National income

A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication.  Thus national income measures the net value of goods and services produced in a country during a year and it also includes the foreign income. It can be defined in different ways and also interchangeably used with national dividend, national output and national expenditure. It measures flow of goods and services in the economy i.e., it measures production power of an economy.

National Income Estimation in India:

National Income estimation in India was first time done by Dadabhai Nauroji in his book Poverty and unbritish rule in India in 1867-68.

Concepts in the National Income:

The Gross National Product (GNP): Gross National Product refer to the money value of total output or production of final goods and services produced by the nationals of the country during given period of time, generally a year. As we include all final goods and services produced by nationals of a country during a year in the calculation of GNR we include the money value of goods and services produced by nationals outside the country. Hence income produced by nationals of a country within the boundaries of foreign countries should be added in Gross Domestic Product (GDP) of the country . Similarly, income received by foreign nationals within the boundary of the country should be excluded from GDP

In equation form: GNP = GDP + X — M,

where,
X = Income earned and received by nationals within the boundaries of foreign countries
M = Income received by foreign nationals from within the country
If X = M
Then GNP = GDP

Similarly, in a closed economy
X=M=O, then also GNP=GDP

Gross Domestic Product (GDP) is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time. As a conclusion, it must be understood while domestic product emphasizes the total output which is raised within the geographical boundaries of the country, national product focuses attention no only on the domestic product, but also on goods and services produced outside the boundaries of a nation. Besides, any part of GDP which is produced by nationals of a country should be included in GNP.

Net National Product(NNP): NNP is obtained by subtracting depreciation value (i.e., capital stock consumption) from GNP.

National income: GNP, explained   above is based on market prices of produced goods which includes indirect taxes and subsidies. NNP can be calculated in two ways

(a) at market prices of goods and services.
(b) at factor cost

When NNP is obtained at factor cost, it is known as national income:

National Income is calculated by subtracting net indirect taxes (i.e., total indirect tax-subsidy) from NNP at market Prices. The obtained value is known as NNP at factor cost or National income.

In equation form
= NNP at Market Price — (Indirect Taxes - Subsidy)
\(= NNP_{MP} — Indirect Tax + Subsidy \)

Personal income:  Personal income is that income which is actually obtained by nationals. personal income is obtained by subtracting corporate taxes and payments made for social securities provisions from national income and adding ti it government transfer payments, business transfer payments and net interest paid by the government.

In equation form:

Personal income = National income - undistributed profits of corporations. payments for social security provisions - corporate taxes + government transfer payments + business transfer payments + Net interest paid by government.

It is to be noted that personal income is a flow concept.

Disposable personal income: when personal direct taxes are subtracted from personal income, the obtained value is called disposable personal income(DPI).

In the equation form(Disposable personal income) = personal income - direct taxes.

Per capita income:

Per capital income = national income/total population

Methods of estimating National Income

(i) Production method:

In this method net value of final goods and services produced in country during a year is taken into consideration.

(ii) Income method:

Total of net incomes earned by working people in different sectors and commercial enterprises.

Total income = Total rent + Total wages + Total interest + Total profit.

(iii) Consumption method:

It is also called expenditure method. It is the addition of total consumption and total savings.

Items excluded from estimation of National Income:

(i) Input (intermediate consumption)

(ii) Transfer payments (unilateral payments)

(iii) Old goods

(iv) Shares and bonds in stock exchange

(v) Black money

(vi) Wind fall games e.g. prizes, winnings from lotteries

(vii) Household services etc.

Purchasing Power Parity

It shows parity (equality/comparison) on the basis of purchasing power of a currency and not conventional exchange rate of a currency. This says how much quantity of goods/commodities or services can be purchased by different currencies, had those product been at the neutral international market.


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