Idea of National Income

INTRO

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National Income is a fundamental concept in the field of economics which acts as a key standard of calculating a country’s economic performance. It influences investment consideration, and socio-economic planning. This article of C4S is aiming to provide you the in detail depth concepts of GDP, NDP, GNP, NNP, Cost and Price of National Income and other related concepts.

What is National Income ?

National Income refers to the aggregate value of all final goods and services produced in a country in a particular time period. ( One financial Year )

Gross Domestic Product ( GDP )

GDP is an estimate of the total value of all the final products and services produced in a given period by the production owned by a country’s citizen.

• Final Goods and Services : It means that only the final, and not the intermediate, goods and services are taken into account for calculation of GDP.
• Within the Domestic Economy: It means that the produce of resident citizens as well as foreign nationals who reside within that geographical boundary is considered.
  

GDP at Market Price

GDP at Market Price is market value of all the final goods and services produced within a domestic territory of a country during a financial year.

GDP at Factor Cost

GDP at Factor Cost refers to aggregate value of income earned from factors of production i.e. Land, Labor, Capital, and Entrepreneurship.

GDP at Factor Cost excludes indirect taxes but includes subsidies.

GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies

Gross National Product ( GNP )

GNP is an estimate of total value of all the final products and services produced in a given period by the production owned by a country’s citizens.

Final Goods and Services: This means that only final, and not the intermediate, goods and services are taken into account for calculation of GNP.

Owned by a Country’s Citizens: This means that produce of resident as well as non-resident citizens of the country is considered, whereas that of the foreign nationals who reside within that geographical boundary of the country is not been considered.

Thus, GNP = GDP + Factor Income from Abroad to India – Factor Income from India to Abroad.

= GDP + Net Factor Income from Abroad (NFIA)

Net National Income

Net National Income refers to the Gross National Income minus Depreciation of the fixed capital assets. Thus, it takes into account the losses due to the depreciation.

Net Domestic Product ( NDP )

NDP is arrived at by deducting the depreciation from GDP. Thus,

Net Domestic Product = GDP – Depreciation.

Net National Product ( NNP )

NNP is calculated by subtracting the depreciation from GNP. Thus,

Net National Product = GNP – Depreciation.

Methods of Computing National Income

National Income can be calculated by 3 methods: 

1. Income Method
2. Expenditure Method
3. Production Method

1. Income Method

Under this method, National Income is obtained by summing up the incomes of all the individuals in an economy. Individuals earn incomes by contributing their own services and the services of their property such as land and capital to the national production.

Therefore,

National Income (NI) = Employee compensation + Corporate profits + Proprietors’ Income + Rental income + Net Interest

2. Product or Value added Method

This method is also known as output method.

Under this method, National Income is computed by adding values of the output produced or services rendered by different sectors of economy during the year.

It is to be noted that while computing the values of output figures, only value added by each firm in the production process is taken into account. Therefore, this method makes use of the concept of Value-added.

3. Expenditure Method:

This method is also known as total-outlay method.

This method assumes that income earned by an individual is either spent on consumer goods/services or saved and invested.

Therefore,

National Income (NI) = Personal Consumption Expenditure (C) + Investments (I) + Government Expenditure (G) + Exports (X) – Imports (I).

Difficulties in Estimating National Income

Some major problems are used to face while estimating national income that can be studied under two heads –

1.Conceptual Difficulties

2. Statistical or Practical Difficulties.

Conceptual Difficulties

The conceptual problem relates to how and what is to be included and what is not in the measurement of National Income. Though the concept of national income implies that everything that is produced should be reckoned, by definition, we consider only those things that are exchanged for money or carry some price.

In order to mitigate these difficulties, certain guidelines have been laid down about the process of National Income estimation, and about what components have to be included.

Statistical or Practical Difficulties

• The lack of adequate statistical data due to flaws in extrapolation, and ineffective training of illiterate statistical staff, makes the task of National Income estimation more acute and difficult.
• Multiple counting is also an important problem while calculating National Income.
• India is a country with large regional diversities. Thus, different languages, customs, etc., also create a problem in computing the estimates.

In conclusion, much more than just a numerical figure, National Income  is a comprehensive reflection of a country’s economic vitality. Though the current measures of NI have some shortcomings, they play a crucial role in guiding governments, businesses, and individuals in making informed economic decisions. As we strive for a more holistic understanding of progress, research & development should be carried out to develop more comprehensive measures of National Income that encompass social well-being and environmental sustainability.