National Income is the total value of all the final goods and services produced by the country’s residents over a particular period, usually a year. It measures the economy’s performance and shows how the incomes generated by the productive activities are distributed among the individuals, businesses, and the government.

National income can be measured in two ways: by adding all incomes received by the factors of production, such as wages, rent, interest, and profit; or by measuring the total expenditure on consumption, investment, and net exports.

National Income Meaning

National income is the total value of all the final goods and services (produced by the residents) in a country during a particular period, usually a year. It indicates the performance of the economy and also shows the distribution of national income generated from productive activities.

National income is the summation of all the activities undertaken by individuals, businesses, and the government. It can be estimated by adding up all the incomes, either factor incomes like wages, profits, rent, and interest or on the basis of total expenditure, i.e. consumption, investment, net export

Components of National Income

National income is the sum total of various components that measure the flow of income in an economy. These components include all the ways through which income is earned as well as all the uses of the income, i.e. how it is spent or invested. The components of national income are:. 

National Income Components 

Consumption (C) 

Expenditure by households on all goods and services for personal consumption. It includes food, clothing, rent, medicines, entertainment expenses, electricity bills, etc. Consumption represents the demand side of the economy.

Investment (I) 

Capital formation is the total expenditure by business firms on fixed assets such as machinery, tools, equipment, buildings, roads, or inventories held by them. It also includes the purchase of residential buildings used in the production process.

Government spending (G) 

All government expenditure by the Central, State, or local governments on final goods and services, which covers items such as salaries of government employees, interest payments on public debt, spending on education, healthcare, defence, roads, electricity, water, etc. Transfer payments like pensions are not included as they do not lead to production of goods and services.

Net exports (X–M) 

The value of the exports of a country minus its imports. If the exports are higher, the difference is called a trade surplus and it is added to the national income, while if the imports are higher, the difference (trade deficit) is deducted from the national income.

Net factor income from abroad (NFIA) 

The difference between the factor incomes earned from outside the economy and the factor incomes paid to the rest of the world. NFIA is used to derive Gross National Product (GNP) from Gross Domestic Product (GDP), or vice versa.

Factor Incomes 

National income at factor cost is the sum of factor incomes which accrues to various factors of production:

• Wages (labour income) 
• Rent (land income) 
• Interest (capital income) 
• Profit (entrepreneurial income)

Net National Income

The definition of net national income (NNI) is the income received by the residents of a country during a specified period, usually a year. It is the total income of a nation minus the loss of capital due to depreciation. It is the income that is available to the people of the economy for the purpose of consumption, saving, and investment.

Net national income (NNI) can be calculated by deducting depreciation from the gross national product (GNP).

Formula: NNI = GNP – Depreciation

Where:

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

Depreciation = the value of machinery, equipment, and building stock that is worn out or obsolete in the process of production.

Importance of Net National Income

• Measures actual income: NNI measures the actual income available to the residents of the economy after replacing the depreciated capital.
• Economic planning: NNI is used by policymakers to plan for investments, consumption, and savings required for sustainable economic growth.
• Standard of living: NNI indicates the number of resources available to the people and thus helps to measure the standard of living of the people.

Factors Affecting National Income

The amount of national income of a country is determined by a number of factors, which, to different extents, affect the production of goods and services in a country. Factors affecting national income include those which are related to productivity, output, and other factors. Below are the major factors which determine national income:

• Natural Resources: Availability of land, minerals, water and forests determines the level of production and output of a nation. The greater these resources are, the more a nation can produce.
• Human Resources: Skilled, educated, trained, and healthy manpower increases efficiency and productivity in a country. The higher the productivity of people, the greater is the national income.
• Capital Formation: Production is determined by the availability of machinery, factories, and infrastructure. The greater the investment in capital, the greater is the national income.
• Technology: Application of modern and new techniques increases efficiency and reduces the costs of production. Countries, which use more modern methods of production, have a higher national income.
• Political Stability and Governance: Political stability, sound policies and governance are important for increasing production and economic growth. Corruption and political instability are factors, which are detrimental to economic activity and income.
• Social Factors: Education, health and population growth play an important role in productivity and economic growth. A literate and healthy society can produce more goods and services. Excessive population growth lowers per capita income. 
• Economic Policies: Tax rates, trade and foreign investment policies, and subsidies have an impact on economic activity and production. Pro-growth government policies promote production and national income, while trade barriers and other restrictions dampen economic activity.
• External Factors: Trade and foreign investment have an impact on national income. Export-led growth strategies increase the national income of a country. In addition, foreign investment is also a determinant of income levels. Furthermore, factors like global growth or global recession also have an impact on national income.

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National Income Measurement Methods

There are three main methods to measure national income:

1. Income Method
2. Production (Value-Added) Method
3. Expenditure Method

Measurement of National Income – Income Method

The Income Method estimates national income by adding all the incomes earned by the factors of production. These include rent, wages, interest, profit, and the mixed income of self-employed individuals.

In India, about one-third of people are self-employed. This method measures domestic income, which is the income generated within the country’s borders.

Measurement of National Income – Production (Value-Added) Method

The Production Method calculates national income by adding the value added by all firms.

Value Added = Value of Output – Value of Non-Factor Inputs

This gives GDP at Market Price (MP) because it includes depreciation (making it gross) and taxes (making it market price). To convert GDP at MP to National Income (NNP at FC), the following adjustments are made:

• Add Net Factor Income from Abroad (NFIA):
  GNP at MP = GDP at MP + NFIA
• Subtract Depreciation (Dep):
  NNP at MP = GNP at MP – Dep
• Subtract Net Indirect Taxes (NIT):
  NNP at FC = NNP at MP – NIT

Measurement of National Income – Expenditure Method

The Expenditure Method calculates national income using the formula:

Y = C + I + G + (X – M)

Where:

• Y = GDP at Market Price
• C = Private sector expenditure on final goods and services
• G = Government expenditure on final goods and services
• I = Investment or capital formation
• X = Exports
• M = Imports
• X – M = Net exports

Any of these methods can be applied to any sector of the economy. The choice depends on which method is most convenient for measuring that particular sector.

Concepts and Aggregates Related to National Income 

In the study of national income, several concepts and aggregates are used to understand and measure the income earned by individuals, the output produced by an economy, and the overall economic performance. These concepts help in providing a framework for economic analysis, policy formulation, and international comparisons of economic activities.

Gross Domestic Product (GDP): GDP is the market value of all final goods and services produced within the domestic territory of a country in a particular year or period. It represents the total output or production within the country’s borders.

Calculation: GDP = C + I + G + (X – M) 

Where: 

C = Consumption expenditure 

I = Investment expenditure 

G = Government expenditure 

X = Exports 

M = Imports 

Gross National Product (GNP): GNP is the market value of all final goods and services produced by the residents of a country, both domestically and abroad, during a specific period. It includes the output produced within the country and the income earned by residents from overseas.

Calculation: GNP = GDP + Net Factor Income from Abroad 

• Net National Product (NNP): NNP is the GNP of a country after accounting for depreciation. It represents the net output produced by the country’s residents and measures the net income available for consumption and investment.

Calculation: NNP = GNP – Depreciation 

• Depreciation: The reduction in the value of capital goods (machinery, buildings, etc.) due to wear and tear, obsolescence, or other factors.
• National Income (NI): National Income is the total income earned by the residents of a country from all economic activities within a specific period. It includes factor incomes earned by individuals, businesses, and the government.

Calculation: NI = NNP at Factor Cost 

• Personal Income (PI): Personal Income is the income received by individuals and households from all sources before paying personal taxes. It includes wages, salaries, dividends, interest, transfer payments, and other sources.

Calculation: PI = National Income – Undistributed Corporate Profits – Social Security Contributions + Transfer Payments

• Disposable Income (DI): Disposable Income is the income available to individuals and households for spending or saving after paying personal taxes. It represents the actual money income available to people.

Calculation: DI = Personal Income – Personal Taxes 

• Factor Cost: The cost of production from the perspective of the factors of production (labor, capital, etc.). It is the value of output based on the payments made to the factors of production.
• Market Price: The price at which goods and services are sold in the market, including taxes and excluding subsidies.

Difference: Market Price = Factor Cost + Taxes – Subsidies 

National Income Limitations

The national income is an economic parameter which has the following limitations:

• It overlooks the distribution of income among citizens. A country may have a high national income while many of its citizens may be poor.
• It overlooks the unreported non-monetary transactions like barter exchange, household production, etc.
• It overlooks environmental issues, for example, the depletion of natural resources.
• It overlooks the quality of goods and services produced and the leisure time enjoyed by the people.

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