What is National Income?

  • National Income of any country means the complete value of the goods and services produced by any country during its financial year.
  • It is thus the consequence of all economic activities that are running in any country during the period of one year. It is valued in terms of money. What is National Income?
  • In short one can say that the national income of any country is the total amount of income that is accrued by it through various economic activities in one year. It is also helpful in determining the progress of the country. 
  • It includes wages, interest, rent, profit, received by factors of production like labour, capital, land and entrepreneurship of a nation.

Background: Estimation of National Income in India

  • The first attempt to calculate national income of India was made by Dadabhai Naoroji in 1867 – 68, who estimated per capita income to be ₹ 20.
  • The first scientific method was made by Professor VKRV Rao in 1931-32, but was not very satisfactory.
  • The first official attempt was made by National Income Committee headed by Professor PC Mahalanobis in 1949.
  • According to the National Income Committee Report (1954), National Income of India was ₹ 8710 crore and Per Capita Income was ₹ 225 in 1948 – 49.
  • In India, Central Statistical Organization (1949) now renamed as Central Statistical Office (CSO) has been formulating National Income.

Measures of National Income

Following are the Measures of National Income

Gross Domestic Product

  • GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP growth rate is an important indicator of the economic performance of a country.
  • Description: It can be measured by three methods, namely,
    • Output Method: This measures the monetary or market value of all the goods and services produced within the borders of the country. In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices o real GDP is computed. GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.
    • Expenditure Method: This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM) C: Consumption expenditure, I: Investment expenditure, G: Government spending and (X-IM): Exports minus imports, that is, net exports.
    • Income Method: It measures the total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country. GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.
  • In India, contributions to GDP are mainly divided into 3 broad sectors – agriculture and allied services, industry and service sector. In India, GDP is measured as market prices and the base year for computation is 2011-12. GDP at market prices = GDP at factor cost + Indirect Taxes – Subsidies.
  • GDP at Factor Cost:

    • GDP at factor cost is the sum of net value added by all producers within the country. Since the net value added gets distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or depreciation).
    • Thus GDP at Factor Cost = Net value added + Depreciation.
    • GDP at factor cost includes:

      (i) Compensation of Employees i.e., wages, salaries, etc.

      (ii) Operating Surplus which is the business profit of both incorporated and unincorporated firms,

      (iii) Mixed Income of Self- employed.

  • Net Domestic Product (NDP):

    • NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.
  • Nominal and Real GDP:

    • When GDP is measured on the basis of current prices, it is called GDP at current prices or nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP.
    • Nominal GDP is the value of goods and services produced in a year and measured in terms of rupees (money) at current (market) prices. In comparing one year with another, we are faced with the problem that the rupee is not a stable measure of purchasing power. GDP may rise a great deal in a year, not because the economy has been growing rapidly but because of rise in prices (or inflation).
    • On the contrary, GDP may increase as a result of fall in prices in a year but actually it may be less as compared to the last year. In both the cases, GDP does not show the real state of the economy. To rectify the underestimation and overestimation of GDP, we need a measure that adjusts for rising and falling prices. This can be done by measuring GDP at constant prices which is called real GDP.
    • To find out the real GDP, a base year is chosen when the general price level is normal, i.e., it is neither too high nor too low. The prices are set to 100 (or 1) in the base year. Now the general price level of the year for which real GDP is to be calculated is related to the base year on the basis of the following formula which is called the deflator index:
    • Real GDP = GDP for the/Current Year × Base Year (=100)/Current Year Index.
  • GDP Deflator:

    • GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100. Thus,
    • GDP Deflator = Nominal (or Current Prices) GDP/Real (or Constant Prices) GDP x 100

Gross National Product

  • One of the closest cousins of GDP is gross national product.
  • GDP includes only what is produced within a country’s borders. GNP adds what is produced by domestic businesses and labor abroad and subtracts out any payments sent home to other countries by foreign labor and businesses located in the United States.
  • Another way to think about is that GNP is based more on the production of citizens and firms of a country—wherever they are located—and GDP is based on what happens within the geographic boundaries of a certain country. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial.
  • Thus GNP according to the Income Method = Wages and Salaries + Rents + Interest + Dividends + Undistributed Corporate Profits +Mixed Incomes +Direct Taxes+ Indirect Taxes+ Depreciation+ Net Income from abroad.

Net National Product

  • Net national product is calculated by taking GNP and then subtracting the value of how much physical capital is worn out—or reduced in value because of aging—over the course of a year. The process by which capital ages and loses value is called depreciation.
  • The NNP can be further subdivided into national income, which includes all income to businesses and individuals and personal income, which includes only income to people.
  • For practical purposes, it is not vital to memorize these definitions.
  • However, it is important to be aware that these differences exist and to know what statistic you are looking at, so that you do not accidentally compare, say, GDP in one year or for one country with GNP or NNP in another year or another country.

Personal Income (PI)

  • Personal Income is the part of National Income which is received by the households.
  • The formula for calculating Personal Income (PI) is:
    • Personal income (PI) ≡ NI – Undistributed profits – Net interest
    • payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
    • Undistributed profits – these are the profits which is not distributed to the households.
    • Corporate Tax – It also does not accrue to the households 

Personal Disposable Income

  • Personal Disposable Income refers to the income that is available to the households that they can spent as they wish. 
  • All the Personal Income is not available to individuals to spend. They have to pay taxes (eg – Income tax) and non tax payment such as fines.
  • The formula for Personal Disposable Income is 
    • Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments (such as fines etc)
  • Thus, Personal Disposable Income is the part of aggregate income which belong to the households. They may decide to consume a part of it, and save the rest.

National Disposable Income

  • National Disposable Income gives us an idea of what is the maximum amount of goods and services the domestic economy has at its disposal
  • The formula for National Disposable Income is 
    • National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world.

Private Income

  • Private income is referred to as the total of all the factors incomes and transfer earnings received by the private sector from all sources. Private income includes incomes generated from any type of occupational activities or any income that is received apart from salary or any type of commission.
  • The formula for Private Income is
    • Private Income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world.

Difference between Private Income and Private Sector Income:

  • Both are different.
  • Private sector income includes only factor income earned by private sector within domestic territory whereas private income includes private sector income, Net factor income from abroad (NFIA) and all current transfers from within and outside the country.
  • Thus, private income is a national and broader concept whereas income from domestic product accruing to private sector is a domestic concept.
  • Symbolically:
    • Private income = Private sector income + NFIA + All transfer incomes

Per Capita Income:

  • The average income of the people of a country in a particular year is called Per Capita Income for that year. This concept also refers to the measurement of income at current prices and at constant prices.

Economy Terms for UPSC-Part II

Economy Terms for UPSC-Part III

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