Concept and definition of national income
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This document defines and compares different methods of calculating national income and GDP. It discusses calculating GDP at market prices versus factor cost, and how GDP is the sum of final goods and services produced domestically but excludes earnings of citizens working abroad. It also defines related terms like GNP, NNP, real versus nominal national income, per capita income, personal disposable income, and compares the product, income, and expenditure methods of calculating national income.
Concept and definition of national income
- 1. It refers to money value of the flow of goods and services available annually in an economy Three different ways of defining national Income value of output of the period which is available for direct utilisation by individual consumers Sum of the incomes earned during the period from supplying of factor units for the use of production equal to the total consumption and savings of all persons and institutions during a given period
- 2. GDP is the sum of money value of all final goods and services produced within the domestic territories of a country during an accounting year. It includes income from exports and payment made on imports during the year. It does not include the earnings of nationals working abroad and also earnings of foreign nationals working in our country
- 3. GDP measures final output and not intermediate products GDP at Market price – GDP + indirect tax – Subsidies GDP at factor cost – GDP at Market price – Indirect Tax + Subsidies
- 4. It is the aggregate final output of citizens and business of an economy in a year. GNP = GDP + NFIA NET DOMESTIC PRODUCT Net refers to exclusion of that part of output which represents depreciation, wear and tear and replacement during the year of accounting
- 5. Net Domestic Product = GDP – Depreciation Net National Product = GDP – Depreciation + NFIA or NNP = GNP - Depreciation
- 6. National income is obtained by multiplying the output of goods and services by their price. There are two Two practices that is either current or constant price is used. Current price are prices prevailing in the year in which national income is calculated National Income calculated at prevailing price is called nominal National Income
- 7. National income measured on the basis of some fixed price, say price prevailing at a particular point of time, or taking a base year, it is known as national income at constant price or Real National income
- 8. Per Capita Income It is the income per head of a country for a year. Personal disposable income PERSONAL INCOME – PERSONAL TAX
- 9. PRODUCT METHOD Economy is divided on the basis of industries The physical units of output are then interpreted in money terms that is by taking market price of all products The total values thus obtained are added up The indirect taxes are subtracted and subsidies are added. This gives GDP The Net value is calculated by subtracting depreciation
- 10. National income at factor cost means national income calculated by income method According to income method, it is the net income received by all citizens of a country in a particular year that is added up ie total of net rents, net wages, net interest and net profits. It is GDP at factor cost
- 11. Now if the money sent by the citizens of the nation from abroad is added and deduct the payments made to foreign nationals Economy classified on the basis of income group Income of each group is calculated Income from all groups , including income from abroad and undistributed profits
- 12. According to expenditure method According to expenditure method, the total expenditure incurred by the society in a particular year is added together to get the national income. Consumption – Payments of households to goods and services Investment Expenditure – Capital spending includes purchase of new materials and equipments by the firm Residential Construction includes new housing units and renovation of existing structures Inventory investment ( unsold portion of ouput) Government Expenditure Net exports
- 13. Economic Planning Comparing the situations of economic growth in two different countries Determining the regional disparities Measure of economic growth