What is National Income: Basic Concepts

National Income is total amount of goods and services produced within the nation during the given period say, 1 year. It is the total of factor income i.e. wages, interest, rent, profit, received by factors of production i.e. labour, capital, land and entrepreneurship of a nation.

Concepts of National Income

There are various concepts of National Income, such as GDP, GNP, NNP, NI, PI, DI, and PCI which explain the facts of economic activities.

GDP at market price: It  is money value of all goods and services produced within the domestic domain with the available resources during a year.

GDP = (P*Q)

Where, 

GDP = gross domestic product

P = Price of goods and services

Q= Quantity of goods and services

GDP is made up of 4 Components

• consumption
• investment
• government expenditure
• net foreign exports of a country

GDP = C+I+G+(X-M) 

Where, 

C=Consumption

I=Investment

G=Government expenditure

(X-M) =Export minus import

Gross National Product (GNP): It is market value of final goods and services produced in a year by the residents of the country within the domestic territory as well as abroad. GNP is the value of goods and services that the country's citizens produce regardless of their location.

GNP=GDP+NFIA or,

GNP=C+I+G+(X-M) +NFIA

Where, 

C=Consumption

I=Investment

G=Government expenditure

(X-M) =Export minus import

NFIA= Net factor income from abroad.

Net National Product (NNP) at MP: It is market value of net output of final goods and services produced by an economy during a year and net factor income from abroad. 

NNP=GNP-Depreciation

or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation

Where, 

C=Consumption

I=Investment

G=Government expenditure

(X-M) =Export minus import

NFIA= Net factor income from abroad.

IT= Indirect Taxes

National Income (NI): It is also known as National Income at factor cost which means total income earned by resources for their contribution of land, labour, capital and organisational ability. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income.

Symbolically, 

NI=NNP +Subsidies-Interest Taxes

or, GNP-Depreciation +Subsidies-Indirect Taxes

or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes +Subsidies

Personal Income (PI): Is the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows: 

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits- Social Security Contribution +Transfer Payments.

Disposable Income (DI): It is the income left with the individuals after the payment of direct taxes from personal income. It is the actual income left for disposal or that can be spent for consumption by individuals.

Thus, it can be expressed as: 

DI=PI-Direct Taxes

Per Capita Income (PCI): Is calculated by dividing the national income of the country by the total population of a country.

Thus, PCI=Total National Income/Total National Population

Measurement of National Income

There are three methods to calculate National Income:

• Income Method
• Product/ Value Added Method
• Expenditure Method

INCOME METHOD

In this National Income is measured as flow of income.

We can calculate NI as:

NET NATIONAL INCOME = Compensation of Employees+ Operating surplus mixed (w +R +P +I) + Net income + Net factor income from abroad.

Where,

W = Wages and salaries

R = Rental Income

P = Profit

I = Mixed Income       

PRODUCT/ VALUE ADDED METHOD

In this National Income is measured as flow of goods and services.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES

EXPENDITURE METHOD

In this National Income is measured as flow of expenditure.

We can calculate NI through Expenditure method as:

National Income=National Product=National Expenditure.

Article on National Income

National Income : Definition

National Income Committee defines national income as "the value of commodities and services produced in an economy during a given period, counted without duplication."

Estimates of National Income:

Pre­Independence Estimates of National Income: Since there was no official body in India to prepare National Income estimate before Indian Independence, the same was prepared by some eminent personalities in their personal capacity. Dadabhai Naoroji, fondly called the Grand Old Man of India, was the pioneer in this field. 

He prepared the first estimates of National income in 1876. He estimated the national income by first estimating the value of agricultural production and then adding a certain percentage as non­agricultural production. However, such method can only been called as a non­scientific method. The first person to adopt a scientific procedure in estimating the national income was Dr. VKRV Rao in 1931. He divided the Indian Economy into two parts.

1. Agricultural Sector which included agriculture, forests, fishing and hunting.

2. Corporate Sector which included industries, construction, business, transport and public services.

Two different methods were used for estimating the income in the two sectors. Product method was used for estimating income in agricultural sector and income method was used for estimating income in the corporate sector. Finally, Net Factor Income earned from abroad was added to the sum of the above two to obtain national income.

Estimates of National Income after Independence 

• The Government of India appointed National Income Committee in 1949. 
• The committee was chaired by Prof. P.C. Mahalanobis and had Prof D.R. Gadgil and Dr. V.K.R.V. Rao as members . 
• The first report of the committee was presented in 1951. According to the first report, the National Income of India for 1948­49 was Rs. 8,710 crore and the per capita income was Rs. 225. Since 1955 the national income estimates are being prepared by Central Statistical Organisation. 
• The Central Statistical Organisation has divided Indian economy into three basic sector for the purpose of evaluation of various data. 
• They are Primary sector comprising agriculture, forestry, fishing, mining and quarrying. 
• Secondary sector comprising manufacturing, power generation, gas and water supply and Tertiary sector comprising transport, communication and trade, banking insurance, computer software, public administration, defence and external trade. 
• The CSO uses different methods like the Product Method, Income Method and Expenditure method for various sectors in the process of estimating the National Income. 
• National Income may be calculated on current prices or at constant prices.

National Income does not include data from the following activities

1. Income from illegal activities like smuggling, gambling etc.

2. Income from work done without remuneration like domestic work by housewives.

3. Black Money