NATIONAL INCOME

NATIONAL INCOME

“National income is the aggregate money value of all final goods and services produced in an economy in an accounting year”

The growth rate of an economy is measured primarily by the rate at which the real national income is growing.

GROSS NATIONAL PRODUCT (GNP)

The GNP is defined as the value of all goods and services produced during a specific period,usually one year,plus incomes earned abroad by the nationals.

GNP = GDP + Net Factor Income From Abroad

NET FACTOR INCOME FROM ABROAD

It is the difference between factor incomes such as wages, rent,interest and profits received from abroad by the normal residents of India for rendering services in another country minus(-) such factor incomes earned by nonresidents for rendering services in the domestic territory during a given period.

GROSS DOMESTIC PRODUCT (GDP)

The GDP is defined as the market value of all final goods and services produced in the domestic economy during a period of one year,plus income earned locally by the foreigners minus income earned abroad by the nationals.

GDP= GNP – Net Factor Income From Abroad

NET NATIONAL PRODUCT (NNP)

NNP is the money value of all currently produced final goods and services by the nationally owned resources,obtained by excluding depreciation from the value of GNP

NNP = GNP - Depreciation

MEASUREMENT OF NATIONAL INCOME

National Income aggregates can be measured in 3 different ways:

Production or Value added method Income Method Expenditure Method

PRODUCTION METHOD According to this approach , National Income aggregates

are measured as the sum of values added from various production sectors in a given period. It involves the following steps.

a)Classifying the production units into 3 sectors 1.Primary sector: The primary sector produces goods and

services by the direct exploitation of natural resources. It includes agriculture,fishing,forestry,logging,quarring,etc

2.Secondary sector:it consist of all activities that transforms one commodity into another through an industrial process. This sector includes manufacturing, construction works, electricity generation,gas and water supply, etc

3.Tertiary sector : it consists of all activities producing non-tangible products called services. This sector incluudes transport & communication, trade, banking, insurance,,etc

PRODUCTION METHOD (CONTD..)

b) Estimating the value of Net domestic product at factor cost :for this purpose,the net value added at factor cost in each producing unit is calculated first, then the total value of these in each sector is calculated. Finally, net domestic product at factor cfost is obtained by adding up the net value added at factor costs in the 3 producing sectors .

c) Estimating Net factor income from abroad:it is the difference between factor income earned by normal residents from abroad and factor income earned by non resident from the domestic territory.

d) Estimating national income NI = Net domestic product at factor cost + Net

factor income from abroad

INCOME METHOD

Under this method, national income is obtained by summing up the incomes of all individuals of the country. This method involves:

a) Classifying the producing units as 1. Primary Sector 2. Secondary Sector & 3. Tertiary Sector

INCOME METHOD (CONTD..) b) Classifying factor income :

Compensation to employees: wages, salaries Operating surplus: rent , intrest, profit Mixed income of the self employed: factor incomes earned by people

for rendering factor services

c) Estimating the value of Domestic Factor Income: Factor income paid out by each production unit is measured. Factor income generated by each sector is calculated The value of domestic factor income is estimated as, Factor income generated in the primary sector + Factor income

generated in the secondary sector + Factor income generated in the tertiary sector

d) Estimating the net factor income from abroad

e) Estimating national income NI = DFI + NFI from abroad

EXPENDITURE METHOD Under this method, national income is measured as the sum of all

final expenditure. The sum of final expenditure given us the value of GDP at market

prices. GDPm = C + I + G + (X-M)This method involves the following steps:

a)Estimating the values of the components of final expenditure

C = Consumption Expenditure:It refers to the expenditure on the purchase of goods and services by households and nonprofit institutions during a given period.This includes the purchase of durable goods, non durable goods and services.

I = Investment expenditure:it refers to the expenditure on the purchase of capital goods during a given period.

G = Gov.t purchases of goods and services X-M = Net exports The sum of these values gives the GDPm.

EXPENDITURE METHOD (CONTD..)

b) Adding the net factor income from abroad to the value of GDPm

GDPm + Net factor income from abroad = GNPm

c)Deducting the values of depreciation and Net indirect taxes from the value of GNPm

GNPm –(Depreciation + Net indirect taxes) = NNPf

NNPf = National Income