National Income

NATIONAL INCOME :

NATIONAL INCOME 1

National Income:

National Income The sum total of the values of all goods and services produced in a year & it also includes net earned foreign income. It is the money value of the flow of goods and services available in an economy in a year. National income is a flow not a stock. 2

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.” 3

National Income concepts:

National Income concepts The following are the concepts of national income Gross Domestic product - GDP Gross National Product – GNP Net National Product – NNP Personal Income – PI Disposable Personal Income - DPI Per capita Income – PCI 4

Gross Domestic Product:

Gross Domestic Product Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. 5

The Measurement of GDP:

The Measurement of GDP Output is valued at market prices . It records only the value of final goods , not intermediate goods (the value is counted only once). It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). 6

The Measurement of GDP:

The Measurement of GDP It includes goods and services currently produced , not transactions involving goods produced in the past. It measures the value of production within the geographic confines of a country. It measures the value of production that takes place within a specific interval of time , usually a year or a quarter (three months). 7

What Is Counted in GDP?:

What Is Counted in GDP? GDP includes all items produced in the economy and sold legally in markets 8

What Is Not Counted in GDP?:

What Is Not Counted in GDP? GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs. 9

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 10

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 11

Gross National Product:

Gross National Product Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. 12

Gross National Product:

Gross National Product In equation form GNP=GDP+X-M X=Income earned & received by nationals with in the boundary of foreign countries. M=Income received by foreign nationals from with in the country. If X=M ; then GNP=GDP Similarly, in a closed economy X=M=O, then also GNP=GDP 13

Net National Product (NNP):

Net National Product (NNP) Net National Product (NNP) is the total income of the nation’s residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economy’s stock of equipment and structures . Therefore NNP=GNP-Depreciation NNP = GNP - Depreciation 14

National Income:

National Income National Income is the total income earned by a nation’s residents in the production of goods and services. It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidies. NI = NNP- Indirect Tax + Subsidy 15

Personal Income:

Personal Income 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 16

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 17

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 18

Disposable Personal Income:

Disposable Personal Income Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain nontax payments . Disposable personal income = Personal Income - Direct Taxes

Per Capita Income:

Per Capita Income If the national income is divided by the total population, we get per capital income PCI = NI / Population 20

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 21

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 22

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 23

Production method:

Production method O = C + I Where O stands for output, C stands for consumption of goods I stands for investment goods 24

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 25

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 26

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 27

Expenditure method:

Expenditure method Expenditure by consumers on goods and services Expenditure by entrepreneurs on capital or investment goods Expenditure by government on consumption and capital goods 28

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 29

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 30

Difficulties in the computation of National Income:

Difficulties in the computation of National Income In Devloping 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 31

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 32

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. 33

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 34

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 35

PREPARED BY:

PREPARED BY RAJEEV NAIN(09) KAUSHAL BHATT(43)