NATIONAL INCOME

A. PAVAN KUMAR
pavankumar3386@gmail.com

Meaning of national income

The concept of National Income
National income is defined to include not
only the incomes which arise from
production within the economy, but also
income which accrues to domestic
residents from activities carried on abroad.

Definition of National Income

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.
J.M.Keynes a famous economist defined national
income as follows. "National Income is the money
value of all goods and services produced in a country
during a year"

India's large service industry accounts for 57.2%

of the country's GDP while the industrial and
agricultural sector contribute 28% and 14.6%
respectively.
Agriculture is the predominant occupation in
India, accounting for about 52% of employment.
The service sector makes up a further 34%, and
industrial sector around 14%.
NEW DELHI: The average income of Indians
has grown by 10.5% to Rs 44,345 in 2009-10 as
against Rs 40,141 in 2008-09, at the current
price.

GDP$1.367 trillion (nominal: 11th; 2009)

$3.862 trillion (PPP: 4th; 2009)
GDP growth8.9% (2010, Q2)
GDP per capita$1,124 (nominal: 142th;
2009)$3,176 (PPP: 127th; 2009)
GDP by sector services (57%), industry
(28%), agriculture (15%) (2009-10)
Inflation (CPI) 8.62% (September 2010)
Population below poverty line 37%
(2010)
Unemployment9.4% (2009-10)

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.
Four things must be noted regarding this definition.
First, it measures the market value of annual output of
goods and services currently produced. This implies that
GDP is a monetary measure.
Secondly, for calculating GDP accurately, all goods and
services produced in any given year must be counted
only once so as to avoid double counting. So, GDP
should include the value of only final goods and services
and ignores the transactions involving intermediate
goods.

1. Gross Domestic Product (GDP):

Thirdly, GDP includes only currently produced
goods and services in a year. Market
transactions involving goods produced in the
previous periods such as old houses, old cars,
factories built earlier are not included in GDP of
the current year.
Lastly, GDP refers to the value of goods and
services produced within the domestic territory
of a country by nationals or non-nationals.

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.

Net National Product (NNP) at

Market Price:
NNP is the market value of all final goods
and
services
after
providing
for
depreciation. That is, when charges for
depreciation are deducted from the GNP
we get NNP at market price. Therefore
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. On the other hand there are
income (transfer payment), which is received but not
currently earned such as old age pensions,
unemployment doles, relief payments, etc. Thus, in
moving from national income to personal income we
must subtract the incomes earned but not received and
add incomes received but not currently earned.
Therefore,
Personal Income = National Income Social Security
contributions corporate income taxes undistributed
corporate profits + transfer payments.

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.

PER CAPITA INCOME

The average income of the people of a
country in a particular year is called per
capita income for that year. This concept
also refers to the measurement of income at
current prices and at constant prices.
Per Capita Income = national income/ total
population

Factors determining size of

National Income
Natural resources
Labour
Capital
Organization
Social and political structure
Quantity and quality of factors of production
State of technical know- how
Political stability

Measurement of National Income

National Income calculation is not an easy task.
For this, we have to collect more facts and
figures. We have already seen that income is
generated through production process.
Normally we use this income for purchasing
goods and services. When demand for
commodities goes up, we have to produce more.
Thus income leads to expenditure which again
leads to increased production. See the following
figure

Output or Value-Added Approach

The total value of all final goods & services ( i.e.
outputs ) can be found by adding up the total
values of outputs produced at different stages of
production.
This method is to avoid the so-called doublecounting or an over-estimation of GNP.
However, there are difficulties in the collection
and calculation of data obtained. It is from 1980
that the H.K. government started to collect data
by this approach.
In 1995, the government started to release GNP
data.

Expenditure Approach
The amount of expenditures refers to all those spending
on currently-produced final goods & services only.
In an economy, there are 3 main agencies which buy
goods & services. They are the households, firms and
the government.
In economics, we have the following terms:
C = Private Consumption Expenditure ( of all households
)
I = Investment Expenditure ( of all firms)
G = Government Consumption Expenditure ( of the local
government )

The expenditure approach is to measure

the GNP. We could not buy all our outputs
because some are exported to overseas.
Similarly, our consumption expenditures
may include the purchases of some
imports. In order to find the GNP, the value
of exports must be added to C, I & G
whereas the value of imports must be
deducted from the above amount.
Finally, we have :
G N P at market prices = C + I + G + X - M

Income Approach
The income approach tries to measure the total
flows of income earned by the factor-owners in
the provision of final goods & services in a
current period.
There are 4 types of factors of production and 4
types of factor incomes accordingly.
National Income = Wages + Interest
Income + Rental Income + Profit
The term profit can be further sub-divided into:
Profit Tax ; Dividend to all those shareholders ; &
Retained Profit ( or retained earnings ).