This action might not be possible to undo. Are you sure you want to continue?
1 National Income
Economics For M.Com
By Fiaz Ahmed
UNIT 2.1 NATIONAL INCOME
Concepts of National Income
The labour and capital of a country working on the natural resources produce annually a certain amount of goods and services, the aggregate of which is known as the national income or national product. Usually National income is expressed in terms of money, therefore national income or national product is equal to the total money value of goods and services produced in the economy during the year. There are many concepts of national income which are used by economists, all of which are interrelated. These concepts are as under.
Gross National Product
Gross national product is defined as “Total market value of all final goods and services produced in the economy during a year.” While measuring GNP we only take the value of final products. All the intermediate goods, semi finished or unfinished goods are excluded to avoid double counting. The value of final goods itself includes the value of raw materials and other unfinished or intermediate goods used in production. For example the value of sugar includes the value of sugarcane and other materials used in the production of sugar.
Gross Domestic Product
Gross domestic product is calculated by subtracting net foreign income from GNP. It may be defined as “Total market value of all final goods and services produced within the country during a year.” GDP = GNP – Net Income from abroad Gross national income refers to income of all the national resources working anywhere in the world, whereas GDP only includes income or out put of the resources working within geographic boundaries of a country, therefore GDP is a narrow concept as compared to GNP.
Net National Product
Net national product at market prices is equal to gross national product minus the allowance for depreciation and replacement. NNP = GNP - Depreciation. Depreciation represents the value of fixed capital consumed during the process of production or this is the expenditures on the wear and tear of capital goods. Therefore depreciation should be treated as an item of cost. Thus, the net addition to the country's final output can only be found out by deducting depreciation from the gross national product during the year.
The national income is calculated by subtracting indirect taxes from NNP and adding subsidies to it. NI = NNP - Indirect taxes + Subsidies Indirect taxes are those taxes which are usually included in the market prices of goods and services.
1 (2) Economics For M. It is equal to the sum of wages. each of them serving a particular purpose. Therefore national income is also represented by following equation. . These concepts can provide an accurate picture of the working of an economy. from the personal income of the people. rent and profit in a given year. social security benefits etc. 7:- Per Capita Income (PCI) PCI = GNP Population Per capita income is the average per person income in a country. NI = Rent + Wage + Interest + Profit 5:- Personal Income (PI) Personal income means total income actually received by people in the economy whether it is earned or not. Income which people actually receive may be different from the income they have earned. PI = NI – (Undistributed profits . It is the income left with people after deducting direct taxes like income taxes etc. In this way it is equal to the sum total of the income received by factors of production during one year. Direct taxes are those taxes which people pay from their income and cannot transfer to other people. Therefore Personal income it is calculated by subtracting all types of deductions from national income and adding all types of additions to it. such as undistributed profits. National income or national income at factor cost can also be regarded as the total income earned by all the factors of production working in the economy during one year.Com National Income By Fiaz Ahmed Subsidies are monetary assistance given by government to firms for keeping market prices below the factor cost.Unit 2. corporate taxes and social security contribution are deducted. for example transfer payments like old age benefits. pensions. the flow of income from firms to household in terms of rewards of factors of production and from household to firms in terms of expenditures on goods and services produced by firms is called circular flow of national income. On the other hand the items which are not a reward of current productive services of the factors of production but received by them are added. The items which are earned but not received by factors of production. All the seven concepts of national income are useful tools of economic analysis. THE CIRCULAR FLOW OF INCOME IN THE ECONOMY In a two sector economy consisting of firms and household. PDI = PI .Direct taxes.corporate taxes -social security contribution) + (pension + Unemployment allowance + other transfer payments) 6:- Personal Disposable Income (PDI) Personal disposable income is that part of our total income which the income earners are free to spend. interest. It is calculated by dividing GNP with total population. A certain part of income which people have earned may not be actually received by them.
Taxes cannot be spent by households. In this way income flows from household sector to firms and from firms to household sector. because it is households that consume the goods and they must have income to afford to pay for them. (b) Taxation (T). Households must pay some of their income to the government. Government and foreign Sector the circular flow of income needs to be amended to allow for (1) withdrawals These are movements of funds out of the cycle of income and expenditure between firms and households. They save some. Labour.Com National Income By Fiaz Ahmed Therefore income in an economy flows between households and firms. (a) Savings (S). because the funds go to the Government. Withdrawals and injections into the circular flow of income In a complete four Sector economy consisting of Household. 3. Capital and Organization) are owned by household and this sector receives income from the sale of these factors 2. The circular flow is explained in the following diagram. There are three types of withdrawal from the circular flow. as taxation. assuming that all goods that are produced are also sold. Firms.Unit 2.1 (3) Economics For M. The total sales value of goods produced (output) should equal the total expenditure on goods. Firms by employing these factors of production produce goods and services. Households do not spend all of their income. To explain circular flow of national income we make following assumptions 1. Goods and services produced by firms are purchased by household sector by spending whole income. The amount of expenditure should also equal the total income of households. . and these savings out of income are withdrawals from the circular flow of income quite simply because savings are not spent. (2) injections These are movements of funds into the flow of national income. All factors of productions (Land.
Unit 2. Market value means. and therefore provide an injection into a country's circular flow of income. For this purpose usually. investment is an injection of funds into the circular flow of income. (c) Exports (X). which is additional to expenditure by households. but on goods made by firms in other countries. Exports earn income from abroad. (1) The Product Method. The payments for imports go to firms in other countries. Firms produce goods and services for export. These are explained as under. Government spending is also an injection into the circular flow of income. (b) Government spending (G). Measurement Of National Income National income of a country can be calculate by any of the following three method (1) Product Method or Value added method (2) Expenditure Method (3) Income Method These methods of estimating national income provide the same answer proper adjustments are made to them. Following procedure is adopted for this purpose (i) The whole economy is divided into various sectors. Spending on imports therefore withdraws funds out of a country's circular flow of income. following procedure may be adopted.1 (4) Economics For M. (a) Investment (I). There are three types of injection into the circular flow of income. Spending on imports is expenditure. For example to calculate the value of a shirt. When we consider national income. Investment in capital goods is a form of spending on output. (ii) In the next step market value of product of each sector is calculated. In most mixed economies. addition to the value of product at each step of production is calculated and then added together to find market value of total output in economy. In this method total market value of all the goods and service produced in the country is calculated which gives the estimate of GDP.Com National Income By Fiaz Ahmed (c) Imports (M). value of goods and service calculated at market prices. the government on goods and services represents a large proportion of total national expenditure. Usually into Primary or agricultural sector. Just as savings are a withdrawal of funds. adding to the total economic wealth that is being created by the country. we are interested in the economic wealth that a particular country is earning. for output created in other countries. total spending by. Step 1 2 3 4 Detail Value of cotton Value of thread Value of cloth Value of shirt (Final Good) Value in Rupee 20 50 100 200 Total Value added Addition of value 20 30 50 100 200 . this is called value added method. the secondary or manufacturing sector and the tertiary or service sector.
it overstates the estimate of national income.Com By Fiaz Ahmed In the above table value of shirt is Rs. (i) Households Expenditures (C) These are the expenditures of common people for personal or household purposes. In the same way Market values of all the goods and services produced during one year are calculated. All of government expenditures are represented by (G). For example the services of house wives are not included.1 National Income (5) Economics For M. PRECAUTIONS (a) Avoid double counting. (b) Avoid counting free services. To avoid this problem we consider either the value of final goods or the value addition at each stage of production. education. As exports are denoted by (X) and imports with (M). Therefore national income can also be calculated by adding all types of expenditures in the economy. In any one year the total of all these expenditures represents GNP. for example expenditures on food. These are the expenditures on capital goods. (iii) Investment (I) Expenditures of firms for the purpose of business are called investment. If total goods and service produced in economy are purchased. (iv) Net Exports (X-M) The difference of the value of exports and imports of a country is called net export. Investment is denoted by (I). 200. (iii) In the third step the value of final goods or value addition at each step is added together to find the total value of GDP (iv) Finally the income from abroad is added to GDP and value of GNP is calculated.Unit 2. therefore net export are denoted by (X-M). These expenditures are also called consumer expenditures and are denoted by (C). GNP = C + I + G +(X-M) PRECAUTIONS: While estimating national income with this method following precautions should be taken . Money value of goods and service not offered for sale should not be included. health etc. (2) EXPENDITURE METHOD. There are four types of expenditures made in any economy. (ii) Government Expenditures (G) Government of a county makes huge expenditures for developmental or non-developmental purposes. then aggregate of all the expenditures in economy must be equal to the value of all the goods and services produced in economy. Double counting means adding value of a good two or many times.
foreign aid and capital in the economy. . because the total by each method should be the same. (2) Illegal earnings from smuggling. As there are four factors of production therefore there are four types of incomes earned by these factors. Wage: It is the reward of use of labour and in national income accounting it includes all type of payments made to labour for work. NI = Rent +Wage + Interest + Profit Precautions In this method of national income estimation following precautions are taken. Profit: profit refers to income of firm and corporations. Besides each method provides a check on the accuracy of the other method. such as house store or farm.1 (6) Economics For M. Rent: It is income earned by the owner of land for the productive use of land or real property.Unit 2. This avoids double counting of already counted income. (3) INCOME METHOD In this method income of all the factors of production is added together to calculate national income. Production method provides information about the production of different sectors in economy. bribery are not included in national income. because the value of these goods has already been include in national income when these goods were purchased first time. CONCLUSION:Ideally the national income of a country should be measured by the three methods separately. The expenditure method provides information about the level of consumption and investment in the economy and about the role of foreign investment.Com National Income By Fiaz Ahmed (a) Expenditures on second hand purchases should not be included. (b) Expenditures on purchase of smuggled goods should not be included as these goods are not a part of national output. scholarships etc are not included. In this method national income at factor cost is estimated. Income method provides information about the income of different factors of production.Interest: It include all types of interest received by the investors during the year on bonds and loans etc. (1) Transfer earnings such as pensions. This is because each measure provides a look of the economy from different view point. .