Definition of National Income
The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.
Measures of National Income
For the purpose of measurement and analysis, national income can be viewed as an aggregate of various component flows. The most comprehensive measure of aggregate income which is widely known is Gross National Product at market prices.
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 – Nnet 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 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 is the total income that actually remains with individuals to dispose off as they wish. It differs from personal income by the amount of direct taxes paid by individuals.
Disposable Income = Personal Income − Personal taxes
The concept of value added is a useful device to find out the exact amount that is added at each stage of production to the value of the final product. Value added can be defined as the difference between the value of output produced by that firm and the total expenditure incurred by it on the materials and intermediate products purchased from other business firms.
Methods of Measuring National Income
Let’s have a look at the following ways of measuring national income −
In product approach, national income is measured as a flow of goods and services. 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.
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.
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.