National Income

Definitions of National Income

 Marshall’s Production- based Definition
National income is the labour and capital of the country,
acting on its natural resources, produce annually a
net aggregate of commodities, material and
immaterial, including services of all kinds.
 Pigou’s Income-based Definition

National dividend is that part of the objective income of

the community, including, of course, income derived
from abroad, which can be measured in money.
 Irving Fisher’s Consumption-based Definition

The true national income is that part of the annual net

produce which is directly consumed during the year.
Concepts in National-income
Analysis
 Gross National Product
GNP = Total government production + Total
individual production
 Net National Product

NNP = GNP − Depreciation or replacement +

Net balance from international trade
 National Income at Factor Cost

NI = NNP − (Indirect taxes + Subsidies)

Concepts in National-income
Analysis
 Personal Income
 Personal income = NI − (Corporate income

taxes + social security contributions + Transfer

payments + Undistributed profits)
 Personal Disposable Income
 DI = Personal Income − Direct taxes

 DI = Consumption expenditure + Savings

 Per Capita Income

NI
Per capita income 
Population
Measuring National Income
 The Product Method
 The net value of all commodities and services

produced in the country during a given year are

added up
 The Income-received Method
 The net incomes received by individuals and

business enterprises in the country during a year.

 The Consumption–Savings Method
 Based on the fact that the total income of the

community is spent on consumption and savings

A Comparison of the Three
Methods
 The consumption–savings method is not
generally used because the necessary facts and
figures cannot be easily obtained
 The product and income methods are used.
 For the actual calculation, the national income
can be measured either by adding up the value
of goods and services produced, or by adding up
the money incomes received by the factors of
production.
Sectoral Composition of
National Income
 The contribution to national income by different
types of occupations or sectors such as agriculture,
industry, transport and communications, banking
and insurance, is known as sectoral contribution.
 In India, the division of the various sectors of the
economy is as follows
 Agriculture

 Manufacturing industries

 Trade and transports

 Other services
 Estimates of India’s National
Income: British India
Year Total income Per capita Estimated by Coverage
(INR crore) income
(INR)
1867–68 340 20 Dadabhoy Naoroji For most of British India
1882 530 27 Baring-Barbour For British India
1895 880 39.5 F. J. Atkinson ---do---
1897–98 670 30 Curzon ---do---
1898–99 430 18 W. Digby ---do---
1910–14 1770 58.5 Vakil and Muranjan For the whole of India
1913–14 1210 44 Wadia and Joshi For British India
1921 2600 107 Findlay Shirras ---do---
1921–22 2360 74 Shah and Khambatta For the whole of India
1925–29 2300 78 V. K. R. V. Rao For British India
1931–32 1690 62 ---do--- ---do---
945–46 2810 82.5 R. C. Desai For the whole of India
1945–46 6230 198 Ministry of Commerce For British India
Estimates of India’s National
Income: Post-independence
Indian national income estimates have been based
upon four sets of statistical services:
 Estimates of national income published in 1956 with

1948–49 as the base year.

 Estimates of national product published in 1957 as a

revision of the conventional series with 1960–61 as

the base year.
 The second revised edition was published in 1978

with 1970–71 as the base year.

 A new series published in 1988 had 1980-81 as the

base year.
Special Features of the 1980–
81 Series
Adopts a twin approach to compile national income
estimates
 Estimates of domestic production by industrial
origin
 Estimates of factor payments using the income
approach
 Contains data on and methods of estimating
forestry including firewood, unregistered and
decentralized textiles sector, katcha construction
work and such diverse areas of domestic industrial
production
Difficulties Involved in the
Measurement of National Income
 Existence of a large non-monetised sector
 Paradox in assigning incomes
 Exclusion of illegal activities
 Unreliability of statistical data
 Changing values of parameters used
 National income estimates are only approximation
 Non-maintenance of accounts by producers
 Lack of occupational differentiations
 Lack of scientific data
Characteristics of the Indian
Economy
 Meagre Increase in Real National Income
 Structural Changes in the Indian Economy
 Declining Share of the Public Sector
 Distribution of Income
 Capital Formation and Savings in India
Limitations of National Income
Estimation in India
 The existence of a large non-monetized sector
 Lack of data concerning the income of small
producers and household enterprises
 Absence of data on income distribution
 Unreported illegal income
Determinants of National
Income
 Natural resources
 The quality of people in general, and labour in
particular
 Capital
 Organization
 Social and political structure
Causes of India’s Low National
Income
 Economic Causes
 Too much dependence all agriculture

 Lack of industrial development

 Inadequate trade and transport services

 Lack of banking and credit services

 Political Causes

Social Causes
Remedies to Improve India’s
National Income
 Strengthening the agricultural base
 Speeding up industrial development and
encouraging diversification
 Developing an orderly and extensive network of
transport and communication system
 Mobilizing the saving potential of the country and
making the savings available to trade and industry
 Spreading free and compulsory education
National Income and
Economic Welfare
 Economic welfare is a general sense of well-being
people experience which they earn and spend what
they earn on goods and services.
 It is normally assumed that if the size of national
income is increased, economic welfare is also
increased and vice versa.
 This generalization is not true in some cases.
National Income and
Economic Welfare
 When there is a wrong priority of goods produced
 When the incomes reflect wrong facilities
 When the workers are overworked
 When income is generated under unhealthy
conditions
 When there is no increase in real incomes
 When there is an improper and uneven distribution
 If income is earned at the cost of leisure
Causes of Inequalities of
National Income Distribution
 Acquired inequalities
 Differences in intellect and physique

 Differences in sex

 Inheritance of property

 Inborn inequalities
 Inequalities due to work

 Inequalities arising out of the nature of work

 Inequalities arising out of supply of and demand

for labour
Steps Taken by the Government
to Reduce Inequalities
 The Minimum Wages Act 1948
 Social security schemes
 Free education, free medical and maternity aid,
old-age pensions, sickness and accident
compensations, provident fund schemes
 Heavy tax on very high incomes
 Tax on articles of luxury and other duties such as
death duty, estate duty, etc.
Uses of National Income Data
 For measuring economic welfare
 For measuring per capita incomes
 For measuring the standard of living
 For comparisons over a time-period
 For measuring the savings-investment ratios
 For international comparisons
 For knowing sectoral compositions
 For economic forecasting
 For knowing the income distribution
 For economic planning
 For correcting regional imbalances
 For studying product-components