NATIONAL INCOME

National Income is the final outcome of all economic activities of a nation valued in terms

of money

What is economic activities

• Economic activities include all human activities which create good and services that can be valued at market price

• Eg. Production by farmers, goods and services by govt. enterprises, production by firms , banks, universities, colleges, professionals like doctor, lawyers etc.

Why do we study NY?(NI)National Income is the most important macro economic

variable and determinant of the business level and economic

status of a country

Importance of NI

• The level of NI determines the level of aggregate demand for goods and services.

• So it is for the decision makers and economic analysists to keep in mind the aspects of NI especially those having long term implication

Meaning of National Income

• Conceptually National Income is the money value of all final goods and services in a country during a period one year.

Marshall’s Definition

“The labor and capital resources 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 the national dividend.”

National income refers to

• The income of a country-to a specific 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

Double counting method

• If steel has been evaluated in industrial production, it should not be included while calculating the value of steel products, viz, machines and motor cars.

• To avoid double counting or multiple counting two methods are used

1.Final products method

• Adding the value of final products only

2.Value added method

• Go on adding the values created at each stage in the manufacture of a commodity.

• Then all such values created added up together to arrive at the national income of the country

1.National income concepts

• Gross national product-GNP: National income is the sum total values of all goods and services produced during a year. The money value of this total output is known as Gross national product-GNP

• Example: If A, B, C, D are goods and services and a,b,c,d are their prices respectively then GNP=AXa+BXb+CXc+DXd (quantityXprice)

• GNP is mostly frequently used in national income concept.

• It is statistically a simpler concept as it takes no account of depreciation and replacement problems.

Definition of GNP

• The GNP is defined as the value of all final goods and services produced during a specific period, usually one year plus income earned abroad by nationals minus incomes earned locally by foreigners.

PRODUCT FLOWS & MONEY FLOWS

• National Income can be defined from the angle of PRODUCT FLOWS and MONEY FLOWS

• While the economic activities generate flow of goods and services on one hand(product flows) they generate money flows on the other in the form of factors of payment – rent, wages, interest, profits.

Estimation of NI

• National income may also be estimated by adding the factor earning and ADJUSTING the sum for indirect taxes and subsidies. This is known as NI at factor cost.

• The GNP so defined is identical to concept of gross national income.

• GNP=GNI• GNP is estimated on the basis of product flows

and GNI is estimated on the money flows.

What is GDP(gross Domestic Product)

• GDP is defined as the market value of all final goods and services produced in the domestic country during a period of one year, plus income earned locally by foreigners ,minus income earned abroad by the national

2. Net National Product(NNP)

• This refers to the net production of goods and services in a country during a year.

• NNP is also called as national income at market prices.

• We get NNP from deducting the depreciation from GNP

• Therefore NNP=GNP-depreciation

Measurement of NNP

• NNP=NNI• NNP is measured at market prices including

direct taxes.• So Indirect taxes are deducted for NNP• NNP-Indirect taxes = National income

• Accounting identities at Market price• GNP=GNI• GDP=GNP-net income from abroad• (net income from abroad is income earned

abroad n nationals –income earnedlocally by foreigners

Accounting Identities

• Accounting identities at factor cost• GNP at factor cost= GNP at market price-net

indirect taxes• NNPat factor cost = NNP at market price –net

indirect taxes

3.Personal Income(PRIVATE INCOME)

• Income earned by all the individuals and institutions during a year in a country.

• The entire national income does not reach individuals and institutions- A part of it goes by way of corporate taxes- Undistributed profits- Social security contributions• People sometimes get income without any productive activity, they are

called Transfer Payments.• Example: unemployment benefits, old age pensions etc.• Such transfer payments are not included in the national income.• However they are added to Personal Income.• PI is computed by using the formula: PI=National Income-(corporate taxes,

undistributed profits, social security contributions)+ Transfer payments.

4.Per Capita Income

• If the national income is divided by the total population, we get per capita income.

• PCI=NI/Population• PCI may be expressed either in money terms

or in real terms.

VIEWS of economy

• For measuring national income – an economy is viewed from three different angles

• 1. The aggregate of productive units of different sectors such as agriculture,miningmanufacturing,trade and commerce service etc

• 2. combination of individuals and households owning different factors of production

• 3. collection of consuming,saving and investing units

National income-methods of computation

1. Production method or census method or Net output method or valued added metho

2. Factor Income method3. Expenditure method

1.Production method• The total products produced in the economy are calculated for

the year and the value is added without double counting.• The economy is classified into sectors like agricultural, industrial,

fisheries, forest, direct services and foreign transactions etc.• In each sector we can find the value of final goods and services.• In the international transactions, net foreign income is calculated

by subtracting the total imports from the total exports and added to the National Income.

• The result of these sectors when combined gives the national income or national product.

• The censes or production method can be expressed with formula: output=consumption of goods + investment goods.

• The output classification varies from country to country depending on the economic activities and availability of data.

• For eg in US 71 divisions are there to compute national output.

• Accoding to CSO (Central Statistical Organisation) in India only 15categories are currently used

2.Factor Income Method

• Net incomes of the individuals and business houses during a year added to know the national income.

• Only those incomes earned and received for producing goods and for rendering services are to be counted.

National Income =rent+wages+interest+profit(factor earning/factor payments

• Transfer payments such as old age pensions, widow pensions, unemployment benefits etc should not be counted as these are the incomes received without contribution to the production.

• The formula is : total income= consumption + savings

3.Expenditure method

• One man’s income is another man’s expenditure therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year.

• Expenditure or outlay on final products taken place in three ways:

-expenditure by consumers on goods and services.- Expenditure by entrepreneurs on capital or investment goods.- Expenditure by government on consumption and capital

goods.• Formula is total expenditure = consumption expenditure +

investment Expenditure.

Choice of methods

• All the three methods give the same measure of national income, provided required data for each method is adequately available.

• The most ommon method is net product method

• However no single method gives accurate measure

• So combination of method is used.

Measurement of national Income in India

• Currently output and income methods are used to estimate national income of the country

• The output method is used for agriculture and manufacturing sectors i.e., the commodity producing sectors.

• Here the value added method is used

• Secondly, income method is used for service sectors including trade, commerce, transport and govt. services.

Categories of economic activities in India

• 1. agriculture 2. forestry and logging 3. fishing 4.mining and quarrying 5. large scale manufacturing 6. small scale manufacturing 7.construction 8. electricity, gas and water supply 9. transport and communication 10.real estate and dwelling 11. public administration and defence 12. external transactions 13. banking and insurance 14.trade ,hotels and resturants 15. other services (education health etc.,)

Difficulties in computation of national income

• The statistics are not fully available.• Non monetized sector is fully dominant• Most people takeout their livelihood from more than

one activity• In backward economies like India particularly in rural

sectors the cultivators and small producers are illiterate and they do not keep books of accounts.

• Avoidance of double counting became complicated.• The village money lenders maintain absolute secracy of

their transactions.

Importance of national income

• This indicates the prosperity of a nation• Growth in national income indicates economies

prosperity.• It indicated the standard of living of people of a

country.• It indicates the per capita income with which we

can compare the level of development of all the countries

• It provides an instruments of economic planning