Concept of National Income

Concept of National Income

National Income
National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure.  On this basis, national income has been defined in a number of ways.  In common parlance, national income means the total value of goods and services produced annually in a country.  In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income.  It includes payments made to all resources in the form of wages, interest rent and profits.
Definitions of national income:
The definitions of national income can be classified into two groups, 1, the traditional definitions given by Marshall, Pigou and Fisher, and, 2, modern definition.

1. Traditional definition:

The Marshallian definition:
According to Marshall,” The labour and capital of country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.  This is the true net annual income or revenue of the country or national dividend.”
The Pigovian Definition
Marshall’s follower, A.C. Pigou has in his definition of national income included that income which can be measured in terms of money.  In the words of Pigou, “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money”.
Fisher’s definition:
Fisher adopted ‘consumption’ as the criterion of national income.  Whereas Marshall and Pigou regarded it to be production, according to Fischer,” the national dividend or income consists solely of services received by ultimate consumers, whether from their material or human environment.  Thus, a piano, or an overcoat made for me this year is not a part of this year’s income, but an addition to the capital, only the services rendered to me during this year by these things are income”.

Definitions advanced by Marshall, and Pigou’s definition tell us the reasons influencing economic welfare.  Whereas Fisher’s definition help us compare economic welfare in different years.
Among the modern economists, Simon Kuznets has defined national income as,” the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers”.
United Nations defines national income on the basis of the systems of estimating national income, as net national product as addition to the shares of different factors and as net national expenditure in a country in a year’s time.  In practice, while estimating national income, any of these three definitions may be adopted, because the same national income would be derived, if different items were correctly included in the estimate.

Concepts of National Income:



There are a number of concepts pertaining to national income.  They are:

1. Gross National Income (GNP)

2. Net National Income (NNP)

3. Gross Domestic Product (GDP)

4. Personal Income

5. Disposable Personal Income

6. Per Capita Income

7. Private Product Remaining  

1.Gross National Income:
GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad, GNP includes four types of final goods and services:

(1) Consumer’s  goods and services to satisfy the immediate wants of the people.

(2) Gross Private Domestic Investment in capital goods consisting of fixed capital  formation, residential construction and inventories of finished and unfinished goods.

(3) goods and services produced by the government and

(4) net exports of goods and services that is, the difference between value of exports and imports of goods and services, known as net income from abroad.

In this concept of GNP there are certain factors that have to be taken into consideration.
First, GNP is the measure of money, in which all kinds of goods and services produced in a country during one year are measured in terms of money at current prices and then added together.
Second, in estimating GNP of the economy, the market price of only the final products should be taken into account.
Third, goods and services rendered free of charge are not included in GNP, because, it is not possible to have a correct estimate of their market prices.
Fourth, the transactions which do not arise from the produce of current year or which do not contribute in any way to production are not included in GNP
Fifth, the profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices are not included in the GNP if they are not responsible for current production or economic activity.
Lastly, the income earned through illegal activities is not included in GNP.
GNP is the most frequently used national income concept.  It is a better index than any other concept because it expresses the actual condition of production and employment in a country during a specific period.  It provides a general idea of the performance of the economy.

2. Net National Income (NNP):

GNP includes the value of total output of consumption and investment goods.  But the process of production uses up a certain amount of fixed capital.  Some fixed equipment wears out, its other components are damaged or destroyed and still others are rendered obsolete through technological changes.  All this process is termed as depreciation or capital consumption allowance.  In order to arrive at NNP, we deduct depreciation from GNP.  The word ‘net’ refers to the exclusion of that part of total output which represents depreciation.  So , NNP = GNP- Depreciation.
3, Gross Domestic Product:
Income generated by the factors of production within the county from its own resources is called domestic income or domestic product.  Gross domestic product includes:

1. Wages and salaries
2. Rents, including imputed house rents
3. Interest
4. Dividends
5. Undistributed corporate profits including surpluses of public sector undertakings
6. Mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships etc. and
7. Direct taxes

Since gross domestic product or income does not include income earned from abroad, it can also be shown as:
Domestic Income = National Income – Net Income from Abroad
Thus the difference between domestic income and national income is the net income earned from abroad may be positive or negative.  If exports exceed imports, net income from abroad is positive.  In this case national income is greater than domestic income.  On the other hand, when inputs exceed exports, net income earned from abroad is negative and domestic income is greater than national income.

Bangladesh GDP Annual Growth Rate:

The Gross Domestic Product (GDP) in Bangladesh expanded 7.05 percent year-on-year in nine months of 2015/2016 fiscal year, according to preliminary estimates. GDP Annual Growth Rate in Bangladesh averaged 5.72 percent from 1994 until 2016, reaching an all time high of 7.05 percent in 2016 and a record low of 4.08 percent in 1994. GDP Annual Growth Rate in Bangladesh is reported by the Bangladesh Bank.

Bangladesh GDP	Last	Previous	Highest	Lowest	Unit
GDP Growth Rate	7.05	6.51	7.05	4.08	percent	[+]
GDP Annual Growth Rate	7.05	6.55	7.05	4.08	percent	[+]
GDP	195.08	172.85	195.08	4.30	USD Billion	[+]
GDP Constant Prices	8245.32	7745.39	8245.32	2372.59	BDT Billion	[+]
Gross National Product	8261.49	8261.49	8261.49	2483.46	BDT Billion	[+]
Gross Fixed Capital Formation	4384.38	3875.14	4384.38	594.12	BDT Billion	[+]
GDP per capita	972.88	924.06	972.88	317.79	USD	[+]
GDP per capita PPP	3136.60	2979.20	3136.60	1290.40	USD	[+]
GDP From Agriculture	1892720.00	1764997.00	1892720.00	976905.00	BDT Million	[+]
GDP From Construction	1257537.00	1084839.00	1257537.00	441805.00	BDT Million	[+]
GDP From Manufacturing	2922821.00	2544831.00	2922821.00	1161971.00	BDT Million	[+]
GDP From Mining	288797.00	238757.00	288797.00	109261.00	BDT Million	[+]
GDP From Public Administration	701031.00	506741.00	701031.00	224643.00	BDT Million	[+]
GDP From Services	1945345.00	1764017.00	1945345.00	734214.00	BDT Million	[+]
GDP From Transport	1693965.00	1500253.00	1693965.00	687386.00	BDT Million	[+]
GDP From Utilities	224585.00	198682.00	224585.00	69975.00	BDT Million	[+]

4. Personal Income:

Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year.  The entire national income will not be available for consumption.  National income is different from personal income.  In order to arrive at personal income several deductions are to be made.  For example, corporations have to pay income-tax from the corporate profits before declaring dividends.  Likewise a part of the corporate profits available for distribution is reduced.  Similarly salaried persons and wage earners pay a certain percentage of their income towards social security contribution.  To that extent income available to the employees and workers is reduced.  Against this, the government may give social security benefits such as unemployment allowances, old age pensions etc.  These payments are called transfer payments are called
transfer payments.  These are to be added to arrive at personal income.  Therefore.

Personal Income = National Income – Corporate income taxes – undistributed corporate profits-social security contributions + transfer payments.

The concept of personal income is a useful concept.  It helps in estimating the potential purchasing power of the households in an economy.  The weakness of this concept is that it does not clearly tell us the actual amount of money available for disposable personal income.

5. Disposable personal income:

Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families.  The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct taxes have actually been paid.  Therefore, in order to obtain the disposable income, direct taxes are deducted from personal income. Thus:

Disposable income = personal income – direct taxes

But the whole of the disposable income is not spent on consumption and a spent on consumption and a part of it is saved.  Thus,

Disposable income = consumption expenditure + savings expenditure.

6. Per capita income:

The average income of the people of a country in a particular year is called per capita income for that year.  This concept also refers to the measurement of income at current prices and at constant prices.  For instance, in order to find out the per capita income at current prices, the national income of a country is divided by the population of the country in that year.

Per capita Income = National income÷ population

This concept enables us to know the average income and the standard of living of the people.  But it is not very reliable, because in every country due to unequal distribution of national income a mojor portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita income.

7. Private Product Remaining: Private product remaining or PPR is a means of national income accounting similar to the more commonly encountered GNP. Since government is financed through taxation and any resulting output is not sold on the market, what value is ascribed to it is disputed  and it is counted in GNP. Murray Rothbard developed the GPP  and PPR measures. GPP is GNP minus income originating in government and government enterprises. PPR is GPP minus the higher of government expenditures and tax revenues plus interest received.

For example, in an economy in which the private expenditures total $1,000 and government expenditures total $200, the GNP would be $1,200, GPP would be $1,000, and PPR would be $800.

Methods of measuring National income:
In preparing the national income estimate it is necessary to add the values of all final goods and services produced and exchanged during a year.  Thus what ever is produced is either used for consumption or saving.  There are three methods of estimating national income. They are:

1. The census of products method
2. The census of income method
3. The expenditure method

1. The census of products method:

This is also called inventory or output method.  Under this method, the value of aggregate production of final goods and services in an economy in a year is considered.  The economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and services etc.  Then the gross product is found out by adding the net values of all production that has taken place in these sectors during a year.  The aggregate of all these is called the gross national product at market price.  While calculating the gross national product under this method, care must be taken to avoid double counting.
Computation of national income of a country through output method

Output method or product method                       Rs. (Crores)

Agriculture, forestry and fishing	300
Construction	200
Distributive Trades	500
Gas, Electricity and finance	100
Insurance, banking and finance	300
Manufacturing	500
Mining and quarrying	200
Public administration and defence	250
Public health and education	250
Others	200
Total Domestic Product	2800

2. The census of income method:

This method approaches the national income from the distribution side.  The incomes accruing to all the factors of production during the process of production are aggregated together.  This is called national income at factor cost.  National income is calculated by adding the following:

1. Wages and salaries
2. Social security
3. Earning of self-employed or professional income
4. Dividends
5. Undistributed profits
6. Interest
7. Rent
8. Profits of public sector enterprises and
9. Subsidies and transfer payments have to be deducted. All unpaid services are to be excluded. Financial investments in the form of equity shares, sales of old property etc. are to be excluded.  Direct tax revenue to the government should be subtracted from the total income.  Government subsidies should be deducted.  In India the national income committee is using this method in calculating national income.

The expenditure method:
Expenditure method arrives at national income by adding up, all expenditure made on goods and services during a year.  Income can be spent on consumer goods or capital goods.  Again, expenditure can be made by private individuals and households or by government and business enterprises.  Further, people of foreign countries spend on the goods and services which a country exports to them.  Similarly people of a country spend on imports of goods and services from other countries.  We add up the following types of expenditure by households, government and by productive enterprises to obtain national income.

1. Expenditure on consumer goods and services by individuals and households.  This is called final private consumption expenditure and is denoted by ’C’.
2. Government expenditure on goods and services to satisfy collective wants. This is called government’s final consumption expenditure and is denoted ‘G’.

3. The expenditure by productive enterprises on capital goods and inventories or stocks. This is called gross domestic capital formation, which, is denoted by ‘I'. Gross domestic capital formation is divided into two parts.
4. Gross fixed capital formation.
5. Addition to the stocks or inventories of goods.

4. The expenditure made by foreigners on goods and services of a country exported to other countries, which are called exports and are denoted by ‘x’.We deduct from exports ‘x’ the expenditure by people, enterprises and government of a country on imports (M) of goods and services from other countries.  That is, we have to estimate net exports (that is exports- imports) or (x-m)

Thus we add up the above four types C+G+I+(x-m) to get final expenditure on gross domestic product.  On deducting consumption of fixed capital, we get net domestic product.
Difficulties in the measurement of national income:
There are a number of difficulties in the measurement of national income of a country.  The following are the important difficulties of national income analysis:

1. National income is always measured in terms of money, but, there are certain goods and services whose money measurement is not possible. For example: the services performed by housewife for her family, voluntary services performed with a charitable object, etc. such items are excluded from the national income figures. This leads to an underestimate of the national income.

2. Income obtained from illegal activities is not included in the national income and their exclusion results in an under-valuation of the national income.

3. It is difficult, to obtain accurate statistics. This is the reason, why there is big differences between the national income statistics collected by the different institutions.

4. The collection of depreciation on capital consumption, presents another formidable difficulty. There are no accepted standard rates of depreciation applicable the various categories of capital goods. Thus, the national income estimate will not be correct.

5. The difficulty of avoiding double counting in the national income. To avoid this difficulty, final goods and services are to be included in the national income, but it is not an easy task.

6. The difficulty of price changes arises in the national income estimate. When the general price index increases, the national income will also increase, even if the national output is reduced. Similarly, if general price index decreases, the national income will also decrease, although, there may be an increase in national output.  Therefore, due to price changes, we may not find an accurate estimate of national income.

7. The prevalence of non-monetized transactions in underdeveloped countries creates an important problem in the measurement of national income. A considerable part of the output does not come into the market at all. In agriculture, a major part of output is consumed by the farmer themselves which reduces the national income figure to a great extent.

8. Due to illiteracy, most of the producers in less developed countries have no idea of the quantity and value of their output and do not keep regular accounts, which, creates difficulties in national income measurement.