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Understanding National Income Basics

National income is the total income earned by a country's people through labor and capital investments. Calculating national income is important to assess a country's economic development and determine how different sectors contribute to income. There are various methods to calculate national income, including production, income, and expenditure methods. The production method values final output by industry. The income method sums payments to factors of production. The expenditure method categorizes spending on consumption, investment, and savings. Calculating India's national income faces difficulties due to lack of reliable current data and underreporting.

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70 views2 pages

Understanding National Income Basics

National income is the total income earned by a country's people through labor and capital investments. Calculating national income is important to assess a country's economic development and determine how different sectors contribute to income. There are various methods to calculate national income, including production, income, and expenditure methods. The production method values final output by industry. The income method sums payments to factors of production. The expenditure method categorizes spending on consumption, investment, and savings. Calculating India's national income faces difficulties due to lack of reliable current data and underreporting.

Uploaded by

bhuvaneshkmrs
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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NATIONAL INCOME

The total income earned by a country's people, including labour and capital investment is
known as national income of that country.

The study of National Income is important because of the following reasons:

• To see the economic development of the country.


• To assess the developmental objectives.
• To know the contribution of the various sectors to National Income.

Internationally some countries are wealthy, some countries are not wealthy and some
countries are in-between. Under such circumstances, it would be difficult to evaluate the
performance of an economy. Performance of an economy is directly proportionate to the
amount of goods and services produced in an economy. Measuring national income is
also important to chalk out the future course of the economy. It also broadly indicates
people’s standard of living.

Income can be measured by


1. Gross National Product (GNP)
2. Gross Domestic Product(GDP),
3. Gross National Income (GNI) and
4. Net National Income (NNI).

In India the Central Statistical Organization has been formulating national income.
However some economists have felt that GNP as a measure of national income has
limitation, since they exclude poverty, literacy, public health, gender equity and other
measures of human prosperity.

Instead they formulated other measures of welfare like Human Development Index (HDI)

Calculating National Income


There are various methods for calculating the national income such as production
method, income method, expenditure method etc.

Production Method
The production method gives us national income or national product based on the final
value of the produce and the origin of the produce in terms of the industry.

All producing units are classified sector wise.

• Primary sector is divided into agriculture, fisheries, animal husbandry.


• Secondary sector consists of manufacturing.
• Tertiary sector is divided into trade, transport, communication, banking, insurance
etc.
Income Method:
Different factors of production are paid for their productive services rendered to an
organization. The various incomes that includes in these methods are wages, income of
self employed, interest, profit, dividend, rents, and surplus of public sector and net flow
of income from abroad.

Expenditure Method:
The various sectors – the household sector, the government sector, the business sector,
either spend their income on consumer goods and services or they save a part of their
income. These can be categorized as private consumption expenditure, private
investment, public consumption, public investment etc.

Difficulties in Calculation of National Income


In India there are various difficulties in calculating the national incomes .The most severe
one is the finding of reliable data. Most of the time, it is based on assumptions. Soon after
independence the National Income Committee was formed to collect data and estimate
National Income. The two major problems which remain in the calculation of National
Income are:

• Most of the data is not from the current year.


• Even if current data are available then values are underreported.

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