National Income

1st year POE - Principles of Economics Notes

 National Income





* Definition of National Income



* Concepts of National Income



* Methods of Calculating National Income



* Difficulties Faced while Calculating National Income



* Importance of National Income Computation in Modern Economic Analysis

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Definition of National Income



The term national income has been differently defined by different
authors. A very simple definition of national income can be given as :



"The National Income for any period consists of the money value of the
goods and services becoming available for consumption during the
period."



National income in the words of Pigou is:



"That part of objective income of the community including income derived from abroad which can be measured in money."



It is the aggregate factor of income i.e. earnings of labour and
property which arises from the current production of goods and services
by the nation's economy.

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Concepts of National Income



The various concepts of national income are given below:

1. Gross National Product (G.N.P)



Gross national product is defined as

“ The total market value of all final goods and services produced in a year”

Two things are important with respect to this definition:

Firstly, it measures the market value of amount output. Therefore it is a monetary measure.

Secondly, for calculating national product accurately all goods and services produced during a year must be counted only once.

G.N.P generally includes the following.

(i) Agricultural Product



In agricultural product wheat, rice, cotton, tobacco, jute all types of vegetables pulses, fruits etc are included.

(ii) Industrial Product



By industrial products we mean all types of machineries, means of
transportation, furniture, electronic items and other electric
equipments.

(iii) Mineral Product



It includes coal, iron, petroleum, natural gas, salts and other materials like gold silver etc.

Since, G.N.P deals in market prices these market prices may be obtained by adding up:

1. What private person spends on consumption?

2. What businessman spends on replacement, renewal or making new investment?

3. What the rest of the world spends on the out put of national economy.

4. What the government spends on the purchase of goods and services.

Equalization of G.N.P can be written as:

G.N.P = CONSUMER GOODS + CAPITAL GOODS + DEPRECIATION + INDIRECT TAXES





2. Net National Product (N.N.P)



During a year the production of gross nation al product some capital
goods are consumed i.e. the plants, machinery, and other equipments are
brought in use. The se capital goods due to utilization in the
production expire its value, commodity known as depreciation allowances
are deducted from the gross national product (G.N.P) we get the net
national product (N.N.P). Its equation can be given as:

N.N.P = G.N.P – DEPRECIATION

Thus the definition of the N.N.P can be properly written as, “The
market value of final goods and services after deducting the
depreciation charges is called net national product.





3. Personal Income (P.I)



The some of all incomes actually received by all individuals or
households during a given financial year is called personal income.
Personal income is different from national income for the simple reason
that some incomes such as social security contribution cooperate income
taxes and distributed profits which are included in national income
are not actually received by the house holds. The equation of personal
income thus can be written as:

PERSONAL INCOME (P.I)= NATIONAL INCOME – SOCIAL SECURITY CONTRIBUTION - COOPERATE INCOME TAX – UNDISTRIBUTED PROFITS

4. Disposable Income (D.I)



After payment of personal taxes like income tax, property tax etc.
What party of personal income is left for others consumption is called
disposable personal income. Its equation is:

DISPOSIBALE INCOME = PERSONAL INCOME - PERSONAL TAXES

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Methods of Calculating National Income



To calculate national income the following three methods are generally used:

1. Net output Method or Production Method



For calculating national income under this method the net output or
the production of various commodities is estimated and evaluated at the
market prices. For this purpose we take two steps,

Firstly we estimate the monetary value of the commodities that are
produced internally .The production or output of different sections of
the economy i.e. agricultural, manufacturing, trade, commerce,
transport etc is analyzed after deducting the depreciation charges.

Secondly; we consider the foreign business transactions that were
performed during the financial year. In this regards in this regard we
only consider the difference between exports and imports.

These two aggregate are then summoned up to get the gross domestic
product which in turn is deducted from the total revenue earned to
arrive at national income. In very simple words the contribution, which
each enterprise makes to total output, is equal to its total revenue
minus what is paid out to other enterprises and the depreciation of
equipment used in the process of production. The production method is
the most direct method for calculating national income. It s equation
can be written as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES





2. Income Method



Under this method the various factors of production are classified in a
few broad categories. The incomes of various and sectors are obtained
from there financial statements. Under this method the national income
is also estimated by summing up the income that arrives to the factors
of production provided by the national residents. Thus the rate at which
the national income is distributed among the various factors of
production is estimated. This method of calculating national income is
quite complex. Usually the undeveloped countries where most of the
people are not directly covered by direct taxation. Equation wise the
method can represent national income as:



NATIONAL INCOMER = RENTAL INCOME + WAGES + INTEREST + PROFIT





3. Expenditure or outlay Method



This method gives national income by adding up all public and private
expenditures made on goods and services during a year. It is obtained
by:

• Personal consumption expenditure of goods and services.

• Gross domestic private investment.

• Government purchase of goods and services.

• Net Foreign investment.

It must however be recognized that it is the final expenditure only which must be counted and not the immediate expenditure.

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Difficulties Faced while Calculating National Income



Some of the problems or the difficulties that are usually faced while calculating national income are as follows.

1. Problem of Definition



One of the greatest difficulties while calculating national income is
that what should be included and what excluded with respect to the
goods and services produced. As a general rule only those goods and
services which are bought and sold i.e. enter into exchange must be only
considered. For example the service of parents towards their children
is not a part of national income on the ground that there is no
investment of there market value. But allowances are made for some
non-exchangeable goods and services e.g. the national product include
the estimated value of food consume on farms. This creates a problem.

2. Calculation of Depreciation



Another problem is the calculation of depreciation. The main reason
behind it is that both the amount and the composition of jour capital
change from time to time. There are no standard or concept rules of
depreciation that can be applied. Since depreciation is an estimate so
correct deduction can be made until and unless these accurate
depreciation estimates are not deducted from the estimate of net
national product the net national income is bound to wrong.

3. Treatment of the Government



Government expenditures:

1. Defiance and administration expenditure.

2. Social welfare expenditure.

3. Payment of interest on national debts

4. Miscellaneous development expenditure.

The real problem that is faced relates to which of the above should be included in the national income.

4. Income from Foreign Firms



One of the major problem relates to the fact that weather the income
arising from the activities of the foreign firms operating in a country
should be included in the countries national income or not .With the
growing trend of doing business globally has increased this problem to a
great extant. However the I.M.F has given the viewpoint that the
production and income of these foreign forms should go to the owning
country while there profit must be credited to the parent concern.

5. Danger of Double Counting



Proper care is required for calculating national income so that double
counting may not take place. This problem usually arises in those
countries where proper documentation or statistics are not available.

6. Value of Inventories



Since it is not easy to calculate the value of raw materials, semi
finished and finished goods in the custody of producers there fore it
creates problems.

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Importance of National Income Computation in Modern Economic Analysis



The computation of national income is one of the very important
statistics for a country. IT has several important uses and therefore
there is a great need for there regular preparation. The following are
some of the important uses of national income statistics:

Level of Economic Welfare



The national income estimate reveals the overall performance of the
country during a given financial year. With the help of this statistics
the per capita income i.e. the income earned by every individual is
calculated. It is obtained by dividing the total national income by the
total population. With this we come to the level of economic welfare in
terms of its standard of living.

Rate of Economic Growth



With the help of national income statistics we can know weather the
economy is growing or declining. In simple words it helps us to know the
conditions of a country economy. If the national income is growing over
a period of year it means that the economy is growing and if the
national income has reduced as compares to the previous it reveals that
the economy is detraining. Similarly the growing per capita income shows
an increasing standard o living of the people which is a positive sign
of a nations growth and vice versa.

Distribution of Wealth



One of the most important objectives that is achieved after calculating
national income is to check its distribution among different categories
of income such as wages, profits, rents and interest. It helps to
understand that how well the income is distributed among the various
factors of the economy and their distribution among the people as well.

Ease in Planning



Since the national income estimates also contain the figures of saving,
consumption and investment in the economy so it proves to be a valuable
guide to economic policy relating to planning and active government
intervention in the economy. The estimates are used as a data for future
planning also.

Formation of Budget



Budget is an effective tool for planning and control. It is prepared in
the light of the information regarding consumption, saving, and
investment which are all provided by the national income estimates.
Further we can asses and evaluate the achievements or otherwise of the
development targets laid down in the plans from the changes in national
income and its various components.

Conclusion



Thus we may conclude that national income statistics chart the movement
of a country from depression to prosperity its rate of economic growth
and its standard of living in comparison with rest of the world.