Lovely Professional University

MATS LAW SCHOOL,

Mats University, Raipur

ECONOMICS - III

Definition of National Income and its Limitation

Project onSUBMITTED TO-

ASST. Professor Pankaj Umbarkar

Faculty of Law

Mats Law SchoolSUBMITTED BY-

AMAN GYAN DAS

B.A, L.L.B (Hons.)

SEMESTER- VI

MU12BALLB008Acknowledgement

I have put my sincere efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them.

I am highly indebted to Prof. Akash Kumar for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project.

I would like to express my gratitude towards my parents, seniors and my classmates for their kind co-operation and encouragement which help me in completion of this project.

My thanks and appreciations also go to my colleague in developing the project and people who have willingly helped me out with their abilities.

Index

1.Acknowledgement

Page no: 022.Introduction

Page no: 043.IMPORTANCE OF NATIONAL INCOME

Page no: 054.TYPES OF MEASURE OF NATIONAL INCOME Page no: 065.CONCEPTS OF NATIONAL INCOME

Page no: 06 6.MEASUREMENT OF NATIONAL INCOME Page no: 077.NATIONAL INCOME SERIES IN INDIA Page no: 088.LIMITATIONS OF NATIONAL INCOME

Page no: 089.Bibliography

Page no: 10

1. INTRODUCTION-It is defined as the aggregate factor income (earning of labour and land) which arises from the current production of goods and services by the nations economy.1.1 DefinitionsThe names of the measures consist of one of the words "Gross" or "Net", followed by one of the words "National" or "Domestic", followed by one of the words "Product", "Income", or "Expenditure". All of these terms can be explained separately.

"Gross" means total product, regardless of the use to which it is subsequently put.

"Net" means "Gross" minus the amount that must be used to offset depreciation ie., wear-and-tear or obsolescence of the nation's fixed capital assets. "Net" gives an indication of how much product is actually available for consumption or new investment.

"Domestic" means the boundary is geographical: we are counting all goods and services produced within the country's borders, regardless of by whom.

"National" means the boundary is defined by citizenship (nationality). We count all goods and services produced by the nationals of the country (or businesses owned by them) regardless of where that production physically takes place.

The output of a French-owned cotton factory in Senegal counts as part of the Domestic figures for Senegal, but the National figures of France.

"Product", "Income", and "Expenditure" refer to the three counting methodologies explained earlier: the product, income, and expenditure approaches. However the terms are used loosely.

"Product" is the general term, often used when any of the three approaches was actually used. Sometimes the word "Product" is used and then some additional symbol or phrase to indicate the methodology; so, for instance, we get "Gross Domestic Product by income", "GDP (income)", "GDP(I)", and similar constructions.

"Income" specifically means that the income approach was used.

"Expenditure" specifically means that the expenditure approach was used.

Note that all three counting methods should in theory give the same final figure. However, in practice minor differences are obtained from the three methods for several reasons, including changes in inventory levels and errors in the statistics. One problem for instance is that goods in inventory have been produced (therefore included in Product), but not yet sold (therefore not yet included in Expenditure). Similar timing issues can also cause a slight discrepancy between the value of goods produced (Product) and the payments to the factors that produced the goods (Income), particularly if inputs are purchased on credit, and also because wages are collected often after a period of production.Traditional Definitions

Marshallion: the labour and capital of a country acting on its natural resources produces annually a certain net aggregate of commodities ,material and immaterial including services of all kindPigovian :national income is that part of objective income of the community including ofcourse income derived from abroad which can be measured in moneyModern definitionThe net output of commodities and services flowing during the year from countrys productive system in the hands of ultimate consumers.2.IMPORTANCE OF NATIONAL INCOME:

National Income is considered an important indicator of economic development of a country. There is no doubt that if national income increases over a long period of time, the economic conditions of the people improve. It is, therefore, suggested that while estimating the economic growth in a country, the level of income and the rate of increase in national income should both be taken into consideration.3. TYPES OF MEASURE OF NATIONAL INCOME:

Following are the measures of national Income: As the sum of all incomes, in cash and kind, according to factor of Production, in a given time period.

As the sum of net output arising in several sectors of nations production.

As the sum of consumers, government expenditure on goods and services and net expenditure on capital goods.

4. CONCEPTS OF NATIONAL INCOME:

The various concepts of national income are given below;

1) Gross National Product (G.N.P): This is the basic social accounting measure of total output or aggregate supply of goods and services. Gross National Product is defined as the total market value of all final goods and services produced in a year.2) Gross Domestic Product (G.D.P): Gross Domestic Product is the most comprehensive measure of economic activity and a broad measure of peoples income and well-being. The growth in real GDP is hence a measure of the growth of peoples real incomes and therefore the pace of improvement in living standards. 3) Net National Product (N.N.P): In the production of gross national product of a year, we consume or use up some capital (equipment, machinery). It is generally known as depreciation, when charges for depreciation are deducted. When charges for depreciation are deducted from the gross national product, we get net national product. NNP = GNP - DEPRECIATION

4) National Income at Factor Cost: National Income at factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labour, capital and entrepreneurial ability which go into the years net production. In other words, it shows how much it costs society in terms of economic resources to produce net product. National Income at Factor Cost = NNP Indirect Taxes + Subsidies.

5) Personal Income (P.I): Personal Income is the sum of all incomes actually received by all individuals or households during a given year.Personal Income = National Income - Social Security Contribution -Corporate Income Taxes - Undistributed Corporate Profits + Transfer Payments.

6) Disposal Income (D.I): After a good part of personal income is paid to government in the form of personal taxes like income tax, personal property tax, etc., what remains of personal income is called disposable income.

Disposable Income = Personal Income Personal Taxes.5. MEASUREMENT OF NATIONAL INCOME:

There are three possible measures of national income:

1) The Income Method: This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country.

2) The Production or Output Method: This method approaches national Income from the output side. According to this method, the economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. Then the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given year.

3) The Expenditure Method: We can get national income by summing up all the consumption expenditure and investment expenditure made by all individuals as well as the government of a country during a year.6. NATIONAL INCOME SERIES IN INDIA:

After independence, a regular national accounts system was initiated in the mid-sixties. Indian system of national account statistics (NAS) follows the united nations (UN) system of national accounts (1968). Based on the national income committees recommendation (1954), the central statistical organization (CSO) has been making continuous efforts to improve the quality of these statistics. Shifting the base year to revise the series is one such effort. The CSO revised its national accounts series by shifting the base year to 1970-71. With improved data base and extended coverage, the CSO revised its series again by shifting the base year to 1980-81, and then to 1993-94. Recently CSO has revised its series within six year period by shifting the base to 1999-2000.7. LIMITATIONS OF NATIONAL INCOME: Errors in Measurement:Black Marketand underground activities are not included when calculating GDP. This is because there is no way to accurately measure black market activity. In the United States, this is a relatively small percentage of the total GDP; however, in many other less developed countries, it can go as high as 70% of the country's total GDP. Another big measurement error is inflation. It is adjusted according to base prices and various other things and the range of possible inflation can be as much as 1% to 15% in some places.

Subcategories that are Misrepresented:The various interpretations of what should be included in consumption or government spending plays a big part in the overall determination of GDP. Decisions are made about what is to be included where, but minor discrepancies will always arise.

Welfare is NOT Measured:GDP only measures the market activity and does not take welfare into account. The economic activity of a country could rise, while welfare could possibly have fallen. Different situations may occur that have a negative impact on the people which cause them to increase spending, therefore increasing the GDP. DIFFICULTIES OR PROBLEMS IN CORRECT MEASUREMENT:

There are some problems which crop up when measuring national income of a country, some are as below-

1)Problems of Definition: Ideally we should include all goods and services produced in the course of the year; but there are some parts of the total which defy measurement. The services of housewives, for example, are not included on the ground that there is no means of assessing their market value.

2)Calculation of Depreciation: The question of calculation of depreciation on capital consumption presents another formidable difficulty. Unless from the gross national income correct deductions are made for depreciation, the estimate of net national income is bound to go wrong. The main problem is that both the amount and the composition of capital are changing all the time.

3)Value of Inventories: It is not easy to calculate the value of inventories, i.e., raw materials, semi-finished and finished goods in the custody of the producers.

4)The Treatment of Government: Another difficulty arises with regard to the treatment of Government in national income accounts. On this point, the general viewpoint is that as regards the administrative functions of the government like justice, administration and defence, they should be treated as giving rise to final consumption of such services by the community as a whole, so that the contribution of general government activities will be equal to the amount of wages and salaries paid by the government.

5)Income by Foreign Firms: Another major problem arises with regard to the treatment of income arising out of activities of the foreign firms in a country. On this point, The IMF viewpoint is that production and income arising from an enterprise should be ascribed to the territory in which production takes place. However, profits earned by foreign branches and subsidiaries are credited to the parent concern.

8. BIBLIOGRAPHY:

1. www.indiastat.com

2. http://dqw3fn8dnd.487/trh3. www.worldbank.org /Data4. www.economywatch.com

5. http://business.mapsofindia.com

6. http://www.Economictimes.com7. http://www.Businesstimes.comPage | 2