National Income
National Income
Introduction
Meaning of National Income
National
Income is the flow of goods and services which become available to a nation
during one year. In simple words, how many goods and services produced in one
year in the country is known as national product, but addition of different
goods is not possible because measuring rod is not same. For example, cloth in
meter, milk in liter, cars in number. We cannot make the total of meter, liter
and number. So we define National Income as how many goods and services
produced in the country in a year multiplied by its price is known as national
income. Thus, National Income is the aggregate money value of all goods and
services produced in the country during one year, account being taken of the
deductions made due to wear and tear and depreciation of plant and machinery
used in the production of goods and services.
Definitions of National
income
National Income
is defined by different economists differently. We will consider only important
definitions.
Dr. Marshall defined
national income as ‘the labor and capital of a country, acting on its natural
resources, produced annually a certain net aggregate of commodities, material
and immaterial, including services of all kinds and net income due on account
of foreign investment must be added in. This is the true net annual income or
revenue of the country or the national dividend’.
Drawbacks:
1.
The number of goods and services produced in a country is so large and there
are so many varieties, so measuring
accurately the national output is very difficult.
2.
There are so many commodities, which does not become available for sale in the
market means produced for self consumption. For example: Food grains produced
by some farmers do not enter into the market and those are not measured in
terms of that of money.
3.
The danger of double counting is always there. For example, if we calculate
value of wheat and again value of bread it is double counting.
Pigou's definition: According to Prof. Pigou, ‘the national dividend is that part of the objective income of the country including, of course income derived from abroad, which can be measured in money’. It means according to Pigou, only those goods and services should be included that are actually sold for money.
This definition
is precise, convenient, and workable. If
there is any commodity or service which has no ‘money value,’ it cannot be
included in the national income. For example, if a mother renders any service
for her child then such a service cannot be included in national income because
it has no money value.
Limitations
1. The definition though applicable to
the developed countries cannot be used to calculate national income of backward and developing
countries, because in such countries, there still exists barter system and
quite substantial part of goods and services are bartered away for other goods
and services. If national income calculated by this definition it would be far
less than their actual rational income.
2. The definition includes in national income only those goods and services, the price of which is expressed in money. For example, If a person pays 1000 per month to his maid- servant then it will be included in national income of a country, but if that person marries that maid- servant, then her services will not be included in the national income because such services are now not exchanged in terms of money. In other words, the field covered by national income is somewhat uncertain.
Fisher’s definition
Fisher defined national income as ‘The national income consists solely of services as received by ultimate consumers, whether from their material or from their human environments. Thus, a piano or an overcoat made for me this year is not a part of this year's income, but an addition to capital. Only the services rendered to me during this year by these, things are income.
It means
according to Fisher the national income of a country is determined not by its
annual production, but by its annual consumption. Suppose, one car is produced
in the year 2008 and price of car is 10 lakhs and life of car is suppose 10
years, it means every year 1 lakh are included in national income. In year 2008
only 1 lakh are included in national income and not 10 lakh. This definition appears to be better and more
scientific than other definitions. Because it is nearer to the concept of
Economic Welfare as it includes in the national income of the country only the
money value of the actual consumption of goods and services during the year.
2. It is very difficult to define life
of each and every commodity in order to find out the money value of consumption
in a particular year. For example, the life of car is suppose 10 years, but the
use of car in every year is not same. In the first year the use of car may be
less and in the second year it may be more.
3. The durable goods like car, TV, bicycle may pass through the hands of so many persons that it may become difficult to know its accurate date and month of manufacture and its original price. This will make the task of calculating the money value of its consumption in a particular year still more difficult.
Different concepts of National Income
National Income of Current and Constant Prices:
National Income at current prices is obtained by expressing the value of goods and services produced in the year in terms of the market prices actually prevailing in the year. For example, suppose in the year 1990-91, 10 crores of goods and services are produced, if the price level in that year is Rs. 15, then the national income is Rs.150 crores. Whereas the national income for the year 1991-92 will be computed by considering the money value of goods and services in that year only. If 10 crores goods and services are produced and the price level is Rs. 20 then, corresponding national income is Rs. 200 crores. This method does not give us a correct comparative picture of economic performance over the period of time because even if the rate of flow of goods (volume of goods) remains the same, but prices rise over the period of time then the national income at current prices will be high. It misleads us to believe that the national income is growing and thereby economy is progressing. This increase in national income is not due to increase in output, but it is only due to rise in prices. To take care of such illusory increases in the growth of national income the concept of national income at constant prices is important.
National income at constant prices
It implies that prices over a period of time are held constant. We do not consider the prevailing prices of goods and services in the market each year, but we hold the prices of goods prevailing in a particular year constant for comparing them for other years. When this method is adopted, then we get a more clear picture of changes in the flow of output.
We can explain this concept with example.
|
Year |
Goods and services x Price level |
National
Income (Rs. crores) |
|
2000-2001 |
10 crores x Rs.
20 |
200 |
|
2001-2002 |
10 crores x Rs.
20 |
200 |
|
2002-2003 |
15 crores x Rs.
20 |
300 |
In the above example, we have taken the price level Rs. 20 constant. So, when number of goods and services produced in a country increases, then only national income is increases and not because only by increase in price level. So it is real increase in national income.
(B) National Income at Market Prices and at Factor Cost
National Income at Market Prices:
Market prices
refer to the current prices of goods and services in the concerned year
or period. While measuring the prices,
it should be taken on an average of the prices prevailing for the commodities
through the period. Market prices give nominal values of the total national
output.
Market prices
include elements of indirect taxes and subsidies. So indirect taxes add to cost
of production and market prices.
Subsidies refer
to economic assistance or help rendered by the Government to the producers. For
example, fertilizers, cooking gas are given subsidy.
In other words,
the concept of national income at market price does not consider the element of
direct taxes which increase the market price. Similarly, it does not consider
the subsidies which reduce the market price.
National Income at Factor Cost:
In this context factor refers to factors of production such as land, labor, capital and enterprise. Gain due to the factors is called factor income. The price paid by consumers is not available to producers for distributing among factors of production. Therefore, to measure the value of national income at factor cost, indirect taxes are to be deducted while subsidies are to be added to the market price. Thus,
National income
at factor cost =
National income
at market price - Indirect taxes + Subsidies
(C) Gross National Product (GNP):
The Gross
National Product represents the market value of the gross output of nation,
whereas Gross National Income represents the allocation of the income
originating from the production of this output. The output under consideration
is gross, because depreciation is not taken into account. Similarly, the output
is national because we are concerned with the productive contribution of
nationals of a given country together with the contribution of any property
owned by such nationals, whether this property is located at home or abroad.
G.N.P thus
consists of the total value measured at market prices of all consumer goods and
services produced, plus capital goods, including the addition of new capital
and replacement of that used in the production process. It is the monetary
value of the goods and services produced in a year.
In an open economy i.e. an
economy open to foreign trade, the GNP includes:
1. The value of all currently produced
consumer goods at market prices (C),
2. The gross value of all capital goods when
depreciation is not excluded (I),
3. The value of government services (G),
4. The difference between value of
exports and imports (X-M).
GNP = C+I+G(X-M)
In a closed economy, not open to trade with
other countries.
GNP = C+1+G
(D) Gross Domestic Product:
The
distinction between GNP and GDP is based on the connotation attached to ‘National’
and ‘Domestic’. The term national in the definition of GNP relates to
nationality. This implies the aggregation of productive contribution of
individuals of a country together with the productive contribution of any
property owned by them whether this property is located at home or abroad. Thus
the boundary of GNP is defined in terms of nationals and their property rather
than in terms of geography. Gross domestic product takes for its frame of
reference the production occurring within a given geographic area irrespective
of whether the productive resources are owned by nationals of that area or not.
Thus the focus of GDP is the productive activity taking place within designated
geographic boundaries, whereas that of GNP is the productive activity of a
specific group of nationals and their property.
Whatever
is earned by Indian citizens whether inside' or 'outside India will form GNP At
the same time that part of income though produced in India but earned by
foreigners has to be excluded.
On
the other hand, whatever is produced in India by nationals or foreigners
working in India will constitute the Gross Domestic Product Similarly incomes
earned by Indians outside Indian territory will not be included in India's
domestic product
GDP
may be either larger or smaller than GNP. If the Indian Nationals have large
foreign investments and own fabulous property for example oil wells, mines etc.
then India's GNP may be higher than GDP. If in India we have rich oil wells,
mines etc. but they are operated by foreigners i.e. nationals of other country
then although the GDP of India will be high its GNP may be low.
Note:
1. Both GNP and
GDP are measured at current market price.
2. GNP = GDP+
Net income from exports.
i. e. GNP = C+I+G+
(X-M)
GDP = C+1+G
(E) Net National
Product (NNP):
From
total product when we deduct depreciation we get Net National Product. In other
words, GNP-Depreciation = NNP
Sometimes
NNP is also known as National Income at market prices.
This
concept is very important because it gives an idea how much is actually
available for consumption. The main merit of this concept is that, it gives the
clear idea of the net increase in total production over the above current
consumption and current replacement investment.
(F) Personal Income:
The
concept of personal income refers to the income received by Individuals or
households from all sources such as rents, wages, interests, profits, old age
pensions etc. during a year. Personal income is the total earned and unearned
income of a person without deducting taxes. Personal income is not necessarily
equal to national income, for a part of national income does not necessarily
become a part of the personal income.
For
example, a joint stock company makes profit and does not distribute it, then it
will not reflect in increase in personal income, but it will be reflected in
rise in the national income.
(G) Per Capita
Income (PCI):
It
is the average income of the people for a particular year. It can be calculated
at current prices or base year prices.
Per Capita Income
= Total
national income
Total population of country
Suppose
total national income is 10000 crores and population is one crores, then 1000
is per capita income. It is not actually earned or received by each person, but
it is the average income. If national income Increases by 3 percent and
population increases by 4 percent, then per capita income will decline. So it
is expected that national income must Increase at a faster rate that the rate
of increase in population for a country do well. Normally in underdeveloped
countries, per capita income is low and it is high in developed countries. It
is the best indicator of economic development.
(H) Personal
Disposable Income:
From
personal income, when we deduct direct taxes or some compulsory payments like
social insurance etc., then remaining income is known as disposable income. It
is the actual income which can be spent in consumption or saved by that
individual. Disposable income tells us what actually an individual get into his
hands to dispose-off as he please.
Disposable
income = Personal income - Direct taxes
***
METHODS OF
MEASURING NATIONAL INCOME
In
national income estimates we have to count all those goods and services
produced in the country and exchange against money during a year. Thus,
whatever is produced is either used for or for saving. Thus national output can
be computed at any of the three levels, i.e. production, distribution and
expenditure. Accordingly there are three methods of estimating national income.
1. The census of
products method
2. Income method
3. The
expenditure method.
National
Income Division (N.I.D.) of the Central Statistical Organization (C.S.O.)
produces national income estimates in India by combination of Output method and
Income method.
(A) Output
Method or the Census of Products Method:
This
is a direct method, which measures the output of the country. It is also called
the inventory method. Here from the census of production the gross value of
output in different sectors like agriculture, industry, trade, commerce,
mining, forests, fisheries, transport etc. is obtained for the entire economy
during a year. The value so obtained is actually the G.N.P. at market prices
taken into account. The total obtained is known as final product total.
It
should be remembered here that goods in this case refer to final goods. Final
goods are those which are finally made available to the consumers. A particular
commodity passes through different stages of production before it becomes a
finished commodity.
For example: The
raw materials are brought to the market, the raw materials are then converted
in the semi-finished or intermediate products which are then finally processed
in the finished goods. So only the values of final goods are considered in the
estimation of national income figures. Otherwise, it will lead to
double-counting. To avoid double counting, we can use following approaches.
The final goods
approach:
In
this method, the value of the goods and services is computed in order to find
out the value of output. This approach takes into account the values of intermediate
goods as well but at the same time it avoids double counting.
The value-added
approach:
In
this case the values of final goods and services are not considered, but rather
the value added at every stage of production and finally sum up the values to
arrive at the value of the output produced. This approach can be made clear
with following example of manufacturing of shirt.
|
Stages of
production |
Market values of goods (Rs) |
Value-added in
production |
|
1. Cotton |
70 |
70 |
|
2. Yarn |
100 |
30 |
|
3. Cloth |
140 |
40 |
|
4. Shirt |
200 |
60 |
|
Aggregate
value added |
|
200 |
This
method is simple and easy to calculate as production and trade statistics are
easily available in almost all countries.
The following precautions are necessary to be
taken to obtain correct results of national income estimate.
1. To avoid
double counting, we must consider the value of only final product. For example,
when we calculate the value of bread we must avoid the value of wheat and the
flour.
2. Farm products kept for self consumption by the
farmers should be estimated by the guess work and measured at the prevailing
market price.
3. The value of
the capital goods produced must be included.
4. Allowance
should be made for exports and imports. If imports are greater than exports,
then the difference should be deducted otherwise added to national income.
5. Depreciation
or replacement cost must be deduced.
6. Transfer
payments like old age pensions, dowry etc. must be deducted.
7. Indirect
taxes included in prices are to be deducted and subsidies given by Government should
be added, for getting exact market value of the products.
8. White evaluating
output, changes in prices level between the year must be taken into account.
For that average price level is considered.
(B) Census of
income Method:
In
this method, we aggregate the income of all the factors of production obtained
participating in the generation of national product. In other wards the total
of all money incomes such as wages, salaries and enterprises in the country
during the year are totaled up. In practice income figures are obtained mostly
from income tax returns books, accounts reports published as well as estimates
for small income.
Along with wages rent, interest and profits, the net profits of Government concerns and income of self employed person, income from abroad should be added.
In
India the National Income Committee uses the income method for adding up the
net income rising from trade, transport public administration professional etc.
In
India due to lack of popularity of personal accounting practices it is
difficult to ascertain the personal income. This method is not wholly
practicable.
Certain
precautions are necessary to be taken while following this method.
1. All government
and personal transfer payment like pensions, gifts, social security benefits like
unemployment, allowances, charity are not to be included in national income
because they do not represent earnings from productive services. Similarly,
earnings from gambling, lottery prize is transfer income so exclude from
national income.
2 All unpaid
services like services of housewives, which cannot be precisely evaluated are
to be excluded.
3. Financial
transactions and second hand sales of property are to be excluded as they do not add anything to the real national
income.
4. Direct tax
revenue to the government should be subtracted from total income as it is only
a transfer of income.
5. Similarly
government subsidies should be deducted from profits of the subsidized
industries.
6 Add
undistributed profits of companies, income from government property and profits
from public enterprises.
7. The value of
exports should be added and value of imports should be deducted to get the net
figure of income.
(C) Census of
Expenditure Method:
This
method is not used in India. According to this method national income is
calculated by adding the total expenditure by the final users of all goods and
services plus addition to the stocks with the producers and distributors. This
method gives
National income = C+I+G+ (E-M)
where,
C = Total expenditure on
consumption
I = Investment
G = Government consumption and
investment
E-M = The net annual difference
between the value of exports (E) (which means income to foreigners) is added.
Precautions to
be taken:
1 Only the
expenditure on the final goods and services must be included. Expenditure on
raw material and intermediate goods should be avoided otherwise; it would
amount to double counting.
2. Care must be
taken to deduct indirect taxes and add subsidies in market price. Because of indirect taxes, market price
increase and due to subsidies price is reduced.
3. Care must be
taken to include the value of exports and deduct the value of imports so that
only the net income from abroad is considered.
***
DIFFICULTIES IN MEASURING NATIONAL INCOME
The
difficulties in calculation of national income can be classified (1) General
and (2) particular i.e. some are the
conceptual and some are practical. Prof.
Kuzents mention the following difficulties usually faced by statisticians and
economists while estimating national income.
1.
Which goods to be included and which excluded:
There
are considerable differences of opinion regarding the type of, goods and
services which should be included in national income. Theoretically, if
commodity or service have money value than we include it in national income.
For
example; house-wives or nurses when render services to her child. The
difficulty is whether these services should be included in national income or
not and how to measure their money value.
2. The danger
of double counting:
The
data of the cost of raw material may not, be available. Hence a part of the
value of raw material may also enter into calculation of national income. This
difficulty mainly arises when we use product method. The best way to avoid the
error is to calculate the money value of only final goods and services.
3.
Lack of full, reliable and adequate statistical data:
The
statistical data in respect of all the sections of the economy is not available
regarding income and expenditure. The data available is inadequate and not
reliable. Normally, incomes are hidden while expenditure may be swollen. Full
data on the people's consumption, expenditure, saving and capital formation in
the entire economy may be lacking.
In
India we collect information in the rural areas through the ‘Patwari’ or ‘Gramsevak’;
both these persons are not sufficiently trained for the collection of data.
4.
Production for self consumption of data:
Farm
products, domestic poultry vegetables etc. very often the production of such
things be for self consumption and the output produced does not appear market
nor is the producer necessarily aware of its value in exchange and thus output
goes uncounted for in national income.
5.
The prevalence of Barter economy many times:
Goods
and services are exchanged against goods or services. Money value of such transactions
are not determined and hence do not figure accurately in the national income
calculations. If we ignore this portion of the output we would reduce national
income considerably.
6.
Lack of differentiation in economic functions:
In India it is customary to collect statistics
of national income by industrial origin so al producers are classified into
various occupational classes. But there are many difficulties in such
classification as many small farmers work in agriculture for few months and in
Industry in remaining months. In such cases it is very difficult to allocate
the income of such person.
7. Income obtained from illegal activities:
The
income earned by illegal activities such as gambling, smuggling etc. is not
known. So exclusion of such income from the national income estimates results
in an under valuation national income.
***
USEFULNESS
(SIGNIFICANCE/ IMPORTANCE) OF NATIONAL INCOME
National
income is measure of productive performance of a country. National income
statistics are important for the following reasons.
1. National income
data forms a basis for a planned development. Unless imbalance in production
and distribution is known, proper policies cannot be framed by the government.
Unless we know the resources at our command, it will not be possible to use
them in the best manner in different sectors.
2. National income
(output), savings, investments and employment are related. The knowledge of the
former helps us to find out the savings that would be required for investments
to increase the production.
3. The national
income figures of a country help us to compare the economic welfare of the
people in the same country between two periods of time or of two different
countries in the same period of time. This helps us to know about economic
conditions prevalent and how we stand as against the world economy and what we
should do if we are comparatively worse-off.
4. In case of big
countries like India the economic conditions of all regions are not same. The
data is therefore, useful for the government to decide about giving grants in
aid to backward areas in the country.
***
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