share of Nepal’s GDP; agriculture employs most people.
- HDI by UNDP (since 1990): health, education, income; Mahbub ul Haq and Amartya Sen.
- Simon Kuznets: father of national income accounting.
Test yourself: National Income
50 questions check what you read about Key concepts, Methods of measuring national income and Human Development Index (HDI). Each attempt picks 25 at random.