National Income Study Notes

National Income

National income represents the total market value of all final goods and services produced within a country during a year. This includes agricultural, industrial, mineral, and trade products, as well as services provided by professionals like doctors, professors, and lawyers.

Definitions of National Income by Economists

• Prof. Marshall: National income is the quantity of goods and services produced by a country's individuals using its resources and capital.
• Prof. Pigou: National income is the portion of a nation's material wealth that can be measured in monetary terms.
• Prof. Paul A. Samuelson: National income is the monetary measure of the annual flow of goods and services in an economy.
• Prof. Ackley, Gardener: National income is the sum of all individual incomes earned from productive services rendered by individuals or their property.
• Prof. Fisher: National income is the quantity of goods and services consumed during a year.
• Commerce Department of the United States of America: National income is the total net national income received by a country's factors of production as rewards for producing goods and services within a specific period.

Various Concepts of National Income

1. Gross National Product (G.N.P)
2. Net National Product (N.N.P)
3. Gross Domestic Product (G.D.P)
4. National Income (N.I)
5. Personal Income (P.I)
6. Disposable Personal Income (D.P.I)

1. Gross National Product (G.N.P)

Gross National Product (G.N.P) is the total market value of all final goods and services produced by a country during one year. It includes:

• Agricultural goods (e.g., wheat, cotton, sugarcane, rice, maize, vegetables, and fruits).
• Industrial goods (e.g., cloth, machinery, furniture, and fans).
• Mineral goods (e.g., iron, coal, petroleum, and gas).
• All kinds of services (e.g., services of people working in private or government institutions, doctors, lawyers, and professors).
• Income earned by people working in foreign countries.
• Expenditure on the repair of machines and buildings.

2. Net National Product (N.N.P)

Net National Product (N.N.P) is derived by subtracting depreciation allowance or replacement cost of machines from Gross National Product (G.N.P).

$Net\ National\ Product = Gross\ National\ Product - Depreciation\ Allowance$

Depreciation Allowance

Depreciation allowance accounts for the wear and tear of machines and tools used in manufacturing. It represents the expenditures made on repairing these machines. For example, if a cloth manufacturing machine costs five lac rupees and becomes useless after five years, the producer should save one lac rupees each year to replace it. This saved money is the depreciation allowance.

3. Gross Domestic Product (G.D.P)

Gross Domestic Product (G.D.P) is the total market value of all final goods and services produced within a country during a year.

$G.D.P = G.N.P - F.I.$

Where F.I. is foreign income.

The difference between G.N.P and G.D.P is that G.N.P includes income earned by Pakistanis working abroad, while G.D.P does not. Conversely, the profit of a Toyota car factory built in Lahore by Japan is included in Pakistan's G.D.P but not in its G.N.P. The profit will be included in Japan's G.N.P.

4. National Income (N.I)

National Income (N.I) is obtained by subtracting indirect taxes from N.N.P and adding subsidies.

$National\ Income = Net\ National\ Product - Indirect\ Taxes + Subsidies$

It represents the aggregate of net rewards to the four factors of production: rents, wages, interests, and profits.

Indirect Tax

An indirect tax is a tax whose burden can be shifted to another person, such as sales tax and excise duty, which are included in the prices of goods and paid by consumers.

Subsidy

A subsidy is a payment made by the government to provide goods to the public at a lower price than the market price. For example, if the government purchases flour at Rs. 10/- per kg and sells it at Rs. 8/- per kg, the subsidy is Rs. 2/- per kg.

5. Personal Income (P.I)

Personal Income (P.I) is the income that a person individually earns in a year. It includes transfer payments (donations, alms, pensions, relief funds, scholarships, and gifts) and direct taxes.

Personal Income excludes undistributed corporate profit, corporate profit tax, and contributions for social welfare funds.

$Personal\ Income = National\ Income + Transfer\ Payments + Direct\ Taxes - Corporate\ Profit\ Tax - Undistributed\ Corporate\ Profit - Contributions\ for\ welfare\ fund$

6. Disposable Personal Income (D.P.I)

Disposable Personal Income (D.P.I) is the income remaining with a person after payment of direct taxes. It can be spent or saved.

$Disposable\ Personal\ Income = Personal\ Income - Direct\ Taxes$

For example, if a professor's annual income is one lac rupees and he pays five thousand rupees as income tax, his disposable personal income is 95000 rupees.

$Disposable\ personal\ income = Consumption + Saving$

Therefore,

$Disposable\ personal\ income = Consumption + Investment$

Measurement of National Income

Three methods are used to measure national income:

1. Product Method or Output Method
2. Income Method
3. Expenditure Method

1. Product Method

In the product method, also called the method of measuring national income at market prices, the total value of all goods and services produced in a country during a year is calculated at market prices. These include agricultural, industrial, mineral, and commercial goods and services.

Example Table:

Precautions for Product Method

• Avoid Double Counting: The market value of a product must not be counted twice. Use the market value of final goods and services or calculate the value added at each stage of production.

  Value Added Method Example:

  Stage of production	Shape of good at various stages	Value added	Market value at every stage
  1st	Wheat	1.00 rupee	1.00 rupee
  2nd	Flour	0.20 rupee	1.20 rupees
  3rd	Baked bread	0.40 rupee	1.60 rupees
  4th	Profit of Producer	0.40 rupee	2.00 rupees
  		2.00 rupees	5.80 rupees

• To Subtract Depreciation Allowance: Subtract depreciation allowance from the market value of goods and services.

• To Subtract Indirect Taxes: Subtract indirect taxes (sales tax, excise duty) from the market value of goods and services.

• Free Services: Do not count the market value of commodities produced as a hobby or free services in national income.

• Subsidies should be counted: Subsidies should be counted while measuring national income.

2. Income Method

In the income method, national income is calculated by adding up the annual monetary rewards of all the factors of production.

$National\ income = Rent\ of\ land + Wages\ of\ labour + Interest\ of\ capital + Profit\ of\ entrepreneurs$

It includes:

• All wages, salaries, and other monetary rewards received by employees.
• Incomes of farmers, traders, lawyers, doctors, and daily wage laborers.
• All kinds of interest on bonds, securities, and loans.
• Rent of lands, rent of buildings, and royalties.
• Corporate profit distributed among shareholders.

Exclusions:

• Earnings from unfair means (smuggling, black marketing, hoarding, bootlegging, bribery, racketeering).
• Transfer payments (Zakat, alms, donations, scholarships, pensions, and gifts).

3. Expenditure Method

In the expenditure method, national income is calculated by adding up all the expenditures made on the purchase of goods and services in a country during one year.

It includes:

• Private consumption expenditures.
• Public consumption expenditures.
• Private investment expenditures.
• Public investment expenditures.
• Exports minus imports.

Precautions for Expenditure Method

• Depreciation cost should be subtracted from the expenditures.
• Indirect taxes added in prices should be subtracted.
• Subsidies should be included.
• A single expenditure on the purchase of a good should be included only once.

Circular Flow of National Income

In a capitalistic system, the economy is divided into households (consumption sector) and firms (production sector). Households provide factors of production to firms, which in turn produce goods and services for households. Firms reward households for their services, and households pay firms for goods and services.

This flow of national income circulates between firms and households, with total rewards of factors of production being equal to the total monetary value of goods and services.

Factors of National Income

The prosperity of a country and standard of living of its people depend on its national income. Factors that affect national income include:

1. Natural Resources: Fertility of land, minerals, forests, water resources, harbors, geographical situation, and climatic conditions.
2. Man-made/Artificial Resources: Canals, roads, man-made harbors, dams, power-houses, airports, machinery, etc.
3. Human Resources: Education level, skills, and productivity of the population.
4. Capital Goods: Machines, tools, and instruments used to produce consumer goods.
5. Technical Know-how: The technical literacy and expertise of the workforce.
6. Desire of Development: The willingness of people to work for the development of their country.
7. Division of Labor: Specialization in tasks that increases efficiency.
8. Power Resources: Availability of oil, gas, coal, electricity, and atomic energy.
9. Equal Distribution of Wealth: Fair distribution of wealth leads to increased consumption and demand.
10. Facilities of Transportation: Abundance of railway-lines and roads facilitates the supply of goods.
11. Efficient Entrepreneurs: Active and aware entrepreneurs use resources effectively.
12. Encouragement by Government: Tax concessions and easy provision of loans.
13. Political Stability: Stability encourages investment and production.

Importance of the Study of National Income

1. Study of Economic Conditions: National income reflects the economic conditions of a country. Per capita income indicates the living standards of people.
2. Study of the Economic Growth: Statistical figures of national income are calculated every year to examine the growth rate of economy and by their comparison, growth rate is guessed.
3. Analysis of Economic Problems: The study of national income helps to get details about all sectors of economy.
4. Framing Economic Policies: Policies are based on national income statistics.
5. Economic Planning: National income statistics play a primary role in effective economic planning.
6. Estimation of Inflation and Depression: National income statistics help to estimate the extent of inflation and depression in the country.
7. Importance for Entrepreneurs: Study of national income helps entrepreneurs to avail the chances of investment in economic sectors.