National Income (NI)
- National income is the monetary value of goods and services produced in a country in one year. National income measures the productive power of an economy in a given period to turn out goods and services for final consumption.
Important features of national income are as follows
- National income is calculated for a specified period, normally a financial year. (In India, financial year means April 1 to March 31 of next year).
- National income is the monetary value of all final goods and services produced.
- Depreciation of all plant and machinery is deducted from gross value to get net value.
- Net factor income from abroad is added in the domestic product to get the value of national income.
National income = C + I + G + (X – M)
C = total consumption expenditure
I = total investment expenditure
G = total government expenditure
X – M = export – import
Different concepts of National Income
- Gross domestic product (GDP):
- It is the monetary value of all final goods and services produced in a country in a year. In Gross Domestic Product, income generated by foreigners in a country is included but income generated by nationals of a country outside the country is not included.
- Per annum percentage change in GDP is the “growth rate” of an economy.
- It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy.
- It is used by the IMF/World Bank in the comparative analysis of its member Nations.
- Net domestic product (NDP):
- It is the net value of GDP after deducting depreciation of plant and machinery from GDP.
NDP = GDP – Depreciation
Gross National Product (GNP)
- It is the monetary value of all final goods and services produced by the residents of a country in a year.
- One useful measure used to assess the size and growth of a country's economy is the Gross National Product (GNP). GNP quantifies the size of a country's economy factoring in both what is produced within its borders and what is generated by its citizens abroad.
- GNP is typically calculated as:
GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries
- Where typically GDP is calculated as:
GDP = Consumption + Investment + Government Spending + Exports – Imports
- So while GDP generates a value based on where income is generated, GNP generates a value based on the ownership of that income.
Difference between GDP and GNP
- In GDP, goods and services produced in a country is added, whether it is produced by residents of the country or foreigners. In GNP, the production of foreigners in the country is not included while the production of nationals outside the country is included. In other words, international trade is included in the calculation.
- The items which are counted in the segment ‘Income from abroad’ are:-
- Trade balance: Net outcome at the year end of the total exports and imports of a country.
- Interest of external loans: The net outcome on the front of the interest payments i.e. balance of the inflow (on the money lend out by the economy) and the outflow (on the money borrowed by the economy) of the external interest.
- Private remittances : The net outcome of the money which inflows and outflows on account of the ‘private transfers’ by the Indian nationals working outside India (to India) and the foreign nationals working in India (to their home countries).
- The balance of all the three components of the ‘income from abroad’ segments has been always negative in case of India due to heavy outflows on account of trade deficits and interest payments of the foreign loans.
Net National Product (NNP)
- It is the value of GNP after deducting depreciation of plant and machinery.
NNP = GNP – depreciation.
- Net National product can be calculated in two ways:
- At factor cost
- At market cost
- What differentiated those two costs are indirect taxes imposed by Govt as well as subsidies provided by the Govt.
- Net National product(NNP) at factor cost: It is the value of NNP when the value of goods and services is taken at the production (cost) point.
- Net National product(NNP) at market price: It is the value of NNP at consumer point.
NNP at market price = NNP at factor cost + indirect taxes - subsidies.
- Factor cost : It is the ‘input cost’ which is beard by producer in the process of producing something. This is also termed as ‘factory price’ or ‘production cost/price’.
- Market cost: It is the cost at which the goods reach the market. It is derived after adding the indirect taxes to the factor cost of the product, means the cost at which the goods reach the market. It is also known as ex-factory price. In India, National Income is calculated at factor cost because of lack of uniformity of taxes, goods are not printed with their prices etc.
- Net National Product (GNP) is the “National Income”(NI) of an economy and is the purest form of the income of a nation.
- When we divide NNP by the total population of nation we get the ‘per capita income’ (PCI). Higher the rates of depreciation lower the PCI of the Nation.
National Income (NI)
- We take NNP at factor cost as National income. Because calculating the national income at market price without deducting the indirect taxes, will lead to adding of the taxes twice while counting.
- National Income is calculated by subtracting net indirect taxes from NNP at market prices. The obtained value is known as NNP at factor cost or national income.
- In equation from:
NNP at factor cost or National income = NNP at market price – (Indirect Taxes – Subsidy) = NNPMP – Indirect Tax + Subsidy.
Real National Income
- Real National Income: It is the value of national income adjusted for inflation calculated from some reference point (base year).
Real National Income
= NNP at current prices X 100/Price index.
- Per Capita Income: It is the average income (per person) of a country.
Per Capita income
= National income/ population of the year.
- Personal Income: It is the Income of the residents (Individual) of a country.
Personal Income = National Income + Transfer payments – Social security contributions – corporate tax – Undistributed profits
- Income of person has three forms –
- Nominal income: The wage someone gets in hand per day or per month.
- Real income: This is nominal income minus the present day rate of inflation - adjusted in percentage form.
- Disposable income: The net part of which, one is free to use which is derived after deducting the direct taxes from the real/nominal income.
- Methods of calculating National Income: The national income of a country can be measured by three alternative methods:
- Product Method
- Income Method, and
- Expenditure Method.
- Product method: In this method, net value of final goods and services produced in a country during a year is obtained, which is called total final product. This represents Gross Domestic Product (GDP). Net income earned in foreign countries by nationals is added and depreciation is subtracted from GDP.
- Income method: In this method, a total of net income earned by working people in different sectors and commercial Enterprises is obtained. Incomes of both categories of people paying taxes and not paying taxes are added to obtain national income.
- Expenditure method: Income is either spent on consumption or saved. Hence, National Income is the addition of total consumption and total savings.
- In India, a combination of production method and income method is used for estimating National Income.
Problems in calculating National Income
- Black Money: Illegal activities like smuggling and unreported income due to tax evasion and corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate GDP estimates.
- Non Monetisation: In most of rural economy considerable portion of transaction occurs informally and they are called as non monetized economy. This keeps the GDP estimates at lower level than the actual.
- Growing Service sector: Many services like BPO, value addition in legal consultancy, health services, financial and business services and service sector as a whole is not based on accurate reporting and hence, national income is underestimated.
- Double counting: It is also a hurdle to accurate GDP estimates. Though, there are some corrective measures, but it is difficult to eliminate it.
National Income Estimates in India
- The first attempt to calculate National Income of India was made by Dadabhai naoroji in 1867 - 68, who estimated per capita income to be rupees 20.
- The first scientific method was made by professor VKRV Rao in 1931-32, but was not very satisfactory.
- The first official attempt was made by National Income Committee headed by Professor PC Mahalanobis in 1949.
- According to the National Income Committee Report (1954), National Income of India was rupees 8710 crore and Per Capita Income was rupees 225 in 1948-49.
- In India, Central Statistical Organisation(1949) (now renamed as Central Statistical Office (CSO) has been formulating National Income.
Gross fixed capital formation (GFCF)
- It is a macroeconomic concept used in official national accounts. It is a component of the Expenditure method of calculating GDP.
- Gross fixed capital formation refers to net additions of Capital stock such as equipment, buildings and other intermediate goods. A nation uses capital stock in combination with labour to provide services and produce goods. To grow at a faster rate, a Nation needs high levels of capital formation, so that it can grow its aggregate income as well as per capita income. This is because higher levels of capital stock enable an economy to produce more goods and services.
- To achieve a high level of capital formation, a nation should also achieve high levels of domestic savings(both households and firms), so that capital formation can be funded without relying on external dept.
- In GFCF, the term gross signifies that adjustments due to depreciation of capital stock (e.g., machinery), are not made. When such an adjustment is made, it is called Net Fixed Capital Formation.
- The term fixed signifies that fixed capital is counted and financial assets, stocks of inventory etc are excluded.
- GFCF also excludes land sales and purchases.
Incremental Capital Output Ratio (ICOR)
- ICOR is used to assess a country’s level of production efficiency. ICOR equals Annual Investment/Annual Increase in GDP. Higher levels of ICOR mean that capital is not being used efficiently to increase production.
Hindu Growth Rate
- The Hindu rate of growth is a term referring to the low annual growth rate of the planned economy of India before the liberalisations of 1991, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%.
- The term contrasts with South Korea's Miracle on the Han Riverand the Taiwan Miracle. While these Asian Tigers had similar income level as India in the 1950s, exponential economic growth since then has transformed them into developed countries today.
- Professor Rajkrishna, an Indian economist, coined the term ‘Hindu rate of growth’ in 1978 to characterise the slow growth and to explain it against the backdrop of socialistic economic policies.