NATIONAL INCOME

by • 31/07/2011 • 1st year EconomicsComments (0)1001

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.

 

DIFFICULTIES IN MEASURING OR CALCULATING NATIONAL INCOME

 

 

Some of the problem or the difficulties that are usually faced while calculating national income are as follows:

  1. 1. Non-Monetized Transaction:

Non-monetized transactions are those transactions, the value of which cannot be measured. For example the values of the services of housewives which they rendered to their families are exculeded at the time of computation of national income.

2. Calculation of Depreciation:

Another problem is the calculation of depreciation. The main reason behind it is that both the amount and the composition of jour capital change from time to time. There are no standard or concept rules of depreciation that can be applied. Since depreciation is an estimate so correct deduction can be made until and unless these accurate depreciation estimates are not deducted from the estimate of net national product the net national income is bound to wrong.

3. Treatment of the Government:

Government expenditures:

1. Defense and administration expenditure.

2. Social welfare expenditure.

3. Payment of interest on national debts

4. Miscellaneous development expenditure.

The real problem that is faced relates to which of the above should be included in the national income.

4. Income from Foreign Firms:

One of the major problem relates to the fact that weather the income arising from the activities of the foreign firms operating in a country should be included in the countries national income or not .With the growing trend of doing business globally has increased this problem to a great extant. However the I.M.F has given the viewpoint that the production and income of these foreign forms should go to the owning country while there profit must be credited to the parent concern.

5. Danger of Double Counting:

Proper care is required for calculating national income so that double counting may not take place. This problem usually arises in those countries where proper documentation or statistics are not available.

6. Value of Inventories:

Since it is not easy to calculate the value of raw materials, semi finished and finished goods in the custody of producers therefore it creates problems.

IMPORTANCE OF NATIONAL INCOME COMPUTATION IN MODERN ECONOMIC ANALYSIS

The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for there regular preparation. The following are some of the important uses of national income statistics:

Comparison between economies of the world:

With the help of national income estimates of various countries of the world we can compare the standards of living and the level of economic welfare of the people living in those countries.

Level of Economic Welfare:

The national income estimate reveals the overall performance of the country during a given financial year. With the help of this statistics the per capita income i.e. the income earned by every individual is calculated. It is obtained by dividing the total national income by the total population. With this we come to the level of economic welfare in terms of its standard of living.

Rate of Economic Growth:

With the help of national income statistics we can know weather the economy is growing or declining. In simple words it helps us to know the conditions of a country economy. If the national income is growing over a period of year it means that the economy is growing and if the national income has reduced as compares to the previous it reveals that the economy is detraining. Similarly the growing per capita income shows an increasing standard o living of the people which are a positive sign of a nations growth and vice versa.

Distribution of Wealth:

One of the most important objectives that is achieved after calculating national income is to check its distribution among different categories of income such as wages, profits, rents and interest. It helps to understand that how well the income is distributed among the various factors of the economy and their distribution among the people as well.

Ease in Planning:

Since the national income estimates also contain the figures of saving, consumption and investment in the economy so it proves to be a valuable guide to economic policy relating to planning and active government intervention in the economy. The estimates are used as a data for future planning also.

Formation of Budget:

Budget is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. Further we can asses and evaluate the achievements or otherwise of the development targets laid down in the plans from the changes in national income and its various components.

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