National Income

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National Income : 

National Income The sum total of the values of all goods and services produced in a year It is the money value of the flow of goods and services available in an economy in a year 1

National Income : 

National Income National Income Committee of India 1951 defines National Income as follows: “ A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication.” 2

National Income : 

National Income It refers to the money value of the flow of goods and services available annually in an economy. Marshall’s Definition: “The labour and capital resources of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds…. This is the true net annual income or revenue of the country or the national dividend.” 3

National Income : 

National Income National Income refers to- The income of a country to a specified period of time, say a year includes all types of goods and services which have an exchange value counting each one of them only once 4

National Income : 

National Income Double counting If steel has been evaluated in industrial production, it should not be included while calculating the value of steel products, viz, machines and motor cars. To avoid double counting or multiple counting, two methods are used Final products method Value added method 5

National Income : 

National Income Final Products method: Adding the value of final products only Value added method: Go on adding the values created at each stage in the manufacture of a commodity Then all such values created are added up together to arrive at the national income of the country 6

National Income concepts : 

National Income concepts The following are the concepts of national income Gross National Product – GNP Net National Product – NNP Personal Income – PI Per capita Income – PCI 7

National Income concepts : 

National Income concepts Gross National Product National Income is the sum total of values of all goods and services produced during a year The money value of this total output is known as Gross National Product – GNP 8

National Income concepts : 

National Income concepts Gross National Product Example: If A,B,C,D,… are goods and services and If a,b,c,d,…are their prices respectively The GNP is calculated as follows GNP= Axa+Bxb+Cxc+Dxd…. 9

National Income Concepts : 

National Income Concepts GNP is most frequently used national income concept It is statistically a simpler concept as it takes no account of depreciation and replacement problems 10

National Income concepts : 

National Income concepts Net National Product - NNP: This refers to the net production of goods and services in a country during a year NNP is also called National Income at Market Prices We get NNP, by deducting the depreciation from GNP Therefore NNP = GNP - Depreciation 11

National Income concepts : 

National Income concepts Personal Income - PI: Income earned by all the individuals and institutions during a year in a country The entire national income does not reach individuals and institutions A part of it goes by way of corporate taxes Undistributed profits Social security contributions 12

National Income concepts : 

National Income concepts Personal Income – PI People sometimes get incomes without any productive activity They are called Transfer Payments Example: Unemployment benefits, old age pensions etc. Such transfer payments are not included in the National Income However they are added to Personal Income 13

National Income concepts : 

National Income concepts Personal Income – PI: PI is computed by using the following formula PI = National Income –(Corporate taxes, undistributed profits, social security contributions) + Transfer Payments 14

National Income concepts : 

National Income concepts Per Capita Income – PCI: If the national income is divided by the total population, we get per capital income PCI = NI/Population 15

National Income concepts : 

National Income concepts Per capita income PCI may be expressed either in money terms or in real terms 16

NI – Methods of computation : 

NI – Methods of computation Three methods to measure the national income They are- Production method or Census method Income method Expenditure method 17

Production method : 

Production method In this method The total products produced in the economy are calculated for the year and the value is added without double counting The economy is classified into sectors like Agricultural, industrial, fisheries, forest, direct services and foreign transactions etc In each sector, we can find the value of final goods and services 18

Production method : 

Production method In the international transactions, net foreign income is calculated by subtracting the total imports from the total exports and added to the national income The results of these sectors, when combined, gives the national income or national product The census or product method can be expressed through the formula 19

Production method : 

Production method O = C + I Where O stands for output, C stands for consumption of goods I stands for investment goods 20

Income Method : 

Income Method According to this method Net incomes of individuals and business houses during a year are added to know the national income Only those incomes earned and received for producing goods and for rendering services are to be counted Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production 21

Income Method : 

Income Method People get incomes in the form of Rents, wages or salaries, interest and profit The formula is Y = C + S Here Y stands for Total Income C stands for consumption and S stands for Savings 22

Expenditure method : 

Expenditure method One man’s income is another man’s expenditure Therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year Expenditure or outlay on final products takes place in three ways 23

Expenditure method : 

Expenditure method Expenditure or outlay on final products takes place in three ways Expenditure by consumers on goods and services Expenditure by entrepreneurs on capital or investment goods Expenditure by government on consumption and capital goods 24

Expenditure method : 

Expenditure method The formula for this method is Y = C + I Here Y stands for total expenditure C stands for consumption expenditure I stands for investment expenditure 25

Difficulties in the computation of National Income : 

Difficulties in the computation of National Income The following are the practical difficulties in the measurement of national income The statistics are not fully available Non-monetized sector is dominant Most people take out their livelihood from more than one activity In backward economies like India, particularly in the rural sector 26

Difficulties in the computation of National Income : 

Difficulties in the computation of National Income In backward economies like India, particularly in the rural sector, the cultivators and small producers are illiterate and they do not keep books of account. This is a serious difficulty in the calculation of national income Avoidance of double counting becomes complicated The village money lenders maintain absolute secrecy of their transactions 27

Importance of national income : 

Importance of national income It indicates the prosperity of a nation. Growth in national income indicates economic prosperity It indicates the standard of living of people of a country It indicates the per capita income with which we can compare the levels of development of all the countries Countries can be classified as ‘developed’ and ‘developing’ and ‘under developed’ based on their per capita income only 28

Importance of national income : 

Importance of national income NI estimates are very helpful to the Finance Minister. It guides him to make proper and right decisions in regard to taxation and budgets It is useful to compare the prosperity of a country at different times It provides an instrument of economic planning It indicates the trends of inflation and deflation. Proper corrective action can be taken against them 29

Importance of national income : 

Importance of national income It helps to know the progress of various sectors in the economy. Imbalanced growth, if any, can be solved It helps in forecasting the economic future and preplanning is possible It indicates the economic status of a country among the nations of the world 30

Trends of national income of India : 

Trends of national income of India During the plan periods, national income and per capita income are increasing steadily But the rise in the per capita income is rather slow due to population growth Agricultural sector is the most important sector as it is the single largest contributor to the national income In the recent years, the share of the government sector in national income is steadily increasing indicating the increased efficiency of the public sector 31