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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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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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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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 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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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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