NATIONAL INCOME AND PRODUCT

CONCEPT

By: Vikram.G.BFaculty, P.G Dept of Commerce

Vivekananda Degree CollegeBangalore-55

Meaning & Definition: National income is the flow of goods and

services which becomes available to a nation during a year.

National income is the aggregate money value of all goods and services produced in a country during one year, account being taken of the deductions made due to wear and tear, and depreciation of plants and machinery used in the production of goods and services.

The money value of the goods and services produced in a country during a year is called national income.A country is high national income is said to be a prosperous country.

According to Alfred Marshall -:The labor and capital a country acting upon natural resources produce annually a certain net aggregate of commodities, material and immaterial including service of all kinds. This is the net annual income or revenue of country or the national dividend.

In the word of A.C. Pigou -"The national dividend is that part of the objective income of the community including of course, income dividend from aboard, which can be measured in money.

According to Irving fisher -"The true national income is that part of annual net produce which is directly consumed during that year".

Basic concepts in National Income:- Gross Domestic Product (GDP). GDP at Constant Prices and Current Prices. GDP at Factor Cost and GDP at Market Price. Net Domestic Product (NDP). Gross National Product (GNP). Net National Product (NNP). NNP at Factor cost or National Income Personal Income (PI).

Gross Domestic Product (GDP):-

Gross Domestic Product is the money value of all final goods and services produced within the domestic territory of a country during a year inclusive of depreciation.

Domestic territory is defined to include:

(i) Territory lying within the political frontiers, incl. territorial water of the country.

(ii) Ships and aircrafts operated by the residents of the country between two or countries.

(iii) Fishing vessels, oil and natural gas rigs, and floating platform operated by the residents of the country in the international waters,

(iv) Embassies consulates and military establishments of the country located abroad.

GDP at Constant Prices and Current Prices If the domestic product is estimated on the

basis of the prevailing prices, it is called GDP at current prices.

If the GDP is measured on the basis of some fixed prices, that is prices prevailing at a point of time or in some base year, it is known as GDP at constant or real gross domestic product.

GDP at Factor Cost and GDP at Market Price

GDP at factor cost is estimated as the sum of net value added by different producing units and the consumption of fixed capital, we can also estimate GDP as the sum of domestic factor incomes and consumption of fixed capital.

GDP at Market Price is estimated by deducting the value of intermediate consumption from the value of output produced by all the producers within the domestic territory of a country. In other words, it is estimated as the sum total of gross value added at the market price.

Thus, GDPFC = GDPMP – IT + S

Where IT = indirect taxes and S = subsidies.

Net Domestic Product at Market Price

Net Domestic Product at market price is the market value of final goods and services produced by all the producers in the domestic territory of a country during an accounting year exclusive of consumption of fixed capital. It is equal to the net value added at market price.

Net Domestic Product

When depreciation allowance is subtracted from GDP, we get net domestic product.

Thus, NDP = GDP – depreciation.

Gross National Product

GNP at market price is sum total of all the goods and services produced in a country during a year and net income from abroad.

GNP is the sum of Gross Domestic Product at Market Price and Net Factor Income from abroad.

Thus, GNP = GDP + NIFA

Net National Product

In the process of production of goods and services, there will be some depreciation of fixed capital also called as consumption of fixed capital, if the value of depreciation is deducted from the value of gross national product in a year, we obtain the value of net national product.

Thus, NNP = GNP - depreciation

Net National Product at Factor Cost

Net National Product at factor cost is also called as national income.

Net National Product at factor cost is equal to sum total of value added at factor cost or net domestic product at factor cost and net factor income from abroad.

Thus, NI = NNP – Indirect Taxes + subsidies - Profits accruing to the govt.

Personal Income Personal income is that income which is actually

received by the individuals or households in a country during the year from all sources.

In order to derive PI from NI, we have to deduct from NI those amounts which are not available for distribution among the factors of production.

Thus, PI = NI – corporate income taxes – undistributed corporate profits – social security contribution + transfer payments.

Disposable Personal Income It is the that part of personal income left

behind payment of personal direct taxes. It is the disposable income which is

spent by the individual or the household on consumption.

DPI = Personal Income- Personal Direct taxes

DPI = Consumption + savings.

Items included in the National Income:-

Income of the individual which he has earned as a result of economic activity on his part.

Capital gains made by an individual have also to be excluded from the national income of the country.

Income accruing to an individual from illegal activities.

Methods to avoid Double Counting:- Final product method:- adding up the value of

final products only. i.e., taking total value of the final consumer goods produced in the country during the year and adding total value of durable producer goods. Again to this collective and govt. services are also added then we will arrive at total product of the country.

Value added method:- under this method we do not take the value of the final goods and services produced in the country. But, we go on adding the values created at each stage in the manufacture of a commodity.

The difference between the value of output and input at each stage of production is called value added. By summing such value added for all industries in the economy, GNP can be found out.

Measurement of National Income

Interpretations of the National Income:-It represents the monetary value of aggregate annual

production in the economy.It represents aggregate income of the country.It represents aggregate expenditure of the country.

Methods of measuring National Income:-Census of Production Method.Census of Income Method.Census of Expenditure Method.

i. Census of Production Method:-

It is also referred to as the Inventory Method. The aggregate production of the final goods and

services in an economy in any one year is evaluated in terms of money.

The entire output of final goods and services is multiplied by their respective market prices to find out gross national product or GNP may be arrived at by adding up the values imparted to the intermediate goods and services during the different process of production.

From the GNP estimated gross depreciation on machinery involved in the process of production should be deducted.

Difficulties Production Method:- Large areas of production activities are excluded for

varying reasons.It is difficult to ascertain actual amount of

depreciation.Lack of adequate and reliable data is the major

problem particularly in under-developed countries.

ii. Census of Income Method:- Acc. to this method, the incomes accruing to all

the factors of production during the process of production are aggregated together to arrive at national income of the country.

This is known as National Income at factor cost.

Thus, under this method national product is obtained by adding up the factor-incomes accruing to the concerned factors during the process of production.

iii. Census of Expenditure Method:-

Prof. samuelson calls this method as “flow of product approach”.

In India it is known as Outlay method. GNP is the sum of expenditure incurred on

goods and services during one year in a country.

Under this method we sum up the flow of expenditure in an to arrive at national income estimates.

Factors Determining National Income:-

Quantity and Quality of Factors of Production.

The State of Technical Know-how.

Political Stability.

Difficulties in the calculation of National Income:-

1. Problem of Definition:- One of the greatest difficulties while calculating national income is that what should be included and what excluded with respect to the goods and services produced. As a general rule only those goods and services which are bought and sold i.e. enter into exchange must be only considered.

2. Calculation of Depreciation:- Another problem is the calculation of depreciation. The main reason behind it is that both the amount and the composition of capital change from time to time. There are no standard or concept rules of depreciation that can be applied.

3. Treatment of the Government:- Government expenditures: Defiance and administration expenditure, social welfare expenditure, payment of interest on national debts, miscellaneous development expenditure.The real problem that is faced relates to which of the above should be included in the national income.

4. Income from Foreign Firms:- One of the major problem relates to the fact that weather the income arising from the activities of the foreign firms operating in a country should be included in the countries national income or not .With the growing trend of doing business globally has increased this problem to a great extant.

5. Danger of Double Counting:- Proper care is required for calculating national income so that double counting may not take place. This problem usually arises in those countries where proper documentation or statistics are not available.

6. Value of InventoriesSince it is not easy to calculate the value of raw materials, semi finished and finished goods in the custody of producers there fore it creates problems.

Problems in Developing and Underdeveloped Countries:- Inadequate and unreliable statistics.

Existence of non-monetized sector.

Overwhelming majority of Illiterate and ignorant small producers.

Little occupational Specalisation.