National income and aggregate demand

Concept of National Income

National income means the value of goods and services

produced by a country during a financial year. Thus, it is the net result

of all economic activities of any country during a period of one year

and is valued in terms of money. National income is an uncertain term

and is often used interchangeably with the national dividend, national

output, and national expenditure. We can understand this concept by

understanding the national income definition.

To simply understand what National Income is, it can be

represented as - National Income defines a country's wealth. This

income depicts the value of goods and services which are produced by

an economy. This gives effect to the net result of all the economic

activities performed in the country.

 Imagine how you would define a country’s wealth without any

economic term? In that case, there would be no accountability and

responsibility linked with the production in the country. The resources

would go uncalculated and there would be a vague economic

atmosphere. Thus, let us indulge in this study which talks about

National Income.

Understanding National Income

National income is the sum total of the value of all the goods and services

manufactured by the residents of the country, in a year., within its domestic

boundaries or outside. It is the net amount of income of the citizens by

production in a year.

To be more precise, national income is the accumulated money value of

all final goods and services produced in a country during one financial year.

Computation of National Income is very vital as it indicates the overall health of

our economy for that particular year.

 The aggregate economic performance of a nation is calculated with the

help of National income data. The basic purpose of national income is to throw

light on aggregate output and income and provide a basis for the government to

formulate its policy, programs, to maximize the national welfare of the people.

Central Statistical Organization calculates the national income in India.

Definition of National Income

1. The definition of National Income if of two types-

2. Traditional Definition of National Income

3. Modern Definition

Traditional Definition of National Income-

According to Marshall: “The labor and capital 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 national dividend.”

Modern Definition

This definition has two subparts

 GDP

 GNP
 Gross Domestic Product

Gross Domestic Product, abbreviated as GDP, is the aggregate value of

goods and services produced in a country. GDP is calculated over regular time

intervals, such as a quarter or a year. GDP as an economic indicator is used

worldwide to measure the growth of countries economy.

Goods are valued at their market prices, so:

 All goods measured in the same units (e.g., dollars in the U.S.)

 Things without exact market value are excluded.

Constituents of GDP

 Wages and salaries

 Rent

 Interest

 Undistributed profits

 Mixed-income

 Direct taxes

 Dividend
  Depreciation

The Formula for Calculation of GDP

GDP = consumption + investment + government spending + exports - imports.

 Gross National Product

Gross National Product (GNP) is an estimated value of all goods and

services produced by a country’s residents and businesses. GNP does not

include the services used to produce manufactured goods because its value is

included in the price of the finished product. It also includes net income arising

in a country from abroad.

Components of GNP

 Consumer goods and services

 Gross private domestic income

 Goods produced or services rendered

 Income arising from abroad.

Formula to Calculate GNP

GNP = GDP + NR (Net income from assets abroad or Net Income Receipts)

- NP (Net payment outflow to foreign assets).

 GDP and GNP on the basis of Market Price and

Factor Cost

1. Market Price

The Actual transacted price including indirect taxes such as GST,

Customs duty etc. Such taxes tend to raise the prices of goods and services in

the economy.

2. Factor Cost

It Includes the cost of factors of production e.g. interest on capital, wages

to labor, rent for land profit to the stakeholders. Thus services provided by

service providers and goods sold by the producer is equal to revenue price.

Alternatively

Revenue Price (or Factor Cost) = Market Price (net of) Net Indirect Taxes

Net Indirect Taxes = Indirect Taxes Net of Subsidies received

Hence,

Factor Cost shall be equal to

(Market Price) LESS (Indirect Taxes ADD Subsidies)

Net Domestic Product

The net output of the country’s economy during a year is its NDP. During the year

a country’s capital assets are subject to wear and tear due to its use or can become

obsolete.

Hence, we deduct a percentage of such investment from the GDP to arrive at

NDP.

So NDP=GDP at factor cost LESS Depreciation.

The Accumulation of all factors of income earned by residents of a country and

includes income earned from the county as well as from abroad.

Thus, National Income at Factor Cost shall be equal to

NNP at Market Price LESS (Indirect Taxes ADD Subsidies)

 Importance of National Income

Setting Economic Policy

National Income indicates the status of the economy and can give a clear

picture of the country’s economic growth. National Income statistics can help

economists in formulating economic policies for economic development.

Inflation and Deflationary Gaps

Inflation and Deflationary Gaps

For timely anti-inflationary and deflationary policies, we need aggregate data of

national income. If expenditure increases from the total output, it shows

inflammatory gaps and vice versa.

Budget Preparation

The budget of the country is highly dependent on the net national income and its

concepts. The Government formulates the yearly budget with the help of

national income statistics in order to avoid any cynical policies.

Standard of Living

National income data assists the government in comparing the standard of living

amongst countries and people living in the same country at different times.

Defense and Development

National income estimates help us to bifurcate the national product between

defense and development purposes of the country. From such figures, we can

easily know, how much can be set aside for the defense budget.

Sets of methods for measuring National Income

There are four methods of measuring national income. The type of method to be

used depends on the availability of data in a country and the purpose which is

attempted for.

Income Method

In this method, we add net income payments received by all citizens of a

country in a particular year. Net incomes that result in all the factors of
production like net rents, wages, interest, and profits are all added together, but

income received in the form of transfer payments are omitted.

Product Method

According to this method, the aggregate value of final goods and services

produced in a country during a financial year is computed at market prices. To

find out GNP, the data of all the productive activities-agricultural products,

Minerals, Industrial products, the contributions to production made by transport,

insurance, communication, lawyers, doctors, teachers. Etc are accumulated and

assessed.

Expenditure Method

The total expenditure by the society in a financial year is summed up together

and includes personal consumption expenditure, net domestic investment,

government expenditure on goods and services, and net foreign investment.

This concept is backed by the assumption that national income is equal to

national expenditure.
Value Added Method

The distinction between the value of material outputs and material inputs at

every stage of production is Value added.

 GDP VS GNP

The Gross Domestic Product and the Gross National Product are the two most

widely used measures in a country’s calculation of aggregate economic unit.

GDP is the measure of the value of goods and services that are being produced

within a country's borders, by the citizens and the non-citizens. While GNP

determines the value of goods and services that are being produced by the

country's citizens in the domestic and abroad spectrum. GDP is popularly used

by the global economies at large. While, the United States eliminated the use of

GNP in the year 1991, thereby adopting GDP as the measure to compare their

economy with other economies.

India’s Richness: National Income of India 2020-2021

In the year 2020-2021, India had a total NI of 135.13 lakh crore, well this is a

provisional estimate only. However, in the round of the fourth quarter (in the

month of January-March), the country had an economic growth of 1.6%, while

the GDP was calculated at Rs. 38.96 lakh crore in the fourth quarter in the year
2020-21, this is count is slightly different to Rs 38.33 lakh crore in the fourth

quarter of 2019-20.
 National Income and Related Aggregates

In an economy, there are many products and services that are produced by the

organisations and individuals in a year. It is not possible to add up all in their

original state and therefore, need to be expressed in a common term which is

money.

National income is referred to as the net money value of all the final goods and

services that are produced by the residents living within the boundary of the

country within an accounting year.

The following are the aggregates to the national income:

1. Gross Domestic Product at Market Price or GDPMP : It is the gross market

value of all final goods and services that is produced within the domestic

territory of a nation within an accounting year. It is shown as:

GDPMP = Net domestic product at FC (NDPFC) + Depreciation + Net

Indirect tax
2. Gross domestic product at Factor Cost or GDPFC : It refers to the total

money value of goods and services excluding net indirect taxes that are

produced within the domestic territory of a nation within one accounting year. It

can be shown as:

GDPFC = GDPMP – Net Indirect tax

3. Net Domestic Product at Market Price or NDPMP : It is the net market value

of all the final goods and services produced within the domestic territory of the

nation within a year excluding depreciation. It can be shown as:

NDPMP = GDPMP – Depreciation

4. Net Domestic Product at Factor Cost or NDPFC : It refers to the net money

value of all the final goods and services that are produced within the domestic

territory of a nation excluding the net indirect taxes and depreciation. It is

shown as:

NDPFC = GDPMP – Net Indirect tax – Depreciation

5. Net National Product at Factor Cost or NNPFC : It is the net value of all the

final goods and services that are produced by the residents of a nation within a

period of one year. It can be shown as

NNPFC = GNPMP – Net Indirect Taxes – Depreciation

Or NNPFC can be defined as the sum total of all the factor incomes which

includes rent, profit, interest, employee compensation during an accounting

year.

It can be represented as:

NNPFC = NDPFC + Factor income earned by normal residents from abroad –

factor payments made to abroad

NNPFC is also known as the National Income.

6. Gross National Product at Factor Cost or GNPFC : It is referred to as the

gross money value of all the final goods and services that are produced by the

residents living within the boundaries of a nation during one accounting year

excluding the net indirect taxes. It is shown as:

GNPFC = GNPMP – Net Indirect Taxes

Or it can be defined as the sum total of all factor incomes that are earned by the

residents of a nation living within the boundaries of the nation along with

depreciation.

GNPFC = NNPFC + Depreciation or

GNPFC = GDPFC + NFIA

Where NFIA is the Net Factor Income from Abroad which is factor income

received by residents from abroad minus the factor income paid to non-residents

domestically.

7. Net National Product at Market Price or NNPMP : It is the net market value

of all the final goods and services produced by the residents living within

boundaries of the nation during one accounting year.

It is shown as

NNPMP = GNPMP – Depreciation

Or, it can be defined as the sum total of all the factor incomes earned by the

residents living within the boundaries of the nation during an accounting year

inclusive of net indirect taxes

NNPMP = NNPFC + Net Indirect Taxes

8. Gross National Product at Market Price or GNPMP : This is the gross market

value of all final goods and services that are produced by the residents living

within the boundaries of a nation.

It can be said as the sum total of all the factor incomes by the residents of a

country during a year and is inclusive of depreciation and net indirect taxes.

GNPMP = NNPFC + Net Indirect Taxes + Depreciation

 Basic Aggregates of National Income

A number of goods and services are produced in a year by different production

units within an economy. It is not possible to add those goods and services in

terms of their quantity; therefore, these are added in terms of money. There are

eight aggregates in National Income for measuring the value of goods and

services in terms of money. These are as follows:

Gross Domestic Product at Market Price (GDPMP)

GDPMP refers to the gross market value of all the final goods and services

produced during a year within the domestic territory of a country.

Gross in GDPMP means that the total value of final goods and services includes

depreciation, i.e., no provision has been made for it.

Domestic in GDPMP means that the final goods and services produced are

located within the domestic boundaries of the country.

Product in GDPMP indicates that only final goods and services are included.
Market Price in GDPMP means that the amount of indirect taxes paid is

included in GDP; however, the subsidies are excluded from it.

The rest of the aggregates are determined by making some adjustments in

GDPMP.

Gross Domestic Product at Factor Cost (GDPFC)

GDPFC refers to the gross money value of all the final goods and services

produced during a year within the domestic territory of a country. It can be

determined as:

GDPFC = GDPMP – Net Indirect Taxes

Net Domestic Product at Market Price (NDPMP)

NDPMP refers to the net market value of all the final goods and services

produced during a year within the domestic territory of a country. It can be

determined as:

NDPMP = GDPMP – Depreciation