INTRODUCTION TO NATIONAL INCOME

In this unit we will discuss about the national income. National Income means the
total income of a nation. There are various methods for measuring the national
income. Then we will state the various importance of national income. Finally, we will
explain the various concepts of national income.

National Income is one of the basic concepts in macroeconomics. National Income

means the total income of the nation, The aggregate economic performance of the
whole economy is measured by the national income data.

National Income refers to the money value of all final goods and services produced
by the normal residents of a country while working both within or outside the
domestic territory of a country in an accounting year. National Income also includes
net factor income from abroad.

Symbolically,
Y = PG + PS
Where, Y = National Income
P = Price
G = Goods
S = Service

Traditional Definitions of National Income :

Marshall
"The labour and capital 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 national
dividend."

Pigou
"National income is that part of objective income of the community, including of
course income derived from abroad, which can be measured in money."

Fisher
"The national dividend or income consists solely of services as received by ultimate
consumers, whether from their material or from their human environments. Thus, a
piano, or an over coat made for me this year is not a part of this year's income, but
an additions to the capital. Only the services rendered to me during this year by
these things are income."

KEYNESIAN APPROACH TO NATIONAL INCOME

Keynes has suggested three approaches to national income :

(1) Income - expenditure approach : According to this approach, national income is
equal to total expenditure on consumption and investment goods.
(2) Factor - income approach : According to this approach, national income is
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measured as the aggregate of incomes received by all the factors of production.
(3) Sales proceeds minus cost approach : According to this approach, national
income is defined as the aggregate sales proceeds minus cost.

MODERN APPROACH TO NATIONAL INCOME

Modern economists consider three aspects of national income and emphasise the
fundamental identity between these three aspects. These three aspects are : (a)
product aspect (b) income aspect, and (c) expenditure aspect. In one of the
publications of the United Nations, national income has been defined in three ways :
(a) 'Net National Product' as the aggregate of the net value added is all branches of
economic activity during a specified period, together with the net income from
abroad.

(b) 'Sum of the distributive shares' as the aggregate of national income accrued to
the factors of production (in the form of wages, profits, interest, rent, etc) in a
specified period.

(c) 'Net National Expenditure' as the sum of expenditure on final consumption of

goods and services, plus domestic and foreign investments.
Modern economists consider national income as a flow of output, income and
expenditure, When goods are produced by the firms, the factors of production are
paid incomes in the form of wages, profits, interest, rent, etc. These income receipts
are spent by the household sector on consumption goods and their savings are
mobilised by the producers for investment spending. Thus, there is a circular flow of
production, income and expenditure, Obviously, income, output and expenditure
flows are always equal per unit of time. Thus, there is a tripple identity : Output =
Income = Expenditure.
Let us now discuss how is the national income measured. There are three methods
of measurement of national income. These are : (i) Product method, (ii) Income
method and (iii) Expenditure method.

(i) Product Method : Product method measures national income at the phase of
production. In this method, the total output produced in the economy during the year
is calculated and its money value is determined. It must be noted that the total output
consists of final goods only and not intermediate goods. It means that the market
value of only final goods and services is taken into account in calculating national
income through product method. The value of intermediate goods is not considered.
If the value of intermediate goods is also considered, it will result in the problem of
double counting. Double counting results in overestimation of national income. In
order to avoid double counting, only the value of final goods and services should be
included in national income; the value of intermediate goods should not be
considered. For example, bread is the final good, while wheat, flour and sugar are
intermediate goods. The price of bread (final goods) already includes the costs of
wheat, flour and sugar (intermediate goods) because these costs have been paid
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during the production process. As a matter of fact, inclusion of the value of wheat,
flour and sugar along with the value of the final good in calculating national income
will lead to double counting and this should be avoided.

(ii) Income Method : Under income method, factor incomes are considered in
measuring national income. This method is also known as distributive share method
or factor payment method. In this method, total income generated in the production
of goods and services is taken into account. The incomes earned by the factors of
production– land, labour, capital and organisation- are totalled up. In other words,
rent plus wages plus interest plus profit will be equal to national income. Income
method will not take into account transfer payments. For example, X pays Rs.
1,00,000 to Y. Y's income will increase but at the national level or macro level, there
is no change in income because what Y has gained is exactly what X has lost.
Donations, pensions etc. are not considered in calculating national income. Again,
income earned by smuggler is also not considered in calculating national income as
the smugglers' income is earned through illegal means.

(iii) Expenditure Method : In measuring national income, the expenditure method

take into account the aggregate of all the final expenditure on gross domestic
product in an economy during a year. In other words, the expenditure method
measures the disposal of gross domestic product. This method is also known as
'consumption and investment method' or 'income disposal method'. Final expenditure
is the expenditure on final product. The total income generated in the economy is
used for purchasing either consumption goods or investment goods. As such, total
final expenditure or national expenditure (Y) equal to the sum total of final
expenditure incurred on consumption goods (C) and investment goods (I).

Symbolically,
Y = C + I.
Final consumption expenditure includes - (a) personal consumption expenditure, and
(b) government final consumption expenditure (government's purchase of goods and
services).
Final investment expenditure includes - (a) gross domestic private investment, and
(b) net foreign investment or net export of goods and services.

IMPORTANCE OF NATIONAL INCOME

The study of national income statistics is very important. It helps in analysing the
actual performance of the economy and in preparing future policies. The increasing
importance of the study of the national income is due to the following reasons :

(i) Index of Economic Structure : An important index of the economic structure of the
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economy is national income estimates. National income estimates tell us how
incomes are earned and spent in the country. The knowledge about the relative
importance of various sectors of the economy and their contribution to national
income are also provided by national income estimates.

(ii) Economic Welfare Indicator : National income figures are an indicator of the
economic welfare of the people of a country. With the help of these figures, we can
compare the standard of living of the people of various countries. We can also
compare the standard of living of the people of the same country at different times.

(iii) Measures Aggregate Yield : National income statistics measure the aggregate
yield of the economic policy for development.
(iv) Tools for Economic Planning : National income estimates are the tools for
economic planning. Because for framing an economic plan, a prior knowledge of the
trends in national income is required.

(v) Provides Information about Inflationary and Deflationary gaps : National income
estimates provide information about inflationary and deflationary gaps in the
economy. National income estimates also assist in formulating anti-inflationary and
anti-deflationary policies.

(vi) Helpful in the Allocation of burden of international payments : National income

estimates help in allocating the burden of international payments among different
nations.
(vii) Determination of Subscription and Quotas : National income estimates enable
us to determine the subscriptions and quotas of different countries to international
organisations like IMF, IBRD, etc.

(viii) Helps in the Determination of Grants-in-Aid : National income estimates help the
federal government to determine the amount of grants-in-aid to be provided to the
state governments.

(ix) Provides a Basis of Budgetary Policies : On the basis of national income

statistics, government prepare their budgets and make necessary changes in the
taxation and borrowing policies.

(x) Importance in Defence and Development : National income estimates help in

determining the proper allocation of national product between defence and
development of the economy.

(xi) Helps in estimating Depreciation Provision : National income estimates guide us

to make provision for reasonable depreciation to maintain the capital stock of the
country.
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(xii) Helpful to the government planning process: National income estimates help the
government in making future plans for the expansion of public sectors.

(xiii) Important for less developed or developing countries : National income

estimates throw light on the importance and backwardness of various sectors of the
less developed or developing economics and help in formulating appropriate
economic policies.

(xiv) Helps in Economic Analysis : National income estimates help us in analysing

the functioning, growth and anatomy of the economy.

(xv) Provides basis of Social Accounting : The basis of social accounting or national
income accounting is the national income figures

VARIOUS CONCEPTS OF NATIONAL INCOME

(1) Gross Domestic Product at Market Price (GDP at MP):

Gross Domestic Product at Market Price is the money value of the final goods and
services produced within the domestic territory of a country during a year. Gross
Domestic Product is obtained by multiplying all goods and services produced with
their prices.

Symbolically,
GDP = P x Q,
Where, GDP at MP is Gross Domestic Product at Market Price,
P is market price and
Q is final goods and services.
Gross Domestic Product includes three types of final goods and services:
(i) Consumer goods and services to satisfy immediate wants of the people.
(ii) Capital goods consisting of fixed capital formation, residential construction, and
inventories of finished and unfinished goods, and
(iii) Goods and services produced by the government.

GDP does not include (a) income from gambling and smuggling, (b) black money, (c)
transfer payments like scholarships and old age pensions, (d) income from shares
and debentures, (e) self consumption services, (f) value of second hand goods.

(2) Gross National Product at Market Price (GNP at MP)

Gross National Product at Market Price is the money value of all final goods and
services produced annually in a country plus net factor income from abroad. GNP is
a broader concept than GDP. GNP is GDP plus net factor income from abroad.
Symbolically,

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GNP at MP = GDP at MP + Net Factor Income from abroad.
Net factor income from abroad is the difference between the factor income earned by
our residents from foreign countries and the factor income earned by the foreigners
from our country.

(3) Net National Product at Market Price (NNP at MP)

Net National Product at Market Price is Gross National Product at Market Price less
depreciations of fixed capital or consumption of fixed capital. By deducting the value
of depreciation of fixed capital from the value of Gross National Product in a year, we
get the value of Net National Product.

Symbolically,
NNP at MP = GNP at Mp – Depreciation.

(4) Net Domestic Product at Market Price (NDP at MP)

Net Domestic Product at Market Price is the difference between Net National
Product at Market Price and net factor income from abroad.

Symbolically,
NDP at MP = NNP at MP – Net Factor Income from Abroad.

(5) Net Domestic Product at Factor Cost (NDP at FC)

Net Domestic Product at Factor cost or Domestic Income is the income earned by
the factors of production in the form of wages, profits, rent, interest, etc within the
territorial limits of the country

Symbolically,
Net Domestic Product at Factor Cost (NNP at FC) or Domestic Income =

Rent, including imputed rent

+ Compensation of Employees or Wages and Salaries
+ Interest
+ Dividend
+ Reserve Fund of the Firms or Corporate Saving
+ Corporate or Other Direct Taxes
+ Mixed Income of the Self Employed
+ Profits of Government Enterprises
+ Property Income of the Government
+ Savings of Non-Departmental Undertakings.

(6) Gross Domestic Product at Factor Cost (GDP at FC)

Gross Domestic Product at Factor Cost is obtained by adding depreciation or

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consumption of fixed capital to the Net Domestic Product at Factor Cost.

Symbolically,
GDP at FC = NDP at FC + Depreciation.

(7) Gross National Product at Factor Cost (GNP at FC)

Gross National Product at Factor cost is obtained by adding net factor income from
abroad to the Gross Domestic product at Factor Cost.

Symbolically
GNP at FC = GDP at FC + Net Factor Income From Abroad.

(8) Net National Product at Factor Cost or National Income (NNP at FC or NI)
Net National Product at Factor Cost or National Income is the total earnings of all
factors of production in the form of wages, profits, rent, interest, etc. plus net factor
income from abroad. In other words, if net factor income from abroad is added to the
Net Domestic Product at Factor Cost, we get Net National Product at Factor Cost.

Symbolically,

NNP at FC or NI = NDP at FC + Net Factor Income from Abroad.

(Net National Product at Factor Cost or National Income can also be calculated by
deducting depreciation from Gross National Product at Factor Cost.

Symbolically,
NNP at FC or NI = GNP at FC – Depreciation.

(9) Per Capita Income : Per capita income means income per head. Per capita
income refers to the average income of the normal residents of a country during any
particular year. It is equal to national income divided by total population.

Symbolically,
Per capita income = National income / Total population

(10) Private Income: Private income is the income of the private sector obtained
from any source --- productive or otherwise and retained income of the Corporations.

Symbolically,
Private Income = Income from Net Domestic Product accruing to the private
sector + Net factor income from abroad + Net Transfer Payments from the
Govt. + Transfer Payments from the rest of the world – Contribution in social
security schemes

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In order to obtain private income from national income, we add
(a) Current transfer earnings from the Govt.
(b) Interest on national debts.
(c) Net current transfer from the rest of the world and we deduct from the rest of
the world
(d) Property and entrepreneurship income of Govt. Departmental enterprises
savings of non-departmental undertakings

(11) Personal Income : The income earned by the personal sector, i.e., households
and unincorporated business is personal income. personal income includes transfer
payments like welfare payments, pensions, unemployment etc.

Symbolically,
Personal Income = Private Income + Corporate Savings – Corporate Tax

The basic difference personal income and private income is that the private income
includes corporate savings and corporate tax ( undistributed profit) while personal
income does not include this.

(12) Disposable Personal Income :That part of the personal income which the
households can spend the way they like is called disposable personal income. It
refers to the purchasing power of the households.
Disposable Income = Personal Income – Direct Taxes.
The entire amount of disposable income is not spent on consumption. A part of its is
saved. Thus,
Disposable Income = Consumption Expenditure + Saving.

SUMMARY
National Income refers to the money value of all final goods and services produced
by the normal residents of a country while working both within or outside the
domestic territory of a country in an accounting year. It also includes net factor
income from abroad.
There are three methods of measurement of national income. These are
(i) Product method,
(ii) Income method and
(iii) Expenditure method.
The study of national income statistics is very important. It helps in analysing the
actual performance of the economy and in preparing future policies.
There are various concepts of national income. These are Gross Domestic Product,
Gross National Product, Net National Product, Net Domestic Product, Per Capita
Income, Personal Income, Disposable Income, etc.

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Illustration 1:
Given the following data, using income and outcome methods, find out domestic
income, national income, gross domestic product at market price, and gross national
product at market price.

Items Rs. In Cr.

Value of Sales 8,000

Change in Stock 1,000

Intermediate Consumption 3,000

Interest 800

Wages 700

Dividend 600

Corporate Tax 400

Undistributed Profits 500

Mixed Income of Self Employed 800

Depreciation 400

Net Indirect Taxes 600

Rent 1,200

Net Factor Income from abroad 200

Solution:
(1) Income Method:
(a) Net Domestic Income at Factor Cost (NDPFC)
= Interest + Dividend + Corporate Tax + Undistributed Profits + Mixed
Income + Wages + Rent
= 800 + 600 + 500 + 400 + 800 + 700 + 1200 = Rs. 5,000 Cr.

(b) Net National Product at Factor Cost (NNPFC)

= NDPFC + Net factor income from abroad
= 5,000 + 200 = Rs. 5,200 Cr.

(c) Gross National Income (Product) at Market Price (GNP MP)

= NNPFC + Depreciation + Net Indirect Taxes

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 = 5,200 + 400 + 600 = Rs. 6,200 Cr.

(d) Gross Domestic Product at Market Price (GDPMP)

= GNPMP + Net Factor Income from Abroad
= 6,200 – 200 = Rs. 6,000 Cr.

(2) Output Method:

(a) GDPMP = Sales + Change in Stock – Intermediate Consumption

= 8,000 + 1,000 – 3,000 = Rs. 6,000 Cr
(b) GNPMP = GDPMP + Net Factor Income from Abroad = 6,000 + 200 +
Rs. 6,200 Cr.
(c) NDPFC = GDPMP - Net Indirect Taxes – Depreciation
= 6,000 – 600 – 400 = Rs. 5,000 Cr.
(d) NNPFC = NDPFC + Net Factor Income from Abroad
= 5,000 + 2,000 = Rs. 5,200 Cr.

Illustration 2:
Given the following data, using income and outcome methods, find out net domestic
income at factor cost, net national income at factor cost, gross domestic product at
market price, and net national product at market price.

Items Rs. In Cr.

Sales 6,000

Increase in Stock 2,000

Cost of raw material 1,500

Rent 1,200

Interest 800

Wages 600

Profit 700

Mixed Income 700

Depreciation 1,800

Net Indirect Taxes 700

Net Factor Income from Abroad -150

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Solution:
(1) Income Method:
(a) Net Domestic Income at Factor Cost (NDPFC)
= Rent + Wages + Interest + Profit + Mixed Income
= 1,200 + 600 + 800 + 700 + 700 = Rs. 4,000 Cr.

(b) Net National Income (Product) at Factor Cost (NNPFC)

= NDPFC + Net factor income from abroad
= 4,000 + (-150) = Rs. 3,850 Cr.

(c) Gross domestic Income (Product) at Market Price (GDPMP)

= NDPFC + Depreciation + Net Indirect Taxes
= 4,000 + 1,800 + 700 = Rs. 6,500 Cr.

(d) Net National Product at Market Price ( NNPMP)

= GDPMP - Depreciation + Net Factor Income from Abroad
= 6,500 – 1,800 + (-150) = Rs. 4,550 Cr.

(2) Output Method:

(a) GDPMP = Sales + Change in Stock – Cost of Raw Materials

= 6,000 + 2,000 – 1,500 = Rs. 6,500 Cr
(b) NNPMP = GDPMP – Depreciation + Net Factor Income from Abroad =
6,550 - 1,800 + (-150) = Rs. 4,550 Cr.
(c) NDPFC = NNPMP - Net Factor Income from Abroad – Net Indirect Taxes
= 4,550 – (- 150) – 700 = Rs. 4,000 Cr.
(d) NNPFC = NDPFC + Net Factor Income from Abroad
= 4,000 + (- 150) = Rs. 3,850 Cr.
.

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