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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. National Income. National Income Committee of India 1951 defines National Income as follows:

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National Income

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  1. 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

  2. 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 • 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.”

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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….

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

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

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

  18. 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

  19. 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

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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

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