Wednesday, August 26, 2009

What is National Income?

The term National Income has been defined by various economists According to Collin Clark “The National Income for any period consists of the money value of the goods and services becoming available for consumption during that period, reckoned at their current selling value, plus additions to capital reckoned at the prices actually paid for the new capital goods unless depreciation and obsolescence of existing capital goods and adding the net accretion of or deducting the net drawings upon stock, also reckoned at the current prices.”

In the words of Pigon “National Income is that part of the objective income of the community including of course income derived from absorbed which can be measured in money.”

We can say that National Income is the sum total of all the commodities and services produced by the residents of a country during a given period of time, conventionally one year. This national income is estimated by

(i) Product or output method (ii) Income method (iii) Expenditure method.

These methods are discussed in detail as under:

(i) The product or Output Method: This method approaches national income from the output side. According to this method, the economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. Then the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given year.

In order to arrive at the net value of production of a given industry, the purchases of the producers of this industry form producers of other industries or sectors are deducted from the gross value of production of that industry. The aggregate or net values of production of _____ the industries and sectors of economy plus the net income from abroad will give us Gross National Product. By subtracting the total amount of depreciation from the figure of gross national product we get the net national product or national income. This method of estimating national income enables us to trace the origin of national income aggregate to the different sectors of the economy. Therefore this is called national income by industrial origin.

(ii) Income Method: This method approaches national income from the distribution side. In other words this method measures the national income after it has been distributed and appears as income earned or received by individuals of the country. Thus according to this method national income is obtained by summing up of the incomes all individuals in the country. Individuals earn income by contributing their own services and the services of their property such as land and capital to the national production. Therefore national income is calculated by adding up rent of land, wages and salaries of the employees, interest on capital, profits of entrepreneurs (including undistributed profits of joint stock companies) and income of self employed people.

This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers etc. Therefore this method is called national income by distributive shares.

(iii) Expenditure Method: This method approaches national income by adding up all expenditures made on good and services during a year. Income can be spent either on consumer goods or investment goods. Thus we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals as well as government of a country during a year. Hence the gross national product is found by adding up

(a) What privale individuals spend on consumer goods and services? This is called personal consumption expenditure.

(b) What privale business spends on replacement, renewals and new investment? This is called gross domestic private investment.

(c) What the foreign countries spend on the goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports minus imports.

(d) What the government spends on the purchase of goods and services i.e. government purchases we have explained above three alternative methods of estimating national income. The best way to arrive at national income will be to employ all these three methods so as to permit their cross checking ensuring greater accuracy and throwing light on details.

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