National Income

By

Dr. Samadhan P. BorseAssistant Professor,Department of Economics,C. T. Bora College, Shirur (Pune).

Contents I. Introduction

II. Definitions

III. Features

IV. Methods-

i. Product

ii. Income

iii. Expenditure

V. Difficulties

I. Introduction:

The concept of national income occupies an important placein macro economic analysis. The economic performance of aeconomy evaluated with the help of national income data. Onthe basis of national income data government formulatesvarious polices for solving different economics problems andmaximize the welfare of the people.

In common parlance, national income means the total valueof final goods and services produced annually in a country. Inother words, the total amount of income accruing to acountry from economic activities in a financial year is knownas national income. It is distributed among the factors ofproduction in the forms of rent, wages, interest and profits.

National income refers to the total or aggregate money valueof all final goods and services produced in a country during ayear.

II. Definitions of National Income:

According to Marshall, “The labour and capital of countryacting on its natural resources produce annually a certain netaggregate of commodities, material and immaterial includingservices of all kinds. This is the true net annual income orrevenue of the country or national dividend.”

According to Pigou, “National income is that part of objectiveincome of the community, including of course income derivedfrom abroad which can be measured in money”.

According to Fisher, “The National dividend or incomeconsists solely of services as received by ultimate consumers,whether from their material or from the humanenvironments”.

III. Features of National Income:

Macro Concept: National income is a macro concept as it deals withthe performance of the entire economy.

Flow Concept: It is a flow concept as it considers only the flow ofgoods and services actually produce in the economy during thecurrent year.

Time Period: National income is calculated during a specific timeperiod. In India it calculates from 1st April to 31st March of ever year.

Money Value: It is always express in monetary term. The value ofproduced goods and services express in terms on money.

Double Counting: There is possibility of double counting whilecalculating the national income. It should be avoided so only thevalue of final goods and services is calculated.

Transfer Payments: While calculating national income, the transferpayments or income in the form of old age pension, unemploymentallowances, scholarships, gifts etc. is not included.

IV. Methods of Measuring National Income:

There are three alternative methods or approaches tomeasure national income. These are as follows:

(i) Product Method (ii) Income Method, and (iii) Expenditure Method.

National Income

Product Method

Income Method

Expenditure Method

i) Product Method:

This method is also known as the Value Added Method. In thismethod, national income is measured as a flow of goods and services.We calculate money value of all final goods and services produced bydifferent sectors in the economy during a year. Whatever the goodsand services are produced by primary, secondary and service sectorstheir money value is added together for calculating the nationalincome.

While measuring national income by this method there is possibilityof double counting it means the value of single good calculates twice.Therefore, the value of only final goods and services should be takeninto account. Final goods here refer to those goods which are directlyconsumed and not used in further production process. Goods whichare further used in production process are called intermediate goods.In the value of final goods, value of such intermediate goods isalready included so we do not count the value of intermediate goodsin national income otherwise there will be possibility of doublecounting.

National Income= Primary+ Secondary+ Service Sector

ii) Income Method:This method is also known as Factor Income Method.Under this method, national income is measured byadding up the incomes of the factors of production used inthe production process. It means income received by allthe factors of production in the process of productionduring a year.

There are generally four factors of production such as land,labour, capital, and entrepreneur. Every factor ofproduction gets rewards or income in the process ofproduction in the forms of rent, wages, interest and profit.Thus, national income is treated as the sum of factorspayments or income.

National Income= Rent+ Wages + Interest+ Profits

iii) Expenditure Method:Expenditure method is also known as Total Outlay Method. Thismethod measures national income as sum total of finalexpenditures made by consumers, business firms, governmentsand foreigners during a year. Expenditure is undertaken by all thesectors of an economy by households, firms, governments and theforeign sector. Thus, under expenditure method, national incomeis measured at the point of actual expenditure. In other words,this method adds up consumer expenditure, investmentexpenditure, government expenditure and net exports. However,the expenditure method excludes expenditure on second-handgoods and purchase of shares and bonds. The expenditure methodtakes the following elements into consideration:

Consumers expenditure on goods and services (C) Investment expenditure by business firms (I) Government expenditure on goods and services (G) Net exports (exports-imports) (NX)

National Income = C + I + G + N-X

V. Difficulties of Measuring National Income:

Conceptual Difficulty: National income is wider and broad concept.So it is difficult to say precisely that what should be included andwhat should not be included in it.

Reliable Dada: While calculating national income reliable facts andfigures of personal income are not available. Due to people do notdisclose their real incomes.

Income Earned by Illegal Activities: National income data do notperform income earned by illegal activities such as smuggling, blackmarketing, thefts, corruptions etc. The value or incomes of suchactivities are not available.

Lack of Reliable Statistical Data: The most important difficultyfacing the national income estimation in India is that lack ofavailability of reliable statistical information. Due to the nationalincome estimates in India is still subjected to high degree of error.

Public Goods: The difficulties arise in case of public goodssuch as roads, hospitals, schools, defence etc., which do havemarket prices.

Self-Supplied Goods and Services: People produce same goodsand services for themselves. For example, many farmers producefood grains or agriculture product for self-consumption and manyteachers teach their own children. In such cases, it is not possible toarrive at a market measurement of the value of the output or service.

Services of Housewives: The various services provided byhousewives are not included in the national income because they arenot paid for their work.

Unorganised Sector: There are large numbers of small producers inthe developing countries. They operates their business but are not inposition to keep any information of production and other things thatleads to create difficulties while measuring national income.

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