Wednesday, 2 December 2015

Concepts of National Income

National Income

National Income
  • A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication.
  • Thus, national income measures the net value of goods and services produced in a country during a year and it also includes net earned foreign income. In other words, a total of national income measures the flow of goods and services in an economy.
  • National income estimates are related with the financial year (April 1 to March 31).

The various concepts of national income are as follows:
Gross National Product (GNP)
  • Gross National product is defined as the total market value of all final goods and services produced in a year.
  • It is the market value of everything (total goods and services) that is produced by Nationals of a country both inside and outside the country`s territory.
  • To as certain accurate changes in total output GNP is adjusted for price changes by comparing it to a base year.
  • Hence, income produced and received by nationals of a country within the boundaries of foreign countries should be added in gross National product (GNP) of the country. Similarly, income received by foreign nationals within the boundary of the country should be excluded from GNP.
Gross Domestic Product (GDP)
  • Gross Domestic product is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time.
  • As a conclusion, it must be understood while domestic product emphasizes the total output which is raised within the geographical boundaries of the country, national product focuses attention not only on the domestic product, but also on goods and services produced outside the boundaries of a nation by the citizens of that nation.
  • Besides, any part of GDP, which is produced by nationals of a country, should be included in GNP.
Net National Product (NNP)
  • NNP or National Income at Market price is obtained by subtracting depreciation value (i.e., capital stock consumption) from GNP.
  • Since Gross National Income covers everything which are final goods and services.
  •  In above example, the cost of biscuits is includes production, transport and marketing cost which was incurred at various stages from converting it from Wheat to Biscuits. But there is wear and tear also during all these stages.
This wear and tear must be reduced from the Gross National products to know what net National Income at Market Price:
NNP or NI (market price) = GNP – depreciation
National Income (NI) at Factor Cost
  • National income what we normally hear about is National Income at Factor Cost.
  • To understand this concept we have to know first what factor cost is. We take two example of sugar here.
We suppose that ,
  1. Sugar is being sold in the market for Rs.30 per Kg. This is sugar’s market cost. When sugar came out of the factory it was charged with Re.1 excise and Re. 1 Sales tax kilogram. This means the factors of production of sugar (land, labour and capital) will receive Rs.28 per Kg.
So in this case,
Sugar (Factor Cost) = Sugar (Market price) – Taxes
  1. Sugar is being sold in the market for Rs.30 per Kg. However Govt. Provides subsidy to sugar at Rs.7 per Kg. So the consumer pays Rs.23 (Market price) and factors of production will receive Rs.30 (factor Cost).
This means:
Sugar (Factor Cost) = Sugar (market price) + subsidies
Now we come at NNP:
NNP (Factor cost) = NNP (market price)- taxes + subsidies
In other words:
National Income (Factor Cost) = national Income (market price)-taxes+ subsudies.
Per Capita Income (PCI)
The per capita income is arrived by dividing the national income by population. Per capita income is measured either at constant prices or on current prices.
Personal Income (PI) 
  • National Income is the income of all individuals of the country, however it is not the income received by all individuals. Some part of the national income is  actually not received by individuals.
  • For example, corporate income taxes are a part of national income but they are not received by the individuals. So to arrive at personal income corporate taxes must be subtracted from National Income.
So we can arrive at Personal Income with following formula:
Personal Income = National Income – Social Security Contributions – Corporate Income Taxes- Undistributed Corporate Profits +  Transfer Payments
Disable Income (DI) 
  • The personal income is the income of an individual. He /she pays personal taxes, property taxes etc. and after that whatever left to him or her is Disposable Income.
Personal Income – Personal taxes = Disposable Income
Methods of Measuring National Income 
According to Simon Kuznets, national income of a country is calculated by following mentioned three methods:

Product method
  1. Kuznets gave a new name to this method , i.e., product service method . In this method , net value of final goods and services produced in a country during a year is obtained, which is called total final product. This represents Gross Domestic product (GDP) .Net income earned in foreign boundaries by nationals is added and depreciation is subtracted from GDP.
Income method
In this method, a total of net incomes earned by working people in different sectors and commercial enterprises are obtained Incomes of both categories of people –paying taxes and not paying taxes are added to obtain national income.

Consumption Method or Expenditure method
  • It is also called expenditure method. Income is either spent on consumption or saved. Hence, national income is the addition of total consumption and total savings.
  • In this method we add the final expenditure that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.
  • For using this method, we need data related to income and savings of the consumers. Generally reliable data of saving and consumption are not easily available .Therefore , expenditure method
GDP Deflator
  • In the calculation of real and normal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ, it is only due to change in the price level between the base year and the current year.
  • The ratio of   normal to real GDP is a well known index of prices. This is called GDP Deflator.
  • Thus if GDP stands for normal GDP and gdp stands for real GDP then,
GDP deflator = GDP/gdp
  • Sometimes the deflator is also denoted in percentage terms. In such a case
Deflator = GDP/ gdp ×100 per cent
  • Is generally  not used for estimating national income.
  • In Indi, a combination of production method is used for estimating national income.
Estimates of National Income in India
  • No specific attempts were made for estimating national income in India during pre independence era.
  • In 1868, the first attempt was made by Dadabhai Naoroji.He, in his book ‘poverty and UN British Rule in India’ , estimated Indian per capita annual income at a level of Rs.20. Some other economist followed it and gave various estimates if Indian national income.
  • Soon after independence, the Government of India appointed the National Income Committee in Aug 1949 under the chairmanship of prof. PC Mahalanobis, to compile authoritative estimates of national income. The  committee submitted its first report in 1951 and the final report 1954.
  • According to this report, the total national income of the country was estimated at a level of Rs.8,650 crore and per capita income at a level of Rs. 246.90 .
  • The  final report appeared in 1954 gave estimates of national income during the period 1950-1954.
  • For further estimation of national income, the government established Central Statistical Organization (CSO) which now regularly publishes income national data. Recently CSO has introduced a new series on National Income with 1999-2000 as base year.
  • National Income includes the contribution of three sectors of the economy.
  • Primary Sector (Agriculture, Forest, Fisheries, and Mining), Secondary  Sector (Industries Manufacturing and Construction) and Tertiary Sector ( Trade, Transport, Communications, Banking, Insurance, Real Estate, Community and personal Services).

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