The concept of national income comes under the studies of Macroeconomics. The study of Economics is divided into two parts; Macroeconomics and Macroeconomics. The terms Macro and Micro were coined by Ragnar Frisch. National Income helps policy makers in preparation of yearly budgets and setting economic policies for the country.
Definition of National Income
Simon Kuznets, a Russian-American development economist and statistician, a Noble prize winner in Economics in 1971, defines National Income as, “The net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.”
Further the National income is also defined in two ways; the Traditional definition and the Modern definition.
Traditional Definition of National Income
Marshall defines National Income as, “The labour and capital 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 a true net annual income or revenue of the country or National dividend.”
Modern Definition of National Income
As per the modern definition the concept of national income can be defined in terms of: GDP and GNP
National Income as GDP
GDP which is an abbreviation of ‘Gross Domestic Product’ is an indicator which is used globally to determine the Economic growth of the countries. It is the aggregated value of goods and products produced in a country which is calculated over regular time intervals such as on a quarterly or yearly basis.
While calculating GDP, all The goods are valued at their market price and things that don’t have an exact market price are left out. The market price is considered in the same unit that is in $ dollars. Now let’s move forward to the elements contributing to GDP.
Elements of GDP
Wages and salaries, rent, interest, undistributed profits, mixed income, direct tax, dividends and depreciation are the elements that contribute to GDP.
How GDP is Calculated?
Formula For GDP: (Consumption + Investment + Government Spending + Exports) – Imports
National Income as GNP
GNP stands for ‘Gross National Product’. GNP is an estimated value of all goods and services produced by a country’s residents and businesses. All the economic activities that are being conducted by its citizens, within or outside the country are considered under GNP.
GNP does not include the services used for manufacturing purposes of goods, as it’s included in the price of finished product itself. It is calculated as a sum of GDP and NFIA(Net Foreign Factor Income), NFIA is aggregate income that a country’s citizens and companies earn abroad.
1. GDP + NR (Net income from assets abroad) – NP (Net payment outflow to foreign assets)
2. GDP + NFIA
Elements of GNP
The elements contributing to GNP are following;
- Consumer goods and services
- Gross private domestic income
- Goods produced and services rendered
- Income arising from abroad.
How to Measure National Income?
There are 3 methods used to measure the National Income.
Here National income is estimated by adding all the factors of production such as land, labour and capital and mixed income of the self-employed. By Income method we basically measure the domestic income which is related to the production within the borders of the country.
Here we consider all the goods and services which are produced within the country during one financial year. This includes investment in fixed capital such as residential and non-residential buildings, machinery, inventories, consumer expenditure on services, government expenditure on final goods and services and export of goods and services.
In short the overall expenditure by the society is summed up together which includes personal consumption, expenditure, net domestic investment, government expenditure on goods and services and net foreign investment.
The product method is also known as value added method. This method is based on the total consumption and investment. This is known as a value added method because the value of all goods and services produced in different industries during a period of one year is added up.
The National Income produced by Goods and services of different sectors like Industrial sector; Agriculture, Mining, Manufacturing, Construction, electricity, gas and water supply transport, Service Sector; lawyer, doctor, trade, banking, insurance, public administration, defense and International Transactional Sector in which the value of goods exported and imported, payments from abroad are considered.
Key Points For UPSC on National Income
Here we are presenting some key points regarding national income that are really important from an exam point of view.
- National Income in India is calculated by the National Statistical Office which comes under the Ministry of Statistics and Programme Implementation.
- The first estimation of National Income was done under the Ministry of Commerce during the years 1948-49.
- P C Mahalanobis was the Chairman of the first National Income Committee set up in 1949. On his name National Statistics Day is celebrated on June 29, every year.
- The First rough estimate of National Income was made by Dadabhai Naoroji for the year 1867-68 which is mentioned in his book Poverty and Unbritish Rule in India.
- The First Scientific estimate was made by Professor V K R Rao in 1931-32.