National Income
10.1
National Income
National Income may be defined as sum of net
money value of all final goods and services produced in a country in a year and
net factor income received from abroad.
The national income is
distributed as factor income (wages, salary, rent, interest, profit etc.) among
the factors of production. National income is measured by summing up all the
factors of income.
Factors
of production spend their factor incomes on final goods and services. National
income can also be determined by summing up all the final expenditures.
10.2 Elements of National
Income
National
income comprises various elements like:
-
Gross Domestic Product (GDP)
-
Net Domestic Product (NDP)
-
Per Capital Income
-
Gross National Product (GNP)
-
Net National Product (NNP)
-
Private Income
-
Personal Income
-
Personal Disposable Income (PDI)
10.2.1 Gross Domestic
Product (GDP)
Gross
domestic product may be defined as the money value of all the final goods and services
manufactured within the domestic
territory of a country during the finance year. Domestic territory
includes:
(a) Area lying within the
political frontiers, including territorial waters of the country.
(b) Ships and aircrafts
operated by the residents of India
(c) Fishing vessels, Oil and
Natural Gas Rigs, Floating Platforms operated by the residents of India
(d) Embassies, consulate and
military establishments of the country located abroad.
Standard
of living is measured by real GDP per capita.
Now a days service sectors
provide the major contribution to the country’s GDP.
10.2.1.1 GDP at Current
Prices
GDP determined on the basis
of the prices prevailing in the market, is termed as GDP at current prices or Real
GDP.
10.2.2 Net Domestic Product
(NDP)
Net GDP is computed as
subtracting from gross GDP
So, NDP = GDP – Depreciation
10.2.3 Per Capital Income
The
National Income divided by the population of the country is called its per
capital income or average income per head. The per capital income is a rough
index of the standard of living in the country as it shows the average amount
of income available to its citizens. In most part of the world, the national
income is distributed very unevenly among the people. The greater part of it
goes to richer classes. So the majority of the people have incomes considerably
less than per capital income.
10.2.4 Gross National
Product (GNP)
GDP is the money value of
all the final goods and services produced with in the domestic territory, but
it does not include net factor income from abroad.
Some Indian residents go
abroad to work and earn factor income. Similarly, some people come to India
Gross National Product is
the sum of the gross domestic (GDP) product and net factor income from abroad
(NFIA).
Symbolically GNP = GDP +
NFIA
Purchase of a new home is
an investment. Investment is part of GNP.
A country will be considered
growing if its GNP increases at constant price.
The largest contribution in
value terms to India’s GNP is made by Agriculture.
For studying long term
growth of the economy we should study the growth of real GNP.
Investment is part of GNP.
So, an increase in investment will increase GNP.
10.2.5 Net National Product
(NNP)
During the process of
production, the capital equipment of the country is gradually worn out. Some
also become obsolete. A certain part of the gross national product (GNP) must
be used for the replacement of worn out and obsolete capital goods or
maintaining the existing stock of capital intact. This part is not available
for consumption or investment by the people. GNP less the replacements is called
the Net National product or NNP.
Symbolically
NNP = GNP – Depreciation.
10.2.6 Private Income
Private Income relates to
income and other payments relating to private sector. It includes all payments,
earned by private sector within the country and abroad, plus all current
transfer payments.
Private Income = NI – Income from domestic product accruing to
Government sector + current transfer payments.
10.2.7 Personal Income
Personal income may be
defined as all current income obtained by households from all sources. In
national income analysis, the term personal income is used to denote the
aggregate money payments received by the individuals in a country.
Symbolically,
Personal Income = NNP + Transfer payments (as they can used by individuals) – undistributed profits (including corporate
taxes, as they are not available for use by the individuals)
10.2.8 Personal Disposable
Income (PDI)
All
the personal income are not spent by the individual. PDI is that part of personal
income, which the individual can spend the way they like. It is the residual
income with individual after deduction off all taxes levied against their
income & property by the Government.
Personal
disposable income may be symbolically represented as:
PDI
= Personal
Income – Direct Personal taxes – Miscellaneous fees and fines paid by the
households to the Government.
The following statements
mathematically summarise the various elements of National Income
|
GNP at market price -
depreciation
|
= NNP at market price
|
|
GNP at market price – net
income from abroad
|
= GDP at market price
|
|
GNP at market price – net
indirect taxes
|
= GNP at factor cost
|
|
NNP at market price – net
income from abroad
|
= NDP at market price
|
|
NNP at market price – net
indirect taxes
|
= NNP at factor cost
|
|
GDP at market price – net
indirect taxes
|
= GDP at factor cost
|
|
GNP at factor cost –
depreciation
|
= NNP at factor cost
|
|
NDP at market price – net
indirect taxes
|
= NDP at factor cost
|
|
GDP at factor cost -
depreciation
|
= NDP at factor cost
|
10.3 Measuring
National Income of a country
V.K.R.V. Rao the first to estimate the National
Income of India.
The national income of
India is estimated by the: Central Statistical Organisation.
The National Income can be measured
by three methods:
-
Commodity-Service Method
-
Incomes Received Method
-
Consumption-Savings Method
10.3.1 Commodity-Service Method
(a) Under this method the net
value of all commodities and services produced in the country during a year are
summed up. The total obtained is called the Final Products total..
Following are taken into
consideration:
(i) Net output of a firm implies
the value of its output less the materials purchased by it (known as Value
added by a firm). So, only the
value added by each firm should be added to get national income.
(ii) New capital assets produced
during the period.
(iii) The net payment from
international trade (+ or -) must be added to the value of the internal output to
get national income.
(iv) Depreciation or replacement
costs must be excluded.
(b) The Commodity-Service
Method gives the money value of the net national product.
10.3.2 Income-Received
Method
Under this method the net
incomes received by individuals and business enterprises in the country during
a year are summed up. The total obtained is termed the Factor Payments
Total.
When calculating the
Factor-Payments Total, the following consideration are taken into Account:
(i) Only the net incomes of
individuals and enterprises are to be added. The gross income includes wages
payments and other outgoings, which constitute the income of other individual
or enterprise. So, wages payments and other outgoings should be excluded.
(ii) Transfer payments must not
be considered as income for national income computation. Only those payments
are to be included which represent “a cost payment to a factor of production
for a contribution towards production”. Only such payments have a link with the
production of some commodity or service.
(iii) Payments due to the
employers’ own factors (e.g. his own land) must be counted on the basis of the
market price or their use if they enter into the cost of production of some
commodity.
(iv) Goods and services for
which no money payment is spent should not be counted (e.g. the work of the
housewife or the produce of a man’s garden which not is not sold in the
market), as there is no convenient method of measuring the value of such goods
and services.
(v) Sometimes a part of the
profits of business enterprises are transferred to reserve fund and not paid
out as dividend. Such undistributed profits must be included in the national
income accounts because they represent income earned during the period under
consideration.
10.3.3 Consumption-Savings
Method
Under this method, it is
assumed that total expenditure of the community on consumption plus the
aggregate savings must be equal to the community’s total income. Since savings
ultimately equal Investments, this method may also be called the
Consumption-Investment Method.
10.3.4 Evaluation of Income
Measurement Methods
The consumption-Savings
Method is not generally used because the necessary data cannot be easily available.
The data for the other two methods can be collected more easily and both the
methods are in general used for national income computation. Figures for
consumption and savings can be obtained from the production and income figures.
If consumption and savings or investment figures are available independently
they can be utilised for checking the accuracy of the figures otherwise obtained.
The national income can be
considered from two points of view: (i) as the sum total of the goods and
services manufactured in a country during a certain period (the flow of goods
and services) and (ii) as the sum total of the payments made to the factors of
production for their services in production (the flow of earnings). The former
is termed as the Final Products Total and the later is termed as the Factors
Payments Total. The two aggregates must be the same because income is earned by
producing output and the value of the total output must be equal to the total
income.
The total value of a
product
=Total rent + total wages + total interest + total profits
= Total payments to the
factors of production
Therefore, the Aggregate
Income of the Factors of Production.
The national income can be estimated
either by adding up the value of goods and services produced or by adding up
the money incomes earned by the factors of production. Both methods will give
the same result provided adequate precautions are taken. Statisticians usually
combine the two methods. In certain sectors of the economy it is easier to find
the value of the goods produced (e.g., agriculture or mining). In other sectors,
it is easier to find out the income of the factors and there from compute the
value of the goods and services produced (e.g. the professions like medicine,
law etc.)
10.3.5
Limitation of National Income Analysis
(i)
The national income is calculated in terms of money. But certain
things, like un paid personal services of a housewife services that a man does
for himself; free services obtained from the Government or local authorities,
like toll-free bridges; hobby products like pictures painted for amusements;
goods consumed by people producing them, e.g,. farm products eaten by
the farmer. Items, like those mentioned above, cannot be valued in terms of
money get excluded from the national income estimates. Their omission causes undervaluation
of the national income.
(ii) Incomes obtained from illegal
activities are not included in the national income (unless income tax is
paid thereon), e.g., production of illicit liquor or gambling. But the
products of such activities are wanted by the consumers and have utility in the
economic sense. The exclusion of such items results in an undervaluation of the national income.
(iii) It is difficult to distinguish
between a final product and an intermediate product.
(iv) The regional diversities in
prices and goods are so wide that those of one region cannot be taken as
typical for the whole country.
(v) In many countries tax
evasion is rampant. Therefore, the official national income figure is an
understatement.
(vi) Difficult problems arise
regarding the treatment of government expenditure and taxation in statistical computation. Opinions
differ among statisticians regarding these matters and different solutions have
been adopted in different countries.
(vii) Statistics are not always
accurate. Parts
of official statistics, even in advanced countries, are based on guesswork.
(viii) While comparing the figures
of different years, adjustment has to be made for changes in the
price index. But index numbers are not always accurate.
(ix) The national income figures
of different. countries are, not comparable. Consumer preferences and needs
are different in different countries. The price levels vary. Methods of
computing the national income also differ.
(x) The national income,
computed in terms of money, shows the amount of output but does not show the
efforts or sacrifice of leisure or the real cost of producing the output. Also,
it does not show the benefit obtained from natural amenities (e,g., sunshine
or the climate), the amount of which differs from country to country.
10.3.6 Utility of National Income Analysis
(i)
The National Income of a country is the sum total of the products (or
the earnings) of the different sectors of the economy. Its component parts (e.g.
agricultural incomes, industrial profits, wages of labour, professional
incomes, earnings from foreign trade etc.) depicts the estimates of the value of the component
parts. They also show how the earnings of the different sectors are related to
one another. So, National Income statistics constitute the "Accounts" of the economy (called
the Social Accounts).
(ii)
National income figures can be used to forecast the level of business
activity at later dates to find out trends in other annual data.
(iii)
The national income data are useful in getting an indication about the structure of the economy.
(iv)
The national income data can be used to determine the allocation of revenues and
"aids" between different political subdivisions of the country.
(v)
National income data can be used to' determine how an international
financial burden should be apportioned between different countries. The quantum
of national income measures the ability of a country to pay contributions for
international purposes.
(vi)
The national income data are indispensable for economic planning. The development plans of a country is based
on an appraisal of existing resources and diagnosis of deficiencies. These
things can be found out from the national income data.
10.3.7
Factors Determining Size of National Income
The size of the
National Income of a country is determined by the following factors.
i.
Natural
Resources: Nature
supplies the main ingredients of wealth production, Countries having sufficient
land, fertile soil, necessary minerals like coal and iron, power resources etc.
have the necessary potential for a high national income. Countries having poor
natural resources usually have low national incomes. The natural resources
must, however, be properly utilised. Some countries, even having abundant
natural resources, remain poor because they are unable to utilise the resources
properly.
ii.
Labour: Labour is required for the
production of wealth. The workers must be reasonably efficient. There must also
be adequate number of workers. From the standpoint of the per capita income
of a country, under population is as bad as overpopulation. In an under populated
country, the natural resources are inadequately utilised owing to lack of
labour. In an overpopulated country, the per capita income is low
because, there are too many to share the total income.
iii.
Capital: Efficient production is
impossible without modern machinery and equipment. The national income of underdeveloped
countries is low because of lack of capital. The rate of capital formation in a
country should be high enough to promote rapid growth.
iv.
Organisation: Skilled management is
necessary for a high level of production. In all high-income countries, efficient
leadership is available for industrial organisation.
v.
The
Social and Political Structure: Social and political institutions may retard or
accelerate economic development it. In underdeveloped countries there exist
many social barriers to progress. Democratic institutions are conducive to a
high national income. The political structure of a country is also important
from the standpoint of efficient production. The existence of law and order and
a sound and incorruptible administration are factors which promote economic
development and bring about a high level of national income.
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