National Income Concepts

NATIONAL INCOME CONCEPTS

What is national income?

Answer:

The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities material an immaterial including services of all kinds- Marshall

National income consists solely of services as received by ultimate consumers, whether from their material or from their human environments- Fisher

A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication- National Income Committee of India (1951)

Gross national product at market prices is the market value of the produce before deduction of provisions for the consumption of fixed capital distributable to the factors of production supplied by the normal residents of the given country- United Nations Department of Economic Affairs

National income is a collection of goods and services reduced to a common basis by being measured in terms of money- Hicks

Therefore, all the above definitions make it clear that national income is the monetary measure of-

· The net value of all products and services

· In an economy during a year

· Counted without duplication

· After allowing for depression

· Both in the public and private sector of products and services

· In consumption and capital goods sector

· The net gains from international transactions.

What is gross national product (G.N.P.)?

Answer:

It is the basic measure of a nation’s output stated in terms of money representing the total value of a nation’s annual output. It is evaluated in terms of market prices. It includes all the economic productions in the economy from apples and automobiles to zinc and zippers.

G.N.P. is defined as the money value of the national production for any given period. Here we take into account:

· The money value of the final goods and services produced in the economy to avoid double counting. Intermediate products are excluded from it.

· The money value of only currently produced goods and services as G.N.P. is a measure of the economy’s productivity during the year.

· The word gross has significance. We do not deduct the depreciation or replacement of the fixed assets. In the process of production there is wear and tear of fixed assets. This depreciation is loss to the economy and it will not be deducted from GNP produced in the economy.

What is net national product (N.N.P.)?

Answer:

It refers to the net production of goods and services in a country during the year. It is G.N.P. less depreciation during the year.

N.N.P. = G.N.P. - depreciation for the given year

It is also called national income at market prices. It is a useful concept in study of growth economics as it takes into consideration the net increase in the total production of the country.

What is national income at factor cost (N.I.FC)?

Answer:

It is the total of all incomes earned by the owner of factors of production for their contribution of factors of production.

Therefore, for calculating it, such payments which are not made for any productive service is not included. Example- an individual may get gifts, transfer payments from business, etc. which form a part of his income but, since he has not rendered any service to get from them, they do not enter the calculation of national income at factor cost.

N.I.FC= N.N.P. - indirect taxes+ subsidies

It is therefore the aggregation of factor earnings. It does not include capital consumption allowance government business and individual transfer payments and indirect taxes. All these do not reach the factors of production. Similarly, if the government pays any subsidy in support of any industry whose cost of production is high, these subsidies have to be added.

What is personal income (P.I.)?

Answer:

This is the actual income received by the individuals and households in the country from all sources. It denotes aggregate money payments received by the people by way of wage, interest, profits, and rents. It is the spendable income at current prices available to individuals. Corporate income taxes and payment towards social security measured will not be available for individuals, so these have to be deducted from what is earned. Payments such as old age pensions, widow pensions, etc. that accrue to people have to be added.

P.I. = N.I. – corporate taxes – undistributed corporate profits – social security contributions + transfer payments

Transfer payments may be by government or business transfers, interest paid by government, dividends, etc.

What is disposable personal income (D.P.I.)?

Answer:

The whole of personal income is not available for consumption as personal direct taxes have to be paid. What is left after payment of personal direct taxes is call disposable personal income.

D.P.I = P.I. – personal taxes, property taxes and insurance payments

This is the amount available for individuals and households for consumption. It is not that the entire D.P.I. is spent on consumption. A part of it may be saved, therefore

D.P.I. = consumption + savings

What remains after saving is called the personal outlay, which represents the community’s demand for goods and services.

Discuss the various methods of calculating national income.

Answer:

There are three methods by which national income can be calculated-

I. Product Method

This is also called the output method, the inventory method or the census method. It consists of finding out the market value of all the goods and services produced during a year.

According to this method the economy is classified into different sectors, namely

· Direct sector: in this sector the value of services of such professions like doctors, dramatics, soldiers, politicians, etc., are taken by equating to their services.

· Agriculture industry

· International transaction sector: in this sector, we take into account the value of goods exported and imported payment from abroad, payments to other countries.

In each sector we make an inventory of goods produced and find out the end product making an addition to the value of goods. The value added method can be followed in order to avoid double counting. The value added of a firm is its output less whatever it purchases from other firms such as raw materials, and other inputs.

This method has a merit because it helps us to have a comparative idea of the importance of various activities in economy like agriculture, manufacturing, trade, etc. However in advanced countries this method may be successful as it is very easy to get data from government records. But in under developed countries this method may give rise to various problems like imputation of money values to non- monetized sector.

II. Income Method

This method refers to the gross national income obtained by adding together wages and salaries, interests, profits and rents of persons and institution and including government incomes are earned either from property or through work. To arrive at the totality of income of nation, the following procedure will be adopted:

a) Net rents include the rental value of owner occupied houses.

b) Wages, salaries and all such earnings of person employed, pensions are excluded.

c) Earnings by way of interest.

d) Income of joint stock companies.

e) Income from overseas investment.

This method gives national income at factor cost.

III. Expenditure Method

This method is also called the flow of product approach (by American economist Samuelson) or the outlay method.

Here we take into account the expenditure on finished products-

· Expenditure by consumers on goods and services.

· Expenditure by producers on investment of goods.

· Expenditure by government on consumption as well as capital goods.

To this we add money received from abroad through trade and other payments. This figure thus arrived at will give us G.N.P.

The merit of this method is that it believes in the identity between national expenditure, income and total product.

Whichever method we use the result should be more or less the same. In other words, they can be used to cross-check reliability of each other.