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NATIONAL INCOME

While per capita gross domestic product is the indicator most commonly
used to compare income levels, there are two other measures are
generally preferred by analysts: per capita Gross National Income (GNI)
and Net National Income (NNI). Whereas GDP refers to the income
generated by production activities on the economic territory of the country,
GNI measures the income earned by the residents of a country, whether
generated on the domestic territory or abroad, NNI is GNI net of
depreciation.

Definitions :
National Income is the total money value of all goods and services
produced in a during year. It is the total income of the economy during the
year.

The total net value of all goods and services produced within a nation over
a specified period of time, representing the sum of wages, profits, rents,
interest, and pension payments to residents of the nation.

GNI is defined as GDP plus net receipts from abroad of wages and salaries
and of property income plus net taxes and subsidies receivable from
abroad. NNI is equal to GNI net of depreciation.

Wages and salaries from abroad are those that are earned by residents
who essentially live and consume inside the economic territory but work
abroad (this happens in border areas on a regular basis) or for those who
live and work abroad for only short periods (seasonal workers) and whose
centre of economic interest remains in their home country. Guest-workers
and other migrant workers who live abroad for twelve months or more are
considered to be resident in the country where they are working. Such

but these remittances are treated as transfers between resident and non-resident households and are recorded in national disposable income but not national income. . 6. 2. 3. Property income from/to abroad includes interest. To trace the trend or the speed of the economic growth in relation to previous year(s) also in other countries. 8. To fix various development targets for different sectors of the economy on the basis of the earlier performance. To make projections about the future development trend of the economy. To know the composition and structure of the national income in terms of various sectors and the periodical variations in them. The measurement of the size of the economy and level of country's economic performance. 4. 5. To help government formulate suitable development plans and policies to increase growth rates. To make international comparison of people’s living standards. dividends and all or part of the retained earnings of foreign enterprises owned fully or in part by residents (and vice versa). The Importance of National Income : Measuring national income is crucial for various purposes: 1. To help businesses to forecast future demand for their products. 7.people may send part of their earnings to relatives at home.

Import R . G.) GNP refers to the aggregate market value of all final goods & services produced in a country during a year.P.P. Ina open economy GNP include the following :  The money value of the final goods and services produced in the economy to avoid double counting.P.N.  The word gross has significance. is defined as the money value of the national production for any given period.  The money value of only currently produced goods and services as G.N. In the process of production there is wear and tear of fixed assets.P. We do not deduct the depreciation or replacement of the fixed assets. Intermediate products are excluded from it.N.Receipts from abroad P .Government Service X . Gross of Domestic Product (G.D. C . It is a monetary measures. is a measure of the economy's productivity during the year.Concepts Of National Income : 1.) .Capital Goods and Gross Investment G . GNP = C + I + G + (X-M) + (R-P) where.Export M . Gross National Product (G.Consumption goods I .Payment made abroad 2. This depreciation is loss to the economy and it will not be deducted from GNP produced in the economy.

Net factor income from abroad is an addition or a subtraction to GNP to arrive at GDP. for calculating it. 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. 4. Therefore. transfer payments from business. abroad has to be excluded to get GDP.GDP refers to the money value of goods and services produced within the Geographical boundaries of a country. Example. At the same time . income earned by Indians outside the country are not included.) It refers to the net production of goods and services in a country during the year. since he has not rendered any service to get from them. less depreciation during the year. etc. Net National Product (N.FC) It is the total of all incomes earned by the owner of factors of production for their contribution of factors of production.I. NNP = GNP . they do not enter the calculation of national income at factor cost. It is G. National Income at Factor Cost (N.P.N. . This implies that whatever is produced in India by .N. 3. such payments which are not made for any productive service is not included.depreciation for the given year It is also called national income at market prices. Whatever earned by Indian citizens inside or outside the country from GNP.P.an individual may get gifts. which form a part of his income but. Indian nationals %& foreigners working in India will constitute GDP. but that part of income earned by Indians.

I. these subsidies have to be added.P.I. etc. – corporate taxes – undistributed corporate profits – social security contributions + transfer payments Transfer payments may be by government or business transfers. interest.FC= N. profits. Payments such as old age pensions.I. It is the spendable income at current prices available to individuals. 5. It does not include capital consumption allowance government business and individual transfer payments and indirect taxes.N.N. etc. . Similarly.indirect taxes+ subsidies It is therefore the aggregation of factor earnings. It denotes aggregate money payments received by the people by way of wage.) This is the actual income received by the individuals and households in the country from all sources.I. . that accrue to people have to be added. All these do not reach the factors of production. interest paid by government. 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. and rents. widow pensions. P. if the government pays any subsidy in support of any industry whose cost of production is high. dividends. = N. Personal Income (P.

I.I. The various methods of calculating national income : There are three methods by which national income can be calculated: 1.P.I = P. – personal taxes. therefore D. property taxes and insurance payments This is the amount available for individuals and households for consumption.P.P. is spent on consumption. It is not that the entire D.I. Disposable Personal Income (D. Product Method . A part of it may be saved. What is left after payment of personal direct taxes is call disposable personal income.I. = consumption + savings What remains after saving is called the personal outlay.P.6. D.) The whole of personal income is not available for consumption as personal direct taxes have to be paid. which represents the community’s demand for goods and services.

and other inputs. soldiers. are taken by equating to their services. But in . the inventory method or the census method. The value added method can be followed in order to avoid double counting. dramatics. Product Method : This is also called the output method. payments to other countries. This method has a merit because it helps us to have a comparative idea of the importance of various activities in economy like agriculture. politicians. manufacturing.  Agriculture industry  International transaction sector: in this sector. namely  Direct sector: in this sector the value of services of such professions like doctors. trade. It consists of finding out the market value of all the goods and services produced during a year.. Expenditure Method 1. Income Method 3. we take into account the value of goods exported and imported payment from abroad. In each sector we make an inventory of goods produced and find out the end product making an addition to the value of goods. etc.2. However in advanced countries this method may be successful as it is very easy to get data from government records. The value added of a firm is its output less whatever it purchases from other firms such as raw materials. According to this method the economy is classified into different sectors. etc.

This method gives national income at factor cost. Income Method : This method refers to the gross national income obtained by adding together wages and salaries. profits and rents of persons and institution and including government incomes are earned either from property or through work.  Expenditure by government on consumption as well as capital goods. the following procedure will be adopted: a) Net rents include the rental value of owner occupied houses. d) Income of joint stock companies.monetized sector. Expenditure Method : This method is also called the flow of product approach (by American economist Samuelson) or the outlay method. e) Income from overseas investment. salaries and all such earnings of person employed. 3. Here we take into account the expenditure on finished products-  Expenditure by consumers on goods and services. c) Earnings by way of interest. . pensions are excluded. 2. To arrive at the totality of income of nation.  Expenditure by producers on investment of goods. b) Wages.under developed countries this method may give rise to various problems like imputation of money values to non. interests.

In other words.To this we add money received from abroad through trade and other payments. they can be used to cross-check reliability of each other. Since national income . The difficulties in calculation of national income : 1) Conceptual difficulties : there has been a difference of opinion regarding the term ‘nation’ in the concept of national income. The merit of this method is that it believes in the identity between national expenditure.N. This figure thus arrived at will give us G. It has to define exactly. whether it is geographical entity of the country or the nationals including those residing abroad. income and total product. Whichever method we use the result should be more or less the same.P.

2) 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. artisans and cottage industry workers do not have a fair idea of the expenses of their occupation. Also. services produced in economy for love of humanity. the village money lender combines his profession with the cultivating of his farm. 5) Incomplete government records: due to ignorance and illiteracy in backward areas. the figures furnished by government officials may not be from reliable sources and data is not current.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. 4) Non. the data may not be available and if available.constitutes a quantitative measure of economics activity rather than verbal description. the cultivators. Since everything has to be equated to the money value. drives a country cart in off season. A worker in a peak season works in a farm. similarly. 3) Difficulty in value estimation: in backward areas. affection and philosophy could not be taken into consideration in calculating national income. Takes up unskilled work. 6) 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. etc. Hence the net value of their products cannot be estimated precisely. . may be unreliable.

The village money lenders and indigenous bankers maintain absolute secret of their and they do not furnish correct information. 10) Inefficient data collection: the machinery for collecting statistical data may not be efficient. The data of one region cannot be applied to another region with minor modification. The investigators. Every region would be a separate entity requiring specialized approach suited only to that region. 8) Non-applicability of a uniform formula: in a big country where wide disparities and regional differences. The small units do not maintain these figures correctly. . are available only in big units. cost. etc. making sample surveys. preparation of adhoc figures. a uniform formula cannot be applied. etc.7) Problems in industrial sector: data relating to output. 9) Double-counting: the error of double-counting is another obstacle to be avoided in the calculation of national income.