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NATIONAL INCOME

CONCEPTS OF NATIONAL
INCOME

Gross National Product (GNP) – It is defined as
the total market value of all final goods and
services produced in a year in a country.
Gross National
components:

Product

has

the

following

Value of final goods and services produced in a
year
and
consumed
by
the
household
(Consumption C)

Value of new capital goods produced and addition
to the inventories of goods but not sold during the
year. ( Investment I)
Value of output of Government which is equal to
the value of purchases of goods and services by
the government (G)

Net exports (Xn)

Net Factor Income from abroad

Net factor income earned from abroad is the
difference between factor income received from
abroad by normal residents of India for rendering
factor services in other countries and the factor
incomes paid to the foreign residents for factor
services rendered by them in the domestic territory
of India.

Net factor income earned from abroad have the
following three components:

Net compensation of employees
Net income from property i.e. rent, interest and
income from entrepreneurship
Net retained earnings of the resident companies
working in foreign countries.

Gross Domestic Product (GDP) - It is the
money value of all final goods and services
produced by normal residents as well as nonresidents in the domestic territory of a country. The
difference between GDP and GNP at market prices
arises due to the existence of ‘net factor income
from abroad’.

GDPMP = GNPMP – net factor income from
abroad
 

Net National Product (NNP) or National
Income at Market Prices – When charges for
depreciation are deducted from the gross national
product we get net national product. It means the
market value of all final goods and services after
providing for depreciation. It is also called ‘national
income at market prices’.

National Income (NI) or National
Income at factor cost – It is the
national income at factor cost for
which we use the term National
Income. National income at factor
cost means the sum of all incomes
earned by resource suppliers for their
contribution of land, labor, capital and
entrepreneurial ability, which go into
the year’s net production.

The difference between national income at factor
cost and national income at market prices arises
from the fact that indirect taxes and subsidies cause
market prices of output to be different from the
factor incomes resulting from it.
National Income = National income at factor cost
at market prices
-Indirect taxes +
Subsidies

Personal Income (PI) –
Personal income is the sum of all incomes
actually received by all individuals or
households during a given year. National
income (total income earned) and personal
income (total income received) must be
different because some incomes which are
earned such as social security contributions,
corporate income taxes and undistributed
corporate profits are not actually received by
households, and conversely, some incomes
which are received like transfer payments
(eg. pension, unemployment compensation,
relief payments etc.) are not currently

Thus,
Personal Income = National Income – Social
security
contributions –
Corporate income taxes –
Undistributed profits +
transfer
payments

Disposable Income – Even whole of the
incomes which are actually received by the people
are not available to them for consumption because
government levy some personal taxes.
Disposable Income= Personal income–Personal
taxes
Also,
Disposable income = Consumption + Savings

Difficulties in the
Measurement of National
The first problem Income
relates to the treatment of nonmonetary transactions such as the services of
housewives to the members of their families and
farm output consumed at home.

The second difficulty arises with regard to the
treatment of the government in national income
accounts. The viewpoint is that as regards the
administrative functions of the government like
justice, administration and defence 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.

Third problem is regarding the treatment of
income arising out of the activities of the foreign
firm in a country. IMF viewpoint is that production
and income arising from an enterprise should be
ascribed to the territory in which production takes
place.

Difficulties in
Measurement in
One major problem is the prevalence of nonDeveloping
monetised
transactions. countries
Because of illiteracy most producers have no idea
of the quantity and value of their output and do
not keep regular accounts.
Inadequacy, non-availability and unreliability of
statistics.

Occupational specialization is still incomplete.
One difficulty is that production is unorganized and
scattered in these countries.

National Income and Economic Welfare
Net Economic Welfare = Real GNP
- Depreciation
+ Value of Leisure
+ Value of Non-market
activities
- Environment Pollution
- Regrettable costs

MEASUREMENT OF NATIONAL
INCOME
1. Output Method or Production Method –
Also called the value added method.
Under this method, the economy is divided into
different industrial sectors and the net value added
at factor cost (NVAFC ) by each productive enterprise
as well as by each industry is estimated. Value of
output of an enterprise is found out by multiplying
the physical output with market prices of the goods
produced.

To calculate NVAFC, we need to subtract:

Intermediate consumption

Depreciation

Net indirect taxes
Summing up NVAFC by all productive enterprises
of a sector gives us the NVAFC of the sector. We
then add up NVAFC by all industries or sectors to
get Net domestic product at factor cost (NDPFC).

If we add the net factor income from abroad to
the NDPFC we get the Net national product at factor
cost (NNPFC) which is also called the national
income.

NI or NNPFC = NDPFC + Net factor income
from abroad

2. The Income Method – This method
measures national income at the phase of
distribution and appears as income paid and or
received by individuals of the country, i.e. national
income is obtained by summing up of the incomes
of all individuals of a country.

National income is calculated by adding up the
rent of land, wages and salaries of employees,
interest on capital, profits of entrepreneurs and
incomes of self-employed people.
By summing up the incomes paid out by all
industrial sectors we will obtain domestic factor
income or NDPFC. If we further add the net factor
income from abroad to the NDPFC we get the Net
national product at factor cost (NNPFC) or
national income.

3. The Expenditure Method - National
Income can also be measured by aggregating the
flow of total expenditure on the final goods &
services in the economy. It can be observed that the
flow of the total expenditure can be measured by
aggregating the flow of expenditure of final goods &
services incurred by each of the three main sectors
involved, viz. household sector, business sector &
the government sector.

Expenditure on consumer goods and services by
individuals and households, C.
Government’s expenditure on goods and services,
G.
The expenditure by productive enterprises on
capital goods and inventories, called gross
domestic capital formation and denoted by I.
Net exports, X-M or Xn.
Adding the above four we get GDPMP. On
deducting depreciation, we get NDPMP. If we
further deduct net indirect taxes we get NDPFC. If
we add the net factor income from abroad to the
NDPFC we get NNPFC.

EXAMPLE
OrangeInc Transactions

Wages paid to employees
15,000
Taxes paid to Government
5,000
Revenue received from sale of oranges
35,000
Oranges sold to public
10,000
Oranges sold to JuiceInc.
25,000

$

JuiceInc Transactions
Wages paid to employees
10,000
Oranges purchased from OrangeInc
25,000
Revenue received from sale of orange juice
40,000

$

National Income by Product approach
Orange Inc revenue = $35,000
Juice Inc.’s value added = $ 15,000
Total value added in the economy = $
50,000

National Income by Income approach
Profit of OrangeInc = $ 20,000
Wages received by employees of OrangeInc=
$15,000
Profit of JuiceInc = $ 5,000
Wages received by employees of JuiceInc = $
10,000
Total income received = $ 50,000

National Income by Expenditure approach

Expenditure on oranges = $ 10,000
Expenditure on juice = $ 40,000
Total expenditure = $ 50,000