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Business Environment Chapter 08 National Income 1

This document discusses key concepts related to national income, including: 1. National income is defined as the aggregate factor income arising from current production of goods and services by a nation's economy. It refers to the income earned by normal residents within a national territory. 2. There are three main measures of national income: the sum of all cash and kind incomes to factors of production; the sum of net outputs across production sectors; and the sum of consumer, government, and net capital expenditures. 3. National income estimation in India uses both net product and income methods across various sectors to determine GDP and per capita income figures.

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77 views17 pages

Business Environment Chapter 08 National Income 1

This document discusses key concepts related to national income, including: 1. National income is defined as the aggregate factor income arising from current production of goods and services by a nation's economy. It refers to the income earned by normal residents within a national territory. 2. There are three main measures of national income: the sum of all cash and kind incomes to factors of production; the sum of net outputs across production sectors; and the sum of consumer, government, and net capital expenditures. 3. National income estimation in India uses both net product and income methods across various sectors to determine GDP and per capita income figures.

Uploaded by

rjvmafia
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 08

National Income

Business Environment Chapter 08 National Income 1


MEANING AND DEFINITION OF NATIONAL INCOME

Keynes’ concept of “national income” is somewhere between gross national


product (GNP) and net national product (NNP) (as discussed below). From
GNP he subtracts only the “user cost”, that is, reduction in the value of
capital equipment actually used and not full depreciation.

According to present ideas, national income may be defined as the


aggregate factor income (i.e., earning of labour and property), which arises
from the current production of goods and services (G&S) by the nation’s
economy.

The nation’s economy refers to the factors of production (i.e., labour and
property) supplied by the normal residents of the national territory.

Business Environment Chapter 08 National Income 2


Thus, there are three measures of national income
of a country which are as follows:
1. As the sum of all incomes, in cash and kind,
accruing to factors of production in a given time
period, that is, the total of income fl ows;
2. As the sum of net outputs arising in several
sectors of the nation’s production; and

3. As the sum of consumers’ expenditure,


government expenditure on G&S, and net
expenditure on capital goods.

Business Environment Chapter 08 National Income 3


CONCEPTS OF NATIONAL INCOME

It measures the market value of the annual output. In other words, GNP is a
monetary measure. Th ere is no other way of adding up the diff erent sorts of
G&S produced in a year,except with their money prices. But in order to know
accurately the changes in physical output, the fi gure for GNP is adjusted for
price changes by comparing to a base year as we do when we prepare index
numbers.

For calculating GNP accurately, all G&S produced in any given year must be
counted once, but not more than once. Most of the goods go through a series
of production stages before reaching a market. As a result, parts or
components of many goods are bought and sold many times. Hence, to
avoid counting several times the parts of goods that are sold and resold,
GNP only includes the market value of fi nal goods and ignores transactions
involving intermediate goods.

Business Environment Chapter 08 National Income 4


Net National Product (NNP)

NNP, means the market value of all final G&S


after providing for depreciation.

Net National Product (NNP) or National Income at


Market Prices =

Gross National Product − Depreciation

Business Environment Chapter 08 National Income 5


National Income or National Income at
Factor Cost (NI)

National income at factor cost means the sum of all


incomes earned by resource suppliers for their
contribution of labour, capital, and entrepreneurial
ability, which go into the year’s net production.

National Income or National Income at Factor Cost =


Net National Product (NNP) (National Income at
Market prices) − Indirect Taxes + Subsidies.

Business Environment Chapter 08 National Income 6


Personal Income (PI)

“Personal Income” (PI) is the sum of all incomes


actually received by all individuals or households
during a given year. National income, that is income
received, must be diff erent for the simple reason
that some income which is earned through social
security contributions, corporate income taxes, and
undistributed corporate profi ts is not actually
received by households and, conversely, some
income which is received through transfer payments
is not currently earned. (Transfer payments are old-
age pensions, unemployment doles, relief
payments, interest payment on the public
debt, etc.)
Business Environment Chapter 08 National Income 7
METHODOLOGY OF NATIONAL INCOME ESTIMATION IN INDIA

Net-product Method

While estimating the gross domestic product (GDP) of the country, the contribution to
GDP from various sectors, like agriculture, livestock, fi shery, forestry and logging, and
mining and quarrying is estimated with the adoption of product method. In this
method, it is important to estimate the gross value of product, bi-products, and
ancillary activities and, then, steps are taken to deduct the value of inputs, raw
materials, and services from such gross value as follows:

1. In respect of other sub-sectors like animal husbandry, fishery, forestry, mining, and
factory establishments, the gross value of their output is obtained by multiplying the
estimated output with their market price. From such gross value of output, deductions
are made, for the cost of materials used and depreciation charges are levied, so as to
obtain net value added in each sector.

2. In respect of secondary activities, the computation of GDP is done by the production


approach only for the manufacturing industrials units (both registered and unregistered).
3. In respect of constructions activity, the estimates of the value of pucca construction are
made by the commodity-fl ow approach and that of the Kachcha construction are made by
the expenditure method.

Business Environment Chapter 08 National Income 8


Net - income Method

In India, the income from rest of the sectors, that is, small
enterprises, commerce, transport and
communications, banking and insurance, professions,
liberal arts, domestic activities, house
property, public authorities, and the rest of the world is
estimated by the income method. Here,
the income approach is adopted to estimate the value
added from these aforesaid remaining sectors.
Here, the process involves the measurement of aggregate
factor incomes in the shape of compensation
of employees (wages and salaries) and operating surpluses
in the form of rent, interest,
profi ts,
Business and dividends.
Environment Chapter 08 National Income 9
Per Capita Income and Consumption

Growth is of interest, not for its own sake, but for the
improvement in public welfare that it brings
about. Economic growth, and, in particular, the growth in
per capita income, is a broad quantitative
indicator of the progress made in improving the public
welfare. Per capita consumption
is another quantitative indicator that is useful for judging
welfare improvement. It is, therefore,
appropriate to start looking at the changes in real (i.e., at
constant prices) per capita income and
consumption.

Business Environment Chapter 08 National Income 10


SAVINGS AND INVESTMENTS
• A notable feature of the recent GDP growth has been a
sharply rising trend in gross domestic investment (GDI)
and saving, with the former rising by 13.1 per cent of
GDP and the latter by 11.3 per cent of GDP over a
period of five years till 2006–07.

• The average investment ratio for the Tenth Five-Year


Plan at 31.4 per cent was higher than that for the Ninth
Five-Year Plan, while the average saving rate was also
31.4 per cent of GDP higher than the average ratio of
23.6 per cent during the Ninth Five-Year Plan.

Business Environment Chapter 08 National Income 11


TRENDS IN NATIONAL INCOME GROWTH AND
STRUCTURE

• Sectoral Investment and ICOR

• Consumption Basket

• Inclusive Growth
• Inflation

Business Environment Chapter 08 National Income 12


CAUSES FOR THE SLOW GROWTH OF NATIONAL
INCOME IN INDIA

The following are some of the important causes of


slow growth of national income in India:

• High Growth Rate of Population


• Excessive Dependence on Agriculture
• Occupational Structure
• Low Level of Technology and its Poor Adoption
• Poor Industrial Development
• Poor Development of Infrastructural Facilities
• Poor Rate of Savings and Investment
• Socio-political Conditions

Business Environment Chapter 08 National Income 13


SUGGESTIONS TO RAISE THE LEVEL AND
GROWTH RATE OF NATIONAL INCOME IN INDIA

• Development of Agricultural Sector


• Development of Industrial Sector
• Raising the Rate of Savings and Investment
• Development of Infrastructure
• Utilisation of Natural Resources
• Removal of Inequality
• Containing the Growth of Population
• Balanced Growth
• Higher Growth of Foreign Trade
• Economic Liberalisation

Business Environment Chapter 08 National Income 14


MAJOR FEATURES OF NATIONAL
INCOME IN INDIA
• Excessive Dependence on Agriculture
• Poor Growth Rate of GDP and Per Capita
Income
• Unequal Distribution and Poor Standard of
Living
• Growing Contribution of Tertiary Sector
• Unequal Growth of Different Sectors
• Regional Disparity
• Urban and Rural Disparity
• Public and Private Sector

Business Environment Chapter 08 National Income 15


DIFFICULTIES OR LIMITATIONS IN THE
ESTIMATION OF NATIONAL INCOME IN INDIA

• Non-monetised Output and its Transactions

• Non-availability of Information About Petty Income

• Lack of Differentiation in Economic Functions

• Unreported Illegal Income

• Lack of Reliable Statistical Data

Business Environment Chapter 08 National Income 16


Business Environment Chapter 08 National Income 17

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