National income is the total income of a country and does not include the incomes from illegal sources. There are three different approaches to measure the national income of a country i.e. income method, product method, and expenditure method. Since three different methods are used for the measurement of national income therefore it can be explained in three different ways.
According to income method, national income is the aggregate of all individual incomes plus the income of government. People receive their incomes from four factors of production i.e. land, labor, capital and entrepreneurship in the form of rent, wages, interest and profit. Therefore the aggregate of all such incomes of all the residents of a country during one year, is called national income of the country. Here we should note that national income does not mean income of the government alone rather it is the aggregate of incomes of all nationals of a country.
In case of product method, national income is the money value of all the final goods and services produced in a country throughout the year. Therefore the money value of primary and intermediate goods should not be added because it will cause double counting. For example the value of shirt is taken and not of cotton, because the value of cotton is already included in the value of the shirt. There are various sectors in the economy such as transport, agriculture, communication, manufacturing, services etc. The net money value of total production of these sectors in a given year is then added to get the national income.
According to expenditure method, national income is the aggregate of total expenditure done by the people and government during a year. This method works on the principal i.e. for every dollar of income there is a dollar of expenditure. It means that every dollar spent on a good or service is income to somebody. Therefore national income is calculated by taking the aggregate of all expenditures done by people as well as government.
Concepts of National Income
There are different concepts of national income which describe how and where national income is produced, what part is distributed and after deducting taxes, how much is left with the people to spend. Some of the important concepts of national income which are used differently in economic theory and analysis are given below.
1. Gross National Product (GNP)
2. Gross Domestic Product (GDP)
3. Net National Product (NNP)
4. National Income (NI)
5. Personal Income (PI)
6. Disposable Income (DI)