Understanding National Income

To simply understand what National Income is, it can be represented as - National Income defines a country's wealth. This income depicts the value of goods and services which are produced by an economy. This gives effect to the net result of all the economic activities performed in the country.

Imagine how you would define a country’s wealth without any economic term? In that case, there would be no accountability and responsibility linked with the production in the country. The resources would go uncalculated and there would be a vague economic atmosphere. Thus, let us indulge in this study which talks about National Income. 

Understanding National Income

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National income is the sum total of the value of all the goods and services manufactured by the residents of the country, in a year., within its domestic boundaries or outside. It is the net amount of income of the citizens by production in a year. 

To be more precise, national income is the accumulated money value of all final goods and services produced in a country during one financial year. Computation of National Income is very vital as it indicates the overall health of our economy for that particular year.

The aggregate economic performance of a nation is calculated with the help of National income data. The basic purpose of national income is to throw light on aggregate output and income and provide a basis for the government to formulate its policy, programs, to maximize the national welfare of the people. Central Statistical Organization calculates the national income in India.

Definition of National Income

The definition of National Income if of two types-

• Traditional Definition of National Income

• Modern Definition

Traditional Definition of National Income-

According to Marshall: “The labor 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 the true net annual income or revenue of the country or national dividend.”

Modern Definition 

This definition has two subparts

• GDP

• GNP

Gross Domestic Product

Gross Domestic Product, abbreviated as GDP, is the aggregate value of goods and services produced in a country. GDP is calculated over regular time intervals, such as a quarter or a year. GDP as an economic indicator is used worldwide to measure the growth of countries economy.

Goods are valued at their market prices, so:

• All goods measured in the same units (e.g., dollars in the U.S.)

• Things without exact market value are excluded.

Constituents of GDP

• Wages and salaries

• Rent

• Interest

• Undistributed profits

• Mixed-income

• Direct taxes

• Dividend

• Depreciation

The Formula for Calculation of GDP

GDP = consumption + investment + government spending + exports - imports.

Gross National Product

Gross National Product (GNP) is an estimated value of all goods and services produced by a country’s residents and businesses. GNP does not include the services used to produce manufactured goods because its value is included in the price of the finished product. It also includes net income arising in a country from abroad.

Components of GNP

• Consumer goods and services

• Gross private domestic income

• Goods produced or services rendered

• Income arising from abroad.

Formula to Calculate GNP

GNP = GDP + NR (Net income from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets).

Importance of  National Income

Setting Economic Policy

National Income indicates the status of the economy and can give a clear picture of the country’s economic growth. National Income statistics can help economists in formulating economic policies for economic development.

Inflation and Deflationary Gaps

For timely anti-inflationary and deflationary policies, we need aggregate data of national income. If expenditure increases from the total output, it shows inflammatory gaps and vice versa.

Budget Preparation

The budget of the country is highly dependent on the net national income and its concepts. The Government formulates the yearly budget with the help of national income statistics in order to avoid any cynical policies.

Standard of Living

National income data assists the government in comparing the standard of living amongst countries and people living in the same country at different times.

Defense and Development

National income estimates help us to bifurcate the national product between defense and development purposes of the country. From such figures, we can easily know, how much can be set aside for the defense budget.

Sets of methods for measuring National Income

There are four methods of measuring national income. The type of method to be used depends on the availability of data in a country and the purpose which is attempted for.

Income Method

In this method, we add net income payments received by all citizens of a country in a particular year. Net incomes that result in all the factors of production like net rents, wages, interest, and profits are all added together, but income received in the form of transfer payments are omitted.

Product Method

According to this method, the aggregate value of final goods and services produced in a country during a financial year is computed at market prices. To find out GNP, the data of all the productive activities-agricultural products, Minerals, Industrial products, the contributions to production made by transport, insurance, communication, lawyers, doctors, teachers. Etc are accumulated and assessed.

Expenditure Method

The total expenditure by the society in a financial year is summed up together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment. This concept is backed by the assumption that national income is equal to national expenditure.

Value Added Method

The distinction between the value of material outputs and material inputs at every stage of production is Value added.

GDP Vs GNP

The Gross Domestic Product and the Gross National Product are the two most widely used measures in a country’s calculation of aggregate economic unit.

GDP is the measure of the value of goods and services that are being produced within a country's borders, by the citizens and the non-citizens. While GNP determines the value of goods and services that are being produced by the country's citizens in the domestic and abroad spectrum. GDP is popularly used by the global economies at large. While, the United States eliminated the use of GNP in the year 1991, thereby adopting GDP as the measure to compare their economy with other economies.

India’s Richness: National Income of India 2020-2021

In the year 2020-2021, India had a total NI of 135.13 lakh crore, well this is a provisional estimate only. However, in the round of the fourth quarter (in the month of January-March), the country had an economic growth of 1.6%, while the GDP was calculated at Rs. 38.96 lakh crore in the fourth quarter in the year 2020-21, this is count is slightly different to Rs 38.33 lakh crore in the fourth quarter of 2019-20.