Detailed Information About National Income

A Complete Information Of  National Income

INTRODUCTION

When we undertake the study of national economics, we are interested in macroeconomics aggregates such as, aggregate income, output, employment, prices, consumption, savings, investment etc. Just as there are accounting conventions, measure the performance of business, there are conventions for analyzing the economic performance of a nation. 

National income means the net value of final  goods and services produced within the domestic territory of a country in an accounting year plus the net factor income from abroad. 

The basic fundamental principle of national income is based on the following basis:

                        In a nation Production=Sale=Income

∴ GDP: The aggregate value of all the final goods and services produced in the domestic territory of the country during a period, generally a year.

Domestic territory is defined to include the following: 

1. Ships and aircrafts operated by residents of India between two or more countries.
2. Territory line within the political frontiers including the territorial waters.
3. Fishing vessels, oil and natural gas, floating platform operated in international waters.
4. Embassies consulates and military establishments of the country located abroad.

Three Main rules for understanding National Income calculations

• Gross - Depreciation = Net
• Domestic + NFIA = National

GDP at Market Price : This includes indirect taxes and excludes the subsidies given by the government.

GDP at Factor Cost : The net value after deducting indirect taxes and adding subsidies to the GDP at market price is called GDP at factor cost.

 GDP at Constant Price : when GDP is measured based on some fixed prices prevalling at point of time in some base year is known as GDP at constant price.

GDP at constant price = GDP at current price × 100 (Base year) or real GDP / Price Index of cureent year 

GDP at current price : When GDP is estimated based on the prevailing prices, it is called GDP at current price.

           Cost 

  +        Profit

   +      Indirect Taxes 

    -       Subsidy

      =        GDP at MP

GNP : The sum of GDP and net factor income from abroad i.e. income received by tge Indian residents abroad minus paid to the non residents of abroad in the domestic territory of the country.

    GDP + Net Factor Income from Abroad (NFIA) = GNP

National Income : The value of all the goods and services produced by a country, which is measured in terms of money during a period of one year.

          GDP at FC

   (-)   Depreciation 

     =   NDP at FC

  (+)    NFIA

Net National Product at Factor Cost = National Income = Net National Product at Factor Cost.

Factor Income in Domestic Territory i.e. NDP at FC   

+ 

NFIFA (Income Received From Abriad - Payment made to foreign people) 

National Income = NNP at FC 

Personal Income 

         National Income

  (-)   Social Security Contribution

  (-)   Corporate Income Tax

  (-)   Undistributed Profit 

   =    Personal Income

Personal Disposable Income 

            Personal Income

(-)        Personal Taxes

(=)       Personal Disposable Income

Summarising the concepts for Numerical

1. GNP at MP - NFIA = GDP at MP

2. GNP at MP - Depreciation = NNP at MP

3. GNP at MP - Net Indirect Tax = GNP at FC

4. NNP at MP - Net factor income from abroad = NDP at MP 

5. NNP at MP - Net Indirect Taxes = NNP at Fc

6. GDP at MP - Indirect Taxes = GDP at FC

7. GNP at FC - Depreciation = NNP at FC

8. NDP at MP - Net Indirect Taxes = NDP at Fc

9. GDP at FC - Depreciation = NDP at Fc

Three Ways of calculating  the National Income :  

1. Value added Method

(Also known as industry of origin method/ product method / output method) 

2. Income method 

(Also known as Distributed share method, Factor payment Method) 

3. Expenditure method 

(Also known as Consumption and Investment method, income disposal method)

USEFULNESS AND SIGNIFICANCE OF NATIONAL INCOME ESTIMATES

National income accounts are fundamental aggregate statistics in macroeconomic analysis and are extremely useful, especially for the emerging and transition economics. 

1. National income accounts provide a comprehensive, conceptual and accounting framework for analyzing and evaluating the short-run performance of an economy. The level of national income indicated the level of economic activity and economic development as well as aggregate demand for goods and services of a country.
2. The distribution pattern of national income determines the pattern of demand for goods and services and enables businesses to forecast the future demand for their products.
3. Economic welfare depends to a considerable degree on the magnitude and distribution of national income, size of per capita income and the growth of there over time.
4. The estimates of national income show the composition and structure of national income in terms of different sectors of the economy, the periodical variations in them and the abroad sectoral shifts in an economy over time. It is also possible to make temporal and spatial comparisons of the trend and speed of economic progress and development. Using these information, the governments can fix various sector-specific development targets for different sectors of the economy and formulate suitable development plans and policies to increase growth rates.
5. National income statistics also provide a quantitative basis for macroeconomic modeling and analysis, for assessing and choosing economic policies and for objective statement as well as evaluation of governments economic policies. The figures often influence popular and political judgments about the relative success of economics programmes.
6. National income estimates throw light on income distribution and the possible inequality in the distribution among different categories of income earners. It is also possible to make comparison of structural statistics, such as ratios of investments, taxes, or government expenditures to GDP.
7. International comparisons in respect of incomes and living standards assist in determining eligibility for loans, and or other funds or conditions on which such loans, and/ or funds are made available. The national income data are also useful to determine the share of nations contributions to various international bodies.
8. Combined with financial and monetary data, national income data provide a guide to make policies foe growth and inflation.
9. National income or a relevant component of it is an indispensable variable considered in economic forecasting and to make projections about the future development trends of the economy.