What is National Income?
National income refers to the total value of goods and services produced by an economy over a period of time, typically a year. It includes income from domestic and income from abroad. It shows the overall performance of an economy over a period of time.
Understanding National Income
National income is measured by adding the total value of goods and services produced by residents of a country within the country’s boundaries or outside the country. National income is not Gross domestic product (GDP). GDP is the Total value of goods and services produced by the residents within the domestic boundary, and National income is the Net income generated by the residents within the boundary or outside the boundary of the county.
Let’s take an example to understand the difference between GDP and National Income.
Assume there are 3 companies in the Indian economy
Company A sells potatoes, Company B sells Rice and Company C is an Indian company working in the USA and sending earned money back to India.
So, for GDP we include the total income generated by Company A and Company B.
For National Income we include the total income of Company A, Company B, and Company C.
Important Note- In this example we assumed there is no depreciation, taxes and subsidies. If there are any depreciation taxes and subsidies, we have to deduct them for the calculation of National Income.
Important components of National Income-
Gross Domestic Products (GDP)- Total Value of Goods and Services produced in a year within the country’s boundary.
Gross National Product (GNP)- Gross Domestic Product Plus income earned by residents from abroad minus income earned by foreigners within the country.
Net National Products (NNP)- Gross National Products Minus depreciation in the value of goods in a year.
National Income (NI)- Net National Products Minus Taxes and subsidies.
What we include in national income?
- Wages and salaries- Wages and salaries received by the residents
- Interest – Interest earned by the residents on their investment in domestic and international markets
- Profits- Profits earned by domestic companies within the country’s boundary or outside the country’s boundary.
- Rent- rental income earned from the property owned by residents
- Taxes and subsidies- Deduction of taxes and subsidies is compulsory to measure the national income
- Depreciation- Depreciation of capital owned by residents and businesses within a period.
How we calculate national Income
There are three methods of Calculating National Income- Income Method, Expenditure method, and Output method.
Income Method
In This method, we add all the factors of income earned by the residents including wages, compensation from the employers, interest, rent, and profits.
Expenditure Method
In the Expenditure method, we calculate all the expenditures made by the residents, businesses, and government, apart from this we also add net exports.
Products Method/ Value added method
In this method, we calculate the value addition to a product in the different stages of production.
Importance Of National Income ?
National income is a very important parameter to measure a country’s economic well-being and economic performance within a period
- Economic growth
By analyzing National income, we can see the actual growth of the economy within the period.
- Economic Policy
National income is very helpful for the government to make economic policies for residents and economic development.
- Investment Opportunity
National Income is a good indicator of economic performance so after analyzing the national income investors can make a good decision about investment opportunities in the country.
What is the Demerit of national income?
- Non-Monetary Value of Goods
While calculating national income, many activities are not included like volunteer services and household work which help in economic activities and are beneficial for countries’ development but were not considered as important factors in national income accounting because these services do not have a price tag.
2. Double Counting
Due to a large country and lack of responsible data providers, there are major chances of double counting of goods and services
3. Street and household business
There are many businesses that are doing great work and generating good money to survive like small street vendors and small businesses run in households but we don’t have any system to monitor and analyze these transactions and profits earned by these businesses.
4. Black marketing
Our System is helpless in monitoring and calculating the black-marketing business to save taxes and government regulations
5. Inflation
In National income or per capita income we did not include the inflation so it doesn’t show the actual income growth, by example if absolute national income increased by 10% and inflation is 4% the actual growth in national income is only 6%
What is Per Capita Income? Click To Know More
Second advance estimates of National Income of India, Click To Know More
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