National Income
National income or national product is defined as the total market value of all the final goods and
services produced in an economy in a given period of time. There are many concepts of national
income which are used by different economists and all of which are inter-related.
NI is the total net value of all goods and services produced within a nation over a specified
period of time, representing the sum of wages, profits, rents, interest, and pension payments to
residents of the nation.
It includes income from all the productive sectors such as Agricultural, Industrial and Service
Industry.
Final Goods: Final goods are those goods which have crossed the boundary line of production,
and are ready for use by their final users. Final users may be consumers and any firm. Final
goods as used by the producers are called capital goods.
Intermediate Goods: These are those goods which are not out of the boundary line of
production and are yet not ready for use by their final users. These used are largely used as raw
material.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to
wear and tear. Depreciation is a non-cash expense that reduces the value of an asset over time.
Assets depreciate for two reasons: Wear and tear.
Net factor income from abroad (NFIA): Factor income earned by our residents from abroad-
Factor income earned by non residents within our country.
Transfer Payment: A payment made or income received in which no goods or services are
being paid for, such as a benefit payment or subsidy.
A no compensatory government payment to individuals, as for welfare or social security benefits
is transfer payment. People sometimes get income without any productive activity.
Ex: Unemployment benefits, old age pensions etc.
Change in Stock: It is measured as the difference between “Closing Stock” of the accounting
year and “Opening stock” of the accounting year.
Change in Stock = Closing Stock – Opening Stock
GDPMP: GDPMP refers to the market value of final goods and services produced within the
domestic territory of a country during an accounting year.
GDPMP is the sum total of value added by all producing units within the domestic territory of a
country during the period of an accounting year.
GNPMP: Gross National Product is the total market value of all final goods and services
produced annually in a country plus net factor income from abroad.
GNP=GDP+NFIA (Net Factor Income from Abroad)
NNPMP: Net National Product is the market value of all final goods and services after allowing
for depreciation. It is also called National Income at market price. When charges for depreciation
are deducted from the gross national product, we get it. Thus,
NNP=GNP-Depreciation
Personal Income (PI): Personal Income i s the total money income received by individuals and
households of a country from all possible sources before direct taxes. Therefore, personal income
can be expressed as follows: PI = NI - Corporate Income Taxes - Undistributed Corporate Profits
- Social Security Contribution + Transfer Payments
Disposable Income (DI) : The income left after the payment of direct taxes from personal income is
called Disposable Income. Disposable income means actual income which can be spent on
consumption by individuals and families. Thus, it can be expressed as:
DI=PI-Direct Taxes
Per Capita Income (PCI): Per Capita Income of a country is derived by dividing the national
income of the country by the total population of a country. Thus,
PCI=Total National Income/Total National Population
Methods of Measurement of National Income
1. Product Method or Value added Method
2. Income Method
3. Expenditure Method
Product Method/ Value added Method
Product method is that method, which measures domestic money by estimating the contribution of each
enterprise to production in the domestic territory of the country in an accounting year. Product method
or Value added method is also known as Industrial Origin Method or Net output Method or Inventory
Method or Commodity Service method.
Value added is the difference between value of output of an enterprise and the value of its intermediate
consumption.
Value added= Value of Output- Value of Intermediate consumption
Value of Output= Sales (if entire output of the year is sold during the year) Value of
output= Sales + Change in Stock
Value added=GDP mp
To calculate the national income by this method, we need to identify and classify productive enterprises in three
categories:
1. Primary Sector
2. Secondary Sector
3. Tertiary Sector
Primary Sector includes agriculture and allied activities such as animal husbandry fisheries, forestry,
and mining etc. The Secondary Sector includes manufacturing sector which converts the raw materials
into finished products. The Tertiary Sector is the service sector which includes services such as
banking, insurance, transport, communication and trade etc.
After classification, net value added in each sector is calculated in an accounting year. Gross value
added is found by deducting the intermediate consumption from the value of production generated.
Precautions used in production or value added method
1. The sale and purchase of old goods and included but the commission charges by agents in their
transaction is a part of national income.
3. Imputed value of production for self-consumption is taken into account. Because, these goods are
like those produced for the market.
3. Imputed rent on the owner occupied house is included. Because all houses have rental value, no
matter these are self occupied or rented out.
4. Value of intermediate goods is not included into the estimation of national income.
5. Services for Self-consumption are not considered while estimating value added. Because it is difficult
to estimate their market value like services of housewives.
6. Income from illegal activities is not included in national income.
Income Method
This method is also known as factor cost method. Under this method, national income is obtained by
adding the incomes such as rent, wages, interest and profit received by all persons in the country during
a year. In practice, the income figures are obtainable mostly from income tax returns, books of accounts
and published accounts. To this, net income from foreign trade and net investment from abroad should
be added.
According to income method, the net income payments received by all citizens of a country in a
particular year are added up. The net incomes earned by the factors of production in the form of rent,
wage, interest and profit aggregated but incomes in the form of transfer payments are not included in the
national income.
NDPFC= Compensation of Employees + Operating Surplus + Mixed Income
Components of Income Method
Compensation of Employees: It includes Wages and salaries in cash, Employers contribution to social
security scheme, Pension on retirement, Bonus, Allowances etc.
Operating Surplus: It includes rent and royalty, interest, profit (dividend +corporation tax+
undistributed profits).
Mixed Income: It is the income of the self employed persons such as farmers, shopkeepers, doctors etc.
They generate goods and services with the help of their own land, capital and labour and thus earn
mixed income in the form of interest, profit rent and wages. This income is included in national income.
In India, this method is used for adding up the net income arising from trade, transport, public
administration, professional and domestic services. Due to lack of popularity of personal accounting
practices, this method cannot be fully used or practiced. This method is used only for some minor
sectors. None of these methods alone will give a more correct figure.
Precautions:
[Link] transfer income which does not represent earnings from productive services such as pension,
scholarship, unemployment doles, lottery prize, etc. are not to be included as they are not earned by
participating in the current production.
[Link] unpaid services like services of a housewife are to be excluded.
[Link] capital gains or loss (buying an old house, or resale of property) should be excluded.
[Link] tax, revenue to the government should be subtracted from the total income as it is only transfer
of income.
[Link] profits of companies, income from government etc. should be added. Subsidies given by the
government should be deducted from profits of the subsidized industry.
[Link] from sale of second hand goods is not included in national income.
[Link] from sales and purchase of old shares is not included in national income.
Expenditure Method
Expenditure method is the method which measures final expenditure on gross domestic product at
market price during an accounting year. Final expenditure is equal to the gross domestic product at
market price. This is also called “Income Disposal Method”, Consumption and Investment Method”.
According to the expenditure method, the total expenditure incurred by the society in a particular year is
added together. According to these methods total expenditure equals the national income. Following
items are included in it:
[Link] Final Consumption expenditure
[Link]. final consumption expenditure
[Link] domestic capital formation
[Link] in stock
[Link] exports.
[Link] Final Consumption Expenditure
It consists of expenditure on durable goods (e.g., furniture, cars, etc), non-durable goods (e.g., food
items and toiletries) and services (e.g., hotels, educational institutions, hospitals, public transport, etc.,)
by the household consumers.
The figures of private consumption expenditure may be collected from retail trade activities during an
accounting period.
But the purchases made by non-residents and foreign visitors should be deducted from the final
consumption expenditure in the domestic market whereas direct purchases made by resident households
abroad during foreign travel should be included in consumption expenditure.
[Link] Final Consumption Expenditure
The government final consumption expenditure refers to the final consumption expenditure by the
general government and it can be arrived at by summing up (a) value of net purchases in the domestic
market, (b) net purchases abroad.
[Link] Fixed Capital Formation
If consists of (a) Business fixed Investment, (b) Govt. Fixed Investment, (c) Investment on residential
construction.
[Link] in Stock as Inventory Investment
Change in stock is the difference between the opening stock and closing stock. All enterprises and
trading companies incur expenditure on stock of raw materials; semi finished goods or finished goods.
[Link] Exports of Goods and Services
It is the difference between the value of exports and imports of a country during an accounting period.
What the foreigners spend on a country’s exports is the part of expenditure on the Gross domestic
product.
Precautions used in Expenditure method
[Link] expenditure on current final goods should be included so expenditure on second hand goods
must not be added in aggregate expenditure.
[Link] intermediate expenditure also must not be included as it leads to double counting.
[Link] on transfer payments should not be taken account of.
[Link] domestic capital formation already has in it the replacement of machines therefore these two items
should not be separately included in aggregate expenditure.
[Link] on financial transactions, e.g., shares and bonds should not be included because these
transactions do not add to the flow of goods and services but only change the ownership of financial assets.
[Link] expenditure on final goods and services should be included in aggregate expenditure.
[Link] aggregate expenditure got by adding up various components includes in itself the cost of depreciation.
Thus, we have the concept of so as to arrive at the Net Domestic Product at market price; depreciation
should be deducted from it.
Problems in measurement of National Income
There are many difficulties in measuring national income of a country accurately. The difficulties
involved in national income accounting are both conceptual and statistical in nature. Some of these
difficulties involved in the measurement of national income are discussed below:
[Link] Monetary Transactions
The first problem in National Income accounting relates to the treatment of non-monetary transactions
such as the services of housewives to the members of the families. For example, if a man employees a
maid servant for household work, payment to her will appear as a positive item in the national income.
But, if the man were to marry to the maid servant, she would perform the same job as before but without
any extra payments. In this case, the national income will decrease as her services performed remains
the same as before.
[Link] of Double Counting
Only final goods and services should be included in the national income accounting. But, it is very
difficult to distinguish between final goods and intermediate goods and services. An intermediate goods
and service used for final consumption. The difference between final goods and services and
intermediate goods and services depends on the use of those goods and services so there are possibilities
of double counting.
[Link] Underground Economy
The underground economy consists of illegal and unclear transactions where the goods and services are
themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not
included in the national income; the national income seems to be less than the actual amount as they are
not included in the accounting.
[Link] Production
There are large numbers of petty producers and it is difficult to include their production in national
income because they do not maintain any account.
[Link] Services
Another problem is whether the public services like general administration, police, army services,
should be included in national income or not. It is very difficult to evaluate such services.
[Link] Payments
Individual get pension, unemployment allowance and interest on public loans, but these payments
creates difficulty in the measurement of national income. These earnings are a part of individual income
and they are also a part of government expenditures.
[Link] Gains or Loss
When the market prices of capital assets change the owners make capital gains or loss such gains or
losses are not included in national income.
[Link] Changes
National income is the money value of goods and services. Money value depends on market price,
which often changes. The problem of changing prices is one of the major problems of national income
accounting. Due to price rises the value of national income for particular year appends to increase even
when the production is decreasing.
[Link] and Salaries paid in Kind
Additional payments made in kind may not be included in national income. But, the facilities given in
kind are calculated as the supplements of wages and salaries on the income side.
[Link] and Ignorance
The main problem is whether to include the income generated within the country or even generated
abroad in national income and which method should be used in the measurement of national income.
[Link] hand transactions
[Link] and unrealistic statistics National Income in India
Precautions:
[Link] expenditure on current final goods should be included so expenditure on second hand goods
must not be added in aggregate expenditure.
[Link] intermediate expenditure also must not be included as it leads to double counting.
[Link] on transfer payments should not be taken account of.
[Link] domestic capital formation already has in it the replacement of machines therefore these two items
should not be separately included in aggregate expenditure.
[Link] on financial transactions, e.g., shares and bonds should not be included because these
transactions do not add to the flow of goods and services but only change the ownership of financial assets.
[Link] expenditure on final goods and services should be included in aggregate expenditure.
[Link] aggregate expenditure got by adding up various components includes in itself the cost of
depreciation. Thus, we have the concept of so as to arrive at the Net Domestic Product at market price;
depreciation should be deducted from it.
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