NATIONAL INCOME

NATIONAL INCOME

National income is defined as the value of all final goods and services produced by the normal residents of a country,

whether operating within the domestic territory of the country or outside, in a

year.

Needs for the study of National Income :

1. To measure the size of the economy and level of country’s economic performance

2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries

3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them

4. To make projection about the future development trend of the economy

Needs…

5. To help Govt. to formulate suitable development plans and policies to increase growth rates.

6. To fix various development targets for different sectors of economy on the basis of there performance.

7. To help business firms in forecasting future demand for there products

8. To make international comparison of people’s living standards.

NATIONAL INCOME AGGREGATES

• National Income at Current Price

Current Prices refer to the prices prevailing in the market during the year

for which estimates are made.

• National Income at Constant Price

Constant Prices refer to the prices prevailing in the market in the base year. National income is measured at both the levels in order to enable a comparison

PER CAPITA INCOME

This refers to an individual's share of the national income. It is calculated to understand the economic growth and development of a country.

• India has one of the largest economies in the world in terms of its gross domestic product (GDP).

• However, India has such a large population that we have has an extremely low per capita GDP.

• This figure is determined by dividing a nation's GDP by its population.

• As a result of its low per capita GDP, India is considered a developing country

MARKET PRICE V/S FACTOR COST

A commodity when goes to the market, indirect taxes are imposed on it. This is the market price. When we deduct the net indirect taxes we get factor cost.

DOMESTIC V/S NATIONAL

• A concept which includes the contribution of the domestic sector alone and not of the foreign sector is the domestic concept

• When we add the contribution of the foreign sector we get national concept.

CIRCULAR FLOW OF INCOME

Supply of Factors of Production

(Land, Labour, Capital & Organization)

Payment for Commodities

Supply of Commodities

Payment for Factor Services

(Rent, Wages, Interest and Profit)

(Goods & Services)

(Commodity Price)

Firms / ProducersHouseholds / Consumers

Public Business

mon

ey fl

ow

real

flow

Circular Flow of Income

INCOME

EXPENDITUREPRODUCTION

MEASUREMENT OF NATIONAL INCOME

Production methodIn this method• The total products produced in the economy are

calculated for the year and the value is added without double counting

• The economy is classified into sectors like Agricultural, industrial, fisheries, forest, direct

services and foreign transactions etc• In each sector, we can find the value of final

goods and services 12

Production Method• In the international transactions, net

foreign income is calculated by subtracting the total imports from the total exports and added to the national income

• The results of these sectors, when combined, gives the national income or national product

• The census or product method can be expressed through the formula

13

Production Method

• O = C + I

• Where O stands for output,• C stands for consumption of goods• I stands for investment goods

14

Income Method• According to this method Net incomes of individuals and business houses during

a year are added to know the national income

• Only those incomes earned and received for producing goods and for rendering services are to be counted

• Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production 15

Income Method• People get incomes in the form of • Rents, wages or salaries, interest and profit• The formula is

• Y = C + S

• Here Y stands for Total Income• C stands for consumption and S stands for Savings

16

Expenditure Method• One man’s income is another man’s expenditure

• Therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year

• Expenditure or outlay on final products takes place in three ways

17

Expenditure Method• Expenditure or outlay on final products takes

place in three ways• Expenditure by consumers on goods and

services• Expenditure by entrepreneurs on capital or

investment goods• Expenditure by government on consumption

and capital goods

18

Expenditure Method

• The formula for this method is

• Y = C + I

• Here Y stands for total expenditure• C stands for consumption expenditure• I stands for investment expenditure

19

COMPARISON OF THE THREE METHODS

The Product method is very suitable for primary sector such as agriculture industries etc.

The income method is suitable for service sectors.

The Expenditure method is only for the calculation of identical relationship between three methods. It is because we may not get the details of all the expenditure correctly.

Black Money : It has created a parallel economy - unreported economy which is

equivalent to the size of officially estimated size of the economy

Non-Monetization : In most of the rural economy, considerable portion of transactions

occurs informally

Growing Service Sector : growing faster than Agricultural and Industrial sectors… value

addition in legal consultancy, health service ,financial and business services is not

based on accurate reporting.

Problems In Calculating National Income

Problems…

House Hold Services : It ignores domestic work and house keeping services

Social Services : It ignores volunteer and unpaid social services. (Mother Teresa’s social

service)

Environment Cost : It does not distinguish between environmental-friendly and

environmental-hazardous industries … cost of polluting industries is not included in the

estimate.

FACTORS AFFECTING NATIONAL INCOME

Factors of Production

Technology

Government

Political Stability

DIFFICULTIES IN MEASUREMENT OF NATIONAL INCOME

Practical

• Lack of occupational specialization• Non-monetized sector• Unreported illegal income• Non-availability of reliable

statistical data

Conceptual

• Inclusion of Services• Indentifying intermediate goods• Identifying factor incomes• Valuation of inventory changes• Income of foreign companies

Trends In National IncomeGrowth of National Income in India

(in percentage)

7.4%

9%9.2%8.4%

6.2%

8.3%

4.3%

Trends Of National Income Of India

• During the plan periods, national income and per capita income are increasing steadily

• But the rise in the per capita income is rather slow due to population growth

• Agricultural sector is the most important sector as it is the single largest contributor to the national income

• In the recent years, the share of the government sector in national income is steadily increasing indicating the

increased efficiency of the public sector

26

Sectoral Composition on National Income

2010f

IS NATIONAL INCOME THE REFLECTION OF HUMAN DEVELOPMENT?

1.) Doesn't measure per capita to determine the most accurate standard of living

2.) Doesn't measure how the goods are distributed to the population

3.) Doesn't include unpaid household work

4.) Doesn't include the barter system, which is still used by many undeveloped countries

5.) Doesn't measure the quality of items produced

6.) GDP counts remedial and defensive expenditures (such as the costs of security, police, pollution clean up, etc.) as positive contributions to commerce.

IMPORTANCE OF NATIONAL INCOME

Measures inflationary or deflationary pressure

Contribution of various sectors

Distribution of national income in an economy

Shapes the Budgetary policy of the Government

Planning of an Economy