National Income

Definitions of National Income Marshall’s Production- based DefinitionNational income is the labour and capital of the

country, acting on its natural resources, produce annually a net aggregate of commodities, material and immaterial, including services of all kinds.

Pigou’s Income-based DefinitionNational dividend is that part of the objective income

of the community, including, of course, income derived from abroad, which can be measured in money.

Irving Fisher’s Consumption-based DefinitionThe true national income is that part of the annual net

produce which is directly consumed during the year.

Concepts in National-income Analysis Gross National Product GNP = Total government production + Total

individual production Net National Product NNP = GNP − Depreciation or replacement +

Net balance from international trade

National Income at Factor CostNI = NNP − (Indirect taxes + Subsidies)

Personal Income Personal income = NI − (Corporate

income taxes + social security contributions + Transfer payments + Undistributed profits)

Personal Disposable Income DI = Personal Income − Direct taxes DI = Consumption expenditure + Savings

Per Capita Income

Concepts in National-income Analysis

PopulationI N income capitaPer

Measuring National Income The Product Method

The net value of all commodities and services produced in the country during a given year are added up

The Income-received Method The net incomes received by individuals and

business enterprises in the country during a year.

The Consumption–Savings Method Based on the fact that the total income of the

community is spent on consumption and savings

A Comparison of the Three Methods The consumption–savings method is not

generally used because the necessary facts and figures cannot be easily obtained

The product and income methods are used. For the actual calculation, the national income

can be measured either by adding up the value of goods and services produced, or by adding up the money incomes received by the factors of production.

Sectoral Composition of National Income The contribution to national income by

different types of occupations or sectors such as agriculture, industry, transport and communications, banking and insurance, is known as sectoral contribution.

In India, the division of the various sectors of the economy is as follows Agriculture Manufacturing industries Trade and transports Other services

Estimates of India’s National Income: British India

Year Total income (INR crore)

Per capita income (INR)

Estimated by Coverage

1867–68 340 20 Dadabhoy Naoroji For most of British India

1882 530 27 Baring-Barbour For British India

1895 880 39.5 F. J. Atkinson ---do---

1897–98 670 30 Curzon ---do---

1898–99 430 18 W. Digby ---do---

1910–14 1770 58.5 Vakil and Muranjan For the whole of India

1913–14 1210 44 Wadia and Joshi For British India

1921 2600 107 Findlay Shirras ---do---

1921–22 2360 74 Shah and Khambatta For the whole of India

1925–29 2300 78 V. K. R. V. Rao For British India

1931–32 1690 62 ---do--- ---do---

945–46 2810 82.5 R. C. Desai For the whole of India

1945–46 6230 198 Ministry of Commerce For British India

Estimates of India’s National Income: Post-independenceIndian national income estimates have been

based upon four sets of statistical services: Estimates of national income published in

1956 with 1948–49 as the base year. Estimates of national product published in

1957 as a revision of the conventional series with 1960–61 as the base year.

The second revised edition was published in 1978 with 1970–71 as the base year.

A new series published in 1988 had 1980-81 as the base year.

Special Features of the 1980–81 Series Adopts a twin approach to compile national

income estimates Estimates of domestic production by

industrial origin Estimates of factor payments using the

income approach Contains data on and methods of estimating

forestry including firewood, unregistered and decentralized textiles sector, katcha construction work and such diverse areas of domestic industrial production

Difficulties Involved in the Measurement of National Income Existence of a large non-monetised sector Paradox in assigning incomes Exclusion of illegal activities Unreliability of statistical data Changing values of parameters used National income estimates are only

approximation Non-maintenance of accounts by producers Lack of occupational differentiations Lack of scientific data

Characteristics of the Indian Economy Meagre Increase in Real National Income Structural Changes in the Indian Economy Declining Share of the Public Sector Distribution of Income Capital Formation and Savings in India

Limitations of National Income Estimation in India The existence of a large non-monetized

sector Lack of data concerning the income of small

producers and household enterprises Absence of data on income distribution Unreported illegal income

Determinants of National Income Natural resources The quality of people in general, and labour

in particular Capital Organization Social and political structure

Causes of India’s Low National Income Economic Causes

Too much dependence all agriculture Lack of industrial development Inadequate trade and transport services Lack of banking and credit services

Political Causes Social Causes

Remedies to Improve India’s National Income Strengthening the agricultural base Speeding up industrial development and

encouraging diversification Developing an orderly and extensive network

of transport and communication system Mobilizing the saving potential of the country

and making the savings available to trade and industry

Spreading free and compulsory education

National Income and Economic Welfare Economic welfare is a general sense of well-

being people experience which they earn and spend what they earn on goods and services.

It is normally assumed that if the size of national income is increased, economic welfare is also increased and vice versa.

This generalization is not true in some cases.

National Income and Economic Welfare When there is a wrong priority of goods

produced When the incomes reflect wrong facilities When the workers are overworked When income is generated under unhealthy

conditions When there is no increase in real incomes When there is an improper and uneven

distribution If income is earned at the cost of leisure

Causes of Inequalities of National Income Distribution Acquired inequalities

Differences in intellect and physique Differences in sex Inheritance of property

Inborn inequalities Inequalities due to work Inequalities arising out of the nature of work Inequalities arising out of supply of and

demand for labour

Steps Taken by the Government to Reduce Inequalities The Minimum Wages Act 1948 Social security schemes Free education, free medical and maternity

aid, old-age pensions, sickness and accident compensations, provident fund schemes

Heavy tax on very high incomes Tax on articles of luxury and other duties

such as death duty, estate duty, etc.

Uses of National Income Data For measuring economic welfare For measuring per capita incomes For measuring the standard of living For comparisons over a time-period For measuring the savings-investment ratios For international comparisons For knowing sectoral compositions For economic forecasting For knowing the income distribution For economic planning For correcting regional imbalances For studying product-components