NATIONAL INCOME

National Income

The study of National Income is important because of the following reasons:

To see the Economic Development of the country.
To assess the developmental objectives.
To know the contribution of the various sectors to National Income.

Internationally some countries are wealthy, some countries are not wealthy and some countries are in-between. Under such circumstances, it would be difficult to evaluate the performance of an economy. Performance of an economy is directly proportionate to the amount of goods and Services produced in an economy. Measuring national income is also important to chalk out the future course of the economy. It also broadly indicates people’s standard of living.

Income can be measured by Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP) and Net National Income (NNI).

In India the Central Statistical Organization has been formulating national income.

However some economists have felt that GNP has a measure of national income has limitation, since they exclude POVERTY, Literacy, public Health, gender Equity and other measures of human prosperity.

Instead they formulated other measures of welfare like Human Development index (HDI).

NATIONAL INCOME:

The National income measures the flow of goods and services in an economy.

Note: The National income measured only on flow and not on stock.

The National income measures of net volume of goods and services produced in a country during a year. It also includes net earned foreign income. The National Income is counted without duplication.

The National income measures the productive power of an economy (flow).

The National wealth measures the stock of commodities held by the nationals of a country at a given point of time.

The National income estimates are in relation with the financial year.

In India the financial year begins on April 1 and ends on March 31.

BEFORE INDEPENDENCE

No specific attempts were made.The 1^st attempt was made by Dada Bhai Naoroji (Grand Old Man of India) in the year 1868 in his book ‘Poverty and UN British Rule in India’.He estimated that the per capita annual income as Rs. 20 per annum.

Other estimators William Digby in the year 1899, Findlay Shirras in 1911, 1922 and in 1933, Shah and Khambatta in 1921, V K R V Rao during 1925-29 and 1931-32 and R C Desai during 1931-40.

The above people estimated the national income with the value of the output of the agriculture sector and then added a certain Percentage as the income of the non-agriculture sector.The estimates suffered with serious limitations.

AFTER INDEPENDENCE:

In August 1949 the Government of India appointed the National Income Committee. Prof. P C Mahalanobis was appointed as the chairman of the National Income Committee.The other 2 members of the committee were Prof D. R Gadgil and Prof V K R V Rao.The main job of the committee was to compile estimates of National Income.The 1^st report was submitted in the year 1951.The final report was submitted in the year 1954.

This report is considered to be a landmark in the history of India as this is the first time that it provided a comprehensive data of National Income for the whole India.

The government established the CSO (Central Statistical Organization) for further estimation of the National income.The CSO regularly publishes the national income.

CONCEPT (THEORY) OF THE NATIONAL INCOME:

GNP (Gross National Product)

GDP (Gross Domestic Product)

NNP (Net National Product)

NI (National Income)

PI (Personal Income)

DPI (Disposable Personal Income)

Now let us try to understand the meaning of each:

GDP (GROSS DOMESTIC PRODUCT):

The Gross Domestic Product is the Money value of all the goods and services produced within the geographical boundaries of a country in a given period of time.

Note: the GDP is only within the country.

GNP (Gross National Product):

The GNP is the money value of the goods and services produced by a country in a given period of time Plus Total money value of goods and services produced by the nationals outside the country Minus Incomes received by the foreigners with in the country.

Note: The GNP is calculated on the basis of market prices of produced goods, it also includes indirect taxes and subsidies if any.

The GNP is equal to GDP if the income earned and received by the citizens of a country within the boundaries of foreign countries is equal to the income received by the foreigners within the country.

NNP (NET NATIONAL PRODUCT):

This is GNP minus depreciation.

NNP = GNP – Depreciation

Note: Depreciation is the consumption of capital stock

NI (NATIONAL INCOME):

The National income is also called Net National Product at Factor Cost. Hence,

NI = NNP minus (total indirect taxes + Subsidies)

Note: Both indirect taxes and subsidies are deducted from the NNP.

PI (PERSONAL INCOME):

This is actual income obtained by the people after deducting various taxes.

PI = National Income – (Corporate taxes + payments made for social security) +Government Transfer Payments+Business transfer payments+Net interest paid by the government.

DPI (Disposable personal Income):

This is the Personal income minus direct taxes.

DPI = PI – Direct taxes.

HOW THE NATIONAL INCOME IS MEASURED?

There a 3 methods to calculate the National income.These methods are given by Simon Kuznets.

PM (Product Method) or Product service method.
IM (Income Method)
CM (Consumption Method) or Expenditure Method.

In India the combination of Product method and Income methods is used for calculating the National Income.

PRODUCT METHOD:

NI = GDP – income earned in foreign countries – Depreciation.

In the Product method the GDP is taken into consideration.Net income earned in foreign countries is deducted from the GDP.From this the depreciation is subtracted.

INCOME METHOD:

In this method the National Income is calculated by

National Income = Total Rent Plus (+) Total wages Plus (+) Total Interest Plus (+) Total Profit.

The total net income of the people working in different sectors and commercial sectors are taken into consideration.

Consumption Method:

This method is not generally used for calculating the National income.According to this method

National Income =Total Consumption Plus Total Savings

MISCELLANEOUS:

The per capita income in India is calculated by CSO (Central Statistical Organization).

According the statistics released by the CSO in 2015, the per capita income in the country reached Rs. 88538/- per annum . This is according to the data on current prices.
The PMEAC (Prime Minister’s Economic Advisory Council) in the ‘Economic Outlook’ released on August 1, 2011 lowered the economic Growth rate projection from 9 percent to 8.2 percent.The PMEAC also reduced the manufacturing sector growth rate from 9 percent to 7 percent.
The CSO has included the contributions of all the 3 sectors (Primary, secondary and tertiary) in estimating the National income.

Difficulty in measuring National Income

There are many difficulties in measuring national income of a country accurately. The difficulties involved in National Income Accounting are both conceptual and statical in nature. Some of these difficulties involved in the measurement of national income are discussed below:

Non Monetary Transactions

The first problem in National Income accounting relates to the treatment of non-monetary transactions such as the services of housewives to the members of the families. For example, if a man employees a maid servant for household work, payment to her will appear as a positive item in the national income. But, if the man were to marry to the maid servant, she would performing the same job as before but without any extra payments. In this case, the national income will decrease as her services performed remains the same as before.

Problem of Double Counting

Only Final Goods and services should be included in the national income accounting. But, it is very difficult to distinguish between final goods and Intermediate Goods and services. An intermediate goods and service used for final consumption. The difference between final goods and services and intermediate goods and services depends on the use of those goods and services so there are possibilities of double counting.

The Underground Economy

The underground economy consists of illegal and uncleared transactions where the goods and services are themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not included in the national income, the national income seems to be less than the actual amount as they are not included in the accounting.

Petty Production

There are large numbers of petty producers and it is difficult to include their production in national income because they do not maintain any account.

Public Services

Another problem is whether the public services like general administration, police, army services, should be included in national income or not. It is very difficult to evaluate such services.

Transfer Payments

Individual get pension, Unemployment allowance and interest on public loans, but these payments creates difficulty in the measurement of national income. These earnings are a part of individual income and they are also a part of government expenditures.

Capital Gains or Loss

When the market prices of capital assets change the owners make capital gains or loss such gains or losses are not included in national income.

Price Changes

National income is the money value of goods and services. Money value depends on Market Price, which often changes. The problem of changing prices is one of the major problems of national income accounting. Due to price rises the value of national income for particular year appends to increase even when the production is decreasing.

Wages and Salaries paid in Kind

Additional payments made in kind may not be included in national income. But, the facilities given in kind are calculated as the supplements of wages and salaries on the income side.

Illiteracy and Ignorance

The main problem is whether to include the income generated within the country or even generated abroad in national income and which method should be used in the measurement of national income.

Besides these, the following points are also represents the difficulties in national income accounting:

Second hand transactions;
Environment damages;
Calculation of depreciation;
Inadequate and unreliable statistics; etc.

National income is the total market value of all final goods and services produced within a country’s borders in a specific time period, usually one year. It is calculated by adding up the values of all the goods and services produced by the country’s businesses, households, and governments.

Gross domestic product (GDP) is the most commonly used measure of national income. It is calculated by adding up the values of all the final goods and services produced within a country’s borders in a specific time period, usually one year. GDP can be measured in either nominal terms or real terms. Nominal GDP is the value of goods and services produced in current prices, while Real GDP is the value of goods and services produced in constant prices.

Gross national product (GNP) is another measure of national income. It is calculated by adding up the values of all the final goods and services produced by a country’s citizens, regardless of where they are located in the world. GNP is similar to GDP, but it includes income earned by citizens from abroad and excludes income earned by foreigners in the country.

Net national product (NNP) is a measure of national income that takes into account the depreciation of Capital Goods. Depreciation is the decrease in the value of capital goods over time due to wear and tear. NNP is calculated by subtracting depreciation from GNP.

National income (NI) is a measure of national income that takes into account the income earned by factors of production owned by foreigners. NI is calculated by subtracting Net Factor Income from NNP.

Personal income (PI) is a measure of national income that takes into account the income earned by individuals. PI is calculated by adding up the wages, salaries, and other forms of income earned by individuals.

Disposable income (DI) is a measure of national income that takes into account the income that individuals have available to spend or save. DI is calculated by subtracting personal taxes from PI.

Personal consumption expenditures (PCE) is a measure of the total amount of goods and services that individuals purchase. PCE is calculated by adding up the values of all the goods and services that individuals purchase.

Gross private domestic Investment (GPDI) is a measure of the total amount of investment that businesses make in new capital goods. GPDI is calculated by adding up the values of all the new capital goods that businesses purchase.

Net exports of goods and services (NX) is a measure of the difference between the value of goods and services that a country exports and the value of goods and services that it imports. NX is calculated by subtracting the value of imports from the value of exports.

Government consumption expenditures and gross investment (GCE) is a measure of the total amount of goods and services that the government purchases and the total amount of investment that the government makes in new capital goods. GCE is calculated by adding up the values of all the goods and services that the government purchases and the values of all the new capital goods that the government purchases.

Net interest (NI) is a measure of the interest that businesses and individuals pay to the government and other businesses. NI is calculated by subtracting the interest that businesses and individuals earn from the interest that they pay.

Statistical discrepancy (SD) is a measure of the error in the national income accounts. SD is calculated by subtracting the sum of all the other components of national income from the total value of national income.

National income is an important measure of a country’s economic performance. It can be used to track a country’s economic growth, to compare the economic performance of different countries, and to assess the impact of economic policies.

National income is also an important measure of a country’s standard of living. The higher a country’s national income, the higher its standard of living is likely to be.

However, national income is not a perfect measure of a country’s economic performance or standard of living. It does not take into account the distribution of income, the Quality Of Life, or the environmental impact of economic activity.

Despite its limitations, national income is an important tool for understanding and measuring a country’s economic performance.

What is the difference between gross domestic product (GDP) and gross national product (GNP)?

GDP is the total market value of all final goods and services produced within a country’s borders in a given year. GNP is the total market value of all final goods and services produced by a country’s citizens, regardless of where they are located.

What is the difference between nominal GDP and real GDP?

Nominal GDP is the value of goods and services produced in a given year, measured in current prices. Real GDP is the value of goods and services produced in a given year, measured in constant prices.

What is the difference between Economic Growth and Economic Development?

Economic growth is the increase in the amount of goods and services produced by an economy over time. Economic development is the process of improving the quality of life of a Population through economic growth, social progress, and technological advancement.

What are the different types of Economic Systems?

The three main types of economic systems are capitalism, Socialism, and Communism. Capitalism is an economic system based on private ownership of capital and the means of production. Socialism is an economic system based on public ownership of capital and the means of production. Communism is an economic system in which all property is communally owned and there is no private property.

What are the different types of economic growth?

There are two main types of economic growth: extensive growth and intensive growth. Extensive growth is achieved by increasing the quantity of factors of production, such as labor and capital. Intensive growth is achieved by increasing the productivity of factors of production, such as through technological innovation.

What are the different types of economic development?

There are two main types of economic development: human development and Sustainable Development. Human development is the process of improving the quality of life of a population through Education, health care, and other social services. Sustainable development is the process of meeting the needs of the present without compromising the ability of future generations to meet their own needs.

What are the different types of economic policies?

There are two main types of economic policies: Fiscal Policy and Monetary Policy. Fiscal policy is the use of government spending and Taxation to influence the economy. Monetary policy is the use of interest rates and other tools to influence the Money Supply.

What are the different types of economic indicators?

There are many different types of economic indicators, but some of the most important include gross domestic product (GDP), unemployment rate, Inflation rate, and interest rate. GDP is a measure of the total value of goods and services produced in a country. The unemployment rate is a measure of the percentage of the labor force that is unemployed. The inflation rate is a measure of the rate at which prices are rising. The interest rate is the price of borrowing money.

What are the different types of economic theories?

There are many different types of economic theories, but some of the most important include classical economics, neoclassical economics, and Keynesian economics. Classical economics is based on the idea that the economy is self-regulating and that government intervention is not necessary. Neoclassical economics is based on the idea that the economy is not self-regulating and that government intervention is sometimes necessary. Keynesian economics is based on the idea that the economy can be stabilized through government intervention.

What are the different types of economic schools of thought?

There are many different types of economic schools of thought, but some of the most important include classical economics, neoclassical economics, and Keynesian economics. Classical economics is based on the idea that the economy is self-regulating and that government intervention is not necessary. Neoclassical economics is based on the idea that the economy is not self-regulating and that government intervention is sometimes necessary. Keynesian economics is based on the idea that the economy can be stabilized through government intervention.

Which of the following is not a component of GDP?
(A) Consumption
(B) Investment
(C) Government spending
(D) Exports
(E) Imports
Which of the following is not a component of GNP?
(A) Consumption
(B) Investment
(C) Government spending
(D) Net exports
(E) Depreciation
Which of the following is not a component of NNP?
(A) Consumption
(B) Investment
(C) Government spending
(D) Net exports
(E) Capital consumption allowance
Which of the following is not a component of GDP per capita?
(A) GDP
(B) Population
(C) Nominal GDP
(D) Real GDP
(E) Purchasing power parity
Which of the following is not a measure of economic growth?
(A) GDP growth rate
(B) Nominal GDP growth rate
(C) Real GDP growth rate
(D) Per capita GDP growth rate
(E) Population Growth rate
Which of the following is not a factor that can affect economic growth?
(A) Investment
(B) Technology
(C) Education
(D) Government policy
(E) Population growth
Which of the following is not a characteristic of a developed country?
(A) High GDP per capita
(B) High level of industrialization
(C) High level of Human Capital
(D) Low level of poverty
(E) High level of inequality
Which of the following is not a characteristic of a developing country?
(A) Low GDP per capita
(B) Low level of industrialization
(C) Low level of human capital
(D) High level of poverty
(E) High level of inequality
Which of the following is not a goal of economic development?
(A) Increase GDP per capita
(B) Reduce poverty
(C) Improve human capital
(D) Increase industrialization
(E) Reduce inequality
Which of the following is not a strategy for economic development?
(A) Import substitution
(B) Export Promotion
(C) Human capital development
(D) Structural adjustment
(E) Privatization