Hseb Notes - Economics XI - National Income

Meaning of National Income:

      National income is an important concept of macro – economic. It is used to measure the economic condition of a country. It shows the economic condition of a country. The flow of goods and services available to the country during a year is called National income.

      According to Marshall: “The labour and capital of country acting upon its national resources produced annually a certain net aggregate of commodities material and in material services of all kinds. This is the true annual income or revenue of a country or the national divident.”

      According to fisher: “The two national income that part of annual not produced which is directly consumed during that year.”

Concept of National Income: (GDP, GNP, NNP, NI, PI, DI)

I.                   Gross Domestic Product(GDP):

It is defined as the money value of all final goods and services produced within the boundary of a country during a year. Here, final goods and services means those goods and services which are directly consumed.

      The GDP may be expressed as:

a.      GDP                =          A+I+S

Where,                              A         = Production of agricultural sector

                                          I           = Production of industrial sector

                                          S          = Production of service sector

b.      GDP                =          C+I+G

Where,                              C         = Total consumption expenditure

                                          I           = Total investment expenditure

                                          G         = Total government expenditure

           

II.                Gross National Product(GNP):

It is the most widely used concept. It is broader than GDP. It is defined as the total market value of all final good and services produced during a year. It also includes net income from abroad. The GNP can be expressed as,

                 

                  GNP                =          GDP+(X- M)

Where,                              X         = Export

                                          M        = Import

                 

                  GNP                =          GDP+ Net income from abroad

                                          Or

          GNP                =          C+I+G+(X- M)

III.             Net National Product(NNP):

It is the net production of goods and service during a year in a country. When the charges of depreciation is deducted from Gross National Product(GNP), we get Net National Product(NNP). It can be expressed as:

                 

                  NNP                =          GNP – Depreciation

IV.             National Income(NI):

It is also called National Income at factor cost. Here, National Income is calculated on the basis of the renumeration of factors of production. Therefore, the sum of income received by factors of production in the form of rent, wages, interest and profit is called national income. It can be expressed as:

                  NI                    =          NNP+ Subsidies – indirect taxes

V.                Personal Income(PI):

Personal Income is the total money income received by individuals or households of a country during a year. It can be expressed as:

                 

                  PI                    =          NI

– Corporate income taxes

– undistributed profit

– Social security contribution

+ Transfer payments

VI.             Disposable Income(DI):

The income left after the payment of direct taxes from personal income is called disposable income. This income can be either consumed or saved or both. It can be expressed as:

                  DI                    =          PI – Direct taxes

                                          Or

          DI                    =          Consumption expenditure + Saving

VII.          Per Capita Income(PI):

Per capita Income of a country is obtained by dividing the National Income of a country by its total population. It can be expressed as:

                  PCI                 =                      NI                   

                                                      Total Population

Measurement of National Income:

            There are three methods of measuring national income i.e.

1. Product Method
2. Income Method
3. Expenditure Method

1. Product Method:

In this method, national income is measured from production side. This method is also called commodity service method. This method helps to find out the weighing of national income from different sectors of the economy.

      In order to measure national income from this method, first of all, we have to divide economy into different sectors like agriculture, transport, communication, industry and so on. Then GDP is calculated by adding the money value of all final goods and services produced in each of these sectors. Similarly, GNP is calculated by adding net income from abroad to GDP. Then if depreciation fund is deducted from GNP, we get NNP.

2. Income Method:

In this method, national income is calculated from distribution side. The goods and services are produced by the joint efforts of various factors of production i.e. land, labour, capital and organization. Therefore, national income is distributed among these different factors. Hence, national income is calculated by adding the income of all individuals or factors in a country. The addition of salaries, wages, allowances, income earned from self employment, personal income like rent, interest, profit, depreciation, corporate taxes, etc. gives GDP. The addition of net income from abroad to GDP gives GNP. The subtraction from GNP gives NNP.

3. Expenditure Method:

In this method, national income is measured from expenditure side. Under this method, national income is calculated by adding all the expenditures made by individuals, business and the government on goods and services during a year. Thus, we get national income by adding all the consumption expenditure and investment expenditure of a country during a year.

                  i.e.       GDP                =          C+I+G

                  Where,                                    GDP    = Gross Domestic Product

                                                      C         = Total consumption expenditure

                                                      I           = Total investment expenditure

                                                      G         = Government expenditure

Then,

                  GNP                =          C+I+G+(X- M)

                                          =          GDP+(X- M)

                  Where,                        X-M = Net income from abroad

                 

                  NNP                =          GNP – Depreciation

Difficulties in the measurement of National Income:

            There are various difficulties in the measurement of National income which are as follows:

1. Problem of double counting:

While measuring national income, there may arise the problem of double counting because the same commodity may be intermediate as well as final goods. Therefore, only final goods and services should be included in national income.

2. Transfer payments:

The transfer payment should not be included in national income because they represent simply the redistribution of income. They are not the result of economic activities such as pension, unemployment allowance, old age allowance, etc.

3. Calculation of depreciation:

It is difficult to calculate depreciation fund because the depreciation charges differ from commodity to commodity.

4. Change in the price level:

The price level changes from time to time. When the price level increases the national income seems to be increasing even if the production is increasing. In this case, national income doesn’t give the real picture of the economy.

5. Income from illegal activities:

The illegal activities like gambling, smuggling, sell of harmful drugs, etc. also satisfy human wants. But these are not included in national income, since these are secret. Therefore, national income becomes less than actual.

6. Difficult to choose the method of measurement:

There are various methods for the measurement of national income. Thus, it is very difficult to choose the method for competing national income.

7. Capital gain or loss:

When the market prices of capital assets change, the owners make capital gain or loss. Such gain or loss is not included in national income.

8. Conceptual Problem:

It is difficult to define nation in terms of national income because national income acrosses political boundary.