Need for the Study of National Income: A national income measure serves various purposes regarding economy, production

, trade, consumption, policy formulation, etc. The following are some such needs. 1. To measure the size of the economy and level of country’s economic performance. 2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries. 3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them. 4. To make projection about the future development trend of the economy. 5. To help government formulate suitable development plans and policies to increase growth rates. 6. To fix various development targets for different sectors of the economy on the basis of the earlier performance. 7. To help business firms in forecasting future demand for their products. 8. To make international comparison of people’s living standards. Circular Flow of Income: Before discussing the calculation of national income, a brief introduction of the circular flow of income would be helpful. The circular flow of income is explained with a simplest model consisting business (firms or producers) and public (households or consumers). The public own the productive resources (i.e. factors of production namely land, labour and capital). Business sector or producers employ the factors of production to produce the goods and services. Such goods and services are bought by the public. Thus public own the factors of production and provide them to producers. The producers employ the factor inputs to produce output of goods and services, which is bought by the consumers (public). For the employment of factor services, the public receive the factor income namely rent (for land), wages (for labour) and interest (for capital). This income flows back from the public to the business sector as consumption expenditure to buy the goods and services. Thus, the flow chart consist two segments – real flow and money flow. As the outer flow in Figure 4.1 shows the flow of input (factors viz. land, labour, capital and organisation) and output (goods and services), they represent the real economy (or real flow). The inner flow shows the money received as factor income (rent, wage, interest, and profit) and it goes to the producer as consumption expenditure (commodity price) to buy the goods and services. As this flow chart involves only income received and expenditure made in terms of money, it represents the money economy (or money flow). CONCEPTS OF NATIONAL INCOME: GDP: The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value. The most common approach to measuring and understanding GDP is the expenditure method: GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X-M).

"Gross" means depreciation of capital stock is not subtracted. NNP:Net National Product (NNP) is the total market value of all final goods and services produced by citizens of an economy during a given period of time (Gross National Product or GNP) minus depreciation. GNP:The Gross National Product (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period. This is an estimate of how much the country has to spend to maintain the current GDP. while a narrowing gap would mean that the condition of capital stock in the country is improving. then the formula for net domestic product is obtained. but it is also used to compare municipalities within nations. If net investment (which is gross investment minus depreciation) is substituted for gross investment in the equation above. the total personal income is divided by the population. Setting part of NNP aside for investment permits the growth of the capital stock (see economic growth and capital formation). When comparing nations per capita income reflects gross national product per capita income. and auto repair. Net National Product is also known as Net Domestic Product. . and adding back in domestic area (the exports). in monetary terms. and the provision of services used in daily living such as education. Depreciation (also known as consumption of fixed capital) measures the amount of GNP that must be spent on new capital goods to maintain the existing physical capital stock. Per capita income is usually reported in units of currency per year. and the consumption of more goods in the future. PER CAPITA INCOME:Per capita income means how much each individual receives. Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service. The GNP does include allowances for depreciation and indirect business taxes such as those on sales and property. The exportsminus-imports part of the equation (often called net exports) adjusts this by subtracting the part of this expenditure not produced domestically (the imports). NDP:The Net Domestic Product (NDP) equals the Gross Domestic Product (GDP) minus depreciation on a country's Capital (economics) goods. NNP can also be expressed as total compensation of employees + net indirect tax paid on current production + operating surplus. then GDP will fall. Its rise or fall measures economic activity based on the labor and production output within a country. of the yearly income generated in the country. NNP is the amount of goods in a given year which can be consumed without reducing the amount which can be consumed in the future. This is what each citizen is to receive if the yearly national income is divided equally among everyone. Consumption and investment in this equation are expenditure on final goods and services. health care. If the country is not able to replace the capital stock lost through depreciation. a growing gap between GDP and NDP indicates increasing obsolescence of capital goods. furniture. When determining the per capita income of a community. In addition. and bread. The figures used to assemble data include the manufacture of tangible goods such as cars.

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