National Income



The term National Income is used to refer the money value of the total income of the economy in a year. 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 economics activities in a year’s time is known as national income. Firstly it measures the market value of annual product. Secondly National income is a monetary measure. Thirdly national income includes the market value of all final goods the value of intermediate products are not included. A final product is one which is available for immediate consumption. For example, a shirt or a sewing machine. The example of intermediate product is raw materials.



The definitions of National income can be grouped into two classes as the traditional definition advanced by Marshall, Pigou and Fisher and the modern definitions.

Marshallion Definition:- According to Marshall, the labour 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.

Pigovian Definition:- According to Pigou “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money”

Fisher’s Definition:- Fisher adopted consumption as the criterion of national certain whereas Marshall and Pigou regarded it to be production. According to Fisher ‘The national income consists solely of services as received by ultimate consumers whether from their material or from their human environment’. From the modern point of view national income is defined as the net output of commodities and services flowing during the year from country’s productive system in the hands of ultimate consumer.



There are various concepts of national income

1.      Gross National Product (GNP)

Gross national product is defined as the total market value of all final goods and services produced in a year. GNP includes four types of final goods and services,

(i) Consumer goods and services to satisfy the immediate wants of the people

(ii) gross private domestic investment on capital goods consisting of fixed capital formation, residential constructions and inventories of finished and unfinished goods,

(iii) goods and services produced by government and (ir) net export of goods and services’

GNP = government production + private output


2.      Net National Product (NNP)

The second concept is Net National Product. The capital goods like machinery wear out as a result of continuous use. This is called depreciation. This is also called National income at market prices. Hence NNP = GNP – depreciation.


3. National Income at factor cost

National income at factor cost denotes the sum of all incomes earner by the factors. GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. It includes all items of GNP less indirect tax. GNP at market price is always more than GNP at factor cost as GNP at factor cost is the income which the factors of production receive in return for their service alone.

National income at factor cost = net national product – indirect taxes + subsidies.


4. Personal Income (PI)

Personal income is the sum of all incomes received by all individuals during a given year. Some incomes such as Social security contribution are not received by individuals, similarly some incomes such as transfer payments are not currently earned, for example Old Age Pension. Therefore,

Personal income = national income – social security contribution – Corporate income taxes – undistributed corporate profit + transfer payment.

5. Disposable Income (DI)

Disposable income = personal income – personal taxes

After a part of the income is paid to the Government in the form of taxes, the remaining income is called disposable income.



Significance  and  Measurement  of National  Income





There are three methods to calculate the national income of a country. They are:


1. Product or inventory method:

Under this method national income is computed by adding the net value of all commodities and services produced during a given period. Thus national income is equal to the total of final products. We first estimate the gross value of domestic output in the various sectors of production (Agriculture, manufacturing industry, and services including government).

The value of gross output is obtained by multiplying the output of each sector by their respective market prices and adding them together. Then we deduct value of depreciation from gross value of domestic output. The figure so obtained has to be adjusted with net income from abroad. This is the national income at factor cost.

This method is also known as output method or value added method. This method is very complicated because of non-availability of adequate and requisite data. It is also difficult to calculate depreciation.


2. Income Method:

Under this method the national income of a country is obtained by adding the incomes accrue to factors of production within the national territory. Basic factors of production used producing the national products are land, labour, capital and organisation. The national income is equal to total rent plus total wages and salaries of all employees including income of self employed persons plus total interest on capital including dividends of the shareholders plus total profit of all firms including undistributed corporateprofits and earnings of public enterprises.

In short, the national income represents the total of rent, wages, interest and profit. It is difficult to make distinction between the earnings from ordinary labour and organisational efforts. It is also difficult to make distinction between earnings from land and capital. Therefore factors of production are grouped as labour and capital for purposes of estimating national income. Under this method, the income earned by all individuals of the country during a year is taken. Individuals earn income in the form of Rent, profit, wages, and salaries and interest. This method is called income method.


3. Expenditure method:

This method is based on the assumption that income is equal to expenditure plus savings. Under this method the personal consumption expenditure, government purchase of goods and services, gross private domestic investment and net foreign investment are added together to get the national income of a country. This method is also known as consumption- saving method.

The expenditure method is not generally used because the necessary data regarding consumption expenditure are not easily available. This method includes the total expenditure of a country during a given year. The income is spent on consumer goods or on producer goods. The consumption expenditure and investment expenditure of all the individuals in a government during a year is added.


National Income = Consumption Expenditure + Investment Expenditure + government expenditure + exports – imports.

Y = C + I + G + X-M

Value Added Method

Another method of measuring national income is the value added by industries. The difference between the value of material output and input at each stage of production is the value added. If all such differences are added up for all industries in the economy we arrive at the gross domestic product.



The following are the main uses of national income analysis:

1 The national income estimate reveals the overall production performance of the economy. It records the level of production in each year. This enables to compare the real growth of the economy over the years.

2. The percapita income measures the average standard of living of the people. It is used to compare standards of living in different countries.

3. National income data are used to measure economic welfare of the community. Other things being equal, economic welfare is greater if rational income is higher and vice versa.

4. The study of national income statistics is useful in diagnosing the economic ills of a country and suggesting remedies.

5. The national income figures are useful in assessing the pace of economic development of a country.

6. The national income figures are used to assess the savings and investment potential of the community. The rate of saving and investment depend on national income.

7. The comparison of rational income over the years enables to know the nature of the economy. This is important when the government of a country launches planning for economic development. In factor planning is possible without national income estimates.

8. National income estimates show the contribution made by different sectors of f he economy such as agriculture, industry, trade and commerce, service etc. On the basis of national income figures.

9. National income estimates will tell us how far different categories of income such as rent, wages, interest, and profits are contributing to national income.

10. The formulation of panning for different sectors of the economy is based on the national income figures. National income estimates are very useful in formulating plans for the development of agriculture, industry, infrastructure etc.

11. We can evaluate the achievements of the development targets laid down in the plus from the changes in national income and various components.

12. National income data are useful for forecasting future economic events.

13. National income statistics can be used to determine how an international financial burden should be apportioned between different countries.

14. In war time the study of the components of national income is of great importance because they show the maximum production possibilities of the country.












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