Concepts of National Income

Posted by Jeevan Thapa at 3:19 AM

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP, NI, PI, DI,
and PCI. These different concepts explain about the phenomenon of economic activities of the various
sectors of the various sectors of the economy.

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic product is
the money value of all final goods and services produced within the domestic territory of a country
during a year.

Algebraic expression under product method is,

GDP=(P*Q)

where,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.

According to expenditure approach, GDP is the sum of consumption, investment, government

expenditure, net foreign exports of a country during a year.

Algebraic expression under expenditure approach is,

GDP=C+I+G+(X-M)

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import

GDP includes the following types of final goods and services. They are:

1. Consumer goods and services.

2. Gross private domestic investment in capital goods.

3. Government expenditure.

4. Exports and imports.

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced annually in a
country plus net factor income from abroad. Thus, 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 factor
income from abroad. The GNP can be expressed as the following equation:

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

or, GNP=C+I+G+(X-M)+NFIA

Hence, GNP includes the following:

1. Consumer goods and services.

2. Gross private domestic investment in capital goods.

3. Government expenditure.

4. Net exports (exports-imports).

5. Net factor income from abroad.

Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for depreciation. It
is also called National Income at market price. When charges for depreciation are deducted from the
gross national product, we get it. Thus,

NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income (NI)

National Income is also known as National Income at factor cost. National income at factor cost means
the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and
organizational ability which go into the years net production. Hence, the sum of the income received by
factors of production in the form of rent, wages, interest and profit is called National Income.
Symbolically,

NI=NNP+Subsidies-Interest Taxes
or,GNP-Depreciation+Subsidies-Indirect Taxes
or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies

Personal Income (PI)

Personal Income i s the total money income received by individuals and households of a country from all
possible sources before direct taxes. Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security Contribution+Transfer
Payments

Disposable Income (DI)

The income left after the payment of direct taxes from personal income is called Disposable
Income. Disposable income means actual income which can be spent on consumption by individuals and
families. Thus, it can be expressed as:

DI=PI-Direct Taxes

From consumption approach,

DI=Consumption Expenditure+Savings

Per Capita Income (PCI)

Per Capita Income of a country is derived by dividing the national income of the country by the total
population of a country. Thus,

PCI=Total National Income/Total National Populatio

There are three methods of calculating national income:

1. The income method, which adds up all incomes received by the factors of production generated
in the economy during a year. This includes wages from employment and self-employment,
profits to firms, interest to lenders of capital and rents to owners of land.

2. The output method, which is the combined value of the new and final output produced in all
sectors of the economy, including manufacturing, financial services, transport, leisure and
agriculture.

3. The expenditure method, which adds up all spending in the economy by households and firms
on new and final goods and services by households and firms.

Determinants of national income and Factors on

which size of national income depends?

National income is that part of the objective income of a community, which

can be measurement in term of money, it also include income corned from
abroad.
Following are the main factors on which the size if national income depends.

1. Availability of natural resources:

Availability of natural resource and its maximum exploitation increase the

size of national income. A country having a large reserve of natural
resources, in the form of coal, oil, gas etc can easily increases the size of
national income and vice versa.

2. Stock of factor of production:

It is one of the most important factors which influence the size of national
income. The factors of production are land, labour, capital and organization.
If these factors are available in larger quantity, then the size of national
income increases.

3. State of technology:

If advance technology and latest equipment used in the process of

production, then more goods can lie produced, which increase the volume
or size of national income.

4. Means of transport and communication:

The well developed means of transport and communication, facilitate the

exchange of goods and services, and so increase the mobility of the factors
of production. It also strengthens trade activities in the country, while rise the
volume of national income.

5. Political stability:
If there is political stability in the country, the production can be sustained. At
the highest level and is the size of national income will be large. In case of political condition is not
good the production will be adversely affected and so the size of national income will be small.

6. Supply of raw material:

If the raw materials are available in large quantity then the size of national
income increases and vice versa.

7. Technical know-how:

The technical know-how also influences the size of national income. If the
people of a country are well-experienced, trained, and export, then the size
of national income increase, otherwise decrease
There are many determinants or factors which influence the size of the national
income. They, in brief, are as follows:

(i) The stock of factors of production: One of the very important factors which
influences the size of the national income is the quality and quantity of the country's
stock of factors of production. The factors of production are land, labor, capital and
organization. Land supplies man with gifts of nature. It provides him with agricultural
goods and. raw material for production. The production of land depends upon fertility of
the soil, latitude, climate and irrigation system in the country. If the land is fertile and is
not handicapped in any way say by salinity, water logging, shortage of rainfall and
adverse climate, the size of the national income will be quite large, if the quality of land
is poor, the size of the national income will be small.

(ii) Labor: The second factor of production, i.e., labor is by no means less important.
This can be judged from it that if land is not aided by human labor, it cannot produce
anything except the wild vegetation. The size of the national income greatly depends
upon the quality and quantity of labor in the country. If the labor is efficient and its size is
consistent with the means of subsistence, the size of the national income will be large
and if the labor is underfed, under clothed and under-housed unskilled, and has no
ambition to rise, the size of the national income will be small.

(iii) Capital: The volume of production is also very much influenced by the! quality and
quantity of capital available in the country. Capital now-a-days is considered to be the
lifeblood of the modern industry. If the capital consists of primitive tools, the size of the
national income cannot be large. But if modern types of plants are used for production,
then they can enhance the productive capacity of a country.
(iv) Enterprise: The size of the national income also greatly depends upon! the number
and skill of the entrepreneurs. If the captains of the industries! are efficient, they will
combine; the various factors of production to the! optimum proportion and so the volume
of total production will be quite large, if managerial skill is lacking in the country, the size
of the national income will be small.

(v) State of technical knowledge: State of technical knowledge is also one of the very
important factors which influences the size of the national income. The methods of
production now-a-days have become so much roundabout that unless advance
technical knowledge is available in the! country, they cannot be adopted. The
roundabout methods of production have considerably increased the production capacity
of the country. If the state of technical knowledge is poor in the country, the size of the
national income will be small, but if advance technical knowledge is available, then the
size of the national income will be large.

(vi) Political Stability: Political instability greatly hampers economic progress. If there
is political stability in the country, the production can be maintained at the highest level.
The size of the national income will be large. In case of political instability, the
production will be adversely affected and so the size of the national income will be
small.