National income final

National IncomeThe sum total of the values of all goods and

services produced in a year

It is the money value of the flow of goods and services available in an economy in a year

National IncomeNational Income refers to-The income of a country

to a specified period of time, say a yearincludes all types of goods and serviceswhich have an exchange valuecounting each one of them only once

There are various concepts of national income. These are explained below one by one: (1) Gross National Product (GNP). (2) Net National Product (NNP)/National Income. (3) Gross Domestic Product (GDP). (4) National Income at Factor Cost. (5) Personal Income. (6) Disposable Personal Income.

National Income conceptsGross National ProductGross National Product. GNP is the total value

 of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. Basically, GNP measures the value of goods and services that the country's citizens produced regardless of their location.

National Income conceptsNet National Product - NNP 

The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation).

NNP=GNP-Depreciation

Depreciation Allowance and Maintaining Capital Intact. Here a question can be asked as to what we actually mean by depreciation allowance and maintaining capital intact; (the words which we have used in explaining NNP). It is known to every one of us that when production is going on, the value of capital equipments does not remain the same. A decrease in value because of wear and tear through, use, rusting, accident or through actions of elements, gradually take place in the building and other equipments of business. A certain sum of money based on the value of the capital equipment and its longevity is set aside every year from the gross annual income so that when machinery is worn out, a new capital equipment can be set up from the sum thus accumulated. This fund which is set aside for covering the wear and tear, deterioration and obsolescence of the machinery is named as Depreciation Allowance. We can make this concept more clear by taking a simple example.

Example of NNP: Suppose, a person buys a machinery for manufacturing cloth for $10000 only. He expects that this machinery will last ten years and after that period, it will be partially or completely worn out. He sets aside $1000 every year from the gross national income as a depreciation reserve of the capital equipment. After the expiry of ten years, he accumulates $10000 and with that money he replaces the old capital equipment which has lived its useful life and maintains capital intact. The sum of money, i.e., $1000 which he annually deducts from the gross annual income, is known asdepreciation allowance. It is often pointed out by economists that the calculation of depreciation allowance every year is a difficult task. For example, a person expects the longevity of the capital equipment, say for ten years. There is a possibility that machinery may last longer or it may go out of use earlier. So they say what needed is an approximate decision regarding the' depreciation allowance. This decision should be based on high degree of judgment and guessing about the future.

(3) Gross Domestic Product (GDP): Definition and Explanation of GDP: It is a key concept in the national income. "Gross domestic product (GDP) is the total market value at current prices of all final goods and services produced within a year by the factors of production located within a country". The labor and capital of a country working on its natural resources produce a certain aggregate of commodities, material and non-material every year. In addition to this, there may be foreign firms producing goods in the various sectors of the economy like mining, electricity, manufacturing etc.

Distinction Between GDP and GNP: Here it seems necessary to make a distinction between gross domestic product (GDP) and gross national product (GNP). Gross domestic product is the total market value of all final goods and services produced by factors of production within a nation's border during a periodof one years. In other words GDP is a flow of production produced within the country by domestically located resources in a year. Gross national product (GNP) on the other hand, is the measure of all final goods and services produced by the citizens within their own country as well as outside the country during a period of one year. In other words, GNP expresses the money value of flow of goods and services produced within the country and the net income received from abroad during a period of one year. Thus when we move from GDP to GNP, we add factor income receipts from foreigners and subtract factor income payments to foreigners. Formula For GDP: GDP = GNP - Net Foreign Income From Abroad 

NATIONAL INCOME AGGREGATESThere are many aggregates in national income accounting. The basic among these isGross Domestic Product at Market Price (GDPmp). By making adjustments in GDPmp, we canderive other aggregates like Net Doemstic product at Market Price (NDPmp) and NDP at factorcost (NDPfc).Net Domestic ProductWhy is GDPmp called gross? GDPmp is final products valued at market price. This is whatbuyers pay. But this is not what production units actually receive. Out of what buyers pay theproduction units have to make provision for depreciation and payment of indirect tax like excise,sales tax, etc. This explains why GDPmp is called ‘gross’. It is called gross because no provisionhas been made for depreciation. However, if depreciation is deducted from the GDP, it becomesNet Domestic Product (NDP). Therefore,GDPmp - depreciation = NDPmp

Domestic product at Factor CostWhy is GDPmp called ‘at market price’ ?Out of what buyers pay, the production units have to make payments of indirect taxes,if any. Sometimes production units receive subsidy on production. This is in addition to the marketprice which production units receive from the buyers. Therefore what production units actuallyreceive is not the ‘market-price’ but “market price - indirect tax + subsidies” This is what is actuallyavailable to production units for distribution of income among the owners of factors of production.Therefore,Market price - indirect tax (I.T.) + subsidies = Factor payments (or factor costs)By making adjustment of indirect tax and subsidies we derive GDP at factor cost (GDPfc)from GDPmp..GDPmp - I.T. + subsidies = GDPfcor GDP - net I.T. = GDPfc

Net Domestic Product at Factor CostIf we make adjustment of both the net I.T and depreciation (also called consumption offixed capital) we get one more aggregate called Net Domestic Product at Factor Cost (NDPfc)GDPmp - I.T. + Sub-depreciation = NDPfc.or NDPfc+ I.T. - Sub+depreciation = GDPmpNet National Product at Factor Cost (NNPfc) or National IncomeNet factor income from abroad (NFIA) provides the link between NDP and NNP. Therefore,NDPfc + NFIA = NNPfcor NNPfc - NFIA = NDPfcSimilarly,NDPmp + NFIA = NNPmpGDPmp + NFIA = GNPmp

(5) Personal Income: Definition and Explanation: National income is the sum of factor income. In other words, it is the income which individuals receive for doing productive work in the form of wages, rent, interest and profits. Personal income, on the other hand, includes all income which is actually received by all individuals in a year. It includes income which is not directly earned but is received by individuals. For example, Pensions, welfare payments are received by households but these are not elements of national income because they are transfer payments. 

In the same way, in national income accounting, individuals are attributed income which they do not actually receive. For example, undistributed profits, employees contribution for social security corporate income taxes etc. are elements of national income but are not received by individuals. Hence they are to be deducted from national income to estimate the personal income.

P.I. = N.I. – corporate taxes – undistributed corporate profits – social security contributions + transfer payments 

(6) Disposable Personal Income: Definition and Explanation: Disposable personal income is the amount which is actually at the disposal of households to spend as they like. It is the amount which is left with the households after paying personal taxes such as income tax, property tax, national insurance contributions etc. Formula For Disposable Personal Income: Disposable personal income = Personal Income - Personal Taxes DPI = PI - Personal TaxesThe concept of disposable personal income is very important for studying the consumption and saving behavior of the individuals. It is the amount which households can spend and save.Disposable Income = Consumption + SavingDI = C + S

Methods of calculating National Methods of calculating National IncomeIncome

There are three approaches to the There are three approaches to the measurement of national income:measurement of national income:

Spending or Expenditure MethodSpending or Expenditure MethodIncome MethodIncome MethodProduction or Output MethodProduction or Output Method

Income = Expenditure = Output Income = Expenditure = Output

Y = E = OY = E = O

Why output = expenditureUnsold output goes into inventory, and is counted as “inventory

investment”… ….whether the inventory buildup was intentional or not.

In effect, we are assuming that firms purchase their unsold output.

Spending or Expenditure Spending or Expenditure ApproachApproachThe spending approach divides GDP into four The spending approach divides GDP into four

areas:areas: Households (Consumption expenditures) Households (Consumption expenditures)

(C)(C) Businesses (Domestic Investment) Businesses (Domestic Investment) (I)(I) Government (Govt. expenditures) Government (Govt. expenditures) (G) (G) and and Foreigners (Export (X) and Imports (IM)of Foreigners (Export (X) and Imports (IM)of

Goods and Services) Goods and Services) (X-IM).(X-IM).

GDP = E = C + I + G + (X–IM)GDP = E = C + I + G + (X–IM)where E is aggregate expenditurewhere E is aggregate expenditure

•The Income ApproachThe Income Approach

•The measure of GDP are calculated by The measure of GDP are calculated by adding all the income earned by various adding all the income earned by various factors of production which are engaged factors of production which are engaged in the production of output. in the production of output.

•Households supply business with the factors of production in return for payment in the form of wages, rent, and interest•Proprietors income /Income of self Proprietors income /Income of self employed employed (the profits of partnerships and (the profits of partnerships and solely owned businesses, like a family solely owned businesses, like a family restaurant)restaurant)

The Production ApproachThe Production ApproachThe measures of GDP are Calculated by The measures of GDP are Calculated by

adding the total value of the output (of goods adding the total value of the output (of goods and Service) produced by all activities during and Service) produced by all activities during any time period, such as a year. any time period, such as a year.

The production approach looks at GDP from The production approach looks at GDP from the standpoint of value added by each input in the standpoint of value added by each input in the production process. the production process.

major challenge – problem of double countingmajor challenge – problem of double countingOut put of many business = input of some Out put of many business = input of some

otherotherEg : Out put of tyre industry is the input of bike Eg : Out put of tyre industry is the input of bike

industry… counting the out put of both industries industry… counting the out put of both industries will result in double….will result in double….

Problems in calculating National Problems in calculating National IncomeIncomeBlack Money : Black Money : It has created a parallel economy - It has created a parallel economy -

unreported economy which is equivalent to the size of unreported economy which is equivalent to the size of officially estimated size of the economyofficially estimated size of the economy

Non-Monetization : Non-Monetization : In most of the rural economy, In most of the rural economy, considerable portion of transactions occurs informallyconsiderable portion of transactions occurs informally

Growing Service Sector : Growing Service Sector : growing faster than growing faster than Agricultural and Industrial sectors… value addition in Agricultural and Industrial sectors… value addition in legal consultancy, health service ,financial and business legal consultancy, health service ,financial and business services is not based on accurate reporting. services is not based on accurate reporting.

House Hold Services : House Hold Services : It ignores It ignores domestic work and house keeping domestic work and house keeping services services

Social Services : Social Services : It ignores volunteer It ignores volunteer and unpaid social services. (Mother and unpaid social services. (Mother Teresa’s social service)Teresa’s social service)

Environment Cost : Environment Cost : It does not It does not distinguish between environmental-distinguish between environmental-friendly and environmental-hazardous friendly and environmental-hazardous industries … cost of polluting industries … cost of polluting industries is not included in the industries is not included in the estimate.estimate.

Importance of national incomeIt indicates the prosperity of a nation. Growth

in national income indicates economic prosperity

It indicates the standard of living of people of a country

It indicates the per capita income with which we can compare the levels of development of all the countries

Countries can be classified as ‘developed’ and ‘developing’ and ‘under developed’ based on their per capita income only

Importance of national incomeNI estimates are very helpful to the Finance

Minister. It guides him to make proper and right decisions in regard to taxation and budgets

It is useful to compare the prosperity of a country at different times

It provides an instrument of economic planningIt indicates the trends of inflation and

deflation. Proper corrective action can be taken against them

Importance of national incomeIt helps to know the progress of various

sectors in the economy. Imbalanced growth, if any, can be solved

It helps in forecasting the economic future and preplanning is possible

It indicates the economic status of a country among the nations of the world

Trends of national income of IndiaDuring the plan periods, national income and

per capita income are increasing steadilyBut the rise in the per capita income is rather

slow due to population growthAgricultural sector is the most important

sector as it is the single largest contributor to the national income

In the recent years, the share of the government sector in national income is steadily increasing indicating the increased efficiency of the public sector