National Income is macro economic concept.
National Income means money value of goods and services produced in the country in a year. There are three methods to measure national income.
(1) The Output Method,
(2) The Income Method,
(3) The Expenditure Method.
(A) The Income Method : This method is also known as factor cost method. According to this method national income is the sum of income received by all factors of production in a year. So national income is the income received by all the citizens of the country in a year. In income method national income studied from the distribution side. According to income method national income or GNP is NI = R + W + I + P + MI + (X – M)
- Rent (R) : Rent and Royalty is usually treated as the payment for the land, building, machines that are rented.
- Wages (W) : It includes wages and salaries earned by labour as well as it includes commission, bonus, social security payments, fringe benefits, etc.
- Interest (I) : Interest is the payment for using the services of capital. It includes interest paid by banks, insurance companies etc.
- Profit (P) : It includes the profit of private and public sector companies.
- Mixed Income (MI) : It is the income which is earned by self-employed. They earn income through various sources like wages for effort put, rent on own property, interest on own capital, etc.
- Net Exports (X – M) : It is the difference between export and imports.
Precautions :
- Transfer payment : It should not be included in national income. E.g. pension, gifts, unemployment allowances, lottery prize, etc.
- Unpaid services : It should not be included in national income. E.g. services of housewife, teacher teaching her own child, etc.
- Second hand goods : The income from sale of second hand goods should not be included.
- Financial asset : The income from sale of shares and bonds should not be included in national income.
- Tax revenue : The revenue of government through taxes should not be included in national income.
- Undistributed profits of companies, income from government property and profits from public enterprise should be included.
- The imputed value of production kept for self-consumption and rental value of owner-occupied houses should be included in national income.
(B) Expenditure Method :
This method also known as outlay method.
NI = C + I + G + (X – M) + (R – P)
National Income can also be calculated by adding up the expenditure incurred on purchase of final goods and services. We can get National Income by summing up all consumption expenditure, investment expenditure made by all individuals, firms as well as the government of a country during a year.
- Consumption Expenditure (C) : It includes all expenditure incurred on goods and services by households during the year. It includes expenditure mostly on durable and non-durable goods, which are consumed by the consumers. E.g. food, medical care, clothing, car, computer and services, etc.
- Investment Expenditure (I) : It refers to the investment made by private businessman on capital goods like machinery, plants, factories, warehouses, etc.
Government Expenditure on goods and services (G) : Government expenditure refers to expenditure on consumption and investment –
- Consumption expenditure : It refers to expenditure incurred on various administrative services like law and order, defence education, generation and distribution of electricity.
- Investment expenditure : It refers to expenditure incurred by government on construction of roads, railways, dams, canals, etc.
Net Exports (X – M) : It refers to difference between exports and imports of the country. If the exports are more than imports then net exports will be positive, it is called Trade Surplus and if imports are greater than exports, the net exports will be negative, it is called as Trade Deficit.
Net Receipts (R-P) : It is the difference between expenditure incurred by foreigners in the country (R) and expenditure incurred abroad by Nationals (P). Net Receipts can also be Positive or Negative.
Net National Expenditure = NNE = C + I + G + (X – M) + (R – P) – Depreciation. NNPFC or NI = C + I + G + (X -M) + (R-P) "Depreciation" Indirect Tax + Subsidies.
Precautions :
The following precautions should be taken while estimating National Income.
- To avoid double-counting take the expenditure incurred only on final goods and services.
- Government expenditure on transfer payments to be excluded like unemployment allowances, old age pension, etc.
- Expenditure on second-hand goods like furniture, house, land, and financial assets like shares, bonds, etc. should be excluded.
- Exclude expenditure incurred on the purchase of financial assets such as shares, bonds, etc.
- Deduct indirect tax and add subsidies. Out of these methods, output method and income method are extensively used.
- The expenditure method is rarely used because of its practical difficulties.
- In India, the Central Statistical Organisation (CSO) adopts a combination of output method and income method to estimate N.I. of India.
