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National Income

National income is the total income of individuals and the government in a country, measured annually and excluding illegal earnings. It can be calculated using three methods: production, income, and expenditure, each focusing on different aspects of economic activity. Challenges in measuring national income include inadequate data, lack of trained personnel, and the presence of an underground economy.

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2 views4 pages

National Income

National income is the total income of individuals and the government in a country, measured annually and excluding illegal earnings. It can be calculated using three methods: production, income, and expenditure, each focusing on different aspects of economic activity. Challenges in measuring national income include inadequate data, lack of trained personnel, and the presence of an underground economy.

Uploaded by

shah.gohar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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National Income and its Measurement

• National income is the total sum of incomes of all individuals plus income of the
government in a country.

Some important steps to be remembered.

National income is measured for one year.

Only the money or market value of output is to be calculated not the physical quantity.

National income does not include the income earned from illegal activities such as
smuggling, kidnapping, theft etc.

MEASUREMENT OF NATIONAL INCOME

There are three methods which are used to measure National Income:

1. PRODUCTION METHOD

The national income is calculated by adding up the net values of all production that has taken
place in different sectors of economy during a year.

In this method the economy is divided into various sectors such as….

 Agriculture

 industry

 Infrastructure

 Banking

 Health

 Education

 Transport and communication etc.


The net market or money value of all these sectors is added and the result is coming as national
income.

Example…..

 Production sectors Net value (billions)

 Agriculture 340

 Industry 210

 Trade 290

 Transport & communication 200

 Health & education 250

 Banking 160

NATIONAL INCOME 1450

INCOME METHOD

In this method the income of all individuals in a country is calculated which they earn in
return of services they provide for four factors of production such as Land, Labor ,
Capital and Entrepreneurship. Thus national income is the sum total of Rent, Wages,
Interest and profit which are received by people from four factors of production.

FOPs = land + Labor + capital + Entrepreneur

And

N.I = Rent + Wage + Interest+ Profit

Example:
Source of income Amount (billions)

Wages and salaries 400

Rent 300

Interest 320

Profit 450

National income 1470

EXPENDITURE METHOD

National income can also be measured by adding the total expenditure made by the people and
government on consumption of goods and services and investment in a country during a year.

Example:

Expenditure Amount (billions)

Private consumption exp 400

Private domestic investment 200

Government consumption 350

Government investment 300

Export minus import 150

National Income 1400

Difficulties in measuring NI

Inadequate statistical data:

In under-developed countries since scientific methods of collecting data are not used, so
accurate information is not obtained and NI is under estimated.

Lack of trained staff:


Most under developed countries do not have trained staff for data collection which leads to the
problem of estimating exact NI.

Illiteracy :

Due to illiteracy, most of the producers do not maintain proper records of production, cost and
income which lead to under estimated NI.

Many sources of income:

Some people get their incomes from many other sources it is very difficult to compute their
income from different sources and in this way the exact figure of NI is mislead.

No-cooperation of the people:

In most of under-developed countries, people do not cooperate with data collecting staff.

Non-marketed goods and services:

In estimating the national income, only those goods and services are included for which the
payment is made the unpaid or non-marketed goods and services are excluded such as production
for self consumption, help or volunteer etc

Under-ground economy:

In under-developed countries, about 30% of the economy is under-ground the officially


declared incomes are less than the actual incomes.

Significance of NI

It seeks to measure the level of production in the country in one year.

We can know whether the economy is growing, stagnant or declining by comparing it


with the previous years.

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