Best Notes on National Income and its types

Best Toppers Notes on National Income in Economics, Types of National Income, components of National Income in India for UPSC & others competitive exams – pdf download link

Best Notes on National Income in India

National income is the measurement of flow of services and goods in economic system. The national wealth is the measurement of present assets available on a given time while the National income is the measurement of the production power of economic system in a given time period. The figures of National income are based on the financial year (i.e. from 1st April to 31st March). The base of one year is taken for calculating National income which is called base year, as all the seasons come in a year. The data of estimation of India’s National income are issued by Central Statistical Organisation (CSO).

Concepts Of National Income

The important concepts of national income are:

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) at Market Prices
4. Net National Product (NNP) at Factor Cost or National Income
5. Personal Income
6. Disposable Income

Let us explain these concepts of National Income in detail.

1. Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. Four things must be noted regarding this definition.

First, it measures the market value of the annual output of goods and services currently produced. This implies that GDP is a monetary measure. Secondly, for calculating GDP accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. So, GDP should include the value of only final goods and services and ignores the transactions involving intermediate goods.

Thirdly, GDP includes only currently produced goods and services in a year. Market transactions involving goods produced in the previous periods such as old houses, old cars, factories built earlier are not included in GDP of the current year.

Lastly, GDP refers to the value of goods and services produced within the domestic territory of a country by nationals or non-nationals.

2. Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore,

GNP = GDP + Net factor income from abroad.

Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.

Parameter	GDP	GNP
Stands for	Gross Domestic Product	Gross National Product
Definition	An estimated value of the total worth of a country’s production and services, calculated over the course on one year	GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically
Layman Usage	Total value of products & Services produced within the territorial boundary of a country	Total value of Goods and Services produced by all nationals of a country (whether within or outside the country)
Formula for Calculation	GDP = consumption + investment + (government spending) + (exports − imports)	GNP = GDP + NR (Net income from assets abroad (Net Income Receipts)
Uses	Business, Economic Forecasting	Business, Economic Forecasting

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3. Net National Product (NNP) at Market Price

NNP is the market value of all final goods and services after providing for depreciation. That is when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore’

NNP = GNP – Depreciation

Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.

4. Net National Product (NNP) at Factor Cost (National Income)

NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:

NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.

Factor Cost: Factor cost is the sum total of amount paid to four main factors of production viz; land (rent), labour, capital and entrepreneurship (profit). It is exclusive of taxes or subsidies.

National Income at current prices: If goods and services are valued at current prices i.e. prices prevailing in the market in the particular year, we get the National Income at current prices.

National Income at constant prices: When National Income is calculated at constant prices i.e., prices prevailing in a particular year, called the ‘Base Year’, we get National Income at constant prices. This method offsets the impact of inflationary tendency, in price level on economic growth and reflects the real National Income. In India, the base year for constant prices is presently taken as 2004-05.

Per Capita Income: This is derived by dividing the total National Income of a country by its total population. Therefore, an increase in National Income in real terms does not necessarily mean an increase in the per capita income, as it is inversely proportional to the rate of growth of the population.

5. Personal Income

Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore,

Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.

6. Disposable Income

From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,

Disposable Income = Personal income – personal taxes.; Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving.

Measurement Of National Income

Production generates incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:

1. Output or Production method
2. Income method, and
3. Expenditure method

Let us discuss these methods in detail.

1. Output or Production method

This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the 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, intermediate goods purchases by the producers of this industry are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income.

The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.

2. Income method

This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs 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.

3. Expenditure method

This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government:

(a) Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C.
(b) Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I.
(c) Government’s expenditure on goods and services i.e. government purchases denoted by G.
(d) Expenditure made by foreigners on goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports – imports denoted by (X – M). Thus, GDP = C + I + G + (X – M)

National income formula

The national income formula for India is:

National Income = C + I + G + (X – M)

where:

C = Consumption expenditure by households
I = Investment expenditure by businesses
G = Government expenditure on goods and services
X = Exports of goods and services
M = Imports of goods and services

In India, the national income is usually measured using the following methods:

1. Production Method: This method estimates the value of all goods and services produced in the country during a particular year.
2. Income Method: This method estimates the sum of all incomes earned by individuals and companies in the country during a particular year.
3. Expenditure Method: This method estimates the total expenditure made by individuals, businesses, and the government on goods and services during a particular year.

All three methods should ideally provide the same estimate of the national income of a country.

Important Questions on National Income

Questions 1
In India, National Income is computed by which of the following? [UPPCS (Pre) 1995, 2006]
(A) Planning Commission
(B) Ministry of Finance
(C) Central Statistical Organisation
(D) Reserve Bank of India

Questions 2
Who among the following was the Chairman of the National Committee appointed by the Government of India in 1949? [UPPCS (Mains) 2015]
(A) C.R. Rao
(B) P.C. Mahalanobis
(C) V.K.R.V. Rao
(D) K.N. Raj

Questions 3
The national income of a country for a given period is equal to the [UPSC (Pre) 2013]
(A) Total value of goods and services produced by the nationals
(B) Sum of total consumption and investment expenditure
(C) Sum of personal income of all individual
(D) Money value of final goods and services produced

Questions 4
Which among the following sectors contribute most to GDP of India? [MPPCS (Pre) 2008]
(A) Primary sector
(B) Secondary sector
(C) Tertiary sector
(D) All three contribute equally

Questions 5
Which one of the following is the correct sequence in the decreasing order of contribution of different sectors to the Gross Domestic Product of India? [UPSC (Pre) 2008]
(A) Service, Industry, Agriculture
(B) Service, Agriculture, Industry
(C) Industry, Service, Agriculture
(D) Industry, Agriculture, Service

FAQs on National Income