National Income: Learning Objectives

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National Income

Learning Objectives
Meaning and definition
concepts in national income
Gross National Product (GNP)
Net National Product (NNP)
GNP at Market Prices
GNP at Factor Cost
Personal Income
Real National Income
Disposable income
Per capita Income
Property income from Abroad
Property income paid Abroad
Net Property Income
Gross Domestic Product (GDP)
1. Meaning and Definition

• Professor Marshall : “the labour and capital of a


country, acting on its natural resources produce
annually a net aggregate of commodities, material
and immaterial including services of all kinds”.

• Marshall’s definition is simple but it is difficult to


measure the national income as correct data of
production or consumption are not available.

• The entire produce does not come to the market.


Similarly a part of production is retained by producers
either for self consumption or for barter which remain
excluded from national income statistics.
Prof. A.C. Pigou,
“national dividend is that part of the objective income
of the community including of course income
derived from abroad which can be measured in
money.”

Pigou’s definition makes a distinction between goods come


to the market for sale or not.
Goods that are bartered is not considered for calculating
national income.
• Professor Fisher

“national dividend or income consists solely of


services as received by ultimate consumers whether
from their material or human environment.”
Simon Kuznets,
“national income is the net output of commodities and
services flowing during the year from the country’s
productive system in the hands of the ultimate
consumers.”
National Income Committee of India,
• “national income estimate measure the value of
commodity and services turned out during a given
period counted without duplication.”
• National income is one of the basic measures of
economic development of a country.
• It is the total output of an economy over a given
accounting period, generally one year.
• National income is a flow concept.
2. Different Concepts of National Income
1. Gross national Product (GNP)
• Gross national product refers to the total value of final
goods and services produced in the country during a
given period of time.
• If we express the value of total output in terms of money
it will be called the gross national income.
• In simple words, GNP is the sum total of the money
value of final goods and services produced by a nation in
a particular period, say one year.
• 2. Net national Product (NNP)
• The Gross national product is the value of total output of
consumption goods and investment goods.
• However, the process of production causes depreciation
to the fixed capital.
• In order to arrive at NNP, we deduct depreciation from
GNP.
• Therefore, NNP = GNP – Depreciation.
• Net national product is the value of national product after
deducting the loss in the value of capital assets due to
wear and tear.
• Every year the capital assets undergo depreciation.
Such capital consumption value is subtracted from the
gross fixed capital to arrive at net national product.
3. Net National Product at Market Prices
• GNP at market price = GNP at factor cost + taxes –
subsidy.
• NNP at market price = GNP at market prices –
depreciation.
• GNP at market price is affected by taxes and subsidies.
4. Net National Product at Factor Cost

• GNP at factor cost = GNP at market price – indirect


taxes + subsidy.
• NNP at factor cost = GNP at Factor cost – depreciation.
5. Nominal Income or GNP at Current Prices

• Nominal income is the GNP at current prices.

• It is called national income at market price.

• The money national income of a country may increase


just due to change in the price level in spite of goods and
services remaining constant.
6. Real national income or GNP at Constant Prices
• Real national income is the national income expressed in terms of
level of prices of a particular year taken as the base.
• It is called national income at constant prices.
• Real income is the GNP at constant prices.
• The nominal income has to be deflated by the price index to arrive
at the real national income.
• Real NNP = NNP at current prices x (base year index / current year
index)
• Year Nominal Income Price Index
• 1 500 100
• 5 750 125
• In the fifth year the nominal income is deflated by the price index
125 to arrive at the real national income i.e. 750 X 100/125 = 600.
The GNP at constant price is 600.
7. Personal Income
• Personal income refers to the income received by the
individual of a country in a year from all sources.
• Personal income is never equal to national income
because the former includes transfer payments whereas
national income does not does not include transfer
payments.
• Personal income = net national income+ transfer
payments – undistributed corporate profit – corporate
income tax- social security contribution.
• Personal income = income from employment+ income
form self employment+ interest + rent+ profit+ transfer
payment
8. Personal Disposable Income
• Disposable income is the actual income which can be
spent on consumption by individual and families.
• It is the part of income which is left after the deduction of
direct taxes.
• Personal disposable income = Personal Income – Direct
Taxes - Social Security Contributions.
• Otherwise,
• Personal Disposable Income = Consumption
Expenditure + Saving.
Per Capital Income

• Per capita income is the income per head. Per capital


income of a country is the average earning of an
individual in a particular year.

• Per capita income = national income of a country/


population of the country.
10. Property Income from Abroad

• It is the income remitted to their parent company by the


subsidiary firms located in foreign country.
11. Property Income Paid Abroad

• Many foreign companies located in the domestic territory


of a country remit a part of their income abroad.
12. Net Property Income from Abroad
• The difference between the property income from abroad
and property income paid abroad is called the net
property income from abroad.

• When net property income from abroad is added to the


gross domestic product we arrive at gross national
product.
13. Gross Domestic product (GDP)

• Gross national product = GDP + net property income


from abroad. If net property income from abroad is
negative GDP exceeds GNP and vice versa.

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