National Income Estimation & Concept Of National Income
National Income is an important topic of Economics not only for CBSE Class 12 Economics students but also for all the aspirants of Competitive Exams. In this article you will get to know about:
- Concept of National Income
- Terms Related to National Income
- Methods of Calculating National Income
- Problems in National Income Estimation
- Importance of National Income Estimation
Let’s start with the very basic concept of the National Income:
National Income basically means the value of goods and services produced by a country during a financial year. It includes payments made to all resources either in the form of wages, interest, rent, or profits. In other words, we can also say that National Income is the touchstone of the growth of any economy as the growth of national and per capita incomes directly depict the Economic growth or progress of any country.
First scientific estimation of National Income in India is provided by Dr. V.K. Rao. Since 1951, National Income Estimation is the responsibility of Central Statistical Organization established in 1950 as a premier statistical institution for data collection.
National Product, National Expenditure and National Dividend – all three imply the same meaning, i.e., national Income and this concept depicts that “National Income means the total flow of produced, distributed and consumed wealth.”
Now, let’s know about the three Production Sectors:
- Primary Sector: – It is the sector under which production activities are directly linked with land or water or both. In these finish goods is similar to raw material, e.g., fisheries.
- Secondary Sector: -It is the sector under which resources are converted into finish goods with the help of giant technologies, e.g., Steel & textile industry.
- Tertiary Sector: -It is the sector where finish goods are invisible in nature, i.e., services, thus also known as the service sector.
Before moving to the Methods of Calculating National Income, you should know about some important terms related to national Income:
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Terms Related to National Income:
- Gross Domestic Product (GDP):- It is a monetary value of all final goods and services produced in a domestic territory by normal residence in a given financial year.
GDP = market value of goods and services produced in the country + incomes earned in the country by foreigners – incomes received by resident nationals from abroad.
GDP at Factor Cost* = GDP at Market Price* – Indirect Taxes + Subsidies.
- Gross National Product (GNP):- It is the sum total of all goods and services produced by Nationals of a country in a given financial year.
GNP at Market Prices = GDP at Market Prices + Net Income from Abroad.
GNP at Factor Cost = GNP at Market Prices – Indirect Taxes + Subsidies.
- Net National Product (NNP):- It is the value of GNP after deduction depreciation of plant and machinery. NNP is considered as National Income because all policies are based on Data related with NNP.
NNP = GNP—Depreciation.
- Net Domestic Product (NDP):- Net domestic product- at market price is the difference between Net National Product and net factor income from abroad or it is the difference between GNP minus depreciation and net factor incomes from abroad.
Net Domestic Product = GDP at Factor Cost – Depreciation.
NOTE: When the value is added at consumer point of view or from the price of goods at market, then the value is said to be calculated at the Market Price. Whereas if the value is calculated at producer point of view or from the price of factors used, then it is said to be calculated at the Factor Cost.
Measurement of Nation Income:
Every country prepares statistics on its National Income as increase in the national income is tantamount to their economic growth. There are three ways for National Income Calculation of a country, viz., from the income side, the output side and the expenditure side that are explained below:
1. Income Method: – also known as Cost Method. Under this method National Income is estimated by adding various factor incomes, i.e., Rent, Wages, interest & profit.
- It is the best method of NI estimation because it gives accurate value of production.
2 Production Method: – Under this method NI is always calculated on market price basis. it is classified into :-
- Final Goods Price Method: – In this method, final goods are multiplied by prevailing market price to estimate the production.
- Value Added Method: – In this method Value of product is calculated from different stages of production by adding all value addition in different points of production.
3. Expenditure method: – Under this method expenditures of all important economic blocks, i.e., household, government sector, production sector and Rest of world are added.
- Ø It also gives a GDP value on market basis.
Problems in National Income Estimation:
- Presence of large non- monetised sector.
- Non-availability of appropriate and reliable data, i.e., production for self consumption.
- Unreported illegal income.
- Difficulties in classification of working population.
- Income earn through transfer payments or in the form of free food, lodging, dress and other amenities.
- Difficulty in distinguishing intermediate and final goods.
- Problem with Sale and Purchase of second-hand goods and assets as national income would increase many times if income is included every time they are bought and sold.
- Statistical figures are not always precise because they are based on the sample surveys.
Browse other Article also from here- Circular Flow of Income and Methods of Calculating National Income.
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Important Tags : National Income for Competitive exams / National Income Estimation / National income calculation / Concept of national income / Methods of calculating national income / Gross Domestic Product (GDP) / Gross National Product (GNP) / Net National Product (NNP)