National income definition and calculations.pptx

National Income is the total amount of goods and produced within the nation during the period say, 1 year.
National income is also known as total of factor income i.e wages, interest, rent, the profit received by factors of production.

1. National income unit-2 By A.SHANTHI Assistant Professor Department of Business Economics

2. National Income is the total amount of goods and produced within the nation during the period say, 1 year . National income is also known as total of factor income i.e wages, interest, rent, the profit received by factors of production. Meaning

3. Traditional Definition Modern Definition National Income Definition

4. 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.” Traditional Definition

5. Pigou defined the national income or dividend as  “that part of the objective income of the community including, of course, income derived from abroad which can be measured in money”.     Pigou’s Views on National Income:

6. In his words, “… the national dividend or 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 use during this year by these things are income.”  Fisher’s Views on National Income:

7. Simon Kuznets  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 .” Modern Definition

8. 1.Gross Domestic Product (GDP) 2. Gross National Product (GNP) 3. Net National Product (NNP) at Market Prices 4. Net National Product (NNP) at Factor Cost or National Income 5. Personal Income 6. Disposable Income Concepts of National Income

9. Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. Gross Domestic Product (GDP):

10. Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore, GNP = GDP + Net factor income from abroad. Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.  Gross National Product (GNP):

11.  NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore’ NNP = GNP – Depreciation Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.  Net National Product (NNP) at Market Price:

12.   NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year . It may be noted that: NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies. Net National Product (NNP) at Factor Cost (National Income) : 

13.  Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits . On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore, Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.  Personal Income:  

14. From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income . Thus, Disposable Income = Personal income – personal taxes. Disposable Income can either be consumed or saved. Therefore , Disposable Income = consumption + saving. Disposable Income:

15. Methods of Measuring National Income Product Method Income Method Expenditure Method Measurement of National Income

16. Product Method: In this method, national income is measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process .

17. Income Method : Under this method, we add all the incomes from employment and ownership of assets before taxation received from all the production activities in an economy. Thus, it is also the Factor Income method. We also need to add the undistributed  profits  of the private sector and the trading surplus of the public sector corporations. However, we need to exclude items not arising from productive activities such as sickness benefits, interest on the  national debt , etc.

18. Expenditure Method: This method measures the total domestic expenditure of the  economy . It consists of two elements, viz. Consumption expenditure and Investment expenditure. Consumption expenditure includes consumption expenditure of the household sector on goods and services and consumption outlays of the  business  sector and public authorities. Investment expenditure refers to the expenditure on the making of fixed capital such as Plant and Machinery, buildings, etc.

19. National Income accounting provide as an index of economic activity and an instrument of economic planning. It indicates the growth of the economy in terms of income and output. National income statistics help the policy makers to frame policies to achieve full employment and rapid economic growth. Importance of National Income Analysis

20. It depicts the change in the production to output and also the effects of the  Government  policies on the economy . The National Income studies the relation between the input of one industry and the output of the other . It shows the income distribution among different economic units . It also shows the change in the tastes and preferences of the consumers and thus, helps the producers to decide what to produce and for whom to produce . The quantum of the National Income of a country indicates its ability to pay its share for international purposes, such as membership of IMF, World Bank or SAARC.

21. 1. problems of definition 2. lack of adequate data 3. non-availability of reliable information 4. choice of method 5. lack of differentiation in economic functioning 6. double counting. Difficulties faced in Estimating National Income

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