National Income
Meaning of national income:- National Income is the total value of all final goods and services produced by the country in certain year. The growth of National Income helps to know the progress of the country.
In other words meaning of National income:- 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.
Modern definition of National income :- “the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.”
* Concepts of National Income:
1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) at Market Prices
4. Net National Product (NNP) at Factor Cost or National Income
5. Personal Income
6. Disposable Income
NOW WE EXPLAINED THE CONCEPTS OF NATIONAL INCOME:-
1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year.
GDP:- C+ I+ G+(X- M)
GDP= Consumption+ investment+ government+ government spending( exports- imports)
2. Gross National Product (GNP): Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore,
GNP = GDP + Net factor income from abroad.
Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.
NNP = GNP – Depreciation
Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.
4. Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies
5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits.
Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.
6. Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus, Disposable
Income = Personal income – personal taxes.
Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving.
Personal Income vs. Disposable Income:
Measurement Of National Income
Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:
1. Output or Production method (Value-added method)
2. Income method, and
3. Expenditure method.
1. Output or Production Method: This method is also called the value-added method. This method approaches national income from the output side.
* Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services.
* Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year.
* In order to arrive at the net value of production of a given industry, intermediate goods purchase by the producers of this industry is deducted from the gross value of production of that industry.
*The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP.
* If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income.
2. Income Method: This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country.
This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc.
3. Expenditure Method: This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: -
GDP = C + I + G + (X – M).
There are two ways of problems
* conceptual difficulties
* statistical difficulties
Conceptual difficulties :-
- it is difficult to calculate the value of some of the items
- what price to choose to determine the monetary value of a national product is always a difficult question?
Statistical difficulties
-It is not always accurate as they are based on the sample survey
-In case of change in the price level we need use the index numbers which have their own limitations
-All the countries have different methods to estimating national income. thus it is not easily comparable
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