Different Concepts of National Income:

In the measurement of national income there are various situations which we will have to study
and they are known as concepts of national income. These concepts have their significance in
national income accounting.

Important concepts have been discussed here under:

1. Gross National Income or Product (GNP):
Gross National Product has been defined as the total market value of all final goods and services
produced in a year. It is the money value of all the final goods and services which the labour and
capital of a country working on its natural resources have produced in a year. It includes not only
the part of the production which is brought to the market for sale but also that part of the produce
which is kept for self consumption.

While estimating Gross National Product a care is taken that no commodity is counted more than
once. For this, only the value of the final goods and services produced or value added by each
producer is included in the Gross National Product.

Factors to be taken into consideration while studying Gross National Product:

(i) As GNP is the measure of money, so all kinds of goods and services produced in a country
during one year are measured in terms of money at current prices and then added together.

(ii) In estimating GNP of the economy, the market price of only the final products should be taken
into account. Many of the products pass through a number of stages before they are ultimately
purchased by consumers.

(iii) Goods and services rendered free of charge are not included in the GNP, because it is not
possible to have a correct estimate of their market prices.

(iv) The transactions which do not arise from the produce of current year or which do not contribute
in any way to production are not included in the GNP. The sale and purchase of old goods and of
shares, bonds are assets of existing companies are not included in GNP because they do not make
any addition to the national product and the goods are simply transferred.

(v) The profits earned or losses incurred on account of changes in capital assets as a result of
fluctuations in market prices are not included in the GNP if they are not responsible for current
production or economic activity.

(vi) The income earned through illegal activities is not included in the GNP. Although the goods
sold in the black-market are priced and fulfill the needs of the people, but as they are not useful
from the social point of view, the income received from their sale and purchase is always excluded
from the GNP.

2. Net National Product or (NNP):

Net National Product (NNP) refers to the value of the net output of the economy during the year.
It is obtained by deducting the value of depreciation or replacement allowance of the capital assets
from the GNP.
To put it symbolically:
NNP = GNP – D

where D = depreciation allowances.

This value is measured at current prices, while GNP is expressed at the current market price. Net
National Product, in-fact, is the value of total consumption plus the value of net investment of the
community. It is the sum total of net values added by each producer in the productive process of
an economy during one year period.

3. Gross Domestic Product (GDP):

Gross Domestic Product is the money value of all goods and services produced annually within
the territorial limits of the country.

Gross Domestic Income includes:

(i) Wages and salaries,

(ii) Rents, including imputed house rents,

(iii) Interest,

(iv) Dividends,

(v) Undistributed corporate profits, including surpluses of public undertakings,

(vi) Mixed incomes consisting of profits of unincorporated firms, self-employed persons,

partnership etc., and

(vii) Direct taxes.

In the estimation of Gross Domestic Product, no consideration is given to the fact as to whether
the gross value of produce is with the combined efforts of only the people of the country with the
co-operation of the foreigners. But the product must be produced in the country alone as the net
earnings from abroad are excluded.

Therefore, Domestic Income = National Income – Net Income earned from abroad.

Thus, the difference between domestic income and national income is the net income earned from
abroad. If we add net income from abroad to domestic income, we get national income.

i.e., National Income = Domestic Income + Net Income earned from abroad.

But the net national income earned from abroad may be positive or negative.
4. Per Capita Income:
Per capita income refers to the average income of an individual in a particular year. It denotes the
income received by an individual during a certain year in a country. In order to find per capita
income of a country in a certain year, we divide the national income of that country by the
population of that country in that year e.g.,

Per-Capita Income = National Income of India in 2002/Population of India in 2002

It is clear that a country having high national income and less population will have higher per
capita income. The concept of per capita income helps us in estimating the standard of living of
different nations and it also serves as an index of economic development.

5. Personal Income:
Personal income is the aggregate income received by the individuals of a country from all sources
before payment of direct taxes in one year. It is derived from national income by deducting
undistributed corporate profits, profit taxes and employee’s contributions to social security
schemes.

These three components are excluded from national income because they do reach individuals. It
can never be equal to the national income, because the former includes the transfer payments
whereas they are not included in national income.

Business and Government transfer payments and transfer payments from abroad in the form of
gifts and remittances, wind-full gains and interest on public debts are a source of income for
individuals are added to national income. Thus,

Personal Income = National Income + Transfer Payment + Interest on Public Debt – Undistributed
Corporate Profits – Profit Taxes — Social Security Contribution.

Personal Income differs from Private Income in that it is less than the latter because it excludes
undistributed corporate profits. Thus

Personal Income = Private Income – Undistributed corporate profits – Profit taxes.

6. Disposable Income or Personal Disposable Income:

Disposable income or personal disposable income is the actual income which can be spend on
consumption because it is the income that accrues before direct taxes have actually been paid.
Therefore, in order to obtain the disposable income, direct taxes are deducted from personal
income. Thus,

Disposable Income = Personal Income — Direct Taxes.

But it should be remembered while calculating this income that the whole of the disposable income
is not spend on consumption and a part of it is saved. Therefore, the disposable income is divided
into consumption expenditure and saving. Thus,
Disposable Income = Consumption Expenditure + Savings

The concept of Disposable Income is very useful in computing the real purchasing power of the
country. It also gives us an information regarding the personal consumption pattern. It refers to
that part of the personal income which is actually available to the consumers. It can be obtained
by deducting the amount of personal taxes, fines etc., from personal income. It is at the disposal
of the consumers to save or consume or to use it in any way they like.

Importance of National Income Analysis:

The following are the main uses and importance of the national income analysis:
National income analyses are of great importance for the economy of a country. These days it has
been regarded as the accounts of the economy which are known as social accounts. Social accounts
tell us how the aggregates of a nation’s income, output and product result from the income of
different individuals, products of industries and transactions of international trade. This helps us
to assess the pace of economic development of a country. If they are not in a position to measure
the progress of the country precisely, at least they show us the trends and they give us at-least an
idea as to standard of living of community or the people of the country.

Further, they are helpful in the assessment of the saving and investment potential of the
community. Because the rate of saving and investment is finally dependent on the national income.
We can draw and make inter-country comparisons by taking the national income analysis of two
countries which will help us to know where we stand among the world economies. This helps us
to assess inter-sectoral growth of an economy. This information is useful in planning the
development of the various sectors.

Another importance of national income analysis is that they throw light on inter-class distribution
of national income. One can ascertain and judge the standard of welfare of the various sections of
the community. All modern societies aim at reducing inequalities of incomes and this is not
possible without the help of national income analysis.

This analysis helps us to know about the distribution of income in the country. From the analysis
pertaining to wages, rent, interest and profits we learn of the disparities in the incomes of different
sections of society.

Further, the regional distribution of income is revealed. It is only on the basis of these that the
government can adopt measures to remove the inequalities in income distribution and to restore
‘regional equilibrium’.

In this connection Samuelson has said:

“By means of statistics of national income we can chart the movements of a country from
depression to prosperity, its steady long-term rate of economic growth and development and
finally, its material standard of living in comparison with other nations.”