National IncomeThe sum total of the values of all goods and services produced in a yearIt is the money value of the flow of goods and services available in an economy in a year
National IncomeNational Income refers to-The income of a country to a specified period of time, say a year includes all types of goods and services which have an exchange value counting each one of them only once
There are various concepts of national income. These areexplained below one by one:(1) Gross National Product (GNP).(2) Net National Product (NNP)/National Income.(3) Gross Domestic Product (GDP).(4) National Income at Factor Cost.(5) Personal Income.(6) Disposable Personal Income.
National Income conceptsGross National ProductGross National Product. GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non- residents located in that country. Basically, GNP measures the value of goods and services that the countrys citizens produced regardless of their location.
National Income conceptsNet National Product - NNP The monetary value of finished goods and services produced by a countrys citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation). NNP=GNP-Depreciation
Depreciation Allowance and Maintaining Capital Intact. Here aquestion can be asked as to what we actually mean by depreciationallowance and maintaining capital intact; (the words which we haveused in explaining NNP).It is known to every one of us that when production is going on, thevalue of capital equipments does not remain the same. A decrease invalue because of wear and tear through, use, rusting, accident orthrough actions of elements, gradually take place in the building andother equipments of business. A certain sum of money based on thevalue of the capital equipment and its longevity is set aside every yearfrom the gross annual income so that when machinery is worn out, anew capital equipment can be set up from the sum thus accumulated.This fund which is set aside for covering the wear and tear, deteriorationand obsolescence of the machinery is named as DepreciationAllowance. We can make this concept more clear by taking a simpleexample.
Example of NNP:Suppose, a person buys a machinery for manufacturing cloth for $10000 only.He expects that this machinery will last ten years and after that period, it willbe partially or completely worn out. He sets aside $1000 every year from thegross national income as a depreciation reserve of the capital equipment.After the expiry of ten years, he accumulates $10000 and with that money hereplaces the old capital equipment which has lived its useful life and maintainscapital intact. The sum of money, i.e., $1000 which he annually deducts fromthe gross annual income, is known asdepreciation allowance.It is often pointed out by economists that the calculation of depreciationallowance every year is a difficult task.For example, a person expects the longevity of the capital equipment, say forten years. There is a possibility that machinery may last longer or it may go outof use earlier. So they say what needed is an approximate decision regardingthe depreciation allowance. This decision should be based on high degree ofjudgment and guessing about the future.
(3) Gross Domestic Product (GDP):Definition and Explanation of GDP:It is a key concept in the national income. "Gross domesticproduct (GDP) is the total market value at current prices of allfinal goods and services produced within a year by the factors ofproduction located within a country".The labor and capital of a country working on its natural resourcesproduce a certain aggregate of commodities, material and non-material every year. In addition to this, there may be foreign firmsproducing goods in the various sectors of the economy like mining,electricity, manufacturing etc.
Distinction Between GDP and GNP:Here it seems necessary to make a distinction between grossdomestic product (GDP) and gross national product (GNP).Gross domestic product is the total market value of all finalgoods and services produced by factors of production within anations border during a periodof one years. In other words GDPis a flow of production produced within the country bydomestically located resources in a year.Gross national product (GNP) on the other hand, is the measureof all final goods and services produced by the citizens withintheir own country as well as outside the country during a periodof one year. In other words, GNP expresses the money value offlow of goods and services produced within the country and thenet income received from abroad during a period of one year.Thus when we move from GDP to GNP, we add factor incomereceipts from foreigners and subtract factor income payments toforeigners. Formula For GDP:GDP = GNP - Net Foreign Income From Abroad
NATIONAL INCOME AGGREGATESThere are many aggregates in national income accounting.The basic among these isGross Domestic Product at Market Price (GDPmp). By makingadjustments in GDPmp, we canderive other aggregates like Net Doemstic product at MarketPrice (NDPmp) and NDP at factorcost (NDPfc).Net Domestic ProductWhy is GDPmp called gross? GDPmp is final products valuedat market price. This is whatbuyers pay. But this is not what production units actuallyreceive. Out of what buyers pay theproduction units have to make provision for depreciation andpayment of indirect tax like excise,sales tax, etc. This explains why GDPmp is called ‘gross’. It iscalled gross because no provisionhas been made for depreciation. However, if depreciation isdeducted from the GDP, it becomesNet Domestic Product (NDP). Therefore,GDPmp - depreciation = NDPmp
Domestic product at Factor CostWhy is GDPmp called ‘at market price’ ?Out of what buyers pay, the production units have tomake payments of indirect taxes,if any. Sometimesproduction units receive subsidy on production. Thisis in addition to the marketprice which production units receive from thebuyers. Therefore what production units actuallyreceive is not the ‘market-price’ but “market price -indirect tax + subsidies” This is what is actuallyavailable to production units for distribution ofincome among the owners of factors of production.Therefore,Market price - indirect tax (I.T.) + subsidies = Factorpayments (or factor costs)By making adjustment of indirect tax and subsidieswe derive GDP at factor cost (GDPfc)from GDPmp..GDPmp - I.T. + subsidies = GDPfcor GDP - net I.T. = GDPfc
Net Domestic Product at Factor CostIf we make adjustment of both the net I.T and depreciation(also called consumption offixed capital) we get one more aggregate called Net DomesticProduct at Factor Cost (NDPfc)GDPmp - I.T. + Sub-depreciation = NDPfc.or NDPfc+ I.T. - Sub+depreciation = GDPmpNet National Product at Factor Cost (NNPfc) or NationalIncomeNet factor income from abroad (NFIA) provides the linkbetween NDP and NNP. Therefore,NDPfc + NFIA = NNPfcor NNPfc - NFIA = NDPfcSimilarly,NDPmp + NFIA = NNPmpGDPmp + NFIA = GNPmp
(5) Personal Income:Definition and Explanation:National income is the sum of factor income. Inother words, it is the income which individualsreceive for doing productive work in the form ofwages, rent, interest and profits. Personal income,on the other hand, includes all income which isactually received by all individuals in a year. Itincludes income which is not directly earned but isreceived by individuals.For example, Pensions, welfare payments arereceived by households but these are not elementsof national income because they are transfer
In the same way, in national incomeaccounting, individuals are attributed incomewhich they do not actually receive. Forexample, undistributed profits, employeescontribution for social security corporateincome taxes etc. are elements of nationalincome but are not received by individuals.Hence they are to be deducted from nationalincome to estimate the personal income.P.I. = N.I. – corporate taxes – undistributedcorporate profits – social securitycontributions + transfer payments
(6) Disposable Personal Income:Definition and Explanation:Disposable personal income is the amount which isactually at the disposal of households to spend as theylike. It is the amount which is left with thehouseholds after paying personal taxes such asincome tax, property tax, national insurancecontributions etc.Formula For Disposable Personal Income:Disposable personal income = Personal Income -Personal TaxesDPI = PI - Personal TaxesThe concept of disposable personal income is veryimportant for studying the consumption and savingbehavior of the individuals. It is the amount whichhouseholds can spend and save.Disposable Income = Consumption + SavingDI = C + S
Methods of calculating National IncomeThere are three approaches to the measurement of national income:Spending or Expenditure MethodIncome MethodProduction or Output Method Income = Expenditure = Output Y = E = OWhy output = expenditureUnsold output goes into inventory, and is counted as “inventory investment”… ….whether the inventory buildup was intentional or not. In effect, we are assuming that firms purchase their unsold output.
Spending or ExpenditureApproachThe spending approach divides GDP into four areas: Households (Consumption expenditures) (C) Businesses (Domestic Investment) (I) Government (Govt. expenditures) (G) and Foreigners (Export (X) and Imports (IM)of Goods and Services) (X-IM). GDP = E = C + I + G + (X–IM) where E is aggregate expenditure
•The Income Approach•The measure of GDP are calculated by adding allthe income earned by various factors ofproduction which are engaged in the productionof output.•Households supply business with the factors ofproduction in return for payment in the form of wages,rent, and interest•Proprietors income /Income of self employed (theprofits of partnerships and solely ownedbusinesses, like a family restaurant)
The Production ApproachThe measures of GDP are Calculated by adding the total value of the output (of goods and Service) produced by all activities during any time period, such as a year.The production approach looks at GDP from the standpoint of value added by each input in the production process.major challenge – problem of double counting Out put of many business = input of some otherEg : Out put of tyre industry is the input of bike industry… counting the out put of both industries will result in double….
Problems in calculating NationalIncomeBlack Money : It has created a parallel economy - unreported economy which is equivalent to the size of officially estimated size of the economyNon-Monetization : In most of the rural economy, considerable portion of transactions occurs informallyGrowing Service Sector : growing faster than Agricultural and Industrial sectors… value addition in legal consultancy, health service ,financial and business services is not based on accurate reporting.
House Hold Services : It ignoresdomestic work and house keepingservicesSocial Services : It ignores volunteerand unpaid social services. (MotherTeresa’s social service)Environment Cost : It does notdistinguish between environmental-friendly and environmental-hazardousindustries … cost of pollutingindustries is not included in theestimate.
Importance of national incomeIt indicates the prosperity of a nation. Growth in national income indicates economic prosperityIt indicates the standard of living of people of a countryIt indicates the per capita income with which we can compare the levels of development of all the countriesCountries can be classified as ‘developed’ and ‘developing’ and ‘under developed’ based on their per capita income only
Importance of national incomeNI estimates are very helpful to the Finance Minister. It guides him to make proper and right decisions in regard to taxation and budgetsIt is useful to compare the prosperity of a country at different timesIt provides an instrument of economic planningIt indicates the trends of inflation and deflation. Proper corrective action can be taken against them
Importance of national incomeIt helps to know the progress of various sectors in the economy. Imbalanced growth, if any, can be solvedIt helps in forecasting the economic future and preplanning is possibleIt indicates the economic status of a country among the nations of the world
Trends of national income of IndiaDuring the plan periods, national income and per capita income are increasing steadilyBut the rise in the per capita income is rather slow due to population growthAgricultural sector is the most important sector as it is the single largest contributor to the national incomeIn the recent years, the share of the government sector in national income is steadily increasing indicating the increased efficiency of the public sector