National Income - Introduction to the National Income

2. MEANING
• National income means the value of goods and
services produced by a country during a financial
year
• Thus, it is the net result of all economic activities of
any country during a period of one year and is
valued in terms of money.
• The formula of national income is: ni = c
(household consumption) + g (government
expenditure) + i (investment expense) + nx (net
exports).

3. DEFINITION
• The definitions of national income can be grouped into two classes:
one, the traditional definitions advanced by marshall, pigou and
fisher; and two, modern definitions.
• According to Marshall: “the labour and capital of a country acting
on its natural resources produce annually a certain net aggregate of
commodities, material and immaterial including services of all
kinds. This is the true net annual income or revenue of the country
or national dividend.” In this definition, the word ‘net’ refers to
deductions from the gross national income in respect of
depreciation and wearing out of machines. And to this, must be
added income from abroad.

4. IT’S DEFECTS:
• In the present day world, so varied and numerous are the
goods and services produced that it is very difficult to have a
correct estimation of them
• There always exists the fear of the mistake of double
counting, and hence the national income cannot be correctly
estimated
• For example, a peasant sells wheat worth rs.2000 to a flour
mill which sells wheat flour to the wholesaler and the
wholesaler sells it to the retailer who, in turn, sells it to the
customers. If each time, this wheat or its flour is taken into
consideration, it will work out to rs.8000, whereas, in
actuality, there is only an increase of rs.2000 in the national
income

5. Continue …
• Third, it is again not possible to have a correct estimation of
national income because many of the commodities produced
are not marketed and the producer either keeps the produce
for self-consumption or exchanges it for other commodities.
It generally happens in an agriculture- oriented country like
india. Thus the volume of national income is underestimated.
• In the words of pigou, “national income is that part of
objective income of the community, including of course
income derived from abroad which can be measured in

6. MODERN DEFINITIONS:
• From the modern point of view, Simon
kuznets has defined national income as “the
net output of commodities and services
flowing during the year from the country’s
productive system in the hands of the
ultimate consumers.”

7. Feature of national income
• It is calculated every year
• The word net refers to deduction to be done
from gross national income in respect of
depreciation
• It includes only those goods and services
that can be measured in terms of money
• Possibilities of double counting should be
avoided
• National income considers the actual and
final consumption of goods
• National income consider only the value of
final goods
• Inclusion of Net factor income from abroad

9. 1.GROSS NATIONAL PRODUCT( GNP)
• It is the total market value of final goods and services
produced in a year
• GNP measures the value of goods and services
produced by only a country's citizens but both
domestically and abroad.
• Gross national product takes into account the
manufacturing of tangible goods such as vehicles,
agricultural products, machinery, etc., As well as
the provision of services like healthcare, business
consultancy, and education. GNP also includes taxes
and depreciation.
• GNP = GDP + NET FACTOR INCOME FROM ABROAD

11. 2. NET NATIONAL PRODUCT ( NNP)
• Net national product (NNP) is gross national
product (GNP), the total value of finished
goods and services produced by a country's
citizens overseas and domestically, minus
depreciation.
• Net national product is also referred to as the
value that is obtained by subtracting
depreciation from the gross national product
(gnp).
• Net national product considers products that
are produced domestically and also from
overseas.

12. 3. GROSS DOMESTIC PRODUCT ( GDP )
• Gross domestic product (GDP) is a monetary
measure of the market value of all the final
goods and services produced in a specific time
period by countries without adding net factor
income received from abroad.
• Gdp provides an economic snapshot of a
country, used to estimate the size of an
economy and growth rate
• Gdp = gnp – income received from abroad

13. 4. NET DOMESTIC PRODUCT
• The net domestic product is defined as the net value of all the goods and
services produced within a country’s geographic borders. It is considered a
key indicator of economic growth of a country.
• The net domestic product NDP is calculated by subtracting the value of
depreciation of capital assets of the nation such as machinery, housing, and
vehicles from the gross domestic product (gdp).
• The NDP also takes into account the other factors such as obsolescence and
complete destruction of the asset. The depreciation is also referred to as
capital consumption allowance.
• If the gap between the gdp and ndp is narrower or smaller, then it is
considered good for an economy. Also, it indicates economic balance.
However, a wider gap between the GDP and NDP shows an increase in the
value of obsolescence.

14. 5. 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 received by
all the individuals or household during a
given period.
• It indicates the potential purchasing power
of households in an economy

15. 6. PER CAPITA INCOME ( PCI )
• Per capita income (PCI) or total income measures the
average income earned per person in a given
area (city, region, country, etc.) In a specified year.
• It is calculated by dividing the area's total income by
its total population.
• Per capita income is national income divided by
population size.

16. 7. DISPOSABLE PERSONAL INCOME( DPI)
• Disposable personal income (DPI) is how
much money a person has to spend
after taxes
• disposable personal income is the total
amount someone has after taxes to spend
on necessities, like housing and food
• It is calculated as dpi=gross wages-taxes.

19. A. The product method
• Under product method , production of all types of goods
is estimated and they are valued at market prices.
• The net production of all the industries in the countries are
added up like agriculture , industry, trade and commerce
etc.
• Product method is a method which measures domestic
income by estimating the contribution of each
producing enterprise to production in the domestic
territory of the country during an accounting year.
• In this method, we calculate the national income in terms
of final goods and services produced in an economy
during a particular period of time.

20. B. Income method
• Income method calculates national income based on the
flow of factor revenues.
• There are four factors associated with every production
activity; these are land, labor, capital, and entrepreneurship.
Laborers receive their wages, the land gets rent, capital
accrues interest, and entrepreneurship gets profit, each
earning through the individual means.
• National income is computed by summing up the rent of a
land, salaries of employees and wages, interest on capital,
surplus profits of entrepreneurs (including unallocated
corporate profits), and earnings of self-employed people.

21. C. Expenditure method
• Expenditure approach method involves in calculating the
value of the final goods consumed.
• The expenditure method is a system for calculating gross
domestic product (gdp) that combines consumption,
investment, government spending, and net exports
• The amount of spending on the consumption of goods and
services by the consumer
• There are four types of expenditures: consumption,
investment, government purchases and net foreign
investment . Each of these expenditure types represent the
market value of goods and services.

24. IMPORTANCE OF NATIONAL INCOME
1. Economic policy:
2. Economic planning
3. Economy’s structure:
4. Inflationary and deflationary gaps:
5. Budgetary policies:
6. National expenditure:
7. Distribution of grants-in-aid:
8. Standard of living comparison:
9. 9. International sphere:
10. Defence and development:
11. Public sector:

25. Major difficulties in the measurement of National
Income
1. Difficulties in defining the ‘Nation’
2. Lack of Proper information and data
3. The error of Double counting
4. Lack of availability of adequate statistical data
5. Non – Monetary transaction
6. Unpaid Services
7. Inapplicability of any one method.
8. Income from illegal activities
9. The calculation of depreciation

27. CIRCULAR FLOW OF INCOME
• The circular flow of income and expenditure refers to the
process whereby the national income and expenditure of an
economy flow in a circular manner continuously through
time.
• The circular flow model demonstrates how money moves
from producers to households and back again in an endless
loop.
• In an economy, money moves from producers to workers as
wages and then back from workers to producers as workers
spend money on products and services
• The basic purpose of the circular flow model is to
understand how money moves within an economy

28. LEAKAGE AND INJECTION
• Leakage (also called withdrawal) represents that part of
income which is not passed on in the circular flow of income,
and therefore, not available for spending on currently produced
goods and services, leakages have a contractionary effect on
national income.
• Leakage in the circular flow of income represents a situation
which occurs when some money is withdrawn,
• Leakages occur when the households and firm save a certain
portion of their income and is not used to buy goods and
services. So, this part remains idle and is not used to perform
economic activity which results in leakages.

29. WHAT ARE INJECTIONS?
• Injections are the inflow of income to
the circular flow. It occurs when some
money is introduced into the flow.
• Therefore, if the households and firm
borrow savings, it amounts to
injections. It can be investment,
government spending and exports. It
increases the income flow.

30. CIRCULAR FLOW IN A TWO SECTOR ECONOMY:
• There are only two sectors, the household and
business.
• The household sector owns all the factors of
production, that is, land, labour and capital.
This sector receives income by selling the
services of these factors to the business sector.
• The business sector consists of producers who
produce products and sell them to the
household sector or consumers. Thus the
household sector buys the output of products of
the business sector.

32. Circular flow in a three- sector closed
economy

33. CONTINUE ..
• There are three main sectors of economy consists
of household sectors, business sectors and
government sectors.
• Household sectors combine their income and
product, business sectors with the income and
product of the government sector will reach at the
national income in the economy.

34. • CIRCULAR FLOW BETWEEN THE HOUSEHOLD SECTOR AND THE GOVERNMENT
SECTOR.
Taxes in the form of personal income tax and commodity taxes paid by the
household sector are outflows or leakages from the circular flow.
• CIRCULAR FLOW BETWEEN THE BUSINESS SECTOR AND THE GOVERNMENT
SECTOR.
All types of taxes paid by the business sector to the government are leakages from the
circular flow.
On the other hand, the government purchases all its requirements of goods of all types
from the business sector, gives subsidies and makes transfer payments to firms in order
to encourage their production. These government expenditures are injections into the
circular flow.

35. • CIRCULAR FLOW BETWEEN THE BUSINESS SECTOR AND
THE GOVERNMENT SECTOR.
All types of taxes paid by the business sector to the
government are leakages from the circular flow.
On the other hand, the government purchases all its
requirements of goods of all types from the business
sector, gives subsidies and makes transfer payments
to firms in order to encourage their production.
These government expenditures are injections into
the circular flow.

37. CIRCULAR FLOW IN A FOUR-SECTOR OPEN
ECONOMY
• An economy is open where foreign trade
plays an important role.
• Exports are an injection or inflows into
the economy and create incomes for the
domestic firms.
• On the other hand, imports are leakages
from the circular flow. These are
expenditures incurred by the household
sector to purchase goods from foreign
countries.