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National Income
The 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 Income
National Income Committee of India 1951 defines

National Income as follows:

A national income estimate measures the volume of

commodities and services turned out during a given period counted without duplication.

National Income
Marshalls Definition: The labour and capital resources of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or the national dividend.

National Income
National Income refers to The income of a country to a specified period of time, say a year includes all types of goods and services which have an exchange value counting each one of them only once

National Income
Double counting
If steel has been evaluated in industrial production, it

should not be included while calculating the value of steel products, viz, machines and motor cars. To avoid double counting or multiple counting, two methods are used Final products method Value added method

National Income
Final Products method:
Adding the value of final products only Value added method: Go on adding the values created at each stage in the

manufacture of a commodity Then all such values created are added up together to arrive at the national income of the country

National Income concepts

The following are the concepts of national income
Gross National Product GNP Net National Product NNP Personal Income PI Per capita Income PCI

National Income concepts

Gross National Product
National Income is the sum total of values of all goods

and services produced during a year The money value of this total output is known as Gross National Product GNP

National Income concepts

Gross National Product
Example: If A,B,C,D, are goods and services and If a,b,c,d,are their prices respectively The GNP is calculated as follows GNP= Axa+Bxb+Cxc+Dxd.

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National Income Concepts

GNP is most frequently used national income concept
It is statistically a simpler concept as it takes no

account of depreciation and replacement problems

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National Income concepts

Net National Product - NNP:
This refers to the net production of goods and services

in a country during a year NNP is also called National Income at Market Prices We get NNP, by deducting the depreciation from GNP
Therefore

NNP = GNP - Depreciation

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National Income concepts

Personal Income - PI:
Income earned by all the individuals and institutions

during a year in a country The entire national income does not reach individuals and institutions
A part of it goes by way of corporate taxes Undistributed profits

Social security contributions

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National Income concepts

Personal Income PI
People sometimes get incomes without any productive

activity They are called Transfer Payments Example: Unemployment benefits, old age pensions etc. Such transfer payments are not included in the National Income However they are added to Personal Income
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National Income concepts

Personal Income PI:
PI is computed by using the following formula PI = National Income (Corporate taxes, undistributed

profits, social security contributions) + Transfer Payments

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National Income concepts

Per Capita Income PCI:
If the national income is divided by the total

population, we get per capital income

PCI = NI/Population

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National Income concepts

Per capita income
PCI may be expressed either in money terms or in real

terms

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NI Methods of computation
Three methods to measure the national income
They are Production method or Census method Income method Expenditure method

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Production method
In this method
The total products produced in the economy are

calculated for the year and the value is added without double counting The economy is classified into sectors like Agricultural, industrial, fisheries, forest, direct services and foreign transactions etc In each sector, we can find the value of final goods and services
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Production method
In the international transactions, net foreign income is

calculated by subtracting the total imports from the total exports and added to the national income The results of these sectors, when combined, gives the national income or national product The census or product method can be expressed through the formula

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Production method

O=C+I

Where O stands for output, C stands for consumption of goods I stands for investment goods

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Income Method
According to this method
Net incomes of individuals and business houses

during a year are added to know the national income Only those incomes earned and received for producing goods and for rendering services are to be counted Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production
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Income Method
People get incomes in the form of
Rents, wages or salaries, interest and profit The formula is

Y=C+S

Here Y stands for Total Income C stands for consumption and S stands for Savings

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Expenditure method
One mans income is another mans expenditure Therefore national income can be arrived at by adding

the total expenditure of individual and business firms during a year Expenditure or outlay on final products takes place in three ways

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Expenditure method
Expenditure or outlay on final products takes place in

three ways Expenditure by consumers on goods and services Expenditure by entrepreneurs on capital or investment goods Expenditure by government on consumption and capital goods

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Expenditure method
The formula for this method is

Y=C+I

Here Y stands for total expenditure C stands for consumption expenditure I stands for investment expenditure

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Difficulties in the computation of National Income

The following are the practical difficulties in the

measurement of national income The statistics are not fully available Non-monetized sector is dominant Most people take out their livelihood from more than one activity

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Difficulties in the computation of National Income

In backward economies, particularly in the rural

sector, the cultivators and small producers are illiterate and they do not keep books of account. This is a serious difficulty in the calculation of national income Avoidance of double counting becomes complicated The village money lenders maintain absolute secrecy of their transactions

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Importance of national income

It 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
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Importance of national income

NI 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 planning It indicates the trends of inflation and deflation. Proper corrective action can be taken against them

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Importance of national income

It 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

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Trends of national income of India

During the plan periods, national income and per

capita income are increasing steadily But the rise in the per capita income is rather slow due to population growth In the recent years, the share of the government sector in national income is steadily increasing indicating the increased efficiency of the public sector

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