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National Income
NATIONAL INCOME
The total amount of money earned within a country. National income is the total value
a country’s final output of all new goods and services produced in one year. It is the sum total of
wages, rent, interest, and profit earned by the factors of production of a country in a year. Thus it is
the aggregate values of goods and services rendered during a given period counted without
duplication. It includes income from all the productive sectors such as Agricultural, Industrial and
Service Industry such as Agricultural, Industrial and Service Industry
DEFINITION
According to pigou, “ national income is that part of the objective income, of the
community, including of course, income derived from abroad, which can be measured in money”
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National Income
FEATURES OF NATIONAL INCOME
GROWING CONTRIBUTION OF TERTIARY SECTOR: - Tertiary sector includes trade &
commerce, transport, storage & communication; other services include banking & non banking
financial intermediaries, insurance, real estate etc. Another striking feature of India’s national
income is that the contribution of tertiary sector has been increasing continuously over the years.
UNEQUAL GROWTH OF DIFFERENT SECTORS: - In India different sectors are growing at
unequal rates. During the period 1951-97, while the primary sector (agriculture, fishing, and
mining) has recorded a growth rate of 2.9 % the secondary (industry & construction) and tertiary
sectors have recorded a growth rate of 6.3% and 7.1% respectively.
EXCESSIVE DEPENDENCE ON AGRICULTURE: - One striking feature of India’s national
income is that a considerable proportion, i.e. 27.8% of the national income is now being
contributed by the agricultural sector. Naturally development of this sector is very important
considering is employment potential, marketable surplus, & necessary support to the industry
sector.
URBAN & RURAL DISPARITY: - Urban & rural disparity of income is another important
feature of our national income. The all India rural household survey shows that the level of
income in urban areas is just twice that of the rural areas, depicting a poor progress of rural
economy.
PUBLIC & PRIVATE SECTOR: - Another important feature of India’s national income is that
the major portion of it is generated by the private sector (75.8%) & the remaining 24.2% of the
national income is contributed by the public sector.
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National Income
CONCEPTS OF NATIONAL INCOME
There are various concepts of National Income. The main concepts of NI are: GDP,
GNP, NNP, NI, PI, DI, and PCI. These different concepts explain about the phenomenon of
economic activities of the various sectors of the various sectors of the economy.
GDP (GROSS DOMESTIC PRODUCT): - The most important concept of national income is
Gross Domestic Product (GDP). It is the money value of all final goods and services produced
within the domestic territory of a country during a year. GDP per capita is often considered an
indicator of a country's standard of living. GDP measures total income produced domestically.
GDP can be determined in three ways, all of which should, in principle, give the same result.
The product (or output) approach,
The income approach, and
The expenditure approach.
The most direct of the three is the product approach, which sums the outputs of every class of
enterprise to arrive at the total. The expenditure approach works on the principle that all of the
product must be bought by somebody, therefore the value of the total product must be equal to
people's total expenditures in buying things. The income approach works on the principle that the
incomes of the productive factors must be equal to the value of their product, and determines GDP
by finding the sum of all producers' incomes.
Algebraic expression under product method is,
GDP = (P*Q)
Where,
GDP = Gross domestic product
P = Price of goods and service
Q = Quantity of goods and service
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National Income
Algebraic expression under expenditure approach is,
GDP=C+I+G+(X-M)
Where,C = ConsumptionI = InvestmentG = Government expenditure(X- M) = Export minus import
Algebraic expression under income method
GDP = R+I+P+SA+W
Where
R = rent
I = interests
P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)
W = wages
GNP (GROSS NATIONAL PRODUCT):- Gross national product is defined as the total market value of all
final goods & services produced in a year in a country plus net factor income from abroad. GNP measures the
total income earned by nation.
GNP=GDP+NFIA (Net Factor Income from Abroad) OR, GNP=C+I+G+(X-M) +NFIA
NNP (NET NATIONAL PRODUCT):- Net National Product is the market value of all final
goods and services after allowing for depreciation. It is also called National Income at market
price. When charges for depreciation are deducted from the gross national product, we get it net
national product.
NNP=GNP-Depreciation
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National Income
DI (DOMESTIC INCOME):- Income generated or earned by factors of production within the
country from its own resources is called domestic income or domestic product. Domestic income
includes: wages and salaries, rents including imputed house rents, interests, dividends,
undistributed corporate profits including surpluses of public undertakings, mixed incomes
consisting of profits of unincorporated firms, self-employed persons, partnerships etc and direct
taxes.
Since domestic income does not include income earned from abroad, it can also be shown as:
Domestic Income = National Income – Net Income Earned From Abroad.
PI (PERSONAL INCOME):- Personal income refers to an individual's total earnings
from wages, investment enterprises, and other ventures. It is the sum of all the incomes actually
received by all the individuals or household during a given period.
Personal Income = NNP at Factor Cost – Undistributed Profits – Corporate Taxes +
Transfer Payments
DI (DISPOSABLE INCOME):- The income left after the payment of direct taxes from personal
income is called Disposable Income. Disposable income means actual income which can be spent
on consumption by individuals and families. Thus, it can be expressed as:
DI=PI-Direct Taxes
From consumption approach, DI=Consumption Expenditure + Savings
PCI (PER CAPITA INCOME):- Per capita income, more simply known as income per person, is
the mean income within an economic aggregate such as a country or city. It is calculated by
taking a measure of all sources of income in the aggregate (such as GDP or Gross national
income) and dividing it by the total population.
PCI=Total National Income / Total National Population
PI (PRIVATE INCOME):- Any type of income received by a private individual or household,
often derived from occupational activities or income of an individual that is not in the form of a
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National Income
salary (e.g. Income from investment). It can be arrived at from NNP at factor cost by making
certain addition and deductions. The addition includes transfer payments such as pensions,
unemployment allowances and sickness and other social security benefits, gifts and remittances
from abroad, windfall gains from lotteries or from horse racing, and interest on public debt. The
deductions include income from government department s as well as surpluses from public
undertakings, and employees contribution to social security schemes like provident funds, life
insurance etc.
Private income = national income (NNP at factor cost)+ transfer payment + interest on
public debt – social security’s – profits & surpluses of public undertakings.
METHODS OF MEASURING NATIONAL INCOME
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National Income
THERE ARE 3 METHODS OF MEASURING NATIONAL INCOME
Output method
Income method
Expenditure method
A. OUTPUT METHOD: - This method is also known as product method or inventory method.
Under this method national income is calculated by aggregating the value of final goods and
services produced in a country during a year. Whatever goods and services are produced in a
country by different sectors is multiplied by their current market price. The sum total of all this
obtained is actually GNP at market price.
Output method is of two types viz
Final goods method
Value added method
Final goods method: Under this method, only the value of final goods and services is
taken into account to estimate GNP. The value of intermediate goods and the raw material
should not be taken as it would result in double counting
Example: when the value of cloth is taken, value of raw – cotton should not be included
because cloth includes the value of raw – cotton.
Value added method: Under this method, we calculate the value added at each stage of
production and finally sum up the values to get the total value of the output produced.
This method is explained with the help of following examples:
Stages of production Market value of goods in RS Value added in production in
RS
Cotton 40 40
Yarn 55 15
Cloth 75 20
Shirt (final good) 100 25
Total value added 100
In this above table market value of final goods i.e. is shirt is RS 100. The sum total of value
added at each stage of production is also RS 100. Thus GNP by value added approach is equal
to the value of final goods approach.
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National Income
B. INCOME METHOD: - This method is also known as factor cost method. Under this method,
national income is obtained by adding the incomes such as rent, wages, interest and profits
received by all persons and enterprises in the country during a year. The total income earned by
all factor of production will be equal to the value of all types of final goods and services produced
during a year.
C. EXPENDITURE METHOD:- Under this method national income is measured by adding all final
expenditure made for the purchase of goods and services in a country in a year to know national
income by this method, we can divide expenditure into following 4 groups
Personal consumption expenditure i.e. expenditure on goods and services for daily
consumption
Gross private domestic investment expenditure i.e. expenditure by firms on plant,
machinery.
Net foreign investment expenditure i.e. the difference between our expenditure on foreign
goods and services and expenditure by foreigners on our goods and services
Government expenditure on purchase of goods and services i.e expenditure on current
consumption and investment
When all expenditures are added up, we get GNP at market price, if we deduct
depreciation cost we get NNP at market price.
DIFFICULTIES IN MEASURING NATIONAL INCOME
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National Income
National income is an indicator of economic growth of a country. But it is not easy to calculate
national income because of the following difficulties involved in calculating it
1. LACK OF RELIABLE DATA: - Reliable facts and figures of personal income are generally not
available. Professionals do not disclose their actual income earned, salaries people may do some
part time work in their spare time which they do not disclose. Lack of correct information of all
this results in underestimation of national income.
2. SERVICES OF HOUSEWIVES: - Services rendered by housewives are not estimated in national
income, as they are not paid for their work. A cook when employed at home is paid for his
services but when the same work is done by housewife , she is not paid. Hence this leads to under
estimation of national income
3. PRODUCTS KEPT FOR SELF CONSUMPTION: - In agricultural sectors a large part of farm
products are directly consumed by farmers. In the industrial sector also, cloth producers, oil
producers etc keep some products for their family. Estimates are usually taken for those products
which are sold in the market. Hence absence of money value of products kept for self
consumption will lead to under estimation of national income.
4. POSSIBILITY OF DOUBLE COUNTING: - To avoid double counting only the value of final
goods should be taken into account. But it is very difficult to determine whether the goods is
intermediate or final good
Example: restaurant: rice is an intermediate product but for a farmer rice is a final product.
Because of such difficulties sometime there is double counting and this may lead to over
estimation of national income.
5. GOVERNMENT EXPENDITURES LIKE TRANSFER PAYMENT: - Monetary benefits
received by persons like pensions, scholarships are personal incomes but government’s
expenditures. Since all these are transfer payment, these cannot be included in national income.
Hence this leads to under estimation of national income.
6. ILLEGAL ACTIVITIES: - income earned from illegal activities like gambling, black marketing,
illegal production of certain commodities etc is not included in national income. Such goods and
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National Income
services do have value and meet the needs of the consumers. This leads to underestimation of
national income.
CONCLUSION
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National Income
It is flow of goods and services produced in an economy during a year. National
income is very useful and important macro – economic concept to know the overall performance
and achievements of the country it guide to state policy, & helps to tackle the problems like
unempploymen8it, inflation, poverty etc. It also helps for international comparison and for
allocation of resources for different productive activities.
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