Meaning of National Income[1]:
National income is the total value a
country’s final output of all new goods and services produced in one year. In
other words, the final outcome of all the economic activities of any country
during a period of one year and is valued in terms of money. National income is
used interchangeably with national dividend (income), national output (product)
and national expenditure. On this basis, national income has been defined
in a number of ways. National dividend/income is the total amount of
income accruing to a country from economic activities in a year’s time. It
includes payments made to all resources in the form of wages, interest, rent
and profits. National income can be defined as the total
value of goods and services produced annually in a country. Alternatively, it
can be also defined as the sum total of the expenditure incurred in a country during
a period of one year. Hence, national income is also known as gross national
income, gross national product; and gross national expenditure. The three concepts
will be identical in value, i.e., GNI ≡ GNP ≡ GNE in an economy.
Some Important Concepts:
Intermediate Goods and Final
Goods:
An intermediate good is a good
used to make other goods. Intermediate goods are those goods which are
purchased for further processing or resale. For example, steel is used to make
cars. In the calculation of the national product, there should be no double
counting. To count the production of steel plus the production of cars
containing steel would count the steel twice and would overstate the national
product.
A final
good is a good which is purchase for final use or consumption and will not
enter further into any stages of production or transformations. Final goods are
those goods which are purchased for final use and not for resale or further
processing.
Domestic Factor Income:
The sum
of factor incomes such as wages and salaries, rent, interest, and profits
generated with the domestic territory of a country in a year is called domestic
factor income. It includes factor incomes generated both by residents and
non-residents working in the domestic territory of a country.
Net Factor Income from Abroad:
Net factor income from abroad is the
difference between factor incomes received from abroad by the residents of a
country for rendering factor services in other countries on the one hand and
the factor incomes paid to the foreign residents for factor services rendered
by them in domestic territory of a country on the other.
Factor Cost (FC), Market price (MP)
and Basic price (BP):
Factor cost is the total cost incurred in
deploying all factors, which led to the production or generation of goods and
commodities available in the market.
Market price is the price at which a product is sold in the market. It includes the cost of production in the form of wages, rent, interest, input prices, profit etc. It also includes the taxes imposed by the government.
Basic Price is the amount which a producer
expects to receive from the consumer by selling one unit of product. The amount
receivable is exclusive of all taxes.
Gross and Net:
Gross refers to the total amount before anything is deducted. It is the total amount before deduction is made for depreciation.
Net refers to the amount remaining after certain adjustments have been made for deductions. It is the amount that is left after deduction is made for depreciation.
Concepts of National Income:
1. Gross Domestic Product (GDP)[2]: Gross
domestic product is the money value of all final goods and services produced by
normal residents as well as non-residents within the domestic territory of a
country but it does not include net factor income earned from abroad. Income
generated by the factors of production within the county from its own resources
is called domestic income or domestic product.
Since gross
domestic product does not include income earned from abroad, it can also be
written as:
2. Gross[5]
National Product (GNP):
GNP is defined as monetary value of all the final goods and services produced
by normal residents of a country (residing within domestic territory and outside
domestic territory), in a financial year. GNP includes net income from abroad (NFIA).
3. Gross Domestic Product at market price (GDPMP): The market value of all the final goods and services produced in an economy during a given year is called the Gross Domestic Product at market price.
4. Gross Domestic Product at factor cost (GDPFC): The value of all
final goods and services measured at their factor cost produced in an economy
in a particular year is called GDPFC. The GDPMP differs
from GDPFC by the amount of indirect taxes and subsidies.
5. Net Domestic Product at market price (NDPMP): The market value
of all final goods and services, excluding depreciation, produced within a
country in any given financial year is known as NDPMP.
6. Net Domestic Product at factor cost (NDPFC): The factor cost of
all the final goods and services, excluding excluding depreciation produced in
a given year by any country is known as NDPFC. It is also known as
Domestic income. Depreciation is also known as Consumption of Fixed Capital[8].
7. Gross National Product at market price (GNPMP):
GNPMP
is defined as value of all final goods and services produced in an economy by
normal residents of a country (residing within
domestic territory and outside domestic territory), in a financial year. The difference between
8. Gross National Product at factor cost (GNPFC):
GNPFC is
defined as value of all final goods and services measured at factor cost
produced in an economy by normal residents of a country (residing within domestic territory and outside
domestic territory), in a financial year.
The difference
between
9. Net National Product at market price (NNPMP): NNPMP represents
the market value of all the final goods and services, excluding depreciation,
produced by the normal residents of a country (residing within domestic territory and outside
domestic territory), in any given financial
year.
10. Net National Product at factor cost (NNPFC): NNPFC represents
the factor cost of all the final goods and services excluding consumption of
fixed capital produced by the residents of a country in a given financial year.
NNPFC is also called National Income.
Other Related Concepts of National Income:
Personal Income[9]: Personal income is the total income received
by the individuals of a country from all sources before direct taxes in one
year. The entire national income will not be available for
consumption. National income is different from personal income. In
order to arrive at personal income several deductions are to be
made. For example, corporations have to pay income-tax from the
corporate profits before declaring dividends. Likewise a part of the
corporate profits available for distribution is reduced. Similarly
salaried persons and wage earners pay a certain percentage of their income
towards social security contribution. To that extent income
available to the employees and workers is reduced. Against this, the
government may give social security benefits such as unemployment allowances,
old age pensions etc. These payments are called transfer payments
are called transfer payments[10]. These
are to be added to arrive at personal income. Therefore,
Disposable personal income: Disposable income or personal disposable
income means the actual income which can be spent on consumption by individuals
and families. The whole of the personal income cannot be spent 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:
But the whole of the disposable income is not
spent on consumption and a spent on consumption and a part of it is
saved. Thus,
Per capita income[11]:
The average income of the people of a country in a particular year is called per capita income for that year. This concept also refers to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income at current prices, the national income of a country is divided by the population of the country in that year.
|
Inter-relationship between different National Income Concepts: |
|
|
Gross Domestic Product at Market Price (GDPMP) |
= Market value of all final goods and
services produced within the domestic territory of a country during a given
year. |
|
Gross National Product at Market Price (GNPMP) |
= GDPMP + Net Factor Income from Abroad |
|
Net National Product at Market Price (NNPMP[12]) |
= GNPMP - Depreciation |
|
Net National Product at Factor Cost (NNPFC[13])/
National Income |
= NNPMP - Indirect Taxes +
Subsidies (Net Indirect Taxes[14]) |
|
Personal Income |
= NNPFC - Corporate income taxes – undistributed corporate profits-social
security contributions + transfer payments. |
|
Personal Disposable Income |
= Personal Income - Direct Taxes |
Reading
List:
1.
Ahuja,
H.L. (2010), Macroeconomics (16th edition). S. Chand & Co Ltd,
New Delhi.
2.
Rana,
K. C. & Verma, K. N (2013), Macro Economic Analysis (10th
edition). Vishal Publishing Co, Jalandhar, Delhi.
3.
Samuelson,
P. A., & Nordhuas, W.D (2017), Macroeconomics (19th edition).
McGraw Hill International edition, U.S.
4.
Mankiw,
N. G. (2008), Macroeconomics (6th Edition). Worth Publishers, New
York.
5.
Sangita, & Kapoor, V (2018), Introductory Macro Economics (1st
Edition). Taxmann Publication's. Kindle Edition.
[1] Simon Kuznets is generally regarded as the
father of national income and fuelled the Keynesian revolution of expansionary
fiscal policy. In the 1930s, the US Government appointed Simon Kuznets to
devise a measure of America’s National Income (GNP).
Simon Smith Kuznets (April 30, 1901 – July 8,
1985) was an American economist and statistician who received the 1971 Nobel
Memorial Prize in Economic Sciences "for his empirically founded
interpretation of economic growth which has led to new and deepened insight
into the economic and social structure and process of development." Kuznets
made a decisive contribution to the transformation of economics into an
empirical science and to the formation of quantitative economic history
[2] In the 20th
Century, the focus shifted from measuring GNP to today’s more familiar GDP, the
income generated within a nation’s borders.
[3]
[4]
[5]
[6]
[7]
[8] The goods and services produced in any year,
which are devoted to maintain existing stock of capital is known as
Depreciation or Consumption of Fixed Capital. Consumption of fixed capital
(CFC) is the part of the capital produced this year, which is needed to replace
the capital utilized for production in the previous year. CFC is also known as
depreciation.
[9] The concept of personal income is
a useful concept. It helps in estimating the potential purchasing
power of the households in an economy.
[10] A transfer payment is a redistribution of
income and wealth by means of the government making a payment, without goods or
services being received in return. These payments are considered to be
non-exhaustive because they do not directly absorb resources or create output.
Examples of transfer payments include welfare, financial aid, social security,
and government making subsidies for certain businesses.
A transfer payment is a one-way payment to a
person who has given or exchanged no money, good, or service for it. It is a
process used by governments as a way to redistribute money through programs
such as old age or disability pensions, student grants, and unemployment
compensation.
[11] This concept enables us to know the average
income and the standard of living of the people. But it is not
very reliable, because in every country due to unequal distribution of national
income a major portion of it goes to the richer sections of the society and
thus income received by the common man is lower than the per capita income.
[12]
[14]
