National Income and Its Measurement PDF

NATIONAL INCOME AND ITS MEASUREMENT Concept of National Income National income of a country is the sum of incomes earned by its residents from the factor services rendered to the production units both within and outside the geographical boundaries of the country....

NATIONAL INCOME AND ITS MEASUREMENT Concept of National Income National income of a country is the sum of incomes earned by its residents from the factor services rendered to the production units both within and outside the geographical boundaries of the country. The term ‘national’ here refers to ‘of residents’ and the term income refers to ‘factor income’. The term “residents” refers to those individuals (and institutions) whose economic interest lies in the country in which they live (or located). By economic interest we mean the basic economic activities of production, consumption and investment. Factor incomes refer to the incomes derived by four factors of production such as- Land (natural resources), labour (human resources), capital (man- made resources) and entrepreneurship are the four factors of production. METHODS OF MEASURING NATIONAL INCOME Expenditure Method The amount of economic activity occurring during a given period of time can be measured ni terms of the amount of spending on final goods and services. But, expenditure on goods purchased for re-selling (i.e., intermediate goods) is not included in this method. According to this method, final expenditure on GDP at market prices is considered to represent the economic activity. Under this method, the components of GDP are the private consumption expenditure (C), private investment expenditure (I), government expenditure (G), and net foreign expenditure or net export (NX). Hence, ni this method, expenditure incurred by various sectors, viz., household, business, government, and rest of the world are added together to get final expenditure of the economy. According to this method, GDP at market prices (Y) is the aggregate of all the final expenditure in an economy during a financial year which is presented by the following Income- Expenditure Identity: Y=C+I+G+ NX 1. Consumption Consumption expenditure is incurred by the household sector. It includes expenditure incurred on goods and services sold to the final users during the financial year. It captures both durable goods like car, furniture etc., non- durable goods like food, fuel, etc. and services like banking, healthcare, etc. 2.Investment Investment expenditure is incurred by business firms in inputs for production of goods and services. It includes business fixed investment, residential investment, and inventory investment (or, change in stock). 3. Government Expenditure It includes expenditure incurred by local, state and central level governments. Government pays salaries to their employees, spends on social security benefits like medical benefits, unemployment allowance, etc. 4. Net Exports Net exports are defined as exports minus imports. Exports can be seen as spending by foreigners on domestically produced goods and services whereas imports are spending on foreign goods and services by domestic residents. When value of exports is greater than value of imports, net exports are positive and vice versa. Income Method The value of product is equal to the payments made to the factors of production. In general, there are four factors of production, viz., land, labour, capital and entrepreneurship which are compensated through rent, wages, interest and profit, respectively. According to this method, national income is measured in terms of payments made to all factors of production. Hence, based on this National Income = C + G + I + T 1. Compensation of Employees (C) This comprises wages, salaries, employee benefits such as employers' contribution to pension plans, social security, etc. It is the total remuneration, in cash or in kind, paid by an employer to an employee for the labour during the accounting period. It is composed of wages and salaries (in cash and in kind), and employers' social contributions. 2. Gross Operating Surplus (G) It is net business income during the production process from property and enterprises in the form of rent, interest, royalty and profit. Profit includes dividends, corporate taxes and retained earnings Gross Operating Surplus = Rent Interest + Royalty + Profit 3. Income of Self Employed (I) Income of a proprietor (owners of capital, land, and skills) earn mixed income in the form of mix of capital income, labour income and profits. The income of this group is referred to as mixed income because it is not clear what proportion of their income is equivalent to wage or profit. 4. Taxes on production and imports less subsidies on production (T) The former consist of compulsory, non-refundable payments to or from general government or institutions in India, in respect of the production or import of goods and services, the employment of labour, and the ownership or use of land, buildings or other assets used in production. Value Added Method This method is also known as 'Output Method' or 'Product Method'. It measures the contribution made by each producing enterprise in the domestic territory of the economy in a financial year. The method measures economic activity by adding the market values of goods and services produced, excluding any goods and services used up in the intermediate production stages. Under this method, we aggregate the value added by the various sectors of production of goods and services to get GDPMP. Each firm's value added is 'the value of its output minus the value of the intermediate goods it purchased from other firms'. In other words, it is the addition of value in final product to the intermediate goods at different stages of production. National Income under Value Added Method can be calculated by: 1) Gross Value added = Gross output - Intermediate Consumption 2) Net Value Added = Gross Output - Intermediate Consumption - Depreciation. 3) Net Value added at FC =NVAFc =Gross Output - Intermediate Consumption - Depreciation - Net Indirect Taxes. 4) By adding 'net factor income from aboard' to domestic income (NVAFc), we obtain Net National Product (NNPFc). Thus, National Income or NNPFc = Gross Output - Intermediate Consumption - Depreciation - Net Indirect Taxes + Net Factor Income from Aboard GROSS NATIONAL PRODUCT Gross national product (GNP) refers to the total value of all the goods and services produced by the residents and businesses of a country, irrespective of the location of production. GNP takes into account the investments made by the businesses and residents of the country, living both inside and outside the country. It also takes into account the value of the products produced by the industries of the domestic origin. GNP does not take into consideration the incomes earned by the foreign nationals in the country or any products produced by a foreign company in the manufacturing units in the country. For calculating GNP, only the final goods and services are considered. Intermediate goods are avoided as it leads to double counting. To calculate the GNP for a nation, the following factors are considered: Consumption expenditure Investment Government expenditure Net exports (Total exports minus total imports) Net income (Income earned by residents in foreign countries minus income earned by foreigners in the country) The mathematical formula for calculating GNP is expressed as follows: Y=C+I+G+X+Z NET NATIONAL PRODUCT Net national product or NNP is the market value of all the finished goods and services that are produced by citizens of a nation, living domestically and internationally during a year. Net national product is also referred to as the value that is obtained by subtracting depreciation from the gross national product (GNP). Net national product considers all the goods, products and services that are manufactured by the country’s citizens, irrespective of their location, or in other words, net national product considers products that are produced domestically and also from overseas. NNP is one of the important metrics for determining the actual growth of a nation. It measures how much the country is able to consume in a given period of time. When the net national product (NNP) of a country decline or falls, then the businesses consider moving to industries that are deemed to be recession-proof. In case there is a rise in net national product, then the businesses shift their focus on industries that are consumer led, such as travel and sales in order to generate more sales. The net national product can be calculated by the following formula NNP = GNP – Depreciation NET NATIONAL INCOME In national income accounting, net national income (NNI) is net national product (NNP) minus indirect taxes. Net national income encompasses the income of households, businesses, and the government. Net national income is defined as gross domestic product plus net receipts of wages, salaries and property income from abroad, minus the depreciation of fixed capital assets (dwellings, buildings, machinery, transport equipment and physical infrastructure) through wear and tear and obsolescence. It can be expressed as: NNI = C + I+ G + NX+ Net Factor Income from Abroad -Indirect Taxes-Depreciation