Meaning of National Income
We may define national income as the aggregate of money value of the annual flow of final goods and services in the economy during a given period. The well-known writer, Paul Studenski, writes: "National income is both a flow of goods and services and a flow of money incomes. It is therefore called national product as often as national income". The flow of national income begins when production units combine capital and labour and turn out goods and services. We call this Gross National Product GNP. It is the value of all final goods and services produced by domestically owned factors of production within a given period.
At the same time, the production units which produce goods and services, distribute money incomes to all who help in production in the form of wages, rent, interest and profit - we call this as Gross National Income (GNI).
GNI comprises the total value produced within a country, together with its income received from other countries less similar payments made to other countries. It may be noted from above that:
National Income is an Aggregative Value Concept: It makes use of the value determined by the measuring rod of money as the common denominator for the purpose of aggregating the diverse output resulting from different types of economic activities.
National Income is a Flow Concept: It represents a given amount of aggregate production per unit of time, conventionally represented by one year. Thus, national income usually relates to a particular year and indicates the output during that year. National income represents the aggregate value of final products rather than the total value of all kinds of products produced in the economy. The insistence on final goods and services is simply to make sure that we do not double count.
National Aggregates
National income can be viewed as an aggregate of various component flows. Generally these component flows represent the intersectoral transactions which describe the broad structure of the economic system. Accordingly, there exist several measures of aggregate incomes varying in their scope and coverage. To begin with let us consider the most comprehensive and broad-based measure of aggregate income widely known as Gross National Product at market prices or GNPMP . It shows the market value of the aggregate final product before the deduction of provisions for the consumption of fixed capital, attributable to the factors of production supplied by the normal residents of a country. Two important words are "gross" and "national". Similarly the phrase "at market prices" is also significant because it specifies the criterion of valuation. The main alternatives to these three specifications are 'net', 'domestic' and at 'factor cost'.
Gross and Net Concepts Gross emphasises that no allowance for capital consumption has been made or that depreciation has yet to be deducted. Net indicates that provision for capital consumption has already been made or that depreciation has already been deducted.
GNP at market price/factor cost = NNP at market price/factor + depreciation
National and Domestic Concepts
The concept of national versus domestic arises because of the fact that the economy is not closed in the sense that it has transactions with the rest of the world in the form of exports and imports, gifts, loans, factor income flows, etc. National income or product is that income or product which accrues to the economic agents who are resident of the country. Most of the national income is derived from economic activity within the country. But some income arises due to the activities of the residents outside the country. Similarly, some of the product or income arising in the country may be due to the activities of the non-residents. The difference between these two flows is referred to as net factor income from abroad. The measure of production arising out of the activities of economic agents within the country is termed as domestic product even if a part of that income accrues to non-residents. When adjustments are made to this product by deducting the income of non-residents within the country and adding the income of residents abroad, the national product is obtained.
GNP at market price/factor cost = GDP at market price/factor cost + Net factor income from abroad
NNP at market price/factor cost = NDP at market price/factor cost + Net factor income from abroad
Net factor income from abroad = Factor income received from abroad - Factor income paid abroad
Market Prices and Factor Costs
The valuation of the national product at market prices indicates the total amount actually paid by the final buyers while the valuation of national product at factor cost is a measure of the total amount earned by the factors of production for their contribution to the final output.
GNPMP = GNP at factor costs + indirect taxes-Subsidies. *(Note: GNP at factor costs can also be written as GNPFC)
NNPMP = NNPFC+ indirect taxes-Subsidies.
Gross Domestic Product (GDP)
For some purposes we need to find the total income generated from production within the territorial boundaries of an economy, irrespective of whether it belongs to the residents of that nation or not. Such an income is known as Gross Domestic Product (GDP) and found as:
GDP = GNP – Net factor income from abroad
GNP as a Sum of Expenditures on Final Products Expenditure on final products in an economy can be classified into the following categories:
Personal Consumption Expenditure (C): The sum of expenditure on both the durable and non-durable goods as well as services for consumption purposes.
Gross Private Investment (Ig) is the total expenditure incurred for the replacement of capital goods and for additional investment.
Government Expenditure (G) is the sum of expenditure on consumption and capital goods by the government, and Net Exports (Exports - Imports) (X - M) constitute the difference between the expenditure or rest of the world on output of the national economy and the expenditure of the national economy on output of the rest of the world.
GNP is the aggregate of the above mentioned four categories of consumption expenditure.
That is,
GNP = C + Ig + G + (X - M)
GNP as the Total of Factor Incomes
When national income is calculated after excluding indirect taxes like excise duty, sales tax, etc. and including subsidies we get GNP at factor cost as this is the amount received by all the factors of production (indirect taxes being the amount claimed by the government and subsidies becoming a part of factor income).
GNPFC = GNPMP – Indirect taxes + Subsidies
Net National Product (NNP)
The NNP is an alternative and closely related measure of the national income. It differs from GNP in only one respect. GNP is the sum of final products. It includes consumption goods plus gross investment plus government expenditures on goods and services plus net exports. Here Gross Investment (GI) is the increase in investment plus fixed assets like buildings and equipment and thus exceed Net Investment (NI) by depreciation.
GNP = NNP + Depreciation
*NNP includes net private investment while GNP includes gross private domestic investment
We know that during the process of production, assets get consumed or depreciated. So, during a year the net contribution to output is the production of goods and services minus the depreciation during the year. This is known as NNP at market prices because it is the net money value of final goods and services produced at current prices during the year after depreciation.
NNP = GNP - Depreciation
= C + Ig + G + (X - M) – Depreciation
= C + G + (X - M) + (Ig – Depreciation)
= C + G + (X - M) + In (where In = net investment)
= C + G + In + (X - M)
NNPFC (or National Income)
Goods and services are produced with the help of factors of production. National income or NNP at factor cost is the sum of all the income payments received by these factors of production.
National Income = GNP – Depreciation – Indirect taxes + Subsidies
*Since factors receive subsidies, they are added while indirect taxes are subtracted as these do not form part of the factor income.
NNPFC = NNPMP - Indirect taxes + Subsidies
Personal Income
National income is the total income accruing to the factors of production for their contribution to current production but it does not represent the total income that individuals actually receive.
Two types of factors account for the difference between national income and personal income. On the one hand, a part of the total income which accrues to the factors of production is not actually paid out to the individuals who own the factors of production. The obvious instances are corporate taxes and undistributed or retained profits.
On the other hand, the total income that individuals actually receive generally includes some part that comes to be regarded as payment for the factor services rendered in the current year, for example, gifts, pensions, relief payments and other welfare payments. Such payments are known as "transfer payments" because they do not represent the payments made for any direct contribution to current production. Thus, personal income is calculated by subtracting from national income those types of incomes which are earned but not received and adding those types which are received but not currently earned.
Personal Income = NNPFC- Undistributed profits - Corporate taxes + transfer payments
Disposable Income
Disposable income is the total income that actually remains with individuals to dispose off as they wish. It differs from personal income by the amount of direct taxes paid by individuals.
Disposable Income = Personal Income - Personal taxes
DI = PI - T So,
PI = DI + T
Usually, people divide their disposable income between consumption spending and personal saving. We therefore have the following identities,
PI = DI + T
DI = C + S,
It follows
PI = C + S + T
Value Added
The concept of value added is a useful device to find out the exact amount that is added at each stage of production to the value of the final product. Value added can be defined as the difference between the value of output produced by that firm and the total expenditure incurred by it on Notes the materials and intermediate products purchased from other business firms. Thus, value added is obtained by deducting the value of material inputs or intermediate products from the corresponding value of output.
Value added = Total sales + Closing stock of finished and semi-finished goods - Total expenditure on raw materials and intermediate products - Opening stock of finished and semi-finished goods.