The total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.
On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country.
- According to A.C. Pigou, “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money.”
- According to Marshall, “The labour and capital 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 national dividend.”
- According to Fisher, “The National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from the human environments. Thus, a piano, or an overcoat made for me this year is not a part of this year’s income, but an addition to the capital. Only the services rendered to me during this year by these things are income.”
The various concepts of national income are as follows:
1. Per Capita Income
- It is a measure of the amount of money that is being earned per person in a certain area.
- PCI = National Income/Population
- Gross National Product refers to the money value of total output or production of final goods and services produced by the nationals of a country during a given period of time, generally a year.
- In the calculation of GNP, we include the money value of goods and services produced by nationals outside the country.
- Hence, income produced and received by nationals of a country within the boundaries of foreign countries should be added in Gross Domestic Product (GDP) of the country.
- Similarly, income received by foreign nationals within the boundary of the country should be excluded from GDP.
GNP = GDP + X-M
X = Income earned and received by nationals within the boundaries of foreign countries.
M = Income received by foreign nationals within the country.
If X = M, then GNP = GDP.
Similarly, in a closed economy
X = M = 0
then also GNP = GDP
In equation form :
GNP = GDP + NFIA
Where NFIA = Net Factor Income from abroad
also NFIA = Factor incomes received from abroad --
Factor income paid to abroad.
It is to be noted here that in a closed economy which does not deal with outside world, has no NFIA, i.e. its NFIA is equal to Zero. Hence, for such countries, GDP = GNP
Gross Domestic Product (GDP)
- It is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time.
- So, domestic product emphasis the total output which is raised within the geographical boundaries of the country, national product focuses not only on the domestic product but also on goods and services produced outside the boundaries of a nation.
- In order to arrive at NNP, we deduct depreciation from GNP. The word ‘net’ refers to the exclusion of that part of total output which represents depreciation.
- So, NNP = GNP—Depreciation.
- When NNP is obtained at factor cost, it is known as National Income. National Income is calculated by subtracting net indirect taxes (i.e. total indirect taxsubsidy) from NNP at market prices. The obtained value is known as NNP at factor cost or National income.
- So, NNP at factor cost or National Income = NNP at market price – (Indirect Taxes – Subsidy)
- Personal Income is 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
- When personal direct taxes are subtracted from personal income, the obtained value is called disposable personal income (DPI).
- So, Disposable personal income DPI = PI (Personal Income) - Direct Taxes
- Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is the value of goods and services produced as expressed in terms of money at current prices. But it does not indicate the real state of the economy.
- Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index
Methods of Measuring National Income:
There are four methods of measuring national income. Which method is to be used depends on the availability of data in a country and the purpose in hand.
(1) Product Method:
According to this method, the total value of final goods and services produced in a country during a year is calculated at market prices. To find out the GNP, the data of all productive activities, such as agricultural products, wood received from forests, minerals received from mines, commodities produced by industries, the contributions to production made by transport, communications, insurance companies, lawyers, doctors, teachers, etc. are collected and assessed at market prices. Only the final goods and services are included and the intermediary goods and services are left out.
(2) Income Method
According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e., net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form of transfer payments are not included in it. The data pertaining to income are obtained from different sources, for instance, from income tax department in respect of high income groups and in case of workers from their wage bills.
(3) Expenditure Method:
According to this method, the total expenditure incurred by the society in a particular year is added together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment. This concept is based on the assumption that national income equals national expenditure.
(4) Value Added Method:
Another method of measuring national income is the value added by industries. The difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.