National Income

National Income is one of the basic concepts in macroeconomics. National

Income means the total income of the nation, the aggregate economic performance of
the whole economy is measured by the national income data.
National Income refers to the money value of all final goods and services produced by
the normal residents of a country while working both within and outside the domestic
territory of a country in an accounting year. National Income also includes net factor
income from abroad.
Symbolically,
Y = PG + PS
Where, Y = National Income
P = Price
G = Goods
S = Service
Traditional Definitions of National Income :
Marshall
"The labour and capital of a 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."
"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
"The national dividend or income consists solely of services as received by ultimate
consumers, whether from their material or from their human environments. Thus, a
piano, or an over coat made for me this year is not a part of this year's income, but an
additions to the capital. Only the services rendered to me during this year by these
things are income."

KEYNESIAN APPROACH TO NATIONAL INCOME

Keynes has suggested three approaches to national income :
(1) Income - expenditure approach : According to this approach, national income is equal
to total expenditure on consumption and investment goods.
(2) Factor - income approach : According to this approach, national income is measured
as the aggregate of incomes received by all the factors of production.
(3) Sales proceeds minus cost approach : According to this approach, national income is
defined as the aggregate sales proceeds minus cost.
MODERN APPROACH TO NATIONAL INCOME
Modern economists consider three aspects of national income and emphasise the
fundamental identity between these three aspects. These three aspects are : (a) product
aspect (b) income aspect, and (c) expenditure aspect. In one of the publications of the
United Nations, national income has been defined in three ways :
(a) 'Net National Product' as the aggregate of the net value added is all branches of
economic activity during a specified period, together with the net income from abroad.
(b) 'Sum of the distributive shares' as the aggregate of national income accrued to the
factors of production (in the form of wages, profits, interest, rent, etc) in a specified
period.
(c) 'Net National Expenditure' as the sum of expenditure on final consumption of goods
and services, plus domestic and foreign investments.
Modern economists consider national income as a flow of output, income and
expenditure, When goods are produced by the firms, the factors of production are paid
incomes in the form of wages, profits, interest, rent, etc. These income receipts are spent
by the household sector on consumption goods and their savings are mobilised by the
producers for investment spending. Thus, there is a circular flow of production, income
and expenditure, Obviously, income, output and expenditure flows are always equal per
unit of time. Thus, there is a tripple identity : Output = Income = Expenditure.

Objectives of Measuring National

Income
The study of national income statistics is very important. It helps in analysing
the actual performance of the economy and in preparing future policies. The increasing
importance of the study of the national income is due to the following reasons :
(i) Index of Economic structure : An important index of the economic structure of the
economy is national income estimates. National income estimates tell us how incomes
are earned and spent in the country. The knowledge about the relative importance of
various sectors of the economy and their contribution to national income are also
provided by national income estimates.
(ii) Economic Welfare Indicator : National income figures are an indicator of the economic
welfare of the people of a country. With the help of these figures, we can compare the
standard of living of the people of various countries. We can also compare the standard
of living of the people of the same country at different times.
(iii) Measures Aggregate Yield: National income statistics measure the aggregate yield of
the economic policy for development.
(iv) Tools for Economic Planning: National income estimates are the tools for economic
planning. Because for framing an economic plan, a prior knowledge of the trends in
national income is required.
(v) Provide Information about Inflationary and Deflationary gaps : National income
estimates provide information about inflationary and deflationary gaps in the economy.
National income estimates also assist in formulating anti-inflationary and antideflationary policies.
(vi) Helpful in the Allocation of burden of international payments : National income

estimates help in allocating the burden of international payments among different

nations.
(vii) Determination of Subscription and Quotas : National income estimates enable us to
determine the subscriptions and quotas of different countries to international
organisations like IMF, IBRD, etc.
(viii) Help in the Determination of Grants-in-Aid : National income estimates help the
federal government to determine the amount of grants-in-aid to be provided to the state
governments.
(ix) Basis of Budgetary Policies: On the basis of national income statistics, government
prepares their budgets and makes necessary changes in the taxation and borrowing
policies.
(x) Importance in Defense and Development: National income estimates help in
determining the proper allocation of national product between defence and development
of the economy.
(xi) Depreciation Provision : National income estimates guide us to make provision for
reasonable depreciation to maintain the capital stock of the country.
(xii) Helpful to the government : National income estimates help the government in
making future plans for the expansion of public sectors.
(xiii) Important for less developed or developing countries : National income estimates
throw light on the importance and backwardness of various sectors of the less developed
or developing economics and help in formulating appropriate economic polices.
(xiv) Help in Economic Analysis : National income estimates help us in analysing the
functioning, growth and anatomy of the economy.
(xv) Basis of Social Accounting: The basis of social accounting or national income
accounting is the national income figures.

Need & Importance of National Income

Analysis
The national income data have the following importance:
1. For the Economy:
National income data are of great importance for the economy of a country. These days the
national income data are regarded as accounts of the economy, which are known as social
accounts. These refer to net national income and net national expenditure, which ultimately
equal each other.
Social accounts tell us how the aggregates of a nations income, output and product result from
the income of different individuals, products of industries and transactions of international trade.
Their main constituents are inter-related and each particular account can be used to verify the
correctness of any other account.
2. National Policies:
National income data form the basis of national policies such as employment policy, because
these figures enable us to know the direction in which the industrial output, investment and
savings, etc. change, and proper measures can be adopted to bring the economy to the right
path.
3. Economic Planning:
In the present age of planning, the national data are of great importance. For economic planning,
it is essential that the data pertaining to a countrys gross income, output, saving and
consumption from different sources should be available. Without these, planning is not possible.
4. Economic Models:

The economists propound short-run as well as long-run economic models or long-run investment
models in which the national income data are very widely used.
5. Research:
The national income data are also made use of by the research scholars of economics. They
make use of the various data of the countrys input, output, income, saving, consumption,
investment, employment, etc., which are obtained from social accounts.
6. Per Capita Income:
National income data are significant for a countrys per capita income which reflects the
economic welfare of the country. The higher the per capita income, the higher the economic
welfare of the country.
7. Distribution of Income:
National income statistics enable us to know about the distribution of income in the country.
From the data pertaining to wages, rent, interest and profits, we learn of the disparities in the
incomes of different sections of the society. Similarly, the regional distribution of income is
revealed.
It is only on the basis of these that the government can adopt measures to remove the
inequalities in income distribution and to restore regional equilibrium. With a view to removing
these personal and regional disequibria, the decisions to levy more taxes and increase public
expenditure also rest on national income statistics.

Methodology
There are three methods of measurement of national income. These are : (i)
Product method, (ii) Income method and (iii) Expenditure method.
(i) Product Method : Product method measures national income at the phase of production. In
this method, the total output produced in the economy during the year is calculated and its
money value is determined. It must be noted that the total output consists of final goods
only and not intermediate goods. It means that the market value of only final goods and
services is taken into account in calculating national income through product method. The
value of intermediate goods is not considered. If the value of intermediate goods is also
considered, it will result in the problem of double counting. Double counting results in
overestimation of national income. In order to avoid double counting, only the value of final
goods and services should be included in national income; the value of intermediate goods
should not be considered. For example, bread is the final good, while wheat, flour and sugar
are intermediate goods. The price of bread (final goods) already includes the costs of wheat,
flour and sugar (intermediate goods) because these costs have been paid during the
production process. As a matter of fact, inclusion of the value of wheat, flour and sugar along
with the value of the final good in calculating national income will lead to double counting
and this should be avoided.
(ii) Income Method : Under income method, factor incomes are considered in measuring

national income. This method is also known as distributive share method or factor payment
method. In this method, total income generated in the production of goods and services is
taken into account. The incomes earned by the factors of production land, labour, capital
and organisation- are totalled up. In other words, rent plus wages plus interest plus profit will
be equal to national income. Income method will not take into account transfer payments.
For example, X pays Rs. 1,00,000 to Y. Y's income will increase but at the national level or
macro level, there is no change in income because what Y has gained is exactly what X has
lost. Donations, pensions etc. are not considered in calculating national income. Again,
income earned by smuggler is also not considered in calculating national income as the
smugglers' income is earned through illegal means.
(iii) Expenditure Method : In measuring national income, the expenditure method take into
account the aggregate of all the final expenditure on gross domestic product in an economy
during a year. In other words, the expenditure method measures the disposal of gross
domestic product. This method is also known as 'consumption and investment method' or
'income disposal method'. Final expenditure is the expenditure on final product. The total
income generated in the economy is used for purchasing either consumption goods or
investment goods. As such, total final expenditure or national expenditure (Y) equal to the
sum total of final expenditure incurred on consumption goods (C) and investment goods (I).
Symbolically,
Y = C + I.
Final consumption expenditure includes - (a) personal consumption expenditure, and (b)
government final consumption expenditure (government's purchase of goods and services).
Final investment expenditure includes - (a) gross domestic private investment, and (b) net
foreign investment or net export of goods and services.

Analysis of 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 years time is known as national income. It includes payments made
to all resources in the form of wages, interest, rent and profits.
According to Marshall: The labour and capital of a 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. In this definition, the word net
refers to deductions from the gross national income in respect of depreciation and
wearing out of machines. And to this, must be added income from abroad.
Though the definition advanced by Marshall is simple and comprehensive, yet it
suffers from a number of limitations. First, in the present day world, so varied and
numerous are the goods and services produced that it is very difficult to have a
correct estimation of them.
Consequently, the national income cannot be calculated correctly. Second, there
always exists the fear of the mistake of double counting, and hence the national
income cannot be correctly estimated. Double counting means that a particular
commodity or service like raw material or labour, etc. might get included in the
national income twice or more than twice.
For example, a peasant sells wheat worth Rs.2000 to a flour mill which sells wheat
flour to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells
it to the customers. If each time, this wheat or its flour is taken into consideration,
it will work out to Rs.8000, whereas, in actuality, there is only an increase of
Rs.2000 in the national income.
Third, it is again not possible to have a correct estimation of national income
because many of the commodities produced are not marketed and the producer
either keeps the produce for self-consumption or exchanges it for other
commodities. It generally happens in an agriculture- oriented country like India.
Thus the volume of national income is underestimated.

Conclusion
While preparing project on National Income I came to a conclusion that, National
Income refers to the money value of all final goods and services produced by the normal
residents of a country while working both within or outside the domestic territory of a
country in an accounting year. It also includes net factor income from abroad.
There are three methods of measurement of national income. These are
(i) Product method,
(ii) Income method and
(iii) Expenditure method.

The study of national income statistics is very important. It helps in analyzing the actual
performance of the economy and in preparing future policies.
There are various concepts of national income. These are Gross Domestic Product, Gross
National Product, Net National Product, Net Domestic Product, Per Capita Income,
Personal Income, Disposable Income, etc.