Unit-V Macroeconomics – National Income

Introduction

 National Income of any country means the complete value of

the goods and services produced by any country during its
financial year.
 It is thus the consequence of all economic activities that are
running in any country during the period of one year.
 It is valued in terms of money. In short one can say that the
national income of any country is the total amount of income
that is accrued by it through various economic activities in
one year.
 It is also helpful in determining the progress of the country.
 It includes wages, interest, rent, profit, received by factors of
production like labour, capital, land and entrepreneurship of
a nation.
 Simon Kuznets defines national income as “the net output of commodities
and services flowing during the year from the country’s productive system
in the hands of the ultimate consumers.” Whereas, in one of the reports of
United Nations, national income has been defined on the basis of the
systems of estimating national income as net national product (NNP).
 There are various concepts pertaining to national income are as follows:
Gross Domestic Product (GDP) Gross domestic product relates to the
product of the factors of production employed within the political
boundaries i.e., within domestic territory.
 It is defined as a measure of the total flow of goods and services produced
by an economy over a specified time period, usually a year. All value of
intermediate products is excluded. So only the market value of final
products is included to define GDP.
 Gross National Product (GNP) Gross national product is the total measure
of the flow of goods and services at market value resulting from current
production during a year in a country, including net income from abroad.
 The important concepts of national income are:
 Gross Domestic Product (GDP)
 Gross National Product (GNP)
 Net National Product (NNP) at Market Prices.
 Net National Product (NNP) at Factor Cost or National Income.
 Personal Income.
 Disposable Income
 . GDP at market price: Is money value of all goods and
services produced within the domestic domain with the available
resources during a year.
 GDP = (P*Q)
here,
 GDP = gross domestic product
 P = Price of goods and services
 Q= Quantity of goods and services
 GDP is made up of 4 Components
 consumption
 investment
 government expenditure
 net foreign exports of a country
 GDP = C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
 Gross National Product (GNP): Is market value of final
goods and services produced in a year by the residents of the
country within the domestic territory as well as abroad.
 GNP is the value of goods and services that the country's
citizens produce regardless of their location.
 GNP=GDP+NFIA
 NP=C+I+G+(X-M) +NFIA
 Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
 NFIA= Net factor income from abroad
 Net National Product (NNP) at MP: Is market value of net
output of final goods and services produced by an economy
during a year and net factor income from abroad.
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation
 Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
 NFIA= Net factor income from abroad.
 IT= Indirect Taxes
 National Income (NI): Is also known as
National Income at factor cost which means total income
earned by resources for their contribution of land, labour,
capital and organisational ability.
 Hence, the sum of the income received by factors
of production in the form or
 Symbolically or as per the formula
NI=NNP +Subsidies-Interest Taxes
or, GNP-Depreciation +Subsidies-Indirect Taxes
or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes
+Subsidies
 e. Personal Income (PI): Is the total
money income received by individuals and households of a
country from all possible sources before direct taxes.
 Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed
Corporate Profits- Social Security Contribution
+Transfer Payments.
 Disposable Income (DI) : It is the income left with the
individuals after the payment of direct taxes from personal
income.
 It is the actual income left for disposal or that can be spent
for consumption by individuals.
 Thus, it can be expressed as:
 DI=PI-Direct Taxes
 g. Per Capita Income (PCI): It is calculated by dividing
the national income of the country by the total population of
a country.
 Thus, PCI=Total National Income/Total National
Population
 Measurement of National Income
 There are three methods to calculate National Income:
 Income Method
 Product/ Value Added Method
 Expenditure Method
 Income Method
 In this National Income is measured as flow of income.
 We can calculate NI as:
 Net National Income = Compensation of Employees+ Operating surplus
mixed (w +R +P +I) + Net income + Net factor income from abroad.
 Where,
 W = Wages and salaries
 R = Rental Income
 P = Profit
 I = Mixed Income
 Product/ Value Added Method
 In this National Income is measured as flow of goods
and services.
 We can calculate NI as:
 NATIONAL INCOME = G.N.P – COST OF CAPITAL
– DEPRECIATION – INDIRECT TAXES
 Expenditure Method
 In this National Income is measured as flow of
expenditure.
 We can calculate NI through Expenditure method as:
 National Income=National Product=National
Expenditure.