Table of Contents


National Income


It is generally defined as income of the nation. It reveals the nature of economic activities in a country. It also gives us an idea of a country’s aggregate economic activity.


According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, reduced annually a certain net aggregate of commodity and material including services of all kinds.”

Hence, Net means from the gross value of output, the depreciation must be deducted.


According to National Income Committee of India, “a national income estimates and measures the volume of commodity and services produced during a given period.”


National Income has 3 interpretations:

  1. Income
  2. Consumption
  3. Saving

Features:

Features of national income are as follows: -


  1. It is calculated every year.
  2. It includes different kind of services rendered by the people in society.
  3. It includes only those consumption and savings that can be measured in terms of money.
  4. While calculating National Income, the possibility of double counting must be avoided.
  5. National Income considers the actual and final consumption of goods and services.

Basic concepts related to National Income:

One must know about the following basic concepts before calculating National Income: -


1. National Income (NNPfc) – NNP at factor cost is the net value of all goods and services produced by a country's residents, adjusted for depreciation, and calculated at the cost of the factors of production (labour, capital, etc.). It is also known as National Income and is calculated by subtracting depreciation from Gross National Product (GNP).

(NNP = GNP – Depreciation)

 

2. Domestic Income (NDPfc) – Domestic income is the total income earned within a country's geographical borders during a specific period, including income generated by both residents and non-residents, such as wages, profits, rents, and interest. Unlike national income, domestic income excludes any income earned by a country's residents from outside its borders. 


3. Net Factor Income from Abroad (NFIA) – it is the excess of factor incomes (rent, wages, interest, profit) earned from abroad over factor incomes paid to abroad.

NFIA = Factor Income from Abroad – Factor Income to Abroad


4. Depreciation (or Consumption of fixed capital) – it is the continuous fall in the value of fixed assets due to normal wear and tear, passage of time, expected obsolescence or change in technology over a period of time.


5. Indirect Tax – it is a tax imposed by government on production and sale of goods and services e.g. Goods and services tax (GST). Indirect taxes increase market prices of goods and services.


6. Subsidy – it is a form of financial/economic assistance given by the government to the firms and households, with a motive of general welfare e.g. Subsidy on price of cooking gas to the households, Interest-free loan to the firms, etc. Subsidies reduce the market prices of goods and services.

Net Indirect Taxes = Indirect Taxes – Subsidy


Estimation of National Income:

There are 3 methods for estimating National Income: -


1. Product Method or Value Added Method –


Value Added = Value of Output – Intermediate Consumption

Value of Output = sales + change in stock

Sales = Quantity x Price

Change in Stock = closing stock – opening stock


GVAmp = GDPmp

GVAmp of Primary Sector + GVAmp of Secondary Sector + GVAmp of Tertiary Sector = GDPmp

NDPfc (domestic income) = GDPmp – Depreciation – Net indirect taxes

National income (NNPfc) = NDPfc + NFIA


Precautions –

Precautions to take while using product method: -


a. Avoid double counting - Value of intermediate goods is not included in the estimation of National Income to avoid problem of double counting.

Problem of double counting refers to the counting of the value of a good or service, more than once in the estimation of national income.


Two approaches to correct problem of double counting:

  1. Final output Method: Value of only the final goods and services should be added to determine national income.
  2. Value Added Method: Sum total of the value added by all firms should only be taken in consideration. Value of intermediate consumption should not be taken.


b. Do not include sale of second hand goods.

However, any brokerage or commission paid to sell the second hand goods is a fresh production activity, so brokerage or commission is included.


c. Imputed Value of self-consumed output must be included in national income.


2. Income Distribution Method –


Domestic Income (NDPfc) = Compensation of employees + Operating surplus + Mixed income

  1. Compensation of employees includes: (a) Wages and salaries in cash and in kind. (b) Social security contributions by the employers.
  2. Operating surplus/Income from property and entrepreneurship/ Non-wage income includes: (i) Rent (ii) Royalty (iii) Interest (iv) Profit.
  3. Mixed income of self-employed – it is the combined income earned by self-employed people rendering their productive services.

National income (NNPfc) = NDPfc + NFIA


Precautions:

Precautions to take while using income distribution method: -


a. Avoid Transfers - National income includes only factor payments/income. Transfers are not a production activity; it should not be included.


b. Avoid Capital Gain - Income from sale of old cars, old house, etc. is not included since these are not production transactions. Income from sale of financial assets, e.g., shares, bonds, debentures, etc. are not included as such transactions are mere paper claims and do not lead to value addition.


c. Include income from self-consumed output - e.g. imputed rent of own factory should be included in national income since the house provides housing services.


3. Expenditure Method –


Components of GDPmp by Expenditure Method: -

  1. Private Final Consumption Expenditure (PFCE)
  2. Government Final Consumption Expenditure
  3. Gross Domestic Capital Formation (GDCF) = Gross domestic fixed capital formation + Net change or addition in stock OR, GDCF = Net domestic fixed capital formation + Depreciation + Closing stock – Opening Stock
  4. Net exports: Exports – Imports


GDPmp = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation + Net exports (or – Net imports)


National income (NNPfc) = GDPmp – Depreciation – Net indirect taxes + NFIA


Precautions:

Precautions to take while using Expenditure Method: -


a. Avoid intermediate expenditure - Expenditure on ‘intermediate goods’ like that on raw materials, etc. should not be included.


b. Do not include expenditure on second hand goods and financial assets.


c. Avoid transfer expenditures - Expenditure on transfer payments (e.g. Charities, donations, gifts, scholarships, etc.) should not be included.


Real and Nominal GNP


Nominal Income:

When national income is expressed in terms of money, it is called Nominal Income. It measures the value of output during a given year using the price prevailing that year.

Therefore, when a country’s income of a particular year is measured at current price, it is called nominal income.

Value of Product x Current Price = Nominal Income


Real National Income:

When national income is expressed in terms of constant price or price prevailing in the base year, it is called real national income.

It is measured in terms of constant prices and the base year is one which is free from fluctuations or there is a little possibility of fluctuation.