What is National Income?
Let’s take a look at how the National Income is defined in various ways and approaches by a dictionary, International Monetary Fund (IMF), etc.
The definition of National Income according to the Merriam-Webster dictionary is as follows, “The aggregate of earnings from a nation’s current production including compensation of employees, interest, rental income, and profits of the business after taxes.”
The concept of national income has been defined with two approaches; the consumption end approach and the production end approach. Prof. Alfred Marshall’s definition of national income is from the production end. He defines national income as, “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.” Prof. Arthur Pigou also defines national income from production end approach. He says, the national dividend or national income is “that part of the objective income of the community including, of course, income derived from abroad, which can be measured in money.”
Now, Irving Fisher, another prominent economist defined national income with the consumption end approach. He says, “The national dividend or income consists solely of services as received by the ultimate consumers, whether from their material or from the human environments.”
Hence it is seen that Prof. Marshall and Prof. Pigou defined and determined the national income by the annual production of a nation and Fisher, defined it by the annual consumption. This definition of Irving Fisher sufficiently provides us with the concept of economic welfare. Economic welfare depends on consumption and consumption represents the standard of living. The various concepts of national income explained below are GDP, GNP, NDP & NNP. All these concepts are further bifurcated into two types; Market price and factor cost. These terms are pretty self-explanatory. Market price means the price at which the product will be sold or is sold i.e., basically, the market value. Factor cost includes rent, interest, profit, and wages. These are the costs occurred by a producer for making the products or goods. The extent of location is the domestic territory of a country and the time period considered is one year.
Gross Domestic Product (GDP): The International Monetary Fund defines GDP as, “Gross domestic product is the most commonly used single measure of a country’s overall economic activity. It represents the total value of final goods and services produced within a country during a specified time period, such as one year.” Hence, GDP shows us the total value of all the finished goods produced for selling in an economy. Countries and their economic status and economies are compared using GDP. The further bifurcation of GDP is done as follows –
GDP at Market Price [GDP(MP)]: The term ‘Gross’ means the depreciation is included when the income method is used. When GDP is calculated at market price, it includes the net indirect taxes. Net indirect taxes are the amount of indirect taxes paid minus the subsidies received. When the above explanation is put into a formula, we get,
GDP (MP) = C + I + G + (X-M) +IT – S
Let’s understand what they mean. C is total consumption (basically the spending by consumers), I is a total investment, G is total government expenditure, (X-M) is the exports minus imports, S is subsidies and IT is Indirect taxes. It is also expressed as,
GDP (MP) = GNP – Net Income from abroad.
GDP at Factor Cost [GDP(FC)]: various factors of production play a role in producing goods and services. Hence, GDP at factor cost indicates the gross money value of the income which gets produced by and accrues to these various factors of production. Again, its within the domestic territory of a country and for one year. The GDP at factor cost does include the amount of subsidy and here, the net indirect taxes are excluded. Hence, the formula is
GDP (FC) = C + I + G + (X-M) – IT+ S. In other way it also is expressed as,
GDP (FC) = GDP(MP) – Indirect Taxes + Subsidies.
Gross National Product (GNP): Here, along with the domestic earning and expenditure the earnings and expenditure from abroad (foreign) are also taken into consideration. IMF defines GNP as, “Gross national product was formerly used as a measure of a country’s overall economic activity, equal to GDP less compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world; GNP has been renamed gross national income (GNI) in the System of National Accounts”
GNP at Market Price [GNP (MP)]: It means that GNP shows the gross value of the final goods and produced in a country annually. This gross value is estimated according to the price that is prevailing in the market. The market price includes two things, cost of production + indirect taxes. MP stands for market price. Hence, the formula for GNP at market price is,
GNP (MP) = C + I + G + (X-M) + (R-P) +IT – S
C means Private Consumption Expenditure, I means Domestic Private Investment, G is Government’s Consumption and Investment Expenditure, (X-M) is the Net Export Value. (R-P) Receipts from abroad less the payments to abroad i.e., the flow of money into the country and flow of money from the country to the other countries.
Gross National Product at Factor Cost [GNP(FC)]: It shows the total money value of income that is produced by and accrues to the various factors of production (land, labor, capital, etc.) during the period of one year. Hence, the wages earned by laborers, the interest on capital, the rent on land, and the profit by the entrepreneur (producer) are the total income. Now, the money value of this income is considered after subtracting the indirect taxes and addition of subsidies, and this all is subtracted from the GNP at market prices. When expressed through a formula,
GNP(FC) = GNP(MP) – Indirect Taxes + Subsidies.
Net Domestic Product (NDP): is “the gross domestic product minus an allowance for the depreciation of capital goods” – Collins Dictionary. Machinery is an example of capital goods. Hence, it becomes clear that in order to find the ‘net’ domestic product at market price or factor cost, the depreciation will be deducted from the GDP at market value and GDP at factor cost respectively.
Net Domestic Product at Market Price [NDP(MP)]: It means, the net market value after adjusting for depreciation of capital goods from GDP i.e., the market value of all the finished goods and services produced domestically during one year less the depreciation of capital goods. When put in a formula, it simply means,
NDP(MP) = GDP (MP) – depreciation
NDP at Factor Cost [NDP(FC)]: NDP at factor cost will tell us the net money value of the finished or final goods and services produced within the territorial boundaries of a country during one year. When we subtract the depreciation of capital goods from the GDP at factor cost, we get NDP at factor cost. NDP at factor cost is also called domestic income or domestic factor income.
NDP(FC) = GDP (FC) – depreciation
Net National Product at Market Price [NNP(MP)]: when we considered GNP, we considered the flow of money into the country and the flow of money outside the country as well. Net national product at market price means the net market value of all final goods and services that are produced by the residents/citizens of a country during one year. When depreciation is subtracted from GNP at market price, we get Net National Product at market price.
NNP (MP) = GNP(MP) – Depreciation.
Net National Product at Factor Cost [NNP(FC)]: Net national product at factor cost shows the net money value of the final goods and services that the residents/citizens of a country produce in one year. Net national product at factor cost is GNP at factor cost less depreciation. NNP at factor cost includes the income earned by all the factors of production.
NNP (FC) = GNP(FC) – Depreciation
Apart from these, a few more concepts are:
National Income at Factor Cost [NI(FC)]: It basically considers the resource suppliers who provide land, labor, capital and entrepreneurial skills of an entrepreneur. It is the addition or sum total of all the incomes of these resource suppliers for their contribution of factors of production that go into the net production during one year.
NI(FC): NNP(MP) – Indirect Taxes + Subsidies.
Personal Income (PI): When we considered the different concepts at market prices and factor costs, we included the indirect taxes and subsidies. In personal income, all the incomes actually received by individuals and households is considered. Hence, it is the sum total of all the incomes (earned or unearned) actually received by all the households and individuals from all the sources during one year or given year.
Personal Disposable Income: Whatever an individual actually receives or earns, is not what we will always have for spending. The direct taxes that an individual has to pay himself, like income tax, personal property tax, etc. have to be subtracted from the personal income. Hence, when these direct taxes are subtracted from the personal income, the income that is left behind is called personal disposable income.
These are the basic concepts of National Income. Here we have seen three primary things, firstly domestic and national level. Secondly, the gross value and net value, and lastly, the Products at market and factor costs.
Std. XII textbook by – Maharashtra State Board of Secondary and Higher Secondary Education.
https://www.merriam-webster.com/dictionary/national%20income – Merriam Webster.