National Income: Concept of National Income: Objectives
National Income: Concept of National Income: Objectives
National Income: Concept of National Income: Objectives
CONTENTS
Objectives
Introduction
2.1 Concept of National Income
2.2 Measurement of National Income
2.3 Some Related Aggregates
2.4 Components of National Disposable Income
2.5 Summary
2.6 Keywords
2.7 Review Questions
2.8 Further Readings
Objectives
After studying this unit, students will be able to :
Understand the concept of national income.
Understand the measurement of national income.
Explain some related aggregates.
Discuss components of national disposable income.
Introduction
A person will be considered to live in a country, when he does not live outside the country, for
one year. But students who go abroad for study or patients who go for treatment, these terms and
conditions are not applied on them. If any person, suppose any Indian lives in foreign for more than
one year then he will not be considered as normal dissident of India, rather he will be considered as
an NRI–Non-Resident Indian.
National Income at Basic Price (or Factor Cost) and National Income at
Market Price
The actual meaning of concept of national income is national income at factor cost. But if in it, value
of net indirect tax (indirect tax-subsidy) is added then it will be national income at market value.
By following equation this relationship can be expressed:
Net National product at Factor cost + Net Direct Tax (Indirect Tax – subsidy) = Net National Product
at Market value.
Or
Net National Product at market value – Net Indirect Tax = Net National Product at Factor Cost.
Key Points
Gross Domestic Product— An economy’s under domestic border, produced final goods and
service flow measurement is called gross domestic product. In this, depreciation is also
included.
Value Addition— Change of input into production is called value addition.
Final Goods— Final goods are called those goods which cross production’s line and are
ready for final consumer.
Notes Intermediate Goods— Intermediate goods are those goods which are under production line
and which value addition is to be done. These goods are purchased by firms so that it can be
used as raw material or it can be sold.
Domestic Territory— Under this besides political border, under country water region and for
residents in different countries for earning operation of aeroplane and ships are also
included.
Primary Inputs— In it factors of input are included—land, labour, capital and entrepreneur.
Secondary Inputs— Besides primary inputs, raw materials, fuel etc. used for production are
included.
Normal Residents— Normal residents of a country are those people who generally reside in
that country, their economic interest is centred to that country.
Market Price and Bank Price— Market price is that price on which final goods are purchased
by consumer. Basic price is called that price that is obtained by producer. Basic price =
Market price – indirect tax + subsidy.
Self Assessment
Fill in the blanks:
1. A nation’s national income relationship is only with that country’s.....................residents.
2.......................generation of income is done only by residents of the country.
3. The normal residents of a country are those whose economic interest is centred to that
............... .
It has been assumed in above table that at wheat producing time, there is no cost of intermediate
goods. Therefore, farmer value addition is equal to his value of product means ` 400. flour mill
buys wheat in ` 400 and making it flour, sells in ` 600. Flourman ` 600 – ` 400 = ` 200 value
addition. Bakeryman bays flour in ` 600 and making it bread, sells it to shopkeeper in ` 800.
Bakeryman value added ` 800
` 600 = ` 200 and sell bread to shopkeeper in ` 800. Shopkeeper sells bread to consumer in ` 900.
Thus value addition by shopkeeper ` 900– ` 800 = ` 100. Therefore total value addition is equal to
` 400 +
` 200 + ` 200 +` 100 = ` 900. If in each step of production value addition is added then it will be `
400
+ ` 600 + ` 800 + ` 900 = ` 2700. The value of wheat and flour will be double counted. To escape
from
double counting value addition method is followed.
GDPMP IS estimated by adding up Value Addition by all the producing units in the economy. Thus
GDPMP = GVAMP
Generally, value addition has been done by primary, secondary and tertiary sectors of economy, we
estimate separately. Therefore, in the whole context of economy these sectors' relative importance
can be found out.
After the estimation of GDPMP following adjustment find out NNPFC (National income)
GDPMP – Net Indirect Taxes = GDPFC – Depreciation = NDPFC + Net Factor Income from Abroad =
NNPFC or Nation Income.
We get domestic income from total summation of rent, interest, profit, compensation of
employees and self-employed person’s mixed income. Hence, domestic income = compensation of
employee
+rent + interest + profit + mixed income of self-employed persons. To convert domestic income
into national income net factor income from abroad is added.
Notes For the measurement of national income, following factors of income are kept in mind.
6. Net Factor Income from Abroad: Getting income in exchange of giving factor service in
abroad and in domestic boundary of a country by non-resident giving factor service paid
income’s difference is called Net Factor Income from Abroad.
Net National Income = Compensation of employees + obsolescence (rent + interest + profit) + mixed
income + net factor income from abroad.
(Note: Total addition of rent, interest and profit are called obsolescence surplus.)
At factor cost to find out the national production or national income at market cost from domestic
product, net indirect tax and depreciation is deducted and from abroad net factor income is added.
Did You Know? Production for self-consumption is also a part of private consumption
expenditure.
Self Assessment
Multiple Choice Questions:
4. National income can be created
(a) in any part of world (b) only in own country
(c) only in abroad (d) none of these
5. If an Indian resides in abroad for more than one year then he will be considered
(a) foreigner (b) non-resident Indian
(c) domestic resident (d) none of these
6. In ‘Normal Resident' term, both person and rights are ....................... .
(a) pioneer (b) included
(c) separate (d) none of these
Self Assessment
State whether the following statements are True or False:
7. The real meaning of concept of national income is national income at factor cost.
8. High level of national income shows low level of production of a country.
9. ‘National Income’ word is pure conceptual.
10. During a financial year, by normal resident of a country as a result of factor services did
value addition’s sum is called national income.
Net Domestic Product at Factor Cost (NDPFC) = Compensation of employees Notes
+ Rent
+ Interest
+ Profit = operating surplus
+ Mixed income of selfemployed
In this adding net indirect taxes, we will get Net Domestic Product at Market Price (NDP MP)
means
NDPMP = NDPFC + Net Indirect Taxes
In this (NDPMP) adding depreciation, we will get Gross Domestic Product at Market Price (GNP MP)
means
GDPMP = NDPMP + Depreciation
(v) Gross National Product at Market Price (GNPMP)
Using value addition, it is the market value in a financial year of final product and services produced
in domestic boundary, in which abroad net factor income is included. Hence
Gross National Product at Market Price = Gross Domestic Product at Market Price + Net Factor
Income from Abroad
GNPMP = GDPMP + Net factor income from abroad
Net National Disposable Income (in short, disposable income) = Gross national disposable income –
Current replacement cost (which is depreciated at whole economy level)
2.6 Keywords
Economic Interest: Interest related to wealth.
Obsolescence: Out of operation.
Expenditure Method: Process of expenses.