National Income is the money values of all the final goods and services produced in a country throughout the year. These goods and services produced by the four factors of production which command reward for the production made. These rewards are awarded annually in the form of rent, interest, wages and profits. Therefore, the aggregate of these rewards also amount to National Income. Alternately, the expenditure through these rewards also amount to National Income as discussed earlier. The following adjustments have to be made with Net National Product (N.N.P.) in order to arrive at national income.

Government subsidy is that amount of money which the government contributes in order to help certain sectors of the economy to stimulate their production level e.g. the agriculture sector. Usually the government provides subsidy on fertilizer. Let us subsidize (say 20%). Thus the price of fertilizer per bag prevailing in the market would be $80. Hence the money value of fertilizer counted in G.N.P. is calculated at $80. Note the lower price than the actual price of $100. So in order to calculated the money value of the fertilizer at its actual price, the remaining $20 per bag is added to N.N.P. Supposing the government sells 100 bags of fertilizer at the price of $80. Thus the money value of fertilizer will be calculated as $80 * 100 and not as $100 * 100 as desired. Hence the total subsidy from the government i.e. $20 * 100 shall be added to N.N.P. in order to arrive at National income.

Indirect taxes are those taxes which are levied on the commodities and are paid by the manufacturer. The manufacturer makes it a part of the selling price, as a result of which the tax burden ultimately shifts on to the consumer. Indirect taxes are e.g. excise duty, custom duty, sales tax etc. This tax becomes part of G.N.P. and is subtracted from N.N.P. to arrive at National Income. The reason for the subtraction is merely because the tax is counted twice in G.N.P. i.e. in the personal consumption expenditure and in the government expenditure on goods and services. For example, let us take the case of tax implement one cigarettes. Assuming that price of each packet of cigarette. Assuming that price of each packet of cigarettes is $4 and $1 is added as the excise duty. Now originally price for each packet of cigarettes would be $4 and assuming that 100 packets are produced, the money value of the cigarettes would be $400. However, with the excise duty added in price of each packet of cigarette it would now become $5, bringing money value of 100 packets to $500.

Now this extra $100 is the excise duty in the total and is paid by the consumers as personal consumption expenditure. The government also makes the expenditure on goods and services from the tax revenue of $100. Note that it (tax) is counted twice and must therefore be deducted from N.N.P. in order to arrive at National Income.

Transfer payments are not part of the National Income and therefore must be subtracted from N.N.P. in order to arrive at National Income. Such payments are e.g. the bad debts incurred banks, payments of pensions, charity, scholarships, etc. We already know that National Income is the summation of all rewards paid to the factors of production annually and transfer payments are not in any way part of the either reward. That is why it should be subtracted from N.N.P. in order to arrive at National Income, again for the ultimate reason of avoiding double counting.

There are three methods of calculating National Income and the final total from all these methods must be equal to each other. However, more often the totals do not become equal to each other. Thus, the amount of statistical discrepancy should be subtracted algebraically from National Income in order to arrive at the same result. The following equation expresses finally the National Income.

National Income = G.N.P. – Depreciation Allowances = N.N.P. + (Government Subsidies) – Indirect Taxes + Transfer Payments + Statistical Discrepancy).