The national income of a country means the total of incomes earned by the citizens of that country during a given period, over a year.
GDP, sometimes known as ‘National Income’, is a measure of how well an economy is performing. Gross National Product (GNP) is the monetary value of all final goods produced within a country in a given period.
National income accounting refers to the set of methods and principles that are used by the government for measuring production and income, or in other words economic activity of a country in a given period.
National Income issued quarterly Gross Domestic Product (GDP) estimates both at current prices and constant/base prices (2011-12) are released on the last working day two months after the end of a quarter. Further Annual GDP estimates are also released on the last working day after two months of the end of the year. Released by the National Statistical Office (NSO), Ministry of Statistics and Program Implementation
Gross Domestic Product (GDP)
The market value of all final goods and services produced within the domestic economy during a year. or
GDP at market price = Gross Value Added (GVA) at basic price + Indirect tax – Subsidies
The national income accounting equation is an equation that shows the relationship between income and expense of an economy and other categories. It is represented by the following equation:
Y = C + I + G + (X – M)
Where
Y = National income
C = Personal consumption expenditure
I = Private investment
G = Government spending
X = Net exports
M = Imports
Final goods
An item that is meant for final consumption and will not pass through any more stages of
production or transformations is called a final good. For example, bread, butter, biscuits, etc.
used by the consumer.
Intermediate goods
Which are used as raw materials or inputs for the production of other commodities. These are not final goods.
Example: Wheat flour is an intermediate good in the production of bread in the bakery.
Whether a good is a final good or an intermediate good depends on its use. For example; milk used by a sweet maker is an intermediate good but when it is used by the consumer it becomes a final good.
Why do we measure Final goods only?
Intermediate goods are not included in the calculation of national income. Only final goods are included in the calculation of national income because the value of intermediate goods is already included in the value of final goods. If it is included in national income it will lead to the problem of double counting.
Gross Value Added
Total Value of goods and services produced by different Sectors of the Economy minus the value of intermediate goods.
Suppose a farmer produces cotton worth Rs 500 and sells it to the cloth mill. The cloth mill produces cloth worth Rs. 1,500. (Say produces 300 metres of cloth and the market price of cloth is
Rs 5 per meter). But in this value, the value of cotton is also included and cotton used by cloth mills is an intermediate good so the value of cotton i.e. Rs 500 will be the intermediate cost. Therefore value added will be Rs. 1000/-
Indirect taxes are those taxes that are levied by the government on sales and production and also on imports of commodities. For example, GST, Import/customs duties, etc.
Subsidies Sometimes, the Government gives financial help to the production units for selling their product at lower prices fixed by the government. Such help is given to those commodities whose production the government wants to encourage.
Export and Import
Export and Import are already included in GVA at the basic price. Total sales/turnover of an industry
includes both domestic sales and export sales. Import is included in intermediate goods/raw
materials consumed.
Nominal and Real GDP
GDP at current prices is called nominal GDP. It does not show the true picture of the economic growth of a country as any increase in nominal GDP might be due to a rise in price level without any change in physical output.
So, to eliminate the effect of price changes, GDP is estimated at a constant/base price called real GDP. Or we can say, Nominal GDP adjusted for inflation.
An increase in real GDP implies an increase in the production of goods and services. Therefore, the calculation of GDP at constant/base prices or real GDP gives us the correct picture of the economic performance of an economy
Price index used as a deflator
WPI and CPI both are used to deflate the GDP at current prices to arrive at GDP at constant/base price. WPI does not cover services hence CPI is used.
Importance Of Quantifying Economic Growth
Economic growth can be considered among the most crucial indicators that are released. The reason why it’s so important is that it indicates the growth in economic output, whether measured by GDP (gross domestic product), GVA (gross value added), or any other measure.
The stage of development of an economy is crucial for comparing two economies. Developed economies have a much slower growth pace YoY (year-over-year) than emerging or developing economies. As a result, comparing the US and China’s economic growth rates won’t be accurate. Instead, comparing the economic growth of countries in the same stage of development—preferably the same geographic region—provides a more comparable picture.
National income data have the following importance:
For the Economy:
National income data are of great importance for the economy of a country. These days the national income data are regarded as accounts of the economy, which are known as social accounts. These refer to net national income and net national expenditure, which ultimately equal each other.
National Policies:
National income data form the basis of national policies such as employment policy because these figures enable us to know the direction in which the industrial output, investment savings, etc. change, and proper measures can be adopted to bring the economy to the right path.
Economic Planning:
In the present age of planning, national data are of great importance. For economic planning, the data about a country’s gross income, output, savings, and consumption from different sources must be available. Without these, planning is not possible.
Economic Models:
The economists propound short-run as well as long-run economic models or long-run investment models in which the national income data are very widely used.
Research:
The national income data are also used by research scholars of economics. They make use of the various data of the country’s input, output, income, saving, consumption, investment, employment, etc., which are obtained from social accounts.
Per Capita Income:
National income data are significant for a country’s per capita income which reflects the economic welfare of the country. The higher the per capita income, the higher the economic welfare of the country.
Distribution of Income:
National income statistics enable us to know about the distribution of income in the country. From the data about wages, rent, interest, and profits, we learn of the disparities in the incomes of different sections of society. Similarly, the regional distribution of income is revealed.
Various Types Of Economic Indicators Or Concepts Related To Measuring Economic Growth
Key Economic Indicators from different sources are compiled and released by the Office of Economic Adviser, Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry.
For example-
1. Key Macro Economic Indicators like GDP, Savings, Investments, Agriculture production, Unemployment rate, etc
2. Industrial Statistics like Growth Rates of Core Industries, Growth Rates of the Index of Industrial Production, etc
3. Price Statistics like CPI, WPI, etc
4. Monetary and Financial Statistics like CRR, Repo, Bank rate, Bank Credit
5. External Sector Statistics like FPI/FII Net Investment, FDI/FII Inflows, Nominal Exchange Rate of Rupee per USD
6. World Indicators like comparison of GDP, IIP, Consumer prices, Export and Import with other countries
Net Domestic Product (NDP)
NDP is calculated by deducting the depreciation of plant and Machinery from GDP.
NDP = Gross Domestic Product – Depreciation
Gross National Product (GNP)
GNP is the value of all final goods and services produced by the residents of a country in a financial year
While Calculating GNP, the income of foreigners in a country is excluded but the income of people who are living outside of that country is included. The value of GNP is calculated based on GDP.
GNP = GDP + X – M
Where,
X = income of the people of a country who are living outside of the Country
M = income of the foreigners in a country
Net National Product (NNP)
Net National Product (NNP) in an economy is the GNP after deducting the loss due to depreciation.
NNP = GNP – Depreciation
NNP at Factor Cost
It is the value of NNP when the value of goods and services is taken at the production cost.
NNP at Market Price:
It is the value of NNP at consumer cost.
NNP at market cost = NNP at factor cost + Indirect taxes – Subsidies
Domestic Income
Income generated (or earned) by factors of production within the country from its resources is called domestic income or domestic product.
Domestic income includes:
(i) Wages and salaries, (ii) rents, including imputed house rents, (iii) interest, (iv) dividends, (v) undistributed corporate profits, including surpluses of public undertakings, (vi) mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships, etc., and (vii) direct taxes.
Domestic Income = National Income-Net income earned from abroad. Thus the difference between domestic income f and national income is the net income earned from abroad. If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic Income + Net income earned from abroad.
Private Income
Private income is income obtained by private individuals from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.
The additions include transfer payments such as pensions, unemployment allowances, sickness, and other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or horse racing, and interest on public debt. The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contributions to social security schemes like provident funds, life insurance, etc.
Thus Private Income = National Secondary or Industry Sector Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.
Personal Income
Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in one year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income.
Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribution + Transfer Payments + Interest on Public Debt.
Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.
Thus Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.
Real Income
Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is the value of goods and services produced as expressed in terms of money at current prices. But it does not indicate the real state of the economy.
Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index
Suppose 2000-11 is the base year the national income for 2009-2010 is Rs. 20,000 crores and the index number for this year is 250. Hence, the Real National Income for 2009-2010 will be = 20000 x 100/250 = Rs. 8000 crores. This is also known as national income at constant prices.
Personal Income(PI)
PI is the Part of National Income (NI) which is received by households.
Personal Income (PI) = National Income – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
Undistributed Profits (UP) are Savings of firms i.e. part of profit that is not distributed among the factors of production. We have to deduct UP from NI to arrive at PI since UP does not accrue to households.
Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households.
Further, households do receive interest payments from firms or the government on past loans advanced by them. Households may have to pay interest to the firms and the government as well, in case they had borrowed money from either. So we have to deduct the net interests paid by the households to the firms and government.
The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.
However, even PI is not the income over which the households have a complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and
Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income.
Thus Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments.
Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decide to consume a part of it and save the rest.
Classification of Productive Enterprises
Primary sector
Which makes direct use of natural resources
(i) Agriculture and allied activities
(ii) Forestry
(iii) Fishing
Which transforms inputs into output. This sector includes the following production activities
(i) Mining and Quarrying *
(ii) Manufacturing
(iii) Construction
(iv) Electricity Gas and water supply & other utility services
Tertiary or Service Sector
The following services are provided.
(i) Trade, repair, hotels, transport, communication, and services related to broadcasting
(ii) Financial, real estate & professional services
(iii) Public Administration, defense and other services
India’s GDP growth is largely driven by the Service sector. The services sector remains the key driver of India’s economic growth.
*Mining and Quarrying is generally included in the Primary sector but in India, it is included in the Secondary or Industry Sector.
Methods Of Estimating National Income
Output Method
In this method, a country’s national income can be calculated by adding the output of all the firms in the economy to determine the nation’s output.
The product method is also known as the output method or value-added method. In this method, we calculate the national income in terms of final goods and services produced in an economy during a particular time. The final goods are those that are either available to the consumers for consumption or become a part of national wealth in the form of investment.
The product method is that which estimates the national income by measuring the contribution of final output and services by each producing enterprise in the domestic territory of a country during a given accounting period.
Classification of Output
National output is classified into the following types:
Consumer Goods – Consumer goods are those goods that help in the further production of consumer goods. These are also called are also called capital goods.
Producer Goods– Producer goods are those goods that help in the further production of consumer goods. These are also called capital goods.
Govt. Produced Goods– These include defense, police, education, health care, roads, railways, ports, dams etc.
Net Exports– Net exports refer to the value of goods and services exported to the rest of the world minus the value of goods & services imported during an accounting year.
Expenditure Method
Expenditure incurred on final goods is final expenditure. The economy’s total product is used for final consumption as well as for further production. The demand for final consumption and investment is made by all the four consuming sectors of the economy, namely, households, firms the government, and the rest of the world.
(i) Private final consumption expenditure. (Consumption of Final goods by Households)
(ii) Government final consumption expenditure.(Consumption of Final goods by Govt)
(iii) Gross Investment/Capital Formation (Consumption of Final goods by Firms)
(iv) Net exports (exports – imports) (Consumption of Final goods by Rest of the world)
The total of all the above expenditures gives us GDP at market price. Indirect taxes and subsidies are already included in expenditures.
Private final consumption expenditure
The household sector of the economy consists of individuals and families and non-profit organizations who serve the households. The non-profit organizations serving the household sector include charitable trusts, religious foundations, etc., who demand goods and services to serve the household sector.
Government final consumption expenditure
The Government purchases goods and services for the benefit of the public. To provide these services, the government functions through various ministries and departments. To maintain these offices. The government purchases uniforms, vehicles, stationery, furniture, etc. It spends money on the payment of salaries to its employees.
Gross Investment/Capital Formation
The firms and or the producers demand goods and services for further production. The demand for goods by the firms to produce a product is known as “Investment”.
Firms demand capital goods such as machinery and equipment. They also demand intermediate goods for further production. The purchase of wheat flour to produce bread by a bakery unit is an example of intermediate goods.
Gross Capital Formation (GCF)
GCF refers to the aggregate of gross additions to fixed assets (fixed capital formation), increase in stocks of inventories, or change in stocks (CIS) and valuables.
Net capital formation is gross capital formation less consumption of fixed capital i.e depreciation.
Increase in stocks of inventories or change in stocks (CIS)
For a given period, additions to inventories reflect production in that period and so are included in GDP, while withdrawals from inventories reflect production in past periods and so are excluded from GDP.
Valuables (expenditures made on the acquisition of Gold, Jewellery, Diamonds. Precious stones, works of art, Painting, etc. held as investments)
Valuables are assets that are not used primarily for production or consumption. These precious metals do not normally deteriorate over time and are acquired and held primarily as stores of value or in the expectation of capital gains.
Monetary gold is, however, not part of the valuables. Gold held by the monetary authorities (usually Central Banks) as part of the official reserves of a country or by international financial institutions such as the IMF is classified as monetary gold and a financial asset because monetary authorities may use it in settling financial claims.
Income for participation in the production process may take four forms: rent, wages, interest, and profit. By national income, we mean the total of all rent, wages, interest, and profit earned in the production process during a given period by all the citizens, which is known as the factor payments total.
Income Method
The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest, and profit for their productive services in an accounting year. Thus, national income is calculated by adding up factor incomes generated by all the producing units located within the domestic economy during a period of account.
The resulting total is called Domestic Income or Net Domestic Product at FC (NDPFC)- By adding net factor income from abroad to domestic income, we get National Income (NNPFC)- In mind, in the income method, national income is measured at the stage when factor incomes are paid out by enterprises to owners of factors of production—land, labor, capital and enterprise.
- Determinants Of National Income Issues Associated With National Income Accounting In India Possible Solutions To Issues With National Accounting
Determinants of National Income
National income is determined by various factors such as:
Labor and capital:
The quality and quantity of labor and capital available in an economy determine the level of output and ultimately the level of national income.
Natural resources:
The availability and quality of natural resources such as land, water, and minerals also play a vital role in determining national income.
Technology:
Technological advancements and innovations can increase productivity and efficiency, leading to higher levels of output and income.
Infrastructure:
Adequate infrastructure, such as transportation and communication networks, is essential for economic growth and development.
Political stability:
Political stability and the government’s policies and regulations can influence economic growth and investment in an economy.
Issues associated with National Income Accounting in India:
Informal sector:
The informal sector, which constitutes a significant part of India’s economy, is often not accounted for in national income estimates.
Poor data quality:
The quality and accuracy of data used for calculating national income in India are often inadequate, leading to inaccurate estimates.
Non-monetized sectors:
The non-monetized sectors, such as agriculture, are often not accounted for in national income estimates, leading to an underestimation of the actual level of output.
Unrecorded transactions:
Unrecorded transactions, such as those in the black economy, are not captured in national income accounting, leading to an underestimation of the actual level of output.
Possible solutions to issues with national accounting:
Include the informal sector:
Efforts should be made to account for the informal sector in national income estimates, such as conducting surveys to collect data on informal economic activities.
Improve data quality:
Steps should be taken to improve the quality and accuracy of data used for national income accounting in India, such as investing in statistical infrastructure and capacity building.
Include non-monetized sectors:
Non-monetized sectors, such as agriculture, should be accounted for in national income estimates, such as by valuing output based on input costs.
Capture unrecorded transactions:
Efforts should be made to capture unrecorded transactions, such as by conducting surveys or using alternative data sources, to provide a more accurate estimate of national income.
Frequently Asked Questions (FAQs)
Q: What does the term “National Income” refer to?
A: National Income is the total value of all goods and services produced by a country over a specific period, usually a year. It encompasses the sum of wages, profits, rents, and taxes minus subsidies generated within the borders of a nation. This economic indicator provides insight into the overall economic health and performance of a country.
Q: What methods are used to calculate National Income?
A: National Income can be calculated using three main approaches: the Production Approach, the Income Approach, and the Expenditure Approach. The Production Approach sums up the value of all goods and services produced, the Income Approach adds up all incomes earned in the process, and the Expenditure Approach tallies all spending on final goods and services. These methods provide a comprehensive view of the economy from different perspectives.
Q: What is the significance of National Income for a nation’s economy?
A: National Income serves as a crucial economic indicator with several implications. It helps policymakers assess the overall economic performance, formulate fiscal and monetary policies, and make informed decisions. Additionally, it aids in measuring the standard of living, income distribution, and economic growth. Monitoring National Income is vital for understanding the economic well-being of a nation and guiding efforts to improve or stabilize its economic conditions.
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