Economics Class

National Income Concepts


What is national income?


The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities material an immaterial including services of all kinds- Marshall

National income consists solely of services as received by ultimate consumers, whether from their material or from their human environments- Fisher

A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication- National Income Committee of India (1951)

Gross national product at market prices is the market value of the produce before deduction of provisions for the consumption of fixed capital distributable to the factors of production supplied by the normal residents of the given country- United Nations Department of Economic Affairs

National income is a collection of goods and services reduced to a common basis by being measured in terms of money- Hicks

Therefore, all the above definitions make it clear that national income is the monetary measure of-

·         The net value of all products and services

·          In an economy during a year

·         Counted without duplication

·         After allowing for depression

·         Both in the public and private sector of products and services

·         In consumption and capital goods sector

·         The net gains from international transactions.



What is gross national product (G.N.P.)?


It is the basic measure of a nation’s output stated in terms of money representing the total value of a nation’s annual output. It is evaluated in terms of market prices. It includes all the economic productions in the economy from apples and automobiles to zinc and zippers.

G.N.P. is defined as the money value of the national production for any given period. Here we take into account:

·         The money value of the final goods and services produced in the economy to avoid double counting. Intermediate products are excluded from it.

·          The money value of only currently produced goods and services as G.N.P. is a measure of the economy’s productivity during the year.

·         The word gross has significance. We do not deduct the depreciation or replacement of the fixed assets. In the process of production there is wear and tear of fixed assets. This depreciation is loss to the economy and it will not be deducted from GNP produced in the economy.


What is net national product (N.N.P.)?


It refers to the net production of goods and services in a country during the year. It is G.N.P. less depreciation during the year.

N.N.P. = G.N.P. - depreciation for the given year

It is also called national income at market prices. It is a useful concept in study of growth economics as it takes into consideration the net increase in the total production of the country.


What is national income at factor cost (N.I.FC)?


It is the total of all incomes earned by the owner of factors of production for their contribution of factors of production.

Therefore, for calculating it, such payments which are not made for any productive service is not included. Example- an individual may get gifts, transfer payments from business, etc. which form a part of his income but, since he has not rendered any service to get from them, they do not enter the calculation of national income at factor cost.

N.I.FC= N.N.P. - indirect taxes+ subsidies

It is therefore the aggregation of factor earnings. It does not include capital consumption allowance government business and individual transfer payments and indirect taxes. All these do not reach the factors of production. Similarly, if the government pays any subsidy in support of any industry whose cost of production is high, these subsidies have to be added.


What is personal income (P.I.)?


This is the actual income received by the individuals and households in the country from all sources. It denotes aggregate money payments received by the people by way of wage, interest, profits, and rents. It is the spendable income at current prices available to individuals. Corporate income taxes and payment towards social security measured will not be available for individuals, so these have to be deducted from what is earned. Payments such as old age pensions, widow pensions, etc. that accrue to people have to be added.

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

Transfer payments may be by government or business transfers, interest paid by government, dividends, etc.


What is disposable personal income (D.P.I.)?


The whole of personal income is not available for consumption as personal direct taxes have to be paid. What is left after payment of personal direct taxes is call disposable personal income.

D.P.I = P.I. – personal taxes, property taxes and insurance payments

This is the amount available for individuals and households for consumption. It is not that the entire D.P.I. is spent on consumption. A part of it may be saved, therefore

D.P.I. = consumption + savings

What remains after saving is called the personal outlay, which represents the community’s demand for goods and services.

Discuss the various methods of calculating national income.


There are three methods by which national income can be calculated-

        I.            Product Method

This is also called the output method, the inventory method or the census method. It consists of finding out the market value of all the goods and services produced during a year.

According to this method the economy is classified into different sectors, namely

·         Direct sector: in this sector the value of services of such professions like doctors, dramatics, soldiers, politicians, etc., are taken by equating to their services.

·         Agriculture industry

·         International transaction sector: in this sector, we take into account the value of goods exported and imported payment from abroad, payments to other countries.

In each sector we make an inventory of goods produced and find out the end product making an addition to the value of goods. The value added method can be followed in order to avoid double counting. The value added of a firm is its output less whatever it purchases from other firms such as raw materials, and other inputs.

This method has a merit because it helps us to have a comparative idea of the importance of various activities in economy like agriculture, manufacturing, trade, etc. However in advanced countries this method may be successful as it is very easy to get data from government records. But in under developed countries this method may give rise to various problems like imputation of money values to non- monetized sector.

      II.            Income Method

This method refers to the gross national income obtained by adding together wages and salaries, interests, profits and rents of persons and institution and including government incomes are earned either from property or through work. To arrive at the totality of income of nation, the following procedure will be adopted:

a)      Net rents include the rental value of owner occupied houses.

b)      Wages, salaries and all such earnings of person employed, pensions are excluded.

c)      Earnings by way of interest.

d)      Income of joint stock companies.

e)      Income from overseas investment.

This method gives national income at factor cost.

    III.            Expenditure Method

This method is also called the flow of product approach (by American economist Samuelson) or the outlay method.

             Here we take into account the expenditure on finished products-

·         Expenditure by consumers on goods and services.

·         Expenditure by producers on investment of goods.

·         Expenditure by government on consumption as well as capital goods.

To this we add money received from abroad through trade and other payments. This figure thus arrived at will give us G.N.P.

The merit of this method is that it believes in the identity between national expenditure, income and total product.


Whichever method we use the result should be more or less the same. In other words, they can be used to cross-check reliability of each other.






What are the factors that determine national income?


Factors determining national income can be discussed as follows-

Ø  Quality and quantity of factors of production: the quality and quantity of land, the climate, the rainfall, etc., determine the quantity and quality of agricultural production. This determines the size of national income. The quantity of labour has double influence since labour is both a factor of production as well as the consumer of what is produced. The quality of labour depends upon intelligence, training, which in turn decides the volume of industrial productivity. This will have decisive influence on output. Likewise, the quantity and quality of entrepreneurial ability is also a main element in the determination of national income.

Ø  State of technical know-how: the extent of technical know-how and technology in production determine the capital formation in the country. A country with abundant resources will be dormant without any determination if the resources are not scientifically exploited. Natural resources combined with advanced technology will go a long way in increasing the size of national income.

Ø  Political stability: the key to increase the national income rests with important factors like capital formation, natural resources, technical know-how and political stability.


What are the difficulties in calculation of national income?


The measurement of national income is beset with difficulties. In under developed countries these difficulties are more prominent. The difficulties in calculation of national income can be discussed as follows:

·         Conceptual difficulties: there has been a difference of opinion regarding the term ‘nation’ in the concept of national income. It has to define exactly, whether it is geographical entity of the country or the nationals including those residing abroad. Since national income constitutes a quantitative measure of economics activity rather than verbal description. Since everything has to be equated to the money value, services produced in economy for love of humanity, affection and philosophy could not be taken into consideration in calculating national income.

·         Overlapping of occupations: in backward economies there is an overlapping of occupation in rural sector which makes it difficult to know the income by origin. A worker in a peak season works in a farm, drives a country cart in off season. Takes up unskilled work, etc. similarly, the village money lender combines his profession with the cultivating of his farm.

·         Difficulty in value estimation: in backward areas, the cultivators, artisans and cottage industry workers do not have a fair idea of the expenses of their occupation. Hence the net value of their products cannot be estimated precisely.

·         Non- monetized sector: barter dealing and non-monetized sector creates the problem of inputting the value of their produce and services and by guess work and approximation.

·         Incomplete government records: due to ignorance and illiteracy in backward areas, the data may not be available and if available, may be unreliable. Also, the figures furnished by government officials may not be from reliable sources and data is not current.

·         Problems in agricultural sector: in agricultural activities there is a good deal of guess work in data relating to cropwise production and in figures relating to animals and forest products.

·         Problems in industrial sector: data relating to output, cost, etc. are available only in big units. The small units do not maintain these figures correctly. The village money lenders and indigenous bankers maintain absolute secret of their and they do not furnish correct information.

·         Non-applicability of a uniform formula: in a big country where wide disparities and regional differences, a uniform formula cannot be applied. The data of one region cannot be applied to another region with minor modification. Every region would be a separate entity requiring specialized approach suited only to that region.

·         Double-counting: the error of double-counting is another obstacle to be avoided in the calculation of national income.

·         Inefficient data collection: the machinery for collecting statistical data may not be efficient. The investigators, preparation of adhoc figures, making sample surveys, etc.


What are the uses of national income statistics?


National income figures help governments in planning, policy making, preparation of budgets and forecasting the level of economic activity.

Ø  Formulation of economic policies: national income statistics are valuable instruments of economic analysis and a guide to economic policies to be pursued. It is more useful in context of planning and formulation of realistic plans.

Ø  Studying economic structure: it gives an idea of the structure of the economy. It helps to make inter- sectoral comparisons and to study the rate of growth of the economy. The growth of national income is an index of the growth of the productive capacity of an economy.

Ø  Inter- sectoral comparisons: it helps to study inter-sectoral growth. Such comparisons are useful. Share of various sectors can be studied to find out structural defects and weaknesses of the economy.

Ø  Indicator of economic welfare: it enables us to study per capita income or per capita consumption which are general indicators of economic growth. But it is not helpful in revealing distribution of income in the society.

Ø  Making international comparisons: national income estimates enables us to make international comparisons and standard of living of people.

Ø  Contribution to international institutions: it shows the capacity of a country to bear some common burden of international institutions like the U.N.O.