NATIONAL INCOME IN INDIA
The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation. It is denoted by NNPFC. National Income in India is calculated by Income method, Product Method and Expenditure Method.
CONCEPTS OF NATIONAL INCOME
1. GROSS DOMESTIC PRODUCT (GDP)
GDP is the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices.
ACCORDING TO DERNBERG
“GDP at market price is the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.”
These three methods of calculating GDP yield the same result because National Product = National Income = National Expenditure.
1. The Product Method:
In this method, the value of all goods and services produced in different industries during the year is added up. This is also known as the value added method. The following items are included in India in this:
- Agriculture and allied services;
- Manufacturing, construction, electricity, gas and water supply;
- Transport, communication and trade;
- Banking and insurance, real estates and ownership of dwellings and business services;
- Public administration and defense and other services (or government services).
In other words, it is the sum of gross value added.
2. The Income Method:
The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes:
Wages and Salaries (compensation of employees) + Rent + Interest + Profit.
3. Expenditure Method:
This method focuses on goods and services produced within the country during one year.
GDP by expenditure method includes:
- Consumer expenditure on services and durable and non-durable goods (C),
- Investment in fixed capital such as residential and non-residential building, machinery, and inventories (I),
- Government expenditure on final goods and services (G),
- Export of goods and services produced by the people of country (X) Less imports (M); (X-M)
That part of consumption, investment and government expenditure which is spent on imports is subtracted from GDP. Similarly, any imported component, such as raw materials, which is used in the manufacture of export goods, is also excluded.
Thus GDP by expenditure method at market prices = C+ I + G + (X – M), where (X-M) is net export which can be positive or negative.
2.GDP AT FACTOR COST
GDP at factor cost is the sum of net value added by all producers within the country. Since the net value added gets distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or depreciation).
GDP at Factor Cost = Net value added + Depreciation.
GDP at factor cost includes:
- Compensation of employees i.e., wages, salaries, etc.
- Operating surplus which is the business profit of both incorporated and unincorporated firms.
- Mixed Income of Self- employed.
GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies.
3.NET DOMESTIC PRODUCT (NDP)
NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP.
Net Domestic Product = GDP at Factor Cost – Depreciation.
4.NOMINAL AND REAL GDP
When GDP is measured on the basis of current price, it is called GDP at current prices or nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP.
Now the general price level of the year for which real GDP is to be calculated is related to the base year on the basis of the following formula which is called the deflator index:
Suppose 1990-91 is the base year and GDP for 2019-2020 is Rs. 6, 00,000 crores and the price index for this year is 300.
Thus, Real GDP for 1999-2000 = Rs. 6, 00,000 x 100/300 = Rs. 2, 00,000 crores
GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100. Thus,
6.GROSS NATIONAL PRODUCT (GNP)
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:
- Consumers’ goods and services to satisfy the immediate wants of the people;
- Gross private domestic investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods;
- Goods and services produced by the government; and
- Net exports of goods and services, i.e., the difference between value of exports and imports of goods and services, known as net income from abroad.
FACTORS TO BE CONSIDERED IN CALCULATION OF GNP
- 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.
- In estimating GNP of the economy, the market price of only the final products should be taken into account.
- Goods and services rendered free of charge are not included in the GNP, because it is not possible to have a correct estimate of their market price. For example, the bringing up of a child by the mother, imparting instructions to his son by a teacher, recitals to his friends by a musician, etc.
- 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 the GNP. The sale and purchase of old goods, and of shares, bonds and assets of existing companies are not included in GNP because these do not make any addition to the national product, and the goods are simply transferred.
- The payments received under social security, e.g., unemployment insurance allowance, old age pension, and interest on public loans are also not included in GNP, because the recipients do not provide any service in lieu of them. But the depreciation of machines, plants and other capital goods is not deducted from GNP.
- 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.
- The income earned through illegal activities is not included in the GNP. Although the goods sold in the black market are priced and fulfill the needs of the people, but as they are not useful from the social point of view, the income received from their sale and purchase is always excluded from the GNP.
APPROACHES TO GNP
1. Income Method to GNP:
The income method to GNP consists of the remuneration paid in terms of money to the factors of production annually in a country.
Thus GNP is the sum total of the following items:
(i) Wages and salaries:
Under this head are included all forms of wages and salaries earned through productive activities by workers and entrepreneurs. It includes all sums received or deposited during a year by way of all types of contributions like overtime, commission, provident fund, insurance, etc.
Total rent includes the rents of land, shop, house, factory, etc. and the estimated rents of all such assets as are used by the owners themselves.
Under interest comes the income by way of interest received by the individual of a country from different sources. To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. But the interest received on governmental loans has to be excluded, because it is a mere transfer of national income.
Dividends earned by the shareholders from companies are included in the GNP.
(v) Undistributed corporate profits:
Profits which are not distributed by companies and are retained by them are included in the GNP.
(vi) Mixed incomes:
These include profits of unincorporated business, self-employed persons and partnerships. They form part of GNP.
(vii) Direct taxes:
Taxes levied on individuals, corporations and other businesses are included in the GNP.
(viii) Indirect taxes:
The government levies a number of indirect taxes, like excise duties and sales tax.
These taxes are included in the price of commodities. But revenue from these goes to the government treasury and not to the factors of production. Therefore, the income due to such taxes is added to the GNP.
Every corporation makes allowance for expenditure on wearing out and depreciation of machines, plants and other capital equipment. Since this sum also is not a part of the income received by the factors of production, it is, therefore, also included in the GNP.
(x) Net income earned from abroad:
This is the difference between the value of exports of goods and services and the value of imports of goods and services. If this difference is positive, it is added to the GNP and if it is negative, it is deducted from the GNP.
Thus GNP according to the Income Method = Wages and Salaries + Rents + Interest + Dividends + Undistributed Corporate Profits + Mixed Income + Direct Taxes + Indirect Taxes + Depreciation + Net Income from abroad.
2. Expenditure Method to GNP:
From the expenditure view point, GNP is the sum total of expenditure incurred on goods and services during one year in a country.
It includes the following items:
(i) Private consumption expenditure:
It includes all types of expenditure on personal consumption by the individuals of a country. It comprises expenses on durable goods like watch, bicycle, radio, etc., expenditure on single-used consumers’ goods like milk, bread, ghee, clothes, etc., as also the expenditure incurred on services of all kinds like fees for school, doctor, lawyer and transport. All these are taken as final goods.
(ii) Gross domestic private investment:
Under this comes the expenditure incurred by private enterprise on new investment and on replacement of old capital. It includes expenditure on house construction, factory- buildings, and all types of machinery, plants and capital equipment.
In particular, the increase or decrease in inventory is added to or subtracted from it. The inventory includes produced but unsold manufactured and semi-manufactured goods during the year and the stocks of raw materials, which have to be accounted for in GNP. It does not take into account the financial exchange of shares and stocks because their sale and purchase is not real investment. But depreciation is added.
(iii) Net foreign investment:
It means the difference between exports and imports or export surplus. Every country exports to or imports from certain foreign countries. The imported goods are not produced within the country and hence cannot be included in national income, but the exported goods are manufactured within the country. Therefore, the difference of value between exports (X) and imports (M), whether positive or negative, is included in the GNP.
(iv) Government expenditure on goods and services:
The expenditure incurred by the government on goods and services is a part of the GNP. Central, state or local governments spend a lot on their employees, police and army. To run the offices, the governments have also to spend on contingencies which include paper, pen, pencil and various types of stationery, cloth, furniture, cars, etc.
It also includes the expenditure on government enterprises. But expenditure on transfer payments is not added, because these payments are not made in exchange for goods and services produced during the current year.
GNP according to the Expenditure Method=Private Consumption Expenditure (C) + Gross Domestic Private Investment (I) + Net Foreign Investment (X-M) + Government Expenditure on Goods and Services (G)
= C+ I + (X-M) + G.
3. Value Added Method to GNP:
Another method of measuring GNP is by value added. In calculating GNP, the money value of final goods and services produced at current prices during a year is taken into account. This is one of the ways to avoid double counting. But it is difficult to distinguish properly between a final product and an intermediate product.
For instance, raw materials, semi-finished products, fuels and services, etc. are sold as inputs by one industry to the other. They may be final goods for one industry and intermediate for others. So, to avoid duplication, the value of intermediate products used in manufacturing final products must be subtracted from the value of total output of each industry in the economy.
Thus, the difference between the value of material outputs and inputs at each stage of production is called the value added. If all such differences are added up for all industries in the economy, we arrive at the GNP by value added.
GNP by value added = Gross value added + net income from abroad.
7.GNP AT MARKET PRICES
GNP at market prices means the gross value of final goods and services produced annually in a country plus net income from abroad.
GNP at Market Prices = GDP at Market Prices + Net Income from Abroad.
8.GNP AT FACTOR COST
GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. GNP at market prices is always higher than GNP at factor cost. Therefore, in order to arrive at GNP at factor cost, indirect taxes are deducted from GNP at market prices.
GNP at Factor Cost = GNP at Market Prices – Indirect Taxes + Subsidies.
9.NET NATIONAL PRODUCT (NNP)
NNP includes the value of total output of consumption goods and investment goods. In order to arrive at NNP, depreciation is deducted from GNP. The word ‘net’ refers to the exclusion of that part of total output which represents depreciation.
NNP = GNP—Depreciation.
10.NNP AT MARKET PRICES
Net National Product at market prices is the net value of final goods and services evaluated at market prices in the course of one year in a country. If we deduct depreciation from GNP at market prices, we get NNP at market prices. So,
NNP at Market Prices = GNP at Market Prices—Depreciation.
11.NNP AT FACTOR COST
Net National Product at factor cost is the net output evaluated at factor prices. It includes income earned by factors of production through participation in the production process such as wages and salaries, rents, profits, etc. It is also called National Income. This measure differs from NNP at market prices in that indirect taxes are deducted and subsidies are added to NNP at market prices in order to arrive at NNP at factor cost. Thus
NNP at Factor Cost = NNP at Market Prices – Indirect taxes+ Subsidies
GNP at Market Prices – Depreciation – Indirect taxes + Subsidies.
= National Income.
Normally, NNP at market prices is higher than NNP at factor cost because indirect taxes exceed government subsidies. However, NNP at market prices can be less than NNP at factor cost when government subsidies exceed indirect taxes.
Income generated (or earned) by factors of production within the country from its own resources is called domestic income or domestic product.
Domestic income includes:
- Wages and salaries,
- Rents, including imputed house rents,
- Undistributed corporate profits, including surpluses of public undertakings,
- Mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc., and
- Direct taxes.
Since domestic income does not include income earned from abroad, it can also be shown as: Domestic Income = National Income-Net income earned from abroad. Thus the difference between domestic income and national income is the net income earned from abroad.
National Income = Domestic Income + Net income earned from abroad.
Private income is income obtained by private individuals from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.
The additions include transfer payments such as pensions, unemployment allowances, sickness and other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or from horse racing, and interest on public debt. The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc.
Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.
Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in one year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income.
Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employees’ contributions to social security schemes. These three components are excluded from national income because they do reach individuals.
But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall gains, and interest on public debt which are a source of income for individuals are added to national income. Thus,
Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribution + Transfer Payments + Interest on Public Debt.
Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.
Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.
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 disposable income, direct taxes are deducted from personal income. Thus,
Disposable Income=Personal Income – Direct Taxes.
But the whole of disposable income is not spent on consumption and a part of it is saved. Therefore, disposable income is divided into consumption expenditure and savings. Thus,
Disposable Income = Consumption Expenditure + Savings.