National Income and its concepts and components

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 income earned by all the people in a country in a given year. It is a measure of the economic activity of a country. Gross domestic product (GDP) is the most common measure of national income. It is the total market value of all final goods and services produced within a country’s borders in a given year. Gross national product (GNP) is similar to GDP, but it includes income earned by citizens of a country from abroad. Net national product (NNP) is the total market value of all final goods and services produced within a country’s borders in a given year, minus depreciation of Capital Goods. Personal income (PI) is the total income received by individuals from all sources, including wages, salaries, interest, dividends, and rents. Disposable income (DI) is the amount of income that individuals have available to spend or save after taxes have been paid.

National income accounting is the system of accounts used to measure the economic activity of a country. It includes the measurement of GDP, GNP, NNP, PI, and DI. The income approach to national income accounting measures national income by adding up all the income earned by individuals in a country. The expenditure approach measures national income by adding up all the spending on final goods and services in a country. The production approach measures national income by adding up the value added at each stage of production in a country.

Income distribution is the way in which income is divided among the people in a country. It is often measured by the Gini coefficient, which is a measure of inequality. Poverty is the state of being poor. It is often measured by the Poverty Line, which is the income level below which a person is considered to be poor. Inequality is the state of being unequal. It is often measured by the Gini coefficient, which is a measure of inequality.

Economic growth is the increase in the amount of goods and services produced by an economy over time. It is often measured by the annual percentage change in GDP. Economic development is the process of improving the standard of living of a country’s people. It is often measured by the Human Development Index, which is a composite measure of life expectancy, Education, and income. Sustainable Development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It is often measured by the Ecological Footprint, which is a measure of the amount of Resources that a country uses relative to the amount of resources that the Earth can sustainably provide.

National income is an important measure of the economic activity of a country. It can be used to track economic growth, to compare the economic performance of different countries, and to identify areas where economic policy can be improved. Income distribution, poverty, inequality, economic growth, economic development, and sustainable development are all important issues that affect the well-being of people in a country. By understanding these issues, we can better understand the challenges and opportunities that face our world.

What is national income?

National income is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period, such as a year.

What are the different types of national income?

There are three main types of national income: gross domestic product (GDP), gross national product (GNP), and net national product (NNP). GDP is the total market value of all final goods and services produced within a country’s borders in a specific time period. GNP is the total market value of all final goods and services produced by a country’s citizens, regardless of where they are located. NNP is the total market value of all final goods and services produced by a country’s citizens, minus depreciation.

What are the components of national income?

The components of national income are consumption, Investment, government spending, and net exports. Consumption is the total amount of goods and services that households purchase. Investment is the total amount of money that businesses spend on new capital goods, such as machinery and equipment. Government spending is the total amount of money that the government spends on goods and services. Net exports are the difference between the value of a country’s exports and the value of its imports.

What are the benefits of measuring national income?

There are several benefits of measuring national income. First, it allows us to track the overall health of an economy. Second, it can be used to compare the economic performance of different countries. Third, it can be used to identify areas where the government may need to intervene to stimulate economic growth.

What are the limitations of measuring national income?

There are several limitations of measuring national income. First, it does not account for the value of non-market goods and services, such as household work and volunteer work. Second, it does not account for changes in the distribution of income. Third, it does not account for environmental costs.

What are some of the challenges in measuring national income?

One of the biggest challenges in measuring national income is accurately measuring the value of goods and services that are not sold in markets. For example, how do we measure the value of a parent’s time spent caring for their children? Another challenge is accurately measuring the value of goods and services that are produced in the informal economy. The informal economy is the part of the economy that is not regulated by the government. This includes activities such as street vending, illegal gambling, and drug trafficking.

What are some of the uses of national income data?

National income data can be used for a variety of purposes, including:

• Tracking the overall health of an economy
• Comparing the economic performance of different countries
• Identifying areas where the government may need to intervene to stimulate economic growth
• Determining the level of Taxation and government spending
• Making decisions about Monetary Policy
• Forecasting future economic growth

Question 1

Which of the following is not a component of national income?

(A) Consumption
(B) Investment
(C) Government spending
(D) Exports

Answer
(D) Exports are not a component of national income. National income is the total market value of all final goods and services produced within a country’s borders in a given year. It is calculated by adding up the values of consumption, investment, government spending, and net exports.

Question 2

Which of the following is the most common measure of national income?

(A) Gross domestic product (GDP)
(B) Gross national product (GNP)
(C) Net national product (NNP)
(D) Gross national income (GNI)

Answer
(A) Gross domestic product (GDP) is the most common measure of national income. It is the total market value of all final goods and services produced within a country’s borders in a given year.

Question 3

Which of the following is the difference between GDP and GNP?

(A) GDP includes income earned by citizens of a country, while GNP includes income earned by all people working in a country, regardless of their Citizenship-2/”>Citizenship.
(B) GDP includes the value of all final goods and services produced within a country’s borders, while GNP includes the value of all final goods and services produced by a country’s citizens, regardless of where they are produced.
(C) GDP is a measure of economic activity, while GNP is a measure of economic well-being.
(D) GDP is a measure of economic output, while GNP is a measure of economic income.

Answer
(A) GDP includes income earned by citizens of a country, while GNP includes income earned by all people working in a country, regardless of their citizenship.

Question 4

Which of the following is the difference between NNP and GNI?

(A) NNP is a measure of economic activity, while GNI is a measure of economic well-being.
(B) NNP is a measure of economic output, while GNI is a measure of economic income.
(C) NNP includes depreciation, while GNI does not.
(D) NNP includes Net Factor Income from abroad, while GNI does not.

Answer
(C) NNP includes depreciation, while GNI does not. Depreciation is the decrease in the value of capital goods over time due to wear and tear.

Question 5

Which of the following is the difference between Nominal GDP and Real GDP?

(A) Nominal GDP is measured in current prices, while real GDP is measured in constant prices.
(B) Nominal GDP includes the value of all final goods and services produced within a country’s borders, while real GDP includes the value of all final goods and services produced within a country’s borders, adjusted for Inflation.
(C) Nominal GDP is a measure of economic activity, while real GDP is a measure of economic well-being.
(D) Nominal GDP is a measure of economic output, while real GDP is a measure of economic income.

Answer
(A) Nominal GDP is measured in current prices, while real GDP is measured in constant prices. Nominal GDP is the total market value of all final goods and services produced within a country’s borders in a given year, measured at current prices. Real GDP is the total market value of all final goods and services produced within a country’s borders in a given year, measured at constant prices.