NATIONAL INCOME 

Meaning:

National income of the country can be defined as the total market value of all final goods and services produced in the economy in a year. Two things must be noted in regards to this meaning of national income. First, it measures the market value of annual output. In other words, national income is monetary measure. This is because there is no other way of adding up the different sorts of goods and services except with their money prices. Secondly, for calculating national income accurately all goods and services produced in any given year must be counted only once and not more then once. Most of the goods go through a series of production stages before reaching a market. As a result, parts or the component of many goods are brought and sold many times. Hence, in order to avoid double counting of goods that are sold and resold, national income only includes the market value of all final goods and services only ignores the transactions involving intermediate goods.

   The above way of explaining national income is only one way of interpreting it. In fact, the concept of national income has three aspects. It represents a flow of total value of output, it represents a flow of total receipts or incomes, and it represents a flow of total expenditure.

Form above it follows that:

BASIC NATIONAL INCOME CONCEPTS

There are various basic concepts of national income, which are widely used in national income accounting of a country. The important concepts of national income are:

1.      Gross Domestic Product (GDP).

2.      Gross National Product (GNP).

3.      Net National Product at Market Prices (NNP_MP).

4.      National Income (NI).

5.      Personal Income (PI).

6.      Disposable Personal Income (DPI).

These different concepts of national income are appropriate and relevant for different purposes. It is necessary to estimate all kinds of national income to get overall picture of national income. But due to the unavailability of sufficient data, only the GNP and national income are calculated in underdeveloped countries. These concepts are briefly explained below:

Gross Domestic Product (GDP):

            There are many measures of economic performance of an economy and well being of society. The best measure and indicator of an economy’s performance is the total output of goods and services produced in a year. This is gross domestic product, which is also referred to as Gross Domestic Product (GDP). Gross domestic product can be defined as the total market value of all final goods and services currently produced in a year in the domestic territory of a country. Gross Domestic Product is the basic national income accounting measure of total output produced or aggregate supply of output.

Four things must be noted in regard to definition of gross domestic product (GDP):

Firstly, it measures the market value of annual output of goods and services currently Produced. In other words, GDP is a monetary measure.

Secondly, for calculating gross domestic product accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. Most of the goods go through a series production stages before reaching the buyers. As a result, parts of many goods are bought and sold many times during a year. Hence to avoid double counting, gross domestic product (GDP includes the value of only final goods and ignores the transactions involving intermediate goods (goods, which are purchased for further processing or for resale).

Thirdly, GDP includes only currently produced goods and services in a year. It includes only goods and services produced in a particular year. But market transactions involving goods produced in previous periods are not included in GDP of current year.

Lastly, GDP refers to the value of goods and services currently produced by normal residents working in the domestic territory of a country.

Gross National Product (GNP):

             Gross National Product (GNP) is the most widely used concept among different concepts of national income. It is broader than GDP. According to World Bank, “GNP measures the total domestic and foreign value added claimed by residents. It comprises GDP plus net income from abroad for factor services (labor and capital) less similar payments made to non-residents who contributed to the domestic economy.” Gross National Product includes net factor income from abroad. Therefore,

            GNP= GDP + net factor income from abroad

The following things should be considered while calculating the GNP of a country:

         i.            Only the money value of final goods and services should be calculated to avoid double counting. The goods and services finally consumed by the consumers are called the final goods and services. These goods are not used in the production of other goods. The intermediate goods are used in the production of other goods. For example, sugarcane is an intermediate good whereas sugar is a final good.

       ii.            Only the money value of currently produced goods and services should be considered while calculating the national income. The goods produced but not sold in the past year should be calculated on the national income of the same year. Because, GNP is the measurement of the productivity of the economy of a particular period.

It is to be noted that the use of the term ‘total’ in national product means that the depreciation of fixed assets are not deducted while calculating GNP. GNP includes GDP. Only in a closed economy having no transactions with foreign countries, the exports and imports are nil and GNP equals GDP.

Therefore, it is expressed as:

GNP= GDP +(X-M).

Where, (X-M) = net income from abroad or exports minus imports.

Net National Product (NNP):

            The net production of goods and services in a country during a year is called net national product. The capital foods like machine, equipments wear out and their value fall while used in production. These wear out or fall in value is called ‘depreciation’. Due to this every year some depreciation fund is kept aside for the maintenance and replacement of capital goods. Hence, NNP is calculated by deducting depreciation form GNP. In other words, the amount left after deducting depreciation from GNP is called NNP. It is expressed as:

NNP=GNP-depreciation

            It is considered as a better concept than GNP because it considers the depreciation of capital assets. It provides information on the net increase of total product in the country. It helps to analyze the long-term problems related to maintaining or increasing the assets in a country. But it is difficult to determine the appropriate rate of depreciation of machine and equipments.

National Income (NI):

             All the terms of national income in a sense represent national income. National income is called the National Income at factor cost because here the national income is calculated on the basis of the remuneration of factors of production.

            Since national income is the result of the joint efforts of factors of production, it is distributed among the factors. The owners of labor, land, capital, and organization receive wage, rent, interest and profit respectively. Hence, national income is the sum of the income received by factors of production. NI is therefore, the sum of following items:

a.       Wages, salary, commission, bonus before deducting many tax or social security contribution and other forms of earning employees.

b.      Net income from rental and royalties.

c.       Interest income.

d.      Profit before deducting tax based on nay type of business. Whether distributed to the owners or retained in the business.

National Income is expressed as:

National Income (NI) = NNP+ subsidies – indirect taxes.

            The indirect taxes are not available to the factors of production. Hence, they should be deducted from NNP. Likewise, the subsidies given by the government are added to NNP to calculate national income. The subsidies are available to the factors of production.

            The concept of national income throws light on the distribution aspect of national product. This concept is closely related to ‘social justice’. Because, it gives information on how national product is distributed among the factors of production for the services rendered by them.

Personal Income (PI):

            Personal Income is the current individual available before deducting personal taxes but after deducting social security contribution. This concept has practical significance. It can be calculated monthly. The data related to it is available immediately after the end of the month.

            Personal income is that income which the individuals and households receive during a year. The factors of production do not get all parts of national income. Only that amount left after deducting different amounts from national income. Only that amount left after deducting different amounts from national income is available to them.

            The laborers and the earning person should keep some part of their wages, salaries in the form of provident fund, social security contribution. Since, these amounts are not available to individual, they should be deducted from national income. On the contrary the government provides transfer payments in the form of unemployment allowance, old age allowance etc. The individuals get these amounts without rendering any services at present. These amounts should be included in personal income. In this way, in personal income, the payments not received by individuals are not included and the transfer payments received by individuals are included.

Personal income can be expressed as:

Personal Income (PI)= National Income (NI) – corporate income taxes – undistributed corporate profits – social security contribution + transfer payments.

            The concept of personal income is also important because it helps to estimate the potential purchasing power of people and measure their welfare. The weakness of this concept is that it does not give clear information about the real amount available to the households for spending and saving.

Disposable Personal Income (DPI):

            The entire amount received by the individuals and households are not available for consumption or expenditure because, some part of the personal income should be paid to the government in the form of direct tax. Hence, the income left after paying direct taxes from the personal income is called disposable income.

Disposable income is expressed as:

            DI= personal income – direct taxes

Generally, people save the amount left after consumption. Hence, disposable income is also expressed as:

            DI= Consumption + Saving.

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