National Income: Meaning, Concepts and their Inter-Relationship

Meaning of National Income

National income is the total value of a country’s final output of all goods and services produced in one year. In other words, it is the value of all the economic activities of any country during a period of one year expressed 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 many ways.  National dividend/income is the total amount of income accruing to a country from economic activities in a year. 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 also be defined as the sum total of the expenditure incurred in a country during a period of one year. Hence, national income is 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 that 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. For example, 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 purchase for final use or consumption and will not enter further into any stages of production or transformations. Thus, final goods are those goods that are purchased for final use and not for resale or further processing.

Domestic Factor Income:

The sum of factor income such as wages and salaries, rent, interest, and profits generated within a country's domestic territory 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 (NFIA):

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 the 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.

The market price is the price at which a product is sold in the market. It includes the cost of production such as wages, rent, interest, input prices, profit etc. It also includes the taxes imposed by the government.

Basic Price is the amount that a producer expects to receive from the consumer by selling one product unit. The amount receivable is exclusive of all taxes.

Gross and Net:    

Gross refers to the total amount before anything is deducted. For example, it is the total amount before a deduction is made for depreciation.

Net refers to the amount remaining after certain adjustments have been made for deductions. For example, it is the amount that is left after deduction is made for depreciation.

Concepts of National Income:

1. Gross Domestic Product (GDP): 

Gross domestic product is the money value of all final goods and services produced by residents and non-residents within the domestic territory of a country, but it does not include net factor income earned from abroad. Therefore, income generated by the factors of production within the county from its own resources is called domestic income or domestic product.  
Since the gross domestic product does not include income earned from abroad, it can also be written as:

2. Gross National Product (GNP): 

GNP is defined as the monetary value of all the final goods and services produced by normal residents of a country (residing within the domestic territory and outside the domestic territory) in a financial year. In addition, GNP includes net income from abroad (NFIA).

3. Gross Domestic Product at market price (): 

The market value of all the final goods and services produced in an economy during a given year is the Gross Domestic Product at market price.

4. Gross Domestic Product at factor cost (): 

The value of all final goods and services measured at their factor cost produced in an economy in a particular year is called . The  differs from  by the amount of indirect taxes and subsidies.

5. Net Domestic Product at market price (): 

The market value of all final goods and services, excluding depreciation, produced within a country in any given financial year is known as .

6. Net Domestic Product at factor cost (): 

The factor cost of all the final goods and services, excluding depreciation produced in a given year by any country, is known as . It is also known as Domestic income. Depreciation is also known as the Consumption of Fixed Capital. 

7. Gross National Product at market price (): 

 is defined as the market value of all final goods and services produced in an economy by normal residents of a country (residing within the domestic territory and outside the domestic territory) in a financial year. The difference between and is Net Factor Income from Abroad (NFIA).

8. Gross National Product at factor cost (): 

 is defined as the value of all final goods and services measured at factor cost produced in an economy by normal residents of a country (residing within the domestic territory and outside the domestic territory) in a financial year.

9. Net National Product at market price (): 

 represents the market value of all the final goods and services, excluding depreciation, produced by the normal residents (residing within the domestic territory and outside the domestic territory) in any given financial year.

10. Net National Product at factor cost (): 

 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:

Personal Income: 

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.  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 contributions.  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.  These are to be added to arrive at personal income.  Therefore,

Disposable personal income: 

Disposable income or personal disposable income means the actual income spent on consumption by individuals and families. However, 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, to obtain disposable income, direct taxes are deducted from personal income. Thus:

But the whole disposable income is not spent on consumption, and a part of it is saved.  Thus,

Per capita income:

The average income of the people of a country in a particular year is called per capita income for that year. Thus, per capita income is the national income of a country divided by the country's population in that year.

Inter-relationship between different National Income Concepts:

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)	= GNPMP  - Depreciation
Net National Product at Factor Cost (NNPFC)/ National Income	= NNPMP - Indirect Taxes + Subsidies (Net Indirect Taxes)
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 Publications. Kindle Edition.

Additional Notes:

History of NI: 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

In the 20th Century, the focus shifted from measuring GNP to today’s more familiar GDP, the income generated within a nation’s borders.

Depreciation: The goods and services produced in any year devoted to maintaining the existing stock of capital are 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. Therefore, CFC is also known as depreciation.

Personal Income: The concept of personal income is handy.  It helps in estimating the potential purchasing power of the households in an economy.  

Transfer Payment: 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 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 to redistribute money through programs such as old age or disability pensions, student grants, and unemployment compensation.

Per capita income: This concept enables us to know the average income and the standard of living of the people.  But it is not very reliable. Due to the unequal distribution of national income in every country, a major portion goes to the richer sections of society. Thus, income received by the common man is lower than the per capita income.

Relationship between National Product and Domestic Product:

Relationship between Gross and Net: 

Relationship between Market Price and Factor Cost:

Net Indirect taxes: 

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