Definition of National Income
The total income of the nation is called national income. In real terms, national income is the
flow of goods and services produced in the economy in a particular period—a year.
A National Sample Survey has therefore defined national income as “The money measures of
the net aggregate of all commodities and services accruing to the inhabitants of community
during a specific period.”
In other words we can say that national income is a money measure or value of net aggregate
of goods and services becoming available annually to the nation as a result of the economic
activities of the community at large consisting of households or individuals, business firms
and social and political institutions. The time is accepted as one year all over the world as it is
concerned with the natural and seasonal factors. In one year all the seasons repeat itself.
Thus, all the definitions and National Income consider one year.
Different Concepts of National Income and Measurements:
In the measurement of national income there are various situations which we will have to
study and they are known as concepts of national income. These concepts have their
significance in national income accounting.
Important concepts have been discussed here under:
1. Gross National Income or Product (GNP):
Gross National Product has been defined as the total market value of all final goods and
services produced in a year. It is the money value of all the final goods and services which
the labour and capital of a country working on its natural resources have produced in a year.
It includes not only the part of the production which is brought to the market for sale but also
that part of the produce which is kept for self consumption.
While estimating Gross National Product a care is taken that no commodity is counted more
than once. For this, only the value of the final goods and services produced or value added by
each producer is included in the Gross National Product.
2. Net National Product or (NNP):
Net National Product (NNP) refers to the value of the net output of the economy during the
year. It is obtained by deducting the value of depreciation or replacement allowance of the
capital assets from the GNP.
To put it symbolically:
NNP = GNP – D
where D = depreciation allowances.
This value is measured at current prices, while GNP is expressed at the current market price.
Net National Product, in-fact, is the value of total consumption plus the value of net
investment of the community. It is the sum total of net values added by each producer in the
productive process of an economy during one year period.
3. Gross Domestic Product (GDP):
Gross Domestic Product is the money value of all goods and services produced annually
within the territorial limits of the country.
Gross Domestic Income includes:
(i) Wages and salaries,
(ii) Rents, including imputed house rents,
(iii) Interest,
(iv) Dividends,
(v) Undistributed corporate profits, including surpluses of public undertakings,
(vi) Mixed incomes consisting of profits of unincorporated firms, self-employed persons,
partnership etc., and
(vii) Direct taxes.
In the estimation of Gross Domestic Product, no consideration is given to the fact as to
whether the gross value of produce is with the combined efforts of only the people of the
country with the co-operation of the foreigners. But the product must be produced in the
country alone as the net earnings from abroad are excluded.
Therefore, Domestic Income = National Income – Net Income earned from abroad.
Thus, the difference between domestic income and national income is the net income earned
from abroad. If we add net income from abroad to domestic income, we get national income.
i.e., National Income = Domestic Income + Net Income earned from abroad.
But the net national income earned from abroad may be positive or negative.
4. Per Capita Income:
Per capita income refers to the average income of an individual in a particular year. It denotes
the income received by an individual during a certain year in a country. In order to find per
capita income of a country in a certain year, we divide the national income of that country by
the population of that country in that year e.g.,
Per-Capita Income = National Income of India in 2002/Population of India in 2002
It is clear that a country having high national income and less population will have higher per
capita income. The concept of per capita income helps us in estimating the standard of living
of different nations and it also serves as an index of economic development.
5. Personal Income:
Personal income is the aggregate income received by the individuals of a country from all
sources before payment of direct taxes in one year. It is derived from national income by
deducting undistributed corporate profits, profit taxes and employee’s contributions to social
security schemes.
These three components are excluded from national income because they do reach
individuals. It can never be equal to the national income, because the former includes the
transfer payments whereas they are not included in national income.
Business and Government transfer payments and transfer payments from abroad in the form
of gifts and remittances, wind-full gains and interest on public debts are a source of income
for individuals are added to national income. Thus,
Personal Income = National Income + Transfer Payment + Interest on Public Debt –
Undistributed Corporate Profits – Profit Taxes — Social Security Contribution.
Personal Income differs from Private Income in that it is less than the latter because it
excludes undistributed corporate profits. Thus
Personal Income = Private Income – Undistributed corporate profits – Profit taxes.
6. Disposable Income or Personal Disposable Income:
Disposable income or personal disposable income is the actual income which can be spend on
consumption because it is the income that accrues before direct taxes have actually been paid.
Therefore, in order to obtain the disposable income, direct taxes are deducted from personal
income. Thus,
Disposable Income = Personal Income — Direct Taxes.
But it should be remembered while calculating this income that the whole of the disposable
income is not spend on consumption and a part of it is saved. Therefore, the disposable
income is divided into consumption expenditure and saving. Thus,
Disposable Income = Consumption Expenditure + Savings
The concept of Disposable Income is very useful in computing the real purchasing power of
the country. It also gives us an information regarding the personal consumption pattern. It
refers to that part of the personal income which is actually available to the consumers. It can
be obtained by deducting the amount of personal taxes, fines etc., from personal income. It is
at the disposal of the consumers to save or consume or to use it in any way they like.
