National Income

National income is the sum total of the value of all the goods and services
manufactured by the residents of the country, in a year., within its domestic
boundaries or outside. To be more precise, national income is the accumulated
money value of all final goods and services produced in a country during one
financial year.
Computation of National Income is very vital as it indicates the overall health of
our economy for that particular year. The basic purpose of national income is to
throw light on aggregate output and income and provide a basis for the
government to formulate its policy, programs, to maximize the national welfare of
the people. Central Statistical Organization calculates the national income in India.
Definitions
Simon Kuznets, a Russian-American development economist and statistician, a
Noble prize winner in Economics in 1971, defines National Income as, "The net
output of commodities and services flowing during the year from the country's
productive system in the hands of the ultimate consumers."
Further the National income is also defined in two ways; the Traditional definition
and the Modern definition.
 Traditional Definition of National Income
Marshall defines National Income as, "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 a true net annual
income or revenue of the country or National dividend."
 Modern Definition of National Income
As per the modern definition the concept of national income can be defined in
terms of GDP and GNP
National Income as GDP
GDP is an indicator which is used globally to determine the Economic growth of
the countries. It is the aggregated value of goods and products produced in a
country.
National Income as GNP
GNP at MP is the market value of final goods and services produced in a year by
the residents of the country within the domestic territory as well as abroad. GNP at
MP is the value of goods and services that the country's citizens produce
regardless of their location
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 Concepts of National Income
Concept Formula
Gross National Product at C + I + G + (X –M) + Net Factor Income From
Market Price (GNP at MP) Abroad
GNP at MP is the market value of final
goods and services produced in a year by
the residents of the country within the
domestic territory as well as abroad.
GNP at MP is the value of goods and
services that the country's citizens
produce regardless of their location.

Gross National Product at Factor GNP at MP – Net Indirect Taxes ( Indirect

Cost(GNP at FC) Taxes – Subsidy)
Gross Domestic Product at GNP at MP - Net Factor Income From Abroad
Market Price (GDP at MP)
Gross Domestic Product at GNP at MP - Net Factor Income From Abroad
Factor Cost (GDP at FC) – Net Indirect Taxes ( Indirect Taxes –
Subsidy)
Net National Product at Market GNP at MP - Depreciation
Price (NNP at MP)
Net National Product at Factor GNP at MP – Depreciation - Net Indirect Taxes
Cost (NNP at FC) ( Indirect Taxes – Subsidy)
Net Domestic Product at Market GNP at MP – Depreciation - Net Factor Income
Price (NDP at MP) From Abroad
Net Domestic Product at Factor GNP at MP – Depreciation - Net Factor Income
Cost (NDP at FC) From Abroad - Net Indirect Taxes ( Indirect
Taxes – Subsidy)

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 Methods to Measure National Income
There are three techniques to compute national income:
 Income Method
 Product/ Value Added Method
 Expenditure Method
1. Income Method
National income is calculated using this method as a flow of factor incomes.
Labour, capital, land, and entrepreneurship are the four main components of
production. Labour is compensated with wages and salaries, money is
compensated with interest, the land is compensated with rent, and
entrepreneurship is compensated with profit. Furthermore, certain self-employed
individuals, such as doctors, lawyers, and accountants, use their own labour and
capital. Their earnings are classified as mixed-income. NDP at factor costs
(Domestic Income) is the total of all of these factor incomes.
NY can be calculated as follows:
 Domestic income (NDP at FC) =
Employee compensation + Rent + Interest + Profit + Mixed Income + Net
factor income from abroad
 National income (NNP at FC) =
Employee compensation + Operating Surplus (Rent + Interest + Profit) +
Mixed Income + Net factor income from abroad
2. Product/ Value Added Method
National income is calculated using this method as a flow of goods and services.
During a year, we determine the monetary value of all final goods and services
generated in an economy. The term "final goods" refers to goods that are
consumed immediately rather than being employed in a subsequent manufacturing
process. Intermediate goods are goods that are used in the manufacturing process.
Because the value of intermediate products is already included in the value of final
goods, we do not count the value of intermediate goods in national income;
otherwise, the value of goods would be double-counted.
To avoid duplicate counting, we can use the value-addition approach, which
calculates value-addition (i.e., the value of the end good plus the value of the
intermediate good) at each stage of production and then adds them together to get
GDP. This can be made clear with following example:

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Production Product Intermediate Value of Value of Value
Unit Product Output Intermediate Added(Rs.Lakhs)
(Rs.Lakhs) product(Rs.Lakhs)
Farmers Raw ----- 10,000 ---- 10,000
Cotton
Thread Thread Raw Cotton 15,000 10,000 5,000
Mills
Cotton Cotton Thread 25,000 15,000 10,000
Textile Cloth
Mills
Readymade Shirts Cotton Cloth 1,00,000 25,000 75,000
Garments
Mills
1,50,000 50,000 1,00,000

 Gross Domestic Product at MP or Gross Value added at MP =

Value of Output – Value of Intermediate Product
Value of Output = Sales + Change in Stock (Closing Stock - Opening Stock)
Gross Value added at MP = 1,50,000 – 50,000 = 1,00,000
 National Income or NNP at FC =
GDP at MP –Depreciation –Net Indirect Taxes + Net Factor Income from
Abroad
3. Expenditure Method
National income is calculated using this method as a flow of expenditure. The
gross domestic product (GDP) is the total of all private consumption expenditures.
Government consumption expenditure, gross capital formation (public and
private), and net exports are all factors to consider (Export-Import).
The Expenditure technique can be used to calculate NI as follows:
 GDP at MP =
Private Final Consumption Expenditure (C) + Private Final Investment
Expenditure (I) + Government Expenditure (G) + Net Exports (X – M)
GDP at MP = C + I + G + (X –M)
 National Income or NNP at FC =
GDP at MP –Depreciation –Net Indirect Taxes + Net Factor Income from
Abroad

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 Difficulties while Measuring National Income
 Problem of double counting: The greatest difficulty in calculating the
national income is of double counting, which arises from the failure to
distinguish properly between a final and an intermediate product. There
always exists the fear of a good or a service being included more than once.
If it so happens, the national income would work out to be many times the
actual.
 Illegal activities: Income earned through illegal activities such as gambling,
illegal extraction of wine, hoarding and black marketing is not included in
national income. While calculating national income, such earnings are left
out, so the national income works out to less than the actual.
 Change in price: Another difficulty in calculating national income is that of
price changes which fail to keep stable the measuring rod of money for
national income. When the price level in the country rises, the national
income also shows an increase even though the production might have
fallen and vice versa. Thus due to price-changes the national income cannot
be adequately measured.
 Illiteracy: In developing countries we find crores of people as illiterates.
They do not keep proper accounts about the production and sales of their
products. Under such circumstances, the estimates of production and earned
incomes are simply a guess work.
 Non-availability of Data: Adequate and correct production and cost data
are not available. The data relating to crops, forestry, fisheries, animal
husbandry and the activities of petty shop keepers, small enterprises, etc.,
are not counted. For estimating national income by the income method, data
on unearned inijomes and on persons employed in the service sector are not
available.
 Goods kept for self-consumption: In India and other developing countries,
producers keep a large portion of products for self-consumption. For
example, farmers keep certain portion of foodgrains for themselves. Such
goods do not enter the market. It is not included in national income
estimates.
 Absence of occupational specialization: The absence of occupational
specialization makes calculation of national income difficult. Many people
work as part-time workers and as such they do not give complete
information about all sources of their income.

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  Transfer Payments: The payments made by the Government to senior
citizens, widows, scholarships, etc, are neglected while calculating the
national income. But these are a part of individual income and a part of
Government expenditure.
 Income from foreign companies: According to IMF, the income of foreign
company should be included in the income of the host country and the
profits earned by foreign companies should be included in the parent
country. But it may not give correct national income estimates.
 Existence of non-market transactions: Many times people stitch their own
clothes, grow vegetables in their own garden and prepare many items in
their own houses. The value of all such productive activities does not enter
the market transactions and hence are not included in the national income
estimates.
 Absence of trained personnel: There is a lack of well trained, skilled and
efficient persons and staff to collect, classify and analyse the various
information in relation to national income accounting.

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