NATIONAL INCOME

6.2.1. Concept

National income is the money value of all the final goods and services produced by a country during
a period of one year. National income consists of a collection of different types of goods and services
of different types Since, these goods are measured in different physical units it is not possible to add
them together.

Thus, we cannot state national income is so many millions of metres of cloth, so many million litres
of milk, gtc. Therefore, there is no way except to reduce them to a common measure. This common
measure is money.

National income may be defined as, "the aggregate factor, income (i.c., earning of labour and
property), which arises from the current production of goods, and services by the nation's economy.
The nation's economy refers to the factors of production (ie, labour and property) supplied by the
normal residents of the national territory.

According to Professor Fisher, "The national dividend or income consists solely of services as received
by ultimate consumers, whether from their material or from their human environment".

According to Pigou, "National income is that part of the objective income, of the community,
including of course, income derived from abroad, which can be measured in money".

According to Marshall, "The labour and capital of country acting on its natural resources produce
annually a certain net aggregate of commodities, material and immaterial including services of all
kind. This is the true net national income or revenue of the country or national dividend".

Gross Domestic Product (GDP) is a monetary measure of the market value of all the final
goods and services produced and rendered in a specific time period by a country or
countries. GDP is often used to measure the economic health of a country or region. GDP is
often used as a metric for international comparisons as well as a broad measure of
economic progress. It is often considered to be the world's most powerful statistical indicator
of national development and progress.

 $4.038 trillion (nominal; 2024

est.)[12]
 $14.594 trillion (PPP; 2024
est.)[12]
GDP rank  5th (nominal;
2024)
 3rd (PPP; 2024)
GDP growth  8.2% (FY2024
GDP at market price: it is defined as the market value of output of final goods and services
produced in the domestic territory of a country
GDP at market price = GDP at factor cost + Indirect taxes -subsidies
GDP at factor cost it is the sum of net value added by all producers within the country.
GDP at factor cost = GDP at market price – indirect taxes + subsidies

Gross National Product Gross national product (GNP) is the total value
of all the final goods and services made by a nation’s economy in
a specific time (usually a year). GNP is different from net
national product, which considers depreciation and the
consumption of capital.

GNP is similar to gross domestic product (GDP), except that GDP

doesn’t include the income made by a nation’s residents
from investments abroad. In 1991, the United States started
using GDP instead of GNP as its main way to measure economic
output. Because GDP omits international income from the total, it
allows the fiscal and monetary policy makers to more accurately
track total output of goods and services from year to year, as
well as compare output among nations. Gross National Product
(GNP) is a measure of a country's economic output that considers the value
of goods and services produced by its citizens, regardless of their location. In
simple terms, GNP calculates the total value of all products and services
created by a country's residents, whether they're inside or outside the
country's borders.

GNP is the sum of the market values of all final goods and services produced
by a country's residents within a specific time period, typically a year,
including income earned by citizens working abroad but excluding income
earned by non-residents within the country.
Let's consider this example. The citizens of Country A own factories and
businesses inside and outside its borders. To calculate Country A's GNP,
you would need to consider the value of all the goods and services produced
by those factories and businesses, regardless of location. If one of the
factories is located in another country, 'Country B' for instance, the value of
its production would still be included in Country A's GNP, as Country A's
citizens own it.
It is similar to Gross Domestic Product (GDP) but considers the ownership
of economic production by the country's residents.

Net National Product: it is found out by adding the net factor income from
abroad to the net domestic product. If the net factor income from abroad is
positive then NNP will be more than NDP. NNP=NDP+NFIA
Domestic income: income generated by factors of production within the
country from its own resources and includes wages, salaries, rents, interest,
dividends, undistributed corporate profits etc.

Domestic income = national income – net income earned from abroad

Private income: it is the income obtained by private firms or individuals from

any source and the retained income from corporations.

Percapita income : the average income of the people of a country in a

particular year is called per capita income for that year

Personal income it is the sum of incomes actually received by all individuals

or households during a given year.

After making all payments whatever remains of personal income is called

disposable income.

Disposable income = personal income – personal taxes

Measurement of National Income – Income Method

Estimated by adding all the factors of production (rent, wages, interest,
profit) and the mixed-income of self-employed.

1. In India, one-third of people are self-employed.

2. This is the ‘domestic’ income, related to the production within the borders of
the country

Measurement of National Income – Production

Method
Estimated by adding the value added by all the firms.

Value-added = Value of Output – Value of (non-factor) inputs

1. This gives GDP at Market Price (MP) – because it includes depreciation

(therefore ‘gross’) and taxes (therefore ‘market price’)
2. To reach National Income (that is, NNP at FC)

 Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA

 Subtract Depreciation: NNP at MP = GNP at MP – Dep

  Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT

Measurement of National Income – Expenditure

Method
The expenditure method to measure national income can be understood
by the equation given below:

Y = C + I + G + (X-M),

where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer

goods, G = Govt’s expenditure on final consumer goods, I = Investment or
Capital Formation, X = Exports, I = Imports, X-M = Net Exports

Any of these methods can be used in any of the sectors – the choice
of the method depends on the convenience of using that method in
a particular sector
The main methods of calculating national income are:
1. Product Method:
In this method, national income is measured as a flow of goods and
services. We calculate money value of all final goods and services
produced in an economy during a year. Final goods here refer to
those goods which are directly consumed and not used in further
production process.
2. Income Method:
Under this method, national income is measured as a flow of factor
incomes. There are generally four factors of production labour,
capital, land and entrepreneurship. Labour gets wages and salaries,
capital gets interest, land gets rent and entrepreneurship gets profit
as their remuneration.
3. Expenditure Method:

In this method, national income is measured as a flow of expenditure.

GDP is sum-total of private consumption expenditure. Government
consumption expenditure, gross capital formation (Government and
private) and net exports (Export-Import).
The following points highlight the top five factors
affecting national income. The factors are: 1. Natural
and Human Resources 2. Technical Knowledge 3.
Political Stability 4. Terms of Trade 5. Foreign
Investment.

Factor # 1. Natural and Human Resources:

The quantity and quality of a country’s resources exert

perhaps the most important influences on its national in-
come. For example, fertile soil, ready sources of power,
easily worked mineral deposits; a favourable climate,
navigable rivers, etc. will have a beneficial effect on a
country’s productive capacity.

Capital equipment may range from simple hand tools to

the most up-to- date forms of industrial machinery.
Generally, the achievement of an increasing output of
goods is associated with increased investment in capital
equipment. For example, a miner can extract a greater
quantity of mineral resources from the earth with the aid
of machinery than with only a pick and shovel. Thus, the
effectiveness with which natural and human resources
are used depends to a large extent on the capital
equipment available.
ADVERTISEMENTS:

The size of the working population is determined by

factors such as the age structure of the population and
social attitudes. For example, the social attitude towards
women is important in this respect. If the community
judges that woman’s place is in the home, then the
talents of many women may be wasted.
The quality of the labour force will depend partly on the
innate intelligence of the people and partly on the skills
acquired through education and training.

Entrepreneurial skill, that is, the ability to make

decisions, calls for sound judgment and some courage.
The availability of this skill will affect the use of
resources and hence the size of the national income.

Factor # 2. Technical Knowledge:

New methods of production and new ways of utilising

resources may increase the output of goods and
services. A community which is keen to try out new ideas
or inventions in industry and commerce is likely to enjoy
a higher standard of living than a country which is slow
to adopt new ideas.

Factor # 3. Political Stability:

ADVERTISEMENTS:

Political stability is essential for the expansion of

business activities. War and internal revolution interfere
with production because they add to normal commercial
risks. Thus, peace and a stable government promote
confidence and encourage production.

Factor # 4. Terms of Trade:

Trade benefits all countries which engage in it, but the

degree of benefit enjoyed by a particular country will
vary according to changes in the price levels at which it
sells its exports and imports. Favourable terms of trade
occur if the prices of imports fall relatively to the prices
of exported goods. This means that a larger quantity of
exports. Hence, more goods are available and national
income is increased.

Factor # 5. Foreign Investment:

A net income from foreign investment means that the
creditor country can obtain goods and services in return.
Thus, if two countries have equal gross domestic
products (GDP), then the country with the more
favourable net return from foreign investment will have
the higher national income.

Difficulties in Measurement of National Income

Following are the difficulties in estimating the National Income

 Conceptual difficulties
 Statistical difficulties
A. Conceptual difficulties

1. It is difficult to calculate the value of some of the items such

as services rendered for free and goods that are to be sold but
are used for self-consumption.
2. Sometimes, it becomes difficult to make a clear distinction
between primary, intermediate and final goods.
3. What price to choose to determine the monetary value of a
National Product is always a difficult question?
4. Whether to include the income of the foreign companies in
the National Income or not because they emit a major part of
their income outside India?
B. Statistical difficulties

1. In case of changes in the price level, we need to use the Index

numbers which have their own inherent limitations.
2. Statistical figures are not always accurate as they are based
on the sample surveys. Also, all the data are not often
available.
3. All the countries have different methods of estimating
National Income. Thus, it is not easily comparable.
Inflation indicates the decrease in the purchasing power of a unit of the currency in
the country. It is measured in percentages.It is categorized into three types, that is,
Demand-pull, Cost-pull, and Built-in.The most commonly used inflation indexes are
the Consumer Price Index (CPI) and Wholesale Price Index (WPI) Inflation measures
the average change in price in a basket of commodities and services over a period of
time. The opposite and rare fall in the price index of this basket of items is termed as
“Deflation”

What is Inflation?
It is nothing but an increase in the general level of price of the goods and/ or
services in an economy over a certain period of time. As per the law of Economics,
when the general level of prices increase, each unit of currency buys a decreased
number of goods and services. Hence, inflation also reflects a decrease in the
purchasing power of money.

In the world of Economics, the word ‘inflation’ literally means a general price rise
against a standard level of the purchasing power. As per Crowther’s findings,
“Inflation is a state in which the value of money is falling and the prices are rising”.

As per RBI, an inflation target of 4 per cent with a +/-2 per cent tolerance band,
is appropriate for the next five years (2021-2025).

A simple example would be, suppose a kg of apple cost Rs.100 in 2019 and it cost
Rs.110 in 2020, then there would be a 10% increase in the cost of a kg of apple. In
the same way, many commodities and services whose prices have raised over time
are put in a group and the percentage is calculated by keeping a year as the base
year. The percentage of increase in prices of the group of commodities is the rate of
inflation.

Advantages
It means the price levels increase, but for an economy to run healthily, wages should
also be rising. Inflation is a sign that an economy is flourishing. The Reserve Bank of
India (RBI) considers the range of 4-5% as an ideal situation for inflation in India.
Following are some of its advantages:

Slow inflation aids economic growth

Better than deflation as it does not lead to recession
Allows adjustment of prices
Helps in adjustment of real wages

Disadvantages
On the other hand, now let’s take a quick look at the disadvantages of Inflation

May lead to uncertainty and lower investments

Higher rate of inflation can lead to lower growth and instability

Reduces international competitiveness

Distorts the planning process

May also give rise to speculative investment

May result in a decline in the value of savings

May lead to inequality in the income distribution

Types of Inflation
The different types of inflation in an economy can be explained as follows:

1. Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in
the economy.

Causes of Demand-Pull Inflation:

 A growing economy or increase in the supply of money – When consumers

feel confident, they spend more and take on more debt. This leads to a steady
increase in demand, which means higher prices.
 Asset inflation or Increase in Forex reserves– A sudden rise in exports forces a
depreciation of the currencies involved.
 Government spending or Deficit financing by the government – When the
government spends more freely, prices go up.
 Due to fiscal stimulus.
 Increased borrowing.
 Depreciation of rupee.
 Low unemployment rate.

Effects of Demand-Pull Inflation:

 Shortage in supply
 Increase in the prices of the goods (inflation).
  The overall increase in the cost of living.

2. Cost-Push Inflation
This type of inflation is caused due to various reasons such as:

 Increase in price of inputs

 Hoarding and Speculation of commodities
 Defective Supply chain
 Increase in indirect taxes
 Depreciation of Currency
 Crude oil price fluctuation
 Defective food supply chain
 Low growth of Agricultural sector
 Food Inflation
 Interest rates increased by RBI

Cost pull inflation is considered bad among the two types of inflation.
Because the National Income is reduced along with the reduction in
supply in the Cost-push type of inflation.

3 Built-in Inflation
This type of inflation involves a high demand for wages by the workers
which the firms address by increasing the cost of goods and services for
the customers.

4.Creeping inflation – If the rate of inflation is low (upto 3%)

5.Walking/Trotting inflation – Rate of inflation is moderate (3-7%)

6. Running/Galloping inflation – Rate of inflation is high (>10%)

7.Runaway/Hyper Inflation – Rate of inflation is extreme

Remedies to Inflation
The different remedies to solve issues related to inflation can be stated
as:

 Monetary Policy (Contractionary policy)

The monetary policy of the Reserve Bank of India is aimed at managing

the quantity of money in order to meet the requirements of different
sectors of the economy and to boost economic growth.
This contractionary policy is manifested by decreasing bond prices and
increasing interest rates. This helps in reducing expenses during inflation
which ultimately helps halt economic growth and, in turn, the rate of
inflation.

 Fiscal Policy

 Monetary policy is often seen separate from fiscal policy which deals
with taxation, spending by government and borrowing. Monetary policy
is either contractionary or expansionary.

 When the total money supply is increased rapidly than normal, it is

called an expansionary policy while a slower increase or even a
decrease of the same refers to a contractionary policy.

 It deals with the Revenue and Expenditure policy of the government.

Measurement of Inflation
1. Wholesale Price Index (WPI) – It is estimated by the Ministry of Commerce &
Industry and measured on a monthly basis.
2. Consumer Price Index (CPI) – It is calculated by taking price changes for each
item in the predetermined lot of goods and averaging them.
3. Producer Price Index – It is a measure of the average change in the selling
prices over time received by domestic producers for their output.
4. Commodity Price Indices – It is a fixed-weight index or (weighted) average of
selected commodity prices, which may be based on spot or futures price
5. Core Price Index – It measures the prices paid by consumers for goods and
services without the volatility caused by movements in food and
energy prices. It is a way to measure the underlying inflation trends.
6. GDP deflator – It is a measure of general price inflation.

There are two ways to measure inflation, i.e. Wholesale Price Index (WPI) and
Consumer Price Index (CPI). The WPI is a measure of the average change in prices
of goods in the wholesale market or wholesale level. The CPI is the measure of
change in the retail price of goods and services consumed by a population of an
area in a base year.