Concepts of National Income
Meaning of National Income
National income is defined as the total annual value of all the goods and services produced by a country, measured in terms of money. National income data provides a summary statement of a country’s aggregate economic activities. It not only helps to measure the size and health of an economy but also to understand how it functions.
According to Marshall, ‘ The labor 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 the true net annual income or revenue of the country or national dividend.’
Various Concepts of National Income
The measurement of national income accounts to different concepts that have a significant role while determining its value. The important concepts of national income have been explained below:
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a primary indicator of how an economy is functioning. It is the total annual value of all final goods and services produced within the domestic territory of the country. It takes into account the income earned domestically by foreigners but excludes income earned by nationals living and earning in the foreign country.
GDP considers only the value of those final goods and services that are produced at current market price. So, it is also termed as GDP at market price.
GDP comprises of wages and salaries, rents, interest, dividend, undistributed corporate profits, profits from self-employed people, partnership, direct taxes, etc.
From the definition,
GDP= Total product of agricultural sector + Total product of industrial sector + Total product of tertiary sector (service sector).
Alternatively, GDP= ∑ (P*Q)
Where, P= Market price of goods and services; Q= Total volume of output.
Nominal and Real GDP
The GDP measured on the basis of current price is termed as nominal GDP. The value of goods and services produced in a year is measured in terms of money and current market prices. However, with nominal GDP, the problem arises when comparing GDP of one year with another, as money is not a stable measure of purchasing power.
On the other hand, GDP measured on the basis of constant prices or base year price. The fluctuations in prices of goods and services may show an increase in GDP for a year, but it may be lower than the GDP in the previous year. In order to rectify this problem, a base year is determined considering the price during that year was normal.
Now, the base year is taken in order to determine the real GDP. Thus,
Real GDP= GDP of current year * Base year/ Current year index
GDP Deflator is defined as the measure of relative change in current level price in comparison to level of price in the base year. In other words, it is the ratio of nominal GDP and real GDP multiplied by 100.
GDP Deflator= Nominal GDP/ Real GDP X 100
Gross National Product (GNP)
Gross National Product (GNP) is the total annual value of final goods and services produced by domestically owned factors of production. It comprises of income earned by nationals in the foreign countries but doesn’t consider domestically earned income by foreigners.
GNP includes all parts of the production that are either produced for commercial sale or for personal consumption. In order to avoid the problem of double counting, only the value of final goods and services produced or value added by producers at each level is included in GNP.
Thus, GNP= GDP + NFIA
Where, GDP= Gross domestic product; NFIA= Net factor income from abroad.
Net National Product (NNP) at market price
Net National Product (NNP) is the net output of the economy that is calculated after deducting the value of depreciation from gross national product.
In the process of producing goods and service, some parts of capital goods are utilized causing it to depreciate in value. For instance, the use of assets like machinery, buildings, etc. result in the depreciation of their value. NNP is thus calculated by deducting the depreciated value from GNP. This is also termed as National Income or NI at market price.
Thus, NNP= GNP- Depreciation
Net National Product (NNP) at factor cost
National Income is also termed as Net National Product at factor cost. NNP is calculated after deducting indirect taxes like sales tax, excise duty, etc. that are included in the market price of produced goods and services. Subsides, on the other hand are added to the NNP to reduce the market price of the produced goods.
So, NI or NNP at factor cost= NNP- Indirect taxes + Subsidies
Personal Income refers to the aggregate income received by the individuals of a country in a year from all sources before the payment of direct taxes. It is calculated by deducting undistributed business profits, taxes, and employee contributions to security plans.
However, payments like government and business transfer payments, gifts and remittance from abroad, gains from interest on public debts are source of individual income that are added to national income. So,
Personal Income= National Income – Undistributed business profits – Taxes – Social security contribution + transfer payments + interest on public debt
Disposable Income (DI)
Disposable income or personal disposable income is the actual amount received by an individual after the deduction of direct taxes that the individuals are liable to pay to the government. It is referred to the actual income that individuals can spend for consumption and expenditure. So,
DI= Personal Income- Direct taxes
Since, the total disposable income is not spent on consumption alone, some part of it is saved as well. Thus,
DI= C + S
Where, C= Consumption; S= Saving
The concept of disposable income is useful in understanding the consumption pattern of individuals and households. It also gives a concise picture of how much income is actually available to the households for expenditure at personal level.
Per Capita Income
Per Capita Income of a country usually refers to the average earning of an individual in a particular year. In order to determine the per capita income of a country, the national income of the country is divided by the population of the country in that particular year. Thus,
Per Capita Income= National Income of a country/ Total population of the country
The per capita income of a country helps in determining the standard of living of the countries and also serves as an index to determine economic development of different countries.