Transcript National Income

National Income
 The sum total of the values of all goods and services
produced in a year
 It is the money value of the flow of goods and services
available in an economy in a year
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National Income
 National Income Committee of India 1951 defines
National Income as follows:
 “ A national income estimate measures the volume of
commodities and services turned out during a given
period counted without duplication.”
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National Income
 It refers to the money value of the flow of goods and
services available annually in an economy.
 Marshall’s Definition:
 “The labour and capital resources 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 the
national dividend.”
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National Income
 National Income refers to The income of a country
 to a specified period of time, say a year
 includes all types of goods and services
 which have an exchange value
 counting each one of them only once
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National Income
 Double counting
 If steel has been evaluated in industrial production, it
should not be included while calculating the value of
steel products, viz, machines and motor cars.
 To avoid double counting or multiple counting, two
methods are used
 Final products method
 Value added method
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National Income
 Final Products method:
 Adding the value of final products only
 Value added method:
 Go on adding the values created at each stage in the
manufacture of a commodity
 Then all such values created are added up together to
arrive at the national income of the country
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National Income concepts
 The following are the concepts of national income
 Gross National Product – GNP
 Net National Product – NNP
 Personal Income – PI
 Per capita Income – PCI
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National Income concepts
 Gross National Product
 National Income is the sum total of values of all goods
and services produced during a year
 The money value of this total output is known as
Gross National Product – GNP
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National Income concepts
 Gross National Product
 Example:
 If A,B,C,D,… are goods and services and
 If a,b,c,d,…are their prices respectively
 The GNP is calculated as follows
 GNP= Axa+Bxb+Cxc+Dxd….
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National Income Concepts
 GNP is most frequently used national income concept
 It is statistically a simpler concept as it takes no
account of depreciation and replacement problems
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National Income concepts
 Net National Product - NNP:
 This refers to the net production of goods and services
in a country during a year
 NNP is also called National Income at Market Prices
 We get NNP, by deducting the depreciation from GNP
 Therefore
NNP = GNP - Depreciation
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National Income concepts
 Personal Income - PI:
 Income earned by all the individuals and institutions
during a year in a country
 The entire national income does not reach individuals
and institutions
 A part of it goes by way of corporate taxes
 Undistributed profits
 Social security contributions
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National Income concepts
 Personal Income – PI
 People sometimes get incomes without any productive
activity
 They are called Transfer Payments
 Example: Unemployment benefits, old age pensions
etc.
 Such transfer payments are not included in the
National Income
 However they are added to Personal Income
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National Income concepts
 Personal Income – PI:
 PI is computed by using the following formula
 PI = National Income –(Corporate taxes, undistributed
profits, social security contributions) + Transfer
Payments
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National Income concepts
 Per Capita Income – PCI:
 If the national income is divided by the total
population, we get per capital income

PCI = NI/Population
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National Income concepts
 Per capita income
 PCI may be expressed either in money terms or in real
terms
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NI – Methods of computation
 Three methods to measure the national income
 They are Production method or Census method
 Income method
 Expenditure method
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Production method
 In this method
 The total products produced in the economy are
calculated for the year and the value is added without
double counting
 The economy is classified into sectors like
 Agricultural, industrial, fisheries, forest, direct services
and foreign transactions etc
 In each sector, we can find the value of final goods and
services
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Production method
 In the international transactions, net foreign income is
calculated by subtracting the total imports from the
total exports and added to the national income
 The results of these sectors, when combined, gives the
national income or national product
 The census or product method can be expressed
through the formula
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Production method

O=C+I
 Where O stands for output,
 C stands for consumption of goods
 I stands for investment goods
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Income Method
 According to this method
 Net incomes of individuals and business houses
during a year are added to know the national income
 Only those incomes earned and received for producing
goods and for rendering services are to be counted
 Transfer payments such as old age pensions , widow
pensions and unemployment benefits etc should not
be counted as these are the incomes received without
contributing to the production
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Income Method
 People get incomes in the form of
 Rents, wages or salaries, interest and profit
 The formula is

Y=C+S
 Here Y stands for Total Income
 C stands for consumption and S stands for Savings
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Expenditure method
 One man’s income is another man’s expenditure
 Therefore national income can be arrived at by adding
the total expenditure of individual and business firms
during a year
 Expenditure or outlay on final products takes place in
three ways
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Expenditure method
 Expenditure or outlay on final products takes place in
three ways
 Expenditure by consumers on goods and services
 Expenditure by entrepreneurs on capital or investment
goods
 Expenditure by government on consumption and
capital goods
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Expenditure method
 The formula for this method is

Y=C+I
 Here Y stands for total expenditure
 C stands for consumption expenditure
 I stands for investment expenditure
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Difficulties in the computation of
National Income
 The following are the practical difficulties in the
measurement of national income
 The statistics are not fully available
 Non-monetized sector is dominant
 Most people take out their livelihood from more than
one activity
 In backward economies like India, particularly in the
rural sector
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Difficulties in the computation of
National Income
 In backward economies like India, particularly in the
rural sector, the cultivators and small producers are
illiterate and they do not keep books of account. This
is a serious difficulty in the calculation of national
income
 Avoidance of double counting becomes complicated
 The village money lenders maintain absolute secrecy
of their transactions
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Importance of national income
 It indicates the prosperity of a nation. Growth in
national income indicates economic prosperity
 It indicates the standard of living of people of a
country
 It indicates the per capita income with which we can
compare the levels of development of all the countries
 Countries can be classified as ‘developed’ and
‘developing’ and ‘under developed’ based on their per
capita income only
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Importance of national income
 NI estimates are very helpful to the Finance Minister.
It guides him to make proper and right decisions in
regard to taxation and budgets
 It is useful to compare the prosperity of a country at
different times
 It provides an instrument of economic planning
 It indicates the trends of inflation and deflation.
Proper corrective action can be taken against them
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Importance of national income
 It helps to know the progress of various sectors in the
economy. Imbalanced growth, if any, can be solved
 It helps in forecasting the economic future and
preplanning is possible
 It indicates the economic status of a country among
the nations of the world
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Trends of national income of India
 During the plan periods, national income and per
capita income are increasing steadily
 But the rise in the per capita income is rather slow due
to population growth
 Agricultural sector is the most important sector as it is
the single largest contributor to the national income
 In the recent years, the share of the government sector
in national income is steadily increasing indicating the
increased efficiency of the public sector
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