NATIONAL INCOME
National income means the value of goods and services produced by a country during a financial year. Thus,
it is the net result of all economic activities of any country during a period of one year and is valued in terms of
money. National income is an uncertain term and is often used interchangeably with the national dividend, national
output, and national expenditure. We can understand this concept by understanding the national income definition.
The progress of a country can be determined by the growth of the national income of the country
According to Marshall: “The labor 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.”
Measurement of national income:
1) INCOME METHOD: Estimated by adding all the factors of production (rent, wages, interest, profit) and
the mixed-income of self-employed.
1. In India, one-third of people are self-employed.
2. This is the ‘domestic’ income, related to the production within the borders of the country
2) PRODUCTION METHOD: Estimated by adding the value added by all the firms.
Value-added = Value of Output – Value of (non-factor) inputs
1. This gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’) and taxes
(therefore ‘market price’)
2. To reach National Income (that is, NNP at FC)
o Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
o Subtract Depreciation: NNP at MP = GNP at MP – Dep
o Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
3) EXPENDITURE METHOD: The expenditure method to measure national income can be understood by
the equation given below:
Y = C + I + G + (X-M),
where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on
final consumer goods, I = Investment or Capital Formation, X = Exports, I = Imports, X-M = Net Exports
Any of these methods can be used in any of the sectors – the choice of the method depends on the
convenience of using that method in a particular sector
Problems in measurement of national income:
1) Exclusion of real transactions: In measuring national income from the output side only those items
which are purchased and sold through the market are included. Examples are barter transactions and
various free services rendered at personal levels. The value of these services is not included in GDP
because they do not represent services purchased through market transactions.
2) Value of leisure: All of us place some value on our time. The satisfaction we get from recreational
activities and other uses of our leisure time are also not included in GDP.
3) Cost of environmental damage: The costs of environmental damage are not subtracted from the
market value of final products when GDP is calculated. Some economists, therefore, believe that GDP
overestimates the value of output by failing to take into account environmental costs of production.
4) The underground economy: India has a vast underground economy. This economy consists of
transactions that are never reported to tax and other government authorities. It includes transactions
involving illegal goods and services, such as trading in harmful drugs, gambling, smuggling and
prostitution. These illegal goods and services are final products that are not included in GDP
5) Transfer payments and capital gain: All domestic transfer payments (personal, private and
government) are excluded from national income of a country. For example, if an individual receives a
cash gift from his father who is also a resident of India, it will not be a part of India’s national income
6) Self-consumption: Subsistence farmers who produce food for themselves and their family members
consume a major portion of their own output every year. Since this portion is not sold through the
market, it is excluded from GDP.
UNEMPLOYMENT:
unemployment, the condition of one who is capable of working, actively seeking work, but unable to
find any work. It is important to note that to be considered unemployed a person must be an active
member of the labour force and in search of remunerative work.
Unemployment is a key economic indicator because it signals the ability (or inability) of workers to
obtain gainful work and contribute to the productive output of the economy. More unemployed workers
mean less total economic production.
#TYPES:
1) Frictional unemployment: This type of unemployment is usually short-lived. It is also the least
problematic, from an economic standpoint. It occurs when people voluntarily change jobs. Searching
for a new job, recruiting new workers, and matching the right workers to the right jobs all take time
and effort. This results in frictional unemployment.
2) Cyclical unemployment: Cyclical unemployment is the variation in the number of unemployed
workers over the course of economic upturns and downturns, such as those related to changes in oil
prices. Unemployment rises during recessionary periods and declines during periods of economic
growth.
3) Structural unemployment: Structural unemployment comes about through a technological change in
the structure of the economy in which labor markets operate. Technological changes can lead to
unemployment among workers displaced from jobs that are no longer needed. Examples of such
changes include the replacement of horse-drawn transport by automobiles and the automation of
manufacturing
4) Institutional unemployment: Institutional unemployment results from long term or permanent
institutional factors and incentives in the economy. The following can all contribute to institutional
unemployment:
Government policies, such as high minimum wage floors, generous social benefits programs, and
restrictive occupational licensing laws
Labor market phenomena, such as efficiency wages and discriminatory hiring
Labor market institutions, such as high rates of unionization
There are a number of reasons for unemployment. These include recessions, depressions, technological
improvements, job outsourcing, and voluntarily leaving one job to find another .
