The national
income is the market value of all the final goods and services produced in a
country during a year. Sum of earning of all factors of production for their services
from productive activities during a year is known national income. National
income is always indicates in term of money because that is the only common
unit in which we can add up all the diverse goods and services which go to make
up the real income. National income is defined by different economist in
different ways.
By Marshall: People of any country produce a
specific quantity of goods and services from the natural resources by the help
of capital goods with in a specific period is called national income of that
country.
By Ackley: Individual income is the amount of
his earning from the productive services currently rendered by him or by his
property. National income is nothing more than the sum of all individual
income.
By Simon’s: The net aggregate of output produced
by the economy flowing from productive system to ultimate consumer.
Explanation: According to these definitions
individual income depends upon two things.
1) Productive services of the
individual.
2) Productive services of the property.
The
individuals of any country contribute land, labor, capital and organizational
from services in the production process and get individual income in the form
of rent, interest, wages and profit. The sum of all these individual income is
called national income.
Conclusion: From the above definition we
concluded that national income is;
1) The total monetary value of final
goods and services.
2) The sum of all individual incomes
(rent, wages, interest, etc.).
3) The sum of all the expenditure by
government and people at home (consumption, capital expenditure, revenue
expenditure, etc.) during a year.
Various Concept Of National Income: There are five concept of national
income;
1)
Gross National Product (GNP).
2)
Net National Product (NNP).
3)
National Income At Factor Cost (NIFC).
4)
Personal Income (PI).
5)
Disposable Personal Income (DPI).
Gross National Product (GNP): Gross national product is the most
important concept of national income. This is the sum of money value at of all
final goods and services produced by the economy during a year.
By Campbell: Gross national product is defined as
the total market value of all the final goods and services produced in a year.
In the above definition of Campbell two points are very important for measuring
the GNP. The value of various goods and services should be measured in term of
money. Always take final goods and services rather than intermediate goods and
services mean for calculating GNP all goods and services produced in any given
year must be counted once but not more than once.
Calculation Of GNP By Expenditure
Method: Economist
generally use expenditure method to calculate GNP of a country. In this
approach following aspects or components are included to measure GNP.
·
Personal Consumption Expenditure (G).
·
Gross Private Domestic Investment (IG).
·
Government Expenditures (G).
·
Net Export And Net Foreign Investment
(X-M).
From the
above expenditures it is clarify that GNP = C+IG+G+ (X-M)
In the
following each component will be briefly discussed.
·
Personal Consumption Expenditure (C): In this component all the annual
personal consumption expenditure of people which they make on consumer goods
like wheat, rice, clothes etc. are calculated.
·
Personal Private Domestic Investment
(IG): Personal
private domestic investment refers to all investment of private individuals
which they make in a private sector to increase the capital stock of a country
by existing of new factories and business enterprise. For the replacement of
old machinery with new one all the replacement cost and such type of other
capital expenditures in a private sector in a year are calculated as gross
domestic private investment.
·
Government Expenditures (G): Like private individuals government
also makes expenditures as final goods and services. For example, these
expenditures are made on office building and furniture, defense, police,
education, health and also on pensions and scholarships etc. the expenditures
are called government expenditures and are included in GNP.
·
Net Export And Net Foreign Investment
(X-M): Net export
means the difference between the value of export and import in a year. Foreign
exchange earned on export surplus becomes a part of GNP because it shows net
claim on the final goods and services produced in foreign countries. Net
foreign investment is the difference between the aggregate investment made by
our people abroad and investment made by foreigners in our country. If the
foreign investment in our country is greater than our investment abroad, net
foreign investment will be negative. Net foreign investment (negative/positive)
will become the part of GNP.
NET NATIONAL PRODUCT (NNP): Net national product at market price
is the net money market value of all the final goods and services produced in a
country during a year. NNP is found up by subtracting the amount of
depreciation of the existing capital in a year from the market value of all the
final goods and services.
Adjustment: NNP
= GNP – Depreciation
NNP = C+ (I
– Depreciation) + G+ (X-M)
Explanation: The above adjustment shows that we
subtract depreciation from GNP to get NNP. Because in the production process of
a country capital goods like machinery and other goods depreciate in value as a
result of its consumption or used. This decrease in the capital goods is known
as depreciation expense. And this amount of depreciation differentiate GNP from
NNP.
NATIONAL INCOME AT FACTOR COST: National income at factor cost means
the sum of all incomes earned by resources supplier for their contribution of
land, labor, capital and organizational ability in a particular year. In the
other words we can say that national income at factor cost is the aggregate
earning of the four factors of production which arise from the current production.
Adjustment: NI = NNP – Indirect taxes +
subsidies
Explanation: In the above equation we deduct
indirect taxes and add subsidies with NNP to get NI at factor cost. It is
therefore that we know that NI at factor cost is the income which a country
received from the four factors of production therefore it is deducted. Because
indirect taxes make different the market price from the factors income. And secondly
we add subsidies in the NNP because it is that part of NI which is earned by
the factors but not received. So, in short we can say that government taxes are
not the part of NI and subsidies are included in NI.
Personal Income (PI): Personal income can be defined as,
the sum of all incomes actually receive by all individuals or household during
a given year.
Adjustment: PI = NI – Undistributed profit –
corporate taxes – social security – contribution + transfer payments
Explanation: As we know that personal income is
that part of NI which is distributed among the people. And in the above
equation undistributed profit is deducted from NI to get PI because all NI can
not be divided among the people. There are also other things which are earned
by individuals but not received by the individuals therefore these are deducted
from NI to get PI like corporate taxes, social security and contribution.
Transfer payments must be added with NI because it is not earned but received
by the household.
PERSONAL DISPOSABLE INCOME (PDI): Disposable income is the amount
which is left with the individual after paying personal taxes to the
government. In other word, we can say that PDI is that income to which
individual can save or spend.
Adjustment: PDI = PI – Personal taxes
Explanation: Personal taxes will be paid by the
individual from PI therefore it is deducted from the PDI to get PDI.