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    National Income

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    National Income

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    National Income – Defining a Country’s Richness

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    To simply understand what National Income is, it can be represented as - National Income defines a country's wealth. This income depicts the value of goods and services which are produced by an economy. This gives effect to the net result of all the economic activities performed in the country.

    Imagine how you would define a country’s wealth without any economic term? In that case, there would be no accountability and responsibility linked with the production in the country. The resources would go uncalculated and there would be a vague economic atmosphere. Thus, let us indulge in this study which talks about National Income.

    Understanding National Income

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    National income is the sum total of the value of all the goods and services manufactured by the residents of the country, in a year., within its domestic boundaries or outside. It is the net amount of income of the citizens by production in a year.

    To be more precise, national income is the accumulated money value of all final goods and services produced in a country during one financial year. Computation of National Income is very vital as it indicates the overall health of our economy for that particular year.

    The aggregate economic performance of a nation is calculated with the help of National income data. The basic purpose of national income is to throw light on aggregate output and income and provide a basis for the government to formulate its policy, programs, to maximize the national welfare of the people. Central Statistical Organization calculates the national income in India.

    Definition of National Income

    The definition of National Income if of two types-

    Traditional Definition of National Income

    Modern Definition

    Traditional Definition of National Income-

    According to Marshall: “The labor and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.”

    Modern Definition 

    This definition has two subparts

    GDP GNP

    Gross Domestic Product

    Gross Domestic Product, abbreviated as GDP, is the aggregate value of goods and services produced in a country. GDP is calculated over regular time intervals, such as a quarter or a year. GDP as an economic indicator is used worldwide to measure the growth of countries economy.

    Goods are valued at their market prices, so:

    All goods measured in the same units (e.g., dollars in the U.S.)

    Things without exact market value are excluded.

    Constituents of GDP

    Wages and salaries Rent Interest

    Undistributed profits

    Mixed-income Direct taxes Dividend Depreciation

    The Formula for Calculation of GDP

    GDP = consumption + investment + government spending + exports - imports.

    Gross National Product

    Gross National Product (GNP) is an estimated value of all goods and services produced by a country’s residents and businesses. GNP does not include the services used to produce manufactured goods because its value is included in the price of the finished product. It also includes net income arising in a country from abroad.

    Components of GNP

    Consumer goods and services

    Gross private domestic income

    Goods produced or services rendered

    Income arising from abroad.

    Formula to Calculate GNP

    GNP = GDP + NR (Net income from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets).

    Importance of  National Income

    Setting Economic Policy

    National Income indicates the status of the economy and can give a clear picture of the country’s economic growth. National Income statistics can help economists in formulating economic policies for economic development.

    Inflation and Deflationary Gaps

    For timely anti-inflationary and deflationary policies, we need aggregate data of national income. If expenditure increases from the total output, it shows inflammatory gaps and vice versa.

    Budget Preparation

    The budget of the country is highly dependent on the net national income and its concepts. The Government formulates the yearly budget with the help of national income statistics in order to avoid any cynical policies.

    Standard of Living

    National income data assists the government in comparing the standard of living amongst countries and people living in the same country at different times.

    Defense and Development

    National income estimates help us to bifurcate the national product between defense and development purposes of the country. From such figures, we can easily know, how much can be set aside for the defense budget.

    Sets of methods for measuring National Income

    There are four methods of measuring national income. The type of method to be used depends on the availability of data in a country and the purpose which is attempted for.

    Income Method

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    Measurement of National Income

    National income is the value of the aggregate output of the different sectors during a certain time period. In other words, it is the flow of goods and services produced in an economy in a particular year. Thus, the measurement of National Income becomes important.

    National Income

    Measurement of National Income

    National income is the value of the aggregate output of the different sectors during a certain time period. In other words, it is the flow of goods and services produced in an economy in a particular year. Thus, the measurement of National Income becomes important.

    Table of content

    1 Measurement of National Income

    1.1 Methods of Measuring National Income

    1.2 Browse more Topics under National Income

    1.3 Difficulties in Measurement of National Income

    1.3.1 A. Conceptual difficulties

    1.3.2 B. Statistical difficulties

    2 Questions on National Income

    Measurement of National Income

    There are three ways of measuring the National Income of a country. They are from the income side, the output side and the expenditure side. Thus, we can classify these perspectives into the following methods of measurement of National Income.

    Methods of Measuring National Income

    Product Method Income Method Expenditure Method

    1. Product Method

    Under this method, we add the values of output produced or services rendered by the different sectors of the economy during the year in order to calculate the National Income.

    In this method, we include only the value added by each firm in the production process in the output figure.

    Hence, we use the value-added method. The value-added output of all the sectors of the economy is the GNP at factor cost.

    However, this method is unscientific as it adds the value of only those goods and services that are sold in the market or are available for sale in the market

    Browse more Topics under National Income

    The concept of National Income

    The concept of Consumption, Saving, and Investment

    Economic Growth

    Economic Fluctuations

    2. Income Method

    Under this method, we add all the incomes from employment and ownership of assets before taxation received from all the production activities in an economy.

    Thus, it is also the Factor Income method. We also need to add the undistributed profits of the private sector and the trading surplus of the public sector corporations.

    However, we need to exclude items not arising from productive activities such as sickness benefits, interest on the national debt, etc.

    3. Expenditure Method

    This method measures the total domestic expenditure of the economy. It consists of two elements, viz. Consumption expenditure and Investment expenditure.

    Consumption expenditure includes consumption expenditure of the household sector on goods and services and consumption outlays of the business sector and public authorities.

    Investment expenditure refers to the expenditure on the making of fixed capital such as Plant and Machinery, buildings, etc.

    Source: freepik.com

    Difficulties in Measurement of National Income

    Following are the difficulties in estimating the National Income

    Conceptual difficulties

    Statistical difficulties

    A. Conceptual difficulties

    It is difficult to calculate the value of some of the items such as services rendered for free and goods that are to be sold but are used for self-consumption.

    Sometimes, it becomes difficult to make a clear distinction between primary, intermediate and final goods.

    What price to choose to determine the monetary value of a National Product is always a difficult question?

    Whether to include the income of the foreign companies in the National Income or not because they emit a major part of their income outside India?

    B. Statistical difficulties

    In case of changes in the price level, we need to use the Index numbers which have their own inherent limitations.

    Statistical figures are not always accurate as they are based on the sample surveys. Also, all the data are not often available.

    All the countries have different methods of estimating National Income. Thus, it is not easily comparable.

    Questions on National Income

    What is the usefulness of estimating the National Income?

    Ans.

    The usefulness of estimating National Income is as follows:

    It depicts the change in the production to output and also the effects of the Government policies on the economy.

    The National Income studies the relation between the input of one industry and the output of the other.

    It shows the income distribution among different economic units.

    It also shows the change in the tastes and preferences of the consumers and thus, helps the producers to decide what to produce and for whom to produce.

    The quantum of the National Income of a country indicates its ability to pay its share for international purposes, such as membership of IMF, World Bank or SAARC.

    स्रोत : www.toppr.com

    Difficulties of Measuring National Income (4 Problems)

    ADVERTISEMENTS: The measurement of national income in any country is beset with many problems. Problems are more acute in LDCs like India than advanced countries. These problems are grouped into two: (i) conceptual or theoretical problem, and (ii) practical or statistical problem. However, as there is no escape route to avoid all the conceptual problems, […]

    Difficulties of Measuring National Income (4 Problems)

    Article Shared by ADVERTISEMENTS:

    The measurement of national income in any country is beset with many problems.

    Problems are more acute in LDCs like India than advanced countries.

    These problems are grouped into two: (i) conceptual or theoretical problem, and (ii) practical or statistical problem. However, as there is no escape route to avoid all the conceptual problems, we set aside these problems and consider only practical problems.

    ADVERTISEMENTS:

    Some of the difficulties in measuring national income are as follows:

    1. Lack of Reliable Data:

    The reliability of data relating to national income estimation is often questioned (in India). National income estimate is made on the basis of primary data relating to incomes and values of goods produced. It is observed that many producers —particularly petty producers and traders— do not maintain any accounts of their incomes and even goods produced. Obviously, the primary data collected from this source is supposed to be vague. The reason behind this is illiteracy. Further, many people are reluctant to cooperate with the data collectors. Above all, data collectors often ‘fabricate’ data even without approaching the door of producing sectors or economic units. If this information is considered to be the basis of judgement, then the judgement will suffer from inaccuracy.

    2. Existence of Non-Monetised Sector:

    The soundness of national income estimates is affected badly if there exists a large non- monetised sector. This creates valuation problem. In an LDC, there exists an unorganised barter economy where money is not used for transaction purposes.

    In each transaction, the problem of valuation of goods transacted crops up. Further, poor farmers of these countries retain large chunks of their output for self-consumption. Naturally, a large amount of output does not come to the market and is not subject to the valuation process. By imputing values to these goods, the problem of valuation can be partially removed. But considering the vastness of a country like India, such imputation is an uphill task. Even if imputation is possible, its reliability is also doubted.

    ADVERTISEMENTS:

    Various non-market and domestic activities like child care by mothers and sisters are not taken into account while estimating national income of a country, for the said reasons. In fact, these activities add to production when we engage the services of a lady ayah who takes care of a child against some monetary payments. But these are not considered in view of the difficulties of estimating such income.

    Further, in national income estimation, looses or social ills do not get reflected. C02 emission from automobile car pollutes the environment resulting in fewer ‘outputs’ for future generations. Such is not adjusted usually, although attempts are often made to measure ‘green GNP’.

    3. Difficulties in the Classification of Working Population:

    In India, working population is not clearly defined. For instance, agriculturists in India are not engaged in agriculture round the year. Obviously, in off­season they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes to a particular occupation.

    4. Illegal Income:

    Finally, illegal incomes are not reported in national income accounts. In other words, illegal forms of economic activity and illegal activities that are not reported to the authority for the purpose of paying taxes are left out from national income accounts.

    ADVERTISEMENTS:

    This is what is called underground or black economy. Gambling and drug trade are illegal forms of economic activities while people in power receive bribes but these people either underreport or do not report the bribed incomes that are illegal. In India, incomes generated in India’s black economy are estimated to be around 40 p.c. of GDP. Such transactions underestimate the true value of national income of any country.

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