Chapter 1 — NATIONAL INCOME

by • 02/07/2011 • B.COM PART 1 EconomicsComments (1)2131

National Income:

“ The national income of country during a given period of time usually one year, signifies the net monetary value of the output, consisting of goods and services produced. Generally speaking it is the aggregate or sum of income of all factors of production of a country.”

CONCEPTS OF NATIONAL INCOME

Following are the various concepts with which national income is looked upon.

  1. 1. Gross Domestic Product: (G.D.P):

Gross domestic product is defined as:

“The total market value of all final goods and services produced with the help of factor of production during one year in any country.”

Mean the output produced within Pakistan by Pakistani’s and foreign firms by using country’s resources. “Gross” means that depreciation of capital is not subtracted out of GDP.

GDP = GNP – Net factor income from abroad

  1. 2. Gross National Product (G.N.P):

Gross national product is defined as:

“The total market value of all final goods and services produced with the help of national factors of production of any country inside or outside the country during one year.”

For example profits of Pakistani citizen owned factories/business operating in Dubai, U.K, or Africa when sent to Pakistan will be included in the GNP of Pakistan.

GNP = GDP – Net factor income from abroad

  1. 3. Net National Product or National Income At Market Price (N.N.P):

NNP can be calculated by deducting depreciation on capital during the year.

When charges of depreciation are deducted from GNP, we get net national product. It means the market value of all final goods and services after providing depreciation. It is also called National Income at Market Price.

NNP = GNP – Depreciation on capital

  1. 4. National Income Or National Income At Factor Cost (N.I):

National income at factor cost means the sum of all income earned by factors of production that is land, labor, capital and organization. The difference between national income at factor cost and NNP arises from the fact that indirect taxes and subsidies cause market price of output to be different from the factor incomes resulting from it.

National Income = NNP – Indirect Taxes + Subsidies

  1. 5. Personal Income (P.I)

“National income is that income which is actually received by all individuals living in an economy during a period of one year from all possible resources.”

Personal income included all income received whether earned or unearned.

It can be written as:

Personal Income = National Income – Social Security Contribution – Cooperate Income Taxes – Undistributed Corporate Profits + Transfer Payments

  1. 6. Disposable Personal Income (D.P.I):

After a good part of personal income is paid to government in the form of direct taxes or personal taxes like income tax, personal property taxes etc., what remains from personal income is called disposable personal income.

Disposable Personal Income = Personal Income – Personal/Direct taxes

MEASUREMENT OF NATIONAL INCOME

To calculate or measure national income the following three methods are generally used:

  1. Output or Production Method
  2. Income Method
  3. Expenditure or Outlay Method
  1. 1. Net Output Or Production Method:

For calculating national income under this method the net output or the production of various commodities is estimated and evaluated at the market prices. For this purpose we take two steps:

Firstly we estimate the monetary value of all goods that are produced internally. The production or output of different sections of the economy i.e. agricultural, manufacturing, trade, commerce, transport etc is analyzed after deducting the depreciation charges.

Secondly; we consider the foreign business transactions that were performed during the financial year. In this regards we only consider the difference between exports and imports. These two aggregate are then summoned up to get the gross domestic product which in turn is deducted from the total revenue earned to arrive at national income.

The production method is the most direct method for calculating national income. It’s equation can be written as:

National Income = G.N.P – Depreciation on Capitals – Indirect Taxes + Subsidies + Exports – Imports

PRECATIONS:

  • Avoid Double Counting:

Double counting should be avoided while calculating national income, because if it is done the value of goods will be counted twice. So national income will be overestimated.

  • Depreciation Allowance:

While calculating national income, depreciation on capitals should be deducted.

  • Self Used Product:

Goods which are used by the person who produce for himself are not included in national income. For example, shoes by cobblers, furniture by carpenter etc.

  1. 2. Income Method:

“According to this method national income is definable as the total of factor warnings (wages, interest, rent, profit) that are the cost of factor of production of society final goods.”

Under this method the national income is estimated by summing up income that arrives factor of production provided by the national residents. This the rate at which the national factor is distributed among the various factors of production is estimated. This method of calculating national income is quite complex.

Equation wise the method can represent national income as:

National Income = Rental Income + Wages + Interest + Profit

PRECAUTIONS:

  • Double Counting Must Be Avoided:

Transfer payments like pension, gifts, zakat are not included. Price received from sale of old house is also not included in national income because these payments already calculated in different times.

  • Illegal Earning:

Income through illegal activities should not be included in national income like smuggling or gambling.

  1. 3. Expenditure Or Out Lay Method:

The expenditure approach is the most popular national output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This too is acceptable because like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output is to combines all different areas in which money is spent within the region, and then combining them to find the total output.

GDP= C +  I + G + (X – M)

Where:

C = Household consumption expenditure

I = Gross private domestic investment

G = Government consumption

X= Gross exports of goods and services

M = Gross imports of goods and services

PRECAUTIONS:

  • Only final expenditure must be taken into account, initial expenditure are not included.
  • Government’s spending on transfer payments (pension, old age benefits etc.) must be excluded.
  • International transactions must be adjusted, means received from export should be included and payment for import excluded.
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One Response to Chapter 1 — NATIONAL INCOME

  1. Aqleem says:

    I require this notes for our MBA programme

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