NOTES 2 : National Income

What is National Income?

    It is the total value a country's final output of all new goods and services produced in one year. 

More simple definitions: 

(1) The total amount of money earned within a country.

(2) It is the sum of income earned by its residents from the factor services rendered to the production units both within and outside the geographical boundaries of the country. €

National Income: It refers to the residents whose economic interests lie within the country in which they live. € 

Factor Income: It is the income derived from factors of production such as Land, Labour, Capital and Entrepreneurship.

Measures of National Income:

National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time.

There are 3 methods to measure National Income,

The national income of a country can be measured by 3 alternative methods: 

(i) Product method

(ii) Income Method, and

(iii) Expenditure Method.

 

• These are the set of statistical principles and methods used to measure overall economic activities of the nation. 
• These also provide information about the trend of economic activities. 
• While accounting National Income (NI), only the income earned by the residents is taken into account, irrespective of their economic territory. 
• It may be within or outside the economic territory, i.e. we must see whether the income is generated by residents or non-residents.

Significance of National Income

• It helps in comparing estimates, forecasting growth, and policy formulation for the future. 
• It helps in comparing economies around the world. It
• It is helpful in effective decision making on investments, thereby helping business houses to plan for productions.

Concept of Factor Cost, Basic Price and Market Price Factor Cost 

• Factor cost refers to the cost of factors of production such as land, labour, capital and entrepreneurship which is incurred by a firm when producing goods and services. 
• It is the cost of all the factors of production used in producing goods and services. It does not include the taxes that are paid to the government since taxes are not directly involved in the production process and therefore are not a part of the direct production cost. 
• Subsidies received are included in the factor cost as subsidies are given on inputs used in production.

                               Factor Cost = Cost of Production + Subsidies

Basic Price 

• It is the price received by the producer, excluding the product taxes and including the product subsidies. 
• It also excludes any transport charges invoiced separately by the producer.

           Basic Price = Price received by the Producer - Product Taxes + Product Subsidies
Market Price 

• It is the price set after all the levels of value additions, and at which goods and services are sold or offered in the marketplace.
• In a free market economy, the market price is often referred to as retail price and it may fluctuate based on demand and supply.

• Market Price (MP) = Cost of Production + Indirect Taxes - Subsidies

Gross Value Added (GVA) 

• It is a measure of total output and income in the economy. 
• It provides rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of goods and services. 
• It gives a sector-specific picture of growth in an area such as industry, agriculture, manufacturing etc. 
• Classification Good or Service as Intermediate Consumption € It is purchased or acquired from another production unit. € It is acquired for resale, which amounts to being used up entirely in the course of production during the accounting period.

                           GVA = Value of Gross Output - Value of Intermediate Consumption

• In the revision of National Accounts statistics done by Central Statistical Organization (CSO), it was decided that while computing GDP, sector-wise estimates of Gross Value Added (GVA) will now be given at basic prices instead of factor cost. 
• GVA at basic prices will include production taxes and exclude production subsidies available on the commodity.

                 GVA (at Basic Price) = GVA (at Factor Cost) + Production Taxes - Production Subsidies

• GVA at factor cost includes no taxes and excludes no subsidies. 
• While calculating GDP at market prices, it includes both production and product taxes, and excludes both production and product subsidies.

Gross Domestic Product (GDP) 

• It is the market value of all final goods and services produced within the territory of the country during a financial year. 
• However, it can also be computed quarterly or half-yearly. 
• It is estimated by the Central Statistical Office (CSO). 
• The Ministry of Finance uses the GDP numbers (at current prices) to peg the financial targets [as per the Fiscal Responsibility and Budget Management Act (FRBM), 2003].

• It is the monetary value of all final goods and services produced in a country in a year.

GDP = C + I + G + NX
Where
C = Consumption
I = Investment
G = Government Expenditure
NX = Net Export

• GDPMP = GNPMP – (X – M)
• GDPFC = GNPFC – (X – M)

Where X is the export and M is import of a country.

Methods of Calculating GDP Production Method 

• It is also known as the Value Added or the Output Method. 
• In this method, the value of the final product of the primary, secondary and tertiary sector is included, and the transfer payments viz., scholarships, pensions etc. are excluded. Production by unwarranted or illegal activities is also excluded. 
• The total Market Price of the final produce should be equal to the Gross Value Added. Therefore, the GDP can be calculated using the Product or Value Added Method

GDP using Value Added Method GDP (at Factor Cost) = GVA (at Basic Price) 

GDP (at Market price) = GVA (at Basic Price) + Product Taxes - Product Subsidies

Nominal GDP

      It is the market value of all final goods and services produced within the country.

Real GDP

• It is a measurement of the value of the output economy adjusted for price changes.

GNP (GROSS NATIONAL PRODUCT)

          It is the market value of all products and services produced in one year of a country.

GNP = GDP + X – M.

NNP (NET NATIONAL PRODUCT)

• It is the value of GNP after deducting depreciation of plant and machinery.

• NNP = GNP – Depreciation
• National Income (NI) = NNP – Indirect Taxes + Subsidies
• Per-Capita Income (PCI)
• It is the average income (per person) of a country.
• Per−Capita Income=National Income
• Personal Income (PI)
• It is the income of the residents (individuals) of a country. To calculate personal income, transfer payments to individuals are added to national income, while social security contributions, corporate tax and undistributed profits are subtracted.
• Personal = National Income +Income Transfer payments –(Social security contributions+Undistributed profits of Corporate)

Difference between GDP and GNP

In GDP, Goods and Services produced in a country are added, whether it is produced by residents of the country or foreigners.

In GNP, the production of foreigners in the country is not included, while the production of nationals outside the country is included.