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 1st 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 1st 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 accounting is a system of accounting that measures the economic activity of a country. It is used to track the country’s economic growth, to identify areas of economic strength and weakness, and to make economic policy decisions.
The national income accounts are based on the following principles:
- The principle of double counting states that the value of a good or service should only be counted once in the national income accounts.
- The principle of net income states that only the net income from a good or service should be counted in the national income accounts.
- The principle of market value states that the value of a good or service should be measured at its market value.
- The principle of factor cost states that the value of a good or service should be measured at the cost of the factors of production that were used to produce it.
- The principle of consistency states that the national income accounts should be consistent with each other.
- The principle of timeliness states that the national income accounts should be published as soon as possible after the end of the period they cover.
- The principle of accuracy states that the national income accounts should be as accurate as possible.
The national income accounts are used for the following purposes:
- To measure economic growth.
- To identify areas of economic strength and weakness.
- To make economic policy decisions.
- To track the distribution of income.
- To track the Balance of Payments.
- To track the level of Inflation.
- To track the level of unemployment.
- To track the level of poverty.
- To track the level of economic development.
The national income accounts are a valuable tool for policymakers and businesses alike. They provide a comprehensive picture of the economy and can be used to track economic trends, identify areas of concern, and make informed decisions about economic policy.
The national income accounts are also a valuable tool for individuals. They can be used to track the economic well-being of individuals and families, and to make informed decisions about personal finance.
The national income accounts are a complex system, but they are an essential tool for understanding the economy. They provide a comprehensive picture of the economy and can be used to track economic trends, identify areas of concern, and make informed decisions about economic policy.
Here are some additional details about the national income accounts:
- The national income accounts are compiled by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.
- The BEA publishes the national income accounts on a quarterly basis.
- The national income accounts are divided into four major categories: consumption, Investment, government spending, and net exports.
- Consumption is the spending of individuals on goods and services.
- Investment is the spending of businesses on new Capital Goods and inventories.
- Government spending is the spending of the government on goods and services, transfer payments, and interest payments.
- Net exports is the value of a country’s exports minus the value of its imports.
- The national income accounts are used to measure economic growth. Economic growth is the increase in the real value of a country’s output over time.
- The national income accounts are also used to identify areas of economic strength and weakness. For example, if the national income accounts show that investment is increasing, it suggests that businesses are optimistic about the future and are investing in new capital goods.
- The national income accounts are also used to make economic policy decisions. For example, if the national income accounts show that unemployment is high, the government may decide to increase spending on unemployment benefits.
- The national income accounts are also used to track the distribution of income. The distribution of income refers to the way in which income is distributed among the Population.
- The national income accounts are also used to track the balance of payments. The balance of payments is a record of a country’s international transactions.
- The national income accounts are also used to track the level of inflation. Inflation is a general increase in prices.
- The national income accounts are also used to track the level of unemployment. Unemployment is the percentage of the labor force that is unemployed.
- The national income accounts are also used to track the level of poverty. Poverty is the state of being poor.
- The national income accounts are also used to track the level of economic development. Economic development is the process of economic growth and structural change that leads to a rise in living standards.
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. It is usually calculated as the sum of gross domestic product (GDP), net income from abroad, and current transfers from abroad.
What are the different ways to measure national income?
There are three main ways to measure national income: the expenditure approach, the income approach, and the production approach.
The expenditure approach measures national income by adding up the total amount of spending on goods and services produced in a country. This includes spending by consumers, businesses, governments, and foreigners.
The income approach measures national income by adding up the total income earned by all factors of production in a country. This includes wages, salaries, profits, interest, and rents.
The production approach measures national income by adding up the total value added at each stage of production in a country. This includes the value of raw materials, intermediate goods, and final goods.
What are the different components of national income?
The main components of national income are consumption, investment, government spending, and net exports.
Consumption is the total amount of spending by households on goods and services.
Investment is the total amount of spending by businesses on new capital goods, such as factories and equipment.
Government spending is the total amount of spending by governments on goods and services, such as Education and healthcare.
Net exports are the difference between exports and imports. Exports are the total amount of goods and services that a country sells to other countries. Imports are the total amount of goods and services that a country buys from other countries.
What are the uses of national income data?
National income data is used for a variety of purposes, including:
- Measuring economic growth
- Analyzing economic trends
- Forecasting future economic activity
- Making economic policy decisions
- Assessing the standard of living
- Comparing economic performance across countries
What are the limitations of national income data?
National income data is not perfect and has a number of limitations. Some of these limitations include:
- It does not include non-market activities, such as housework and volunteer work.
- It does not include the value of leisure time.
- It is affected by changes in prices.
- It is based on estimates, which can be inaccurate.
Despite these limitations, national income data is a valuable tool for understanding the economy.
Question 1
Which of the following is not a component of GDP?
(A) Consumption
(B) Investment
(C) Government spending
(D) Exports
(E) Imports
Answer
(E) Imports are not a component of GDP. GDP 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 a measure of economic growth?
(A) GDP
(B) GNI
(C) GNP
(D) All of the above
Answer
(D) All of the above are measures of economic growth. GDP is the total market value of all final goods and services produced within a country’s borders in a given year. GNI is the total market value of all final goods and services produced by a country’s residents, regardless of where they are located. GNP is the total market value of all final goods and services produced by a country’s factors of production, regardless of where they are located.
Question 3
Which of the following is a measure of inflation?
(A) CPI
(B) PPI
(C) GDP Deflator
(D) All of the above
Answer
(D) All of the above are measures of inflation. The CPI is a measure of the Average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The PPI is a measure of the average change over time in the prices received by domestic producers for their output. The GDP deflator is a measure of the average change over time in the prices of all goods and services included in GDP.
Question 4
Which of the following is a measure of unemployment?
(A) U-3
(B) U-4
(C) U-5
(D) U-6
Answer
(D) U-6 is the most comprehensive measure of unemployment. It includes all unemployed people, as well as people who are underemployed and discouraged workers. U-3 is the official unemployment rate, which is calculated by the Bureau of Labor Statistics. It includes only people who are actively looking for work and are currently unemployed. U-4 includes U-3 plus people who are marginally attached to the labor force, which are people who are not currently looking for work but would be willing to work if they could find a job. U-5 includes U-4 plus people who are part-time for economic reasons, which are people who would prefer to work full-time but are only able to find part-time work.
Question 5
Which of the following is a measure of poverty?
(A) The Poverty Line
(B) The official poverty rate
(C) The Supplemental Poverty Measure
Answer
(C) The Supplemental Poverty Measure is a more comprehensive measure of poverty than the official poverty rate. It includes the value of noncash benefits, such as food stamps and housing assistance, in its calculation of poverty. The official poverty rate is calculated by the Census Bureau and is based on the cost of a minimum food diet.