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Dear Readers,

In continuation of our series Soul of Banking Awareness we are providing you an important article on National Income. Hope this will surely help you in your preparation.

National Income

National Income is the total income earned by a nation. The rate of savings and investment in an economy also depend on the national income of the country.

GDP: Gross Domestic Product (GDP) is the products which measures all the final goods produced within the boundary of a nation within a specific period of time. GDP also includes the information regarding inflation.

GDP = Consumption + Government Expenditures + Investment + Exports – Imports

Consumption:

  • Durable goods (items expected to last more than three years)
  • Nondurable goods (food and clothing)
  • Services

Government Expenditures:

  • Defense
  • Roads
  • Schools

Investment Spending:

  • Non-residential (spending on plants and equipment), Residential (single-family and multi-family homes)
  • Business inventories

Net Exports:

  • Exports are added to GDP
  • Imports are deducted from GDP

GNP:  Gross National Product (GNP) is the common measures which counts all the income collected from the factors of production which are owned by the citizens of a nation.

GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries

Examples:-

A Honda plant produce an output, it will not be included in GNP but will be included in GDP. Revenue from the sales of the output will go to Japan, even though the products are made & sold in India.

History

Pre Independence: Dadabhai Naoroji also known as the grand old man of India estimated first time national income in India. As there was no official body in India to prepare income statement.

In 1931 Dr. VKRV Rao divided the Indian Economy in two sectors

  • Agriculture Sector: It includes agriculture, forests, fishing & hunting.
  • Corporate Sector: It includes industries, construction, business, transport & public services.

After Independence:

National Income Committee

  • The first National Income Committee was set up in 1949 by the Government of India & the first Chairman was Prof. P.C. Mahalanobis.

Green Accounting: It means measuring the National Income of the country taking into estimation of pollution & environmental damage.

NDP at Factor Cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated NDP at factor cost.

  • “Gross” means total product produced within a country.
  • “Net” means “Gross” minus depreciation – i.e. wear-and-tear or elimination of the nation’s fixed capital assets. “Net” gives an indication of how much product is actually available for consumption or new investment.
  • “Domestic” means the within the boundary of a nation
  • “National” means the boundary is defined by citizenship (nationality). We count all goods and services produced by the nationals of the country regardless of where that production physically takes place.
  • “Income” specifically means that the income approach.
  • “Expenditure” specifically means that the expenditure approach.

National income

Gross national product 

  • Net India income receipts from rest of the world
  • Indian income receipts
  • Indian income payments

Gross domestic product   

  • Private consumption of fixed capital
  • Government consumption of fixed capital
  • Statistical discrepancy

NDP: Net Domestic Product (NDP) is the detailed capital which has been used up over the years in the form of housing, vehicle or machinery declination from which the depreciation is to be deducted. The depreciation for it is referred as capital consumption allowance & represents the amount of capital which is represented as depreciated assets.

NDP = GDP – Depreciation

 NNP: Net National Product (NNP) is the total value of goods produced & services provided by a country during a year after the deprecation of capital goods.

NNP = GNP – Depreciation

Two major things recognized while calculating Incomes are:

  • Factor Cost: it is the input cost also known as production cost. For eg, raw materials cost, salary of the workers, machine cost etc.
  • Market Price: it is the output cost. For eg, transportation cost, maintenance cost, marginal profit etc.

NNP at Factor cost (National Income): NNP at market price – indirect taxes + subsidies

GNI: Gross national income (GNI) is the total output which includes domestic as well as foreign output used by the residents of the country.  GNI is the sum of value added by all resident producers plus any product taxes (minus subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad.

GNI = GNP + Net factor income from abroad

PPP (Purchasing Power Parity)

It estimates the total adjustment made on the currency exchange rate between countries that allow the exchange to be equal to the purchasing power of the currency of each country.

It is calculated as follows:

S = P1 / P2

It is represented as follows:

  • “S” represents exchange rate of currency 1 to currency 2
  • “P1″ represents the cost of good “x” in currency 1
  • “P2″ represents the cost of good “x” in currency 2

Methods of measuring National income

  • The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces.
  • Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output. This avoids an issue often called ‘double counting’, wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production.

There are 3 methods of calculating National Income:-

  • Value added method: also known as output method or production method. In this method the value added by each enterprise in the production goods and services is measured.
  • Income method: This method approaches national income from distribution side. In other words, this method measures national income at the phase of distribution and appears as income paid and or received by individuals of the country.
  • Expenditure method: Expenditure method is calculated by adding up all expenditures made on goods and services during a year with national income. Income can be spent either on consumer goods or capital goods.

Difficulties in measuring national income

There are many difficulties faced while calculating National Income they are grouped in practical & conceptual difficulties.

Conceptual Difficulties

  • Inclusion of Services: There has been some debate about whether to include services in the counting of national income, and if it counts as output.
  • Identifying Intermediate Goods: The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality it is very hard to draw a clear cut line as to what intermediate goods are.
  • Identifying Factor Incomes: Separating factor incomes and non factor incomes is also a huge problem.
  • Services of Housewives and other similar services: National income includes those goods and services for which payment has been made, but there are scores of jobs, for which money as such is not paid.

Practical Difficulties

  • Unreported Illegal Income: Sometimes people don’t provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income.
  • Non Monetized Sector: In many developing nations, there is this issue that goods and services are traded through barter, i.e. without any money.