Tuesday, August 25, 2009
National Income and its Concepts
Professor Marshall defines National Income as “Sum of all the physical goods produced and services provided by utilizing the natural resources of the country with the help of labour and capital. In addition to this net income from abroad is also included. Accordingly National Income is the summation of all the goods produced and services provided and the net income from abroad.” Apparently Marshallian definition seems to be very simple and comprehensive, but it has some practical shortcomings (1) statistically it is difficult to estimate accurately about the produced goods and services. (2) There may be the possibility of double and multiple counting (3) certain portion of produced goods is kept for personal consumption. Because of such shortcomings Pigou defined National Income as “Only those goods and services will be included in National Income which are sold against money” but Pigou’s definition is not acceptable for those countries where there is limited use of money and many a goods are traded under barter system, Professor J. M Keynes has used three methods or approaches to define National Income.
1. The sum of all expenditures which are made on consumption and investment goods is known as National Income. This method is known as Expenditure method.
2. The sum of incomes of all the factors of production engaged in production process is also known as National Income. This method is known as National Income at Factor Prices Method.
3. If we subs tract the cost production from total output produced in the economy we will get National Income.
According to present ideas National Income may be defined as the aggregate factor income which arises from the current production of goods and services by the nation’s economy.
CONCEPTS OF NATIONAL INCOME:
There are five concepts of National Income which are discussed below.
1. Gross National Product (GNP): Gross National Product (GNP) is defined as the total market value of all final goods and services produced in a year. It is a measure of the current output of economic activity in the economy.
Two things must be noted in regard to Gross National Product.
(i) It measures the market value of the annual output. In other words GNP is a momentary measure. There is no other way of adding up the different sorts of goods and services produced in a year except with their money prices. But in order to know accurately the changes in physical output, the figure for Gross National Product (GNP) is adjusted for price changes by comparing to a base year as we do when we prepare index numbers.
(ii) For calculating Gross National Product (GNP) accurately, all goods and services produced in any given year must be counted once, but not more than once. Most of the goods go through a services of production stages before reaching, market. As a result, parts or components of many goods are bought and sold many times. Hence to avoid counting several times the parts of goods that are sold and resold, gross national product only includes the market value of final goods and ignores transactions involving intermediate goods.
2. Net National Product (NNP): The second important concept of National Income is that of Net National Product (NNP). In the production of gross national product of a year, we consume or use up some capital i.e. equipment, machinery etc. The capital goods, like machinery, wear out or depreciate in value as a result of its consumption or use in the production process. This consumption of fixed capital or fall in value of capital duets wear and tear is called depreciation. When charges for depreciation are deducted from gross national product, we get net national product. It means the market value of all final goods and services after providing for depreciation. There fore it is called “national income at market prices.” Thus
Net National Product = Gross National Product – Depreciation
3. National Income at Factor cost or National Income: National Income at Factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labour, capital and entreprenial ability which go into the year’s net production or in other words society in terms of economic resources to produce net output. It is rarely the national income at factor cost for which we sue the term National Income.
The Net National Product (NNP) is summation of market values of all the goods produced and services provided in a country in a year. But NNP does not show what actually has been earned by countryman during a year. In NNP the business taxes are also included. Such taxes do not represent the incomes of the people. Accordingly to know National Income (N.I) we will have to subtract the indirect taxes and add subsidies in NNP. It is shown as
NI = NNP – IT + S
Here IT shows indirect taxes while S is for subsidies.
4. Personal Income (P.I): Personal Income is the sum of all incomes actually received by all individuals or households during a given year. National Income, that is income received, must be different for the simple reason that some income which earned as social security, contributions, corporate income taxes and undistributed corporate profits is not actually received by households and conversely some income which is received as transfer payments is not currently earned. Accordingly if we include transfer payments and subtract undistributed profits etc. from National Income we get Personal Income (P.I). It is as
PI = NI + R + PT – UP
Here PT is taxes on profits, R is transfer payment, and UP is undistributed profits.
5. Disposable Personal Income (D.P.I): After a good part of personal income is paid to government in the form of personal taxes like income tax, personal property tax etc. What remains of personal income is called disposable income.
If personal taxes are subtracted from personal income we get Disposable Personal Income (DPI). It is as
DPI = PI – TP = C + S
Here TP is personal taxes.
6. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value at current prices of all final goods and services produced within a year by factors of production located within country.
If we subtract the income earned through foreign services we get GDP. It is as
GDP = GNP – FIHere FI is Foreign Income. Tags: Macro Economics
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