NATIONAL INCOME

CONCEPTS OF NATIONAL INCOME

Gross National Product (GNP) It is defined as the total market value of all final goods and services produced in a year in a country.Gross National Product has the following components:Value of final goods and services produced in a year and consumed by the household (Consumption C)

Value of new capital goods produced and addition to the inventories of goods but not sold during the year. ( Investment I)Value of output of Government which is equal to the value of purchases of goods and services by the government (G)Net exports (Xn) Net Factor Income from abroad

Net factor income earned from abroad is the difference between factor income received from abroad by normal residents of India for rendering factor services in other countries and the factor incomes paid to the foreign residents for factor services rendered by them in the domestic territory of India.

Net factor income earned from abroad have the following three components:Net compensation of employeesNet income from property i.e. rent, interest and income from entrepreneurshipNet retained earnings of the resident companies working in foreign countries.

Gross Domestic Product (GDP) - It is the money value of all final goods and services produced by normal residents as well as non-residents in the domestic territory of a country. The difference between GDP and GNP at market prices arises due to the existence of net factor income from abroad.

GDPMP = GNPMP net factor income from abroad

Net National Product (NNP) or National Income at Market Prices When charges for depreciation are deducted from the gross national product we get net national product. It means the market value of all final goods and services after providing for depreciation. It is also called national income at market prices.

National Income (NI) or National Income at factor cost It is the national income at factor cost for which we use the term National Income. National income at factor cost means the sum of all incomes earned by resource suppliers for their contribution of land, labor, capital and entrepreneurial ability, which go into the years net production.

The difference between national income at factor cost and national income at market prices arises from the fact that indirect taxes and subsidies cause market prices of output to be different from the factor incomes resulting from it.National Income = National income at factor cost at market prices -Indirect taxes + Subsidies

Personal Income (PI) Personal income is the sum of all incomes actually received by all individuals or households during a given year. National income (total income earned) and personal income (total income received) must be different because some incomes which are earned such as social security contributions, corporate income taxes and undistributed corporate profits are not actually received by households, and conversely, some incomes which are received like transfer payments (eg. pension, unemployment compensation, relief payments etc.) are not currently earned.

Personal Income = National Income Social security contributions Corporate income taxes Undistributed profits + transfer payments

Thus,Personal Income = National Income Social security contributions Corporate income taxes Undistributed profits + transfer payments

Disposable Income Even whole of the incomes which are actually received by the people are not available to them for consumption because government levy some personal taxes.Disposable Income= Personal incomePersonal taxesAlso,Disposable income = Consumption + Savings

Difficulties in the Measurement of National Income

The first problem relates to the treatment of non-monetary transactions such as the services of housewives to the members of their families and farm output consumed at home.

The second difficulty arises with regard to the treatment of the government in national income accounts. The viewpoint is that as regards the administrative functions of the government like justice, administration and defence are concerned, they should be treated as giving rise to final consumption of such services by the community as a whole so that contribution of general government activities will be equal to the amount of wages and salaries paid by the government.

Third problem is regarding the treatment of income arising out of the activities of the foreign firm in a country. IMF viewpoint is that production and income arising from an enterprise should be ascribed to the territory in which production takes place.

Difficulties in Measurement in Developing countries

One major problem is the prevalence of non-monetised transactions.Because of illiteracy most producers have no idea of the quantity and value of their output and do not keep regular accounts.Inadequacy, non-availability and unreliability of statistics.

Occupational specialization is still incomplete.One difficulty is that production is unorganized and scattered in these countries.

National Income and Economic WelfareNet Economic Welfare = Real GNP - Depreciation + Value of Leisure + Value of Non-market activities - Environment Pollution - Regrettable costs

MEASUREMENT OF NATIONAL INCOME

1. Output Method or Production Method Also called the value added method. Under this method, the economy is divided into different industrial sectors and the net value added at factor cost (NVAFC ) by each productive enterprise as well as by each industry is estimated. Value of output of an enterprise is found out by multiplying the physical output with market prices of the goods produced.

To calculate NVAFC, we need to subtract:Intermediate consumptionDepreciationNet indirect taxes

Summing up NVAFC by all productive enterprises of a sector gives us the NVAFC of the sector. We then add up NVAFC by all industries or sectors to get Net domestic product at factor cost (NDPFC).

If we add the net factor income from abroad to the NDPFC we get the Net national product at factor cost (NNPFC) which is also called the national income.NI or NNPFC = NDPFC + Net factor income from abroad

2. The Income Method This method measures national income at the phase of distribution and appears as income paid and or received by individuals of the country, i.e. national income is obtained by summing up of the incomes of all individuals of a country.

National income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and incomes of self-employed people.By summing up the incomes paid out by all industrial sectors we will obtain domestic factor income or NDPFC. If we further add the net factor income from abroad to the NDPFC we get the Net national product at factor cost (NNPFC) or national income.

3. The Expenditure Method - National Income can also be measured by aggregating the flow of total expenditure on the final goods & services in the economy. It can be observed that the flow of the total expenditure can be measured by aggregating the flow of expenditure of final goods & services incurred by each of the three main sectors involved, viz. household sector, business sector & the government sector.

Expenditure on consumer goods and services by individuals and households, C.Governments expenditure on goods and services, G.The expenditure by productive enterprises on capital goods and inventories, called gross domestic capital formation and denoted by I.Net exports, X-M or Xn.

Adding the above four we get GDPMP. On deducting depreciation, we get NDPMP. If we further deduct net indirect taxes we get NDPFC. If we add the net factor income from abroad to the NDPFC we get NNPFC.

EXAMPLE OrangeInc TransactionsWages paid to employees $ 15,000Taxes paid to Government 5,000Revenue received from sale of oranges 35,000Oranges sold to public 10,000Oranges sold to JuiceInc. 25,000

JuiceInc Transactions

Wages paid to employees $ 10,000Oranges purchased from OrangeInc 25,000Revenue received from sale of orange juice 40,000

National Income by Product approachOrange Inc revenue = $35,000Juice Inc.s value added = $ 15,000Total value added in the economy = $ 50,000

National Income by Income approachProfit of OrangeInc = $ 20,000Wages received by employees of OrangeInc= $15,000Profit of JuiceInc = $ 5,000Wages received by employees of JuiceInc = $ 10,000Total income received = $ 50,000

National Income by Expenditure approachExpenditure on oranges = $ 10,000Expenditure on juice = $ 40,000Total expenditure = $ 50,000