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National Income : Definition, Concepts and Methods of Measuring

National Income: Definition, Concepts, and Methods of Measuring. National income is an uncertain term which is used interchangeably with the national dividend, national output, and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country. In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.

National Income Definition, Concepts and Methods of Measuring

What is the ‘Gross National Income (GNI)’

The sum of a nation’s Gross domestic Product(GDP) plus Net Income received from overseas. Gross national income (GNI) is defined as the sum of Value Added by all producers who are residents in a nation, plus any product taxes (minus subsidies) not included in the output, plus income received from abroad such as employee compensation and property income. GNI measures income received by a country both domestically and from overseas. In this respect, GNI is quite similar to Gross National Product(GNP) which measures output from the citizens and companies of a particular nation, regardless of whether they are located within its boundaries or overseas

National income

National income is the total value a country’s final output of all new goods and services produced in one year. Understanding how national income is created is the starting point for macroeconomics.

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.” In this definition, the word ‘net’ refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this, must be added income from abroad.

Gross and Net Concept

Gross emphasizes that no allowance for capital consumption has been made or that depreciation has yet to be deducted. Net indicates that provision for capital consumption has already been made or that depreciation has already been deducted.

National and Domestic Concepts

The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year.

It is also possible to measure the value of the total output or income originating within the specified geographical boundary of a country known as domestic territory. The resulting measure is called “domestic product”.

Market Prices and Factor Costs

The valuation of the national product at market prices indicates the total amount actually paid by the final buyers while the valuation of national product at factor cost is a measure of the total amount earned by the factors of production for their contribution to the final output.

GNP at market price = GNP at factor cost + indirect taxes – Subsidies.

NNP at market price = NNP at factor cost + indirect taxes – Subsidies

Gross National Product and Gross Domestic Product

For some purposes, we need to find the total income generated from production within the territorial boundaries of an economy irrespective of whether it belongs to the inhabitants of that nation or not. Such an income is known as Gross Domestic Product (GDP) and found as −

GDP = GNP – Net Factor Income From Abroad

Net Factor Income from Abroad = Factor Income Received From Abroad – Factor Income Paid Abroad

Net National Product

The NNP is an alternative and closely related measure of the national income. It differs from GNP in only one respect. GNP is the sum of final products. It includes consumption of goods, gross investment, government expenditures on goods and services, and net exports.

GNP = NNP − Depreciation

NNP includes net private investment while GNP includes gross private domestic investment.

Personal Income

Personal income is calculated by subtracting from national income those types of incomes which are earned but not received and adding those types which are received but not currently earned.

Personal Income = NNP at Factor Cost − Undistributed Profits − Corporate Taxes + Transfer Payments

Disposable Income

Disposable income is the total income that actually remains with individuals to dispose of as they wish. It differs from personal income by the amount of direct taxes paid by individuals.

Disposable Income = Personal Income − Personal taxes

Methods of Measuring National Income:

Let’s have a look at the following ways of measuring national income −

Product Approach

In product approach, national income is measured as a flow of goods and services. The value of money for all final goods and services is produced in an economy during a year. Final goods are those goods which are directly consumed and not used in further production process. In our economy product approach benefits various sectors like forestry, agriculture, mining etc to estimate gross and net value.

Income Approach

In income approach, national income is measured as a flow of factor incomes. Income received by basic factors like labor, capital, land and entrepreneurship are summed up. This approach is also called as income distributed approach.

Expenditure Approach

This method is known as the final product method. In this method, national income is measured as a flow of expenditure incurred by the society in a particular year. The expenditures are classified as personal consumption expenditure, net domestic investment, government expenditure on goods and services and net foreign investment.

These three approaches to the measurement of national income yield identical results. They provide three alternative methods of measuring essentially the same magnitude.

Difficulties in Measurement of National Income

There are many difficulties when it comes to measuring national income, however, these can be grouped into conceptual difficulties and practical difficulties:

Conceptual Difficulties

  • The inclusion of Services: There has been some debate about whether to include services in the counting of national income and if it counts as output. Marxian economists are of the belief that services should be excluded from national income, most other economists though are in agreement that services should be included.
  • Identifying Intermediate Goods: The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality, it is very hard to draw a clear cut line as to what intermediate goods are. Many goods can be justified as intermediate as well as final goods depending on their use.
  • Identifying Factor Incomes: Separating factor incomes and non-factor incomes is also a huge problem. Factor incomes are those paid in exchange for factor services like wages, rent, interest etc. Non-factor is sale of shares selling old cars property etc., but these are made to look like factor incomes and hence are mistakenly included in national income.
  • Services of Housewives and other similar services: National income includes those goods and services for which payment has been made, but there are scores of jobs, for which money as such is not paid, also there are jobs which people do themselves like maintain the gardens etc., so if they hired someone else to do this for them, then national income would increase, the argument then is why are these acts not accounted for now, but the bigger issue would be how to keep a track of these activities and include them in national income.

Practical Difficulties

  • Unreported Illegal Income: Sometimes, people don’t provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income.
  • Non-Monetized Sector: In many developing nations, there is this issue that goods and services are traded through barter, i.e. without any money. Such goods and services should be included in accounting of national income, but the absence of data makes this inclusion difficult.

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