NATIONAL INCOME It is defined as the aggregate factor income (earning of labor and land) which arises from the current production of goods and services by the nation’s nation’s economy. There is a circular flow of income as given in the following figure: CIRCULAR FLOW OF MACROECONOMIC ACTIVITY
CONSUMPTION / PURCHASES FINAL GOODS AND SERVICES
H OU SE H OL D
BU SIN ESS
FACTORS OF PRODUCTION WAGES, RENT, PROFIT
IMPORTANCE OF NATIONAL INCOME:
Nat Natio iona nall Inco Income me is cons consid ider ered ed an impo import rtan antt indi indica cato torr of econom economic ic develo developme pment nt of a countr country y. There There is no doubt doubt that that if nation national al income increases over a long period of time, the economic conditions of the peo peopl plee impro improve ve.. It is, is, ther theref efor ore, e, sugg sugges este ted d that that whil whilee esti estima mati ting ng the the economic growth in a country, the level of income and the rate of increase in national income should both be taken into consideration.
TYPES OF MEASURE OF NATIONAL INCOME:
Following are the measures of national income: 1.
As th the su sum of of al all in incomes, in in ca cash an and ki kind, ac according to to factor of production, in a given time period.
2.
As the the sum sum of net outp utput aris arisiing in seve severa rall sect sector orss of of na natio tion’s n’s production.
3.
As th the su sum of of co consum sumer’s r’s, go governm rnment ex expenditure on go goods and services and net expenditure on capital goods.
CONCEPTS OF NATIONAL NATIONAL INCOME:
The various concepts of national income are given below: This is the basi basicc soc social ial 1. Gr Gross oss Nation National al Produ Product ct (G. (G.N.P N.P): ): This accounting measure of total output or aggregate supply of goods and services. Gross National Product is defined as the total market value of all final goods and services produced in a year. 2. Gross Domestic Product (G.D.P): Gross Domestic Product is the
most comprehensive measure of economic activity and a broad measure of people’s income and well-being. The growth in real GDP is hence a measure of the growth of people’s real incomes and therefore the pace of improvement in living standards. 3. Net National Product (N.N.P): In the production of gross national
product of a year, we consume or use up some capital (equipment, machinery). It is generally known as depreciation, when charges for depreciation are deducted. When charges for depreciation are deduct deducted ed from the gross gross nation national al produc product, t, we get net nation national al product.
Net National Product or National Income at Market Prices = Gross national Product – Depreciation 4. National Income (N.I) at Factor Cost: National Income at factor
cost means the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and entrepreneurial ability which go into the year’s net production. In other words, it shows how much it costs society in terms of economic resources to produce net product.
National Income or National Income at Factor Cost = Net National Product – Indirect Taxes + Subsidies 5. Personal Income (P.I): Personal Income is the sum of all incomes
actually received by all individuals or households during a given year.
Personal Income = National Income - Social Security Contribution -Corporate Income Taxes - Undistributed Corporate Profits + Transfer Payments 6. Disposal Income (D.I): After a good part of personal income is
paid to government government in the form of personal personal taxes like income tax, personal property tax, etc., what remains of personal income is called disposable income. Disposable Income = Personal Income – Personal Taxes
MEASUREMENT OF NATIONAL INCOME:
There are three possible measures of national income: 1. The Income Method: This method approaches national income
from the distri distribut bution ion side. side. Accord According ing to this this method method,, nation national al inc income ome is obtai btain ned by summ summiing up of the incom ncomees of all all individuals in the country. method approache approachess Production ion or Outp Output ut Method: Method: This method 2. The Product national Income from the output side. According to this method, the economy is divided into different sectors such as agriculture, mining, mining, manufactur manufacturing, ing, small enterprises enterprises,, commerce, commerce, transport, transport, communication and other services. Then the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given year. year. Expendit itur uree Method Method:: We can can get get nati nation onal al inco income me by 3. The Expend
summing summing up all the consump consumptio tion n expend expenditu iture re and invest investmen mentt expenditure made by all individuals as well as the government of a country during a year.
DIFFICULTIES OR PROBLEMS IN CORRECT MEASUREMENT:
There are some problems which crop up when measuring national income of a country. Some are as below: Problemss of Definiti Definition: on: Ideally we should include all goods and 1. Problem
services produced in the course of the year; but there are some parts of the total which defy measurement. The services of housewives, for example, are not included on the ground that there is no means of assessing their market value. of Depre Deprecia ciatio tion: n: The The ques questi tion on of calc calcul ulat atio ion n of deprec depreciat iation ion on capita capitall consum consumpti ption on presen presents ts anothe anotherr formida formidable ble difficulty. Unless from the gross national income correct deductions are made made for deprec depreciat iation ion,, the estimate estimate of net national national income income is bound to go wrong. The main problem is that both the amount and the composition of capital are changing all the time.
Calculati ation on 2. Calcul
not easy easy to cal calcul culate ate the valu alue of Inventories: ies: It is not 3. Value of Inventor inventories, i.e., raw materials, semi-finished and finished goods in the custody of the producers. 4. The Treatment of Government: Another difficulty arises with regard
to the treatment of Government in national income accounts. On this point point,, the genera generall viewpo viewpoint int is that that as regard regardss the admini administr strati ative ve functions of the government like justice, administration and defense, they should be treated as giving rise to final consumption of such services by the community as a whole, so that the contribution of general government activities will be equal to the amount of wages and salaries paid by the government. 5. Income by Foreign Firms: Another major problem arises with regard
to the treatment of income arising out of activities of the foreign firms in a country. On this point, The IMF viewpoint is that production and income arising from an enterprise should be ascribed to the territory in which which produc productio tion n takes takes place. place. Howeve Howeverr, profit profitss earned earned by foreign foreign branches and subsidiaries are credited to the parent concern.
THE EQUILIBRIUM LEVEL OF INCOME:
When the income earned in a given period is totally spent on the goods and services produced in that specific period, national income is said to be at equili equilibri brium um level level in such such a case, case, aggreg aggregate ate expend expenditu iture re equals equals aggregate income.
Let C = Consumption Expenditure Expenditure I = Investment X = Value of Exports G = Government of Expenditure Expenditure Aggregate Expenditure (Y) = C + I + X + G The income earned is spent on: 1. cons consum umpt ptio ion n goods goods (C) (C) 2. imp imports orts (M) (M) 3. the payment payment of taxes taxes levied levied by by the government government (T) 4. sav savings ings (S) (S) Y = C + S + T + M Thus for the income flow f low to continue at equilibrium level when: C + I + X + G = C + S + T + M Since the consumption expenditure item (C) appears on both sides of the equation, it can be cancelled out I + X + G = S + T + M amount domest domestic ic and foreig foreign n reside residents nts Aggregat Aggregatee demand demand is the amount aggregate supply is wish to spend on the national product of a country and aggregate the amount amount of nation national al output output domest domestic ic firms firms wishes wishes to produc produce. e. When When nati nation onal al incom incomee equa equals ls aggr aggreg egat atee dema demand nd,, ther theree is equi equili libr brium ium in the the economy economy.. That is, planned planned expenditur expendituree by economic economic agents agents (individu (individuals, als, firms and government) is equal to national income. If aggregate demand were less than national income then firms would be left with unsold goods on their hands and so would cut back production. National income would be falling over time and so would not be in equilibrium and the economy will tend to decrease and output, employment, imports and prices will decrease. In the opposite situation of aggregate demand in excess of output , firms wou would resp respon ond d by incr increa easi sing ng prod produc ucttion ion pro provid vided that hat they hey had unde underu ruti tili lize zed d prod produc ucti tive ve capa capaci city ty.. Exce Excess ss aggr aggreg egat atee dema demand nd at full full employment would lead to rising prices and the economy will tend to grow and output, employment, import and prices will rise.
