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 a 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 their policy, programmes, to maximize the national welfare of the people. Central Statistical organisation calculates the national income in India.
Why is National Income Important?
Setting Economic Policy- National Income indicates the status of the economy and can give a clear picture of the countries economic growth. National Income statistics can help economist 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- 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 time.
Defence and Development: National income estimates help us to bifurcate the national product between defence and development purposes of the country. From such figures, we can easily know, how much can be set aside for the defence budget.
National Income Definition-
The definition of National Income if of two types-
1. Traditional Definition of National Income-
According to Marshall: “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 the true net annual income or revenue of the country or national dividend.”
2. Modern Definition-
This definition has two sub-parts-
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.) on
Things without exact market value are excluded.
Constituents of GDP-
Wages and salaries
The Formula for Calculation-
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 NetIncome Receipts) ‑ NP (Net payment outflow to foreign assets).
Methods of Measuring National Income-
There are four methods of measuring national income. Which method is to be used depends on the availability of data in a country and the purpose in hand.
1. Income Method-
This method we add net income payments received by all citizens of a country in a particular year. Net incomes that result to all the factor of production like net rents, wages, interest, and profits are all added together, but income received in the form of transfer payments are omitted.
2. 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.
3. 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.
4. Value Added Method-
The distinction between the value of material outputs and material inputs at every stage of production is Value added.
1. How are GDP and GNP Different from Each Other?
GDP is the value of goods and services produced within a country's borders, by citizens and non-citizens in a financial year. GNP measures the value of goods and services produced by only a country's citizens but both within and outside the country’s borders.