National Income refers to the total of all the goods and services produced in a country during a financial year. In other words, a national income is the outcome of all the economic activities of the nation such that it is valued in terms of money. In order to estimate total economic activity in a country or region, a variety of measures of national income and output including gross domestic product, gross national product, net national income, and adjusted national income are used in economics. National income helps policy-makers in formulating good economic policies both in government and in private industry. Let’s dive in to understand the Concept of National Income in context of

• Macro Economics Class 12; Table of Content:
• Concept of National Income – GDP, GNP, NNP
• Methods of Measuring National Income
• Limitation in Measuring National Income
• Need of National Income Estimation

CONCEPT OF NATIONAL INCOME:

Gross Domestic Product – GDP is the market value of goods and services produced within the country during an accounting year. This is calculated at market prices.

GDP be calculated in the following ways:

• The Product Method: In this method, GDP is the sum of goods and services including agriculture and allied services; mining; manufacturing, construction, electricity, gas and water supply; transport, communication and trade; banking and insurance, etc produced during the year.
• The Income Method: In this method, GDP is the sum of all factor incomes Wages and Salaries (compensation of employees), Rent, Interest and Profit.
• Expenditure method: In this method, GDP is the sum of goods and services including consumer expenditure on services and durable and non-durable goods, investment in fixed capital such as residential and non-residential building, machinery, and inventories, government expenditure on final goods and services, export of goods and services produced by the people of country and Less imports.

GDP at Factor Cost: GDP at factor cost is the sum of domestic factor incomes and fixed capital consumption (or depreciation).It includes compensation of employees i.e., wages, salaries, etc., operating surplus, mixed income of self- employed.

Net Domestic Product (NDP): The value of NDP is the value of depreciation which is deducted from GDP at factor cost.

Nominal and Real GDP: When GDP is measured on the basis of current price in terms of rupees (money), it is known as nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called real GDP.

GDP Deflator: GDP deflator refers to an index of price changes of goods and services that are included in GDP. It is equal to the nominal GDP in a given year divided by the real GDP for the same year and then multiplying it by 100.

Gross National Product (GNP): GNP is the total measure of four types of final goods and services: consumers’ goods and services to satisfy the immediate wants of the people, gross private domestic investment in capital goods, goods and services produced by the government and net exports of goods and services. GNP can be estimated using methods: Income method to GNP (GNP is the sum of wages and salaries, rents, interest, dividends, undistributed corporate profits, mixed incomes, direct taxes, indirect taxes, depreciation, net income earned from abroad ), Expenditure method to GNP ( GNP is the sum of private consumption expenditure, gross domestic private investment, net foreign investment and government expenditure on goods and services ) and Value added method to GNP (GNP by value added is sum of Gross value added and net income from abroad).

NNP at Market Prices: If we deduct depreciation from GNP at market prices, we get NNP at market prices. NNP at Market Prices = GNP at Market Prices—Depreciation.

NNP at Factor Cost: Net National Product at factor cost is also called National Income.
NNP at Factor Cost = NNP at Market Prices – Indirect taxes+ Subsidies

Domestic Income: Domestic income refers to the income generated (or earned) by factors of production within the country from its own resources. It includes wages and salaries, rents, including imputed house rents, interest, dividends, undistributed corporate profits, including surpluses of public undertakings, mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc., and direct taxes.
Domestic Income = National Income-Net income earned from abroad.

Browse the video to understand the Concept of National Income at a glance:

METHODS OF MEASURING NATIONAL INCOME

Product Method: According to this method, GNP is the total value of final goods and services including agricultural products, minerals received from mines, commodities produced by industries, the contributions to production made by transport, insurance companies, lawyers, doctors, teachers, etc. The value of these goods is calculated at market prices.

Income Method: According to this method, GNP is the total value of net income payments received by all citizens of a country by way of net rents, net wages, net interest and net profits.

Expenditure Method: According to this method, GNP refers to the total expenditure incurred by the society in a particular year. Expenditure includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment.

Value Added Method: GNP is the sum of all differences between the value of material outputs and inputs at each stage of production.

LIMITATIONS IN MEASURING NATIONAL INCOME:

• Problems in Income Method: The services of the owner-occupied house are included in national income even if he has not rented that house to anyone else. Also, it is difficult to find out the income of self-employed persons.
  Farmers keep a large portion of food and other goods produced on the farm for self-consumption. The problem is whether that part of the produce which is not sold in the market can be included in national income or not. Payments in kind by employers are included in national income because otherwise the employees would have received money income equal to the value of free food, lodging, etc. from the employer and spent the same in paying for food, lodging, etc.

• Problems in Product Method: The estimation of the unpaid services of the housewife like preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up children, etc. are not included in national income, the problem of double counting leads to the overestimation of national income. Also, the value of the second – hand goods are not included in national income because they were counted in the national product in the year they were manufactured. Income earned through illegal activities like gambling, smuggling, illicit extraction of wine, etc. is also not included in national income. Price changes do not adequately measure national income. When the price level rises, the national income also rises, though the national production might have fallen and with the fall in the price level, the national income also falls, though the national production might have increased.

• Problems in Expenditure Method: The problem of estimating government services arises. Services provided by government like if police, military protect the lives, property and liberty of the people then they are treated as final goods. However, if police, military, legal and administrative services help in maintaining peace and security, then they are treated as intermediate goods and are not included in national income. Government expenditures including payments made in the form of pensions, unemployment allowance, subsidies, interest on national debt, etc are not included in national income because they are paid without adding anything to the production process during the current year.

NEED OF NATIONAL INCOME ESTIMATION

– National income data helps to find out how the aggregates of a nation’s income, output and product result from the income of different individuals, products of industries and transactions of international trade.

– National income data provides information regarding industrial output, investment and savings, etc. so that proper measures can be adopted to take the economy to the right direction.

– Research scholars of economics also use national income data of the country’s input, output, income, saving, consumption, investment, employment, etc.,

– It helps to find out country’s per capita income.

– It enables us to know about the distribution of income in the country as it provides information regarding wages, rent, interest and profits, etc.

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