UNIT-5

National Income
In order to understand economics, one must first have a strong understanding of national
income. National income is a measure of the total value of all services and goods produced in
a country over a specific time period. It is an important indicator of economic health and
well-being. In this article, we will discuss the main concepts of national income, as well as
provide an example. We will also outline the formula for calculating national income.

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.
Therefore, NI is:
National income is the total value of all the final services and goods produced in an economy
during a specific period of time. It includes both the public and private sectors.

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).

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

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.
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 Gross and Net Concept

Gross emphasizes that no allowance for capital consumption has been made or that
depreciation has yet to be deducted. Net indicates that provision for capital consumption has
already been made or that depreciation has already been deducted.

 National and Domestic Concepts

The term national denotes that the aggregate under consideration represents the total income
which accrues to the normal residents of a country due to their participation in world
production during the current year.

It is also possible to measure the value of the total output or income originating within the
specified geographical boundary of a country known as domestic territory. The resulting
measure is called "domestic product".

 Market Prices and Factor Costs

The valuation of the national product at market prices indicates the total amount actually paid
by the final buyers while the valuation of national product at factor cost is a measure of the
total amount earned by the factors of production for their contribution to the final output.

GNP at market price = GNP at factor cost + indirect taxes - Subsidies.

NNP at market price = NNP at factor cost + indirect taxes - Subsidies

Gross National Product and Gross Domestic Product

For some purposes we need to find the total income generated from production within the
territorial boundaries of an economy irrespective of whether it belongs to the inhabitants of
that nation or not. Such an income is known as Gross Domestic Product (GDP) and found as
−

GDP = GNP - Nnet Factor Income From Abroad

Net Factor Income from Abroad = Factor Income Received From Abroad - Factor Income
Paid Abroad

 Net National Product

The NNP is an alternative and closely related measure of the national income. It differs from
GNP in only one respect. GNP is the sum of final products. It includes consumption of goods,
gross investment, government expenditures on goods and services, and net exports.

GNP = NNP − Depreciation

NNP includes net private investment while GNP includes gross private domestic investment.
  Personal Income

Personal income is calculated by subtracting from national income those types of incomes
which are earned but not received and adding those types which are received but not
currently earned.

Personal Income = NNP at Factor Cost − Undistributed Profits − Corporate Taxes + Transfer
Payments

 Disposable Income

Disposable income is the total income that actually remains with individuals to dispose off as
they wish. It differs from personal income by the amount of direct taxes paid by individuals.

Disposable Income = Personal Income − Personal taxes

 Value Added

The concept of value added is a useful device to find out the exact amount that is added at
each stage of production to the value of the final product. Value added can be defined as the
difference between the value of output produced by that firm and the total expenditure
incurred by it on the materials and intermediate products purchased from other business
firms.

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Difficulties in the Measurement of National Income

There are many difficulties in measuring national income of a country accurately. The
difficulties involved are both conceptual and statistical in nature. Some of these difficulties or
problems are discuss below:
1. The first problem relates to the treatment of non-monetary transactions such as the services
of housewives and farm output consumed at home. On this point, the general agreement
seems to be to exclude the services of housewives while including the value of farm output
consumed at home in the estimates of national income.
2. The second difficulty arises with regard to the treatment of the government in national
income accounts. On this point the general viewpoint is that as regards the administrative
functions of the government like justice, administrative and defense are concerned they
should be treated as giving rise to final consumption of such services by the community as a
whole so that contribution of general government activities will be equal to the amount of
wages and salaries paid by the government. Capital formation by the government is treated as
the same as capital formation by any other enterprise.
3. The third major problem arises with regard to the treatment of income arising out of the
foreign firm in a country. On this point, the IMF viewpoint is that production and income
arising from an enterprise should be ascribed to the territory in which production takes place.
However, profits earned by foreign companies are credited to the parent company.