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National Income

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Manish Dhar
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8 views11 pages

National Income

Uploaded by

Manish Dhar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Concept and Measurements

of National Income
Final Goods vs Intermediate Goods

Final goods are those goods which are purchased for final use and not for resale or further
processing .
Intermediate goods are those goods which can be used for further processing or resale.
The sale of intermediate goods is excluded from the gross national product (GNP) , Why?
Because the inclusion of intermediate goods would involve double counting and will therefore
give an exaggerated estimate of gross national product.
An example can clarify this matter. Suppose in an economy there are two products are produced .
Raw cotton worth Rs. 1000 and Cotton cloth worth Rs. 2000.If we add the prices of both cotton
cloth and raw cotton there must have double counting error . Actually , the value of cloth includes
also the value of cotton .
GDP and GNP

Gross Domestic Product refers to the total value of all final goods and services produced within
the domestic territory of the country.

Gross national product (GNP) is the total value of all final goods and services produced by normal
residents as well as non residents in the domestic territory of a country and also includes net
factor income earned from abroad .

GNP = GDP + NFA, where NFA = Net Factor income from abroad .
NDP and NNP

NDP = GDP - D

NNP = GNP - D

Where D = depreciation

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

National Income = NNP - Net indirect taxes.


Personal Income

Personal Income is the sum of all incomes actually received by all individuals or households during
a given year . So from national income we must deduct some social security contributions
corporate income taxes etc to obtain personal income.

Personal Disposable Income = Personal Income - Taxes .


Measurements of National Income: Value added Method

This is also called output method or production method. In this method , the economy is divided
into different industrial sectors such as agriculture, fishing , mining, construction , manufacturing
etc. This method mainly focuses on the value added or the value addition at every stage of
production . The value addition refers the difference between the price of the product at a
particular stage and the value of the factors used to produce up to that stage.
Value added = Value of output - Value of raw materials at each stage.
Suppose , in an economy the value of wheat produced in one year is Rs. 1400. When wheat is
transformed into flour . , the value of flour becomes 4300. When the flour transformed into bread.
The value of bread is Rs. 8700.
Measurements of National Income: Value added Method

Now, The bread converted to sandwiches of worth rs. 12500. So total value added will be 12500.

Value added in case of wheat = 1400

Value added in case of flour = 4300-1400 = 2900

Value added in case of bread = 8700- 4300 = 4400

Value added for sandwich = 12500-8700 = 3800

Total value added = 12500


Measurements of National Income:Income Method

Income Method: This method approaches national income from the distribution side.

Under this method national income is obtained by summing up of the incomes of all individuals of
the country.

National income is obtained by adding up the rent of land , wages and salary of the employees ,
interest on capital, profitsof entrepreneurs .

Like the value added method , the first step in income method is also to identify the productive
enterprises and sectors like agriculture, fishing, forestry, manufacturing, banking etc.

Next we have to classify the factor payments like compensation to employees , rent , interest,
profits etc.
Measurements of National Income:Income Method

Mixed income of self - employed: In India this category can be identified as a factor income which
is termed as mixed income of self- employed. In India a good number of people are engaged in
household industries, in family firms and other unorganised enterprises.
Wages and salaries to the employees can be paid in cash as well as in kind .
Cash payments like overtime work , Travelling allowance, bonuses , Dearness allowance , Vacation
allowance , leave allowance etc.
Wages and salaries in kind can be Housing accommodation provided free of cost, Free meals ,
Free services of transport , children education etc.
Measurements of National Income:Income Method

We have to keep in our mind while we are using this income method some precautions must be
taken Like

1. Transfer payments will not be included in estimating national income through this method .
2. Illegal money such as hawala money , money earned through smuggling will not be included
as income in this method .
Measurements of National Income: Expenditure Method

Expenditure Method: Expenditure method arrives at national income by adding up all


expenditures made on goods and services during a year . Income can be spent either on consumer
goods or capital goods . In expenditure method, the spending of the factors on final goods and
services is added to get the national income .

1. Expenditure on consumer goods and services by individuals and households . This is called
Final private consumption expenditure and is denoted by C .
2. Government’s expenditure on goods and services known as Government’s expenditure , G.
3. Expenditure on capital goods that is domestic capital formation and is denoted by I .
4. And net export , i.e, X - M .

Next we have to add all these expenditures to obtain the national income .

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