Chapter II

National Income Analysis

Dr. GOPALAKRISHNA B.V.Faculty in MBA,

SDM, Mangalore

National Income Analysis……

• The national income statistics are one of the important indicators of economic development and trends in the economy.

• They give us information about the progress and performance of the economy.

• The study of national income helps us to identifying• Standard of living of the people.• Income per head available.• extent of economic growth and• Vital importance to Planning Commission

National Income Analysis……The study of national income measures the aggregate level of income and output of the economy.It tells about relationship between total output and total income of a country.It tells about the level of economic development of a country.National income estimated only final goods and services – excluded intermediate commodities.The level of national income determines the level of aggregate demand for goods and services.

Definition of National Income• Alfred Marshall – The labour and capital of the

country acting on its natural resources and produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income.

• National Income Committee (1951) measures the value of commodities and services turned out during given period of time without duplication.

• Simon Kuznets – national income as “the net output of commodities and services flowing during the year from the countries productive system in the hands of the ultimate consumers”

Definition of National Income

• “National Income” – the aggregate economic performance of the whole economy is measured by the national income. Infact, national income data provide a summary statement of a country’s aggregate economic activity.

• In real terms, national income is the flow of goods and service produced in an economy in a year or particular period of time

• Modern economy is a money economy. Thus, national income of the country is expressed in money term.

Definition of National Income• National Sample Survey (NSS) – national income as “Money

measures of the net aggregates of all commodities and services accruing to the inhabitants of a community during a specific period.

• In Short, national income is the value of goods and service produced during a given period counted without duplication.

• National Income – money measure or value of net aggregate of goods and services becoming available annually to the nation as a result of the economic activities of the community at large consisting of –

Households/individuals.Business firms andSocial and Political Institutions

Estimates of National Income

• In the pre-independence days, a number of estimates were made about India’s national income.

• Dadabhoy Naoroji, Findlay Shirras Wadia, joshi, Shah & Khambatta, V.K.R.V . Roa, & Natarajan etc.

• Some of the estimates of NI and per capita income in the pre-independence period have been given in the following table.

National income and Per capita income estimates – before independence

Estimated by Year of estimated National income Rs. In crores

Per capita income (Rs.)

Dadabhoy Naoroji 1868 370 20

Findley Shirras 1911 1942 80

Wadia & Joshi 1913-14 1067 44

Shah & Khambatt 1921-22 2364 74

VKRV Rao 1931-32 1689 62

B. Natarajan 1938-39 623.4 198

Measuring National Income

• The national income of a country can be computed by various methods – generally three methods are used –

1. Product Method2. Income Method3. Expenditure Method

1. Product Method• The product method is also known as

Value Added Method/Simple Output Method.• This method consists of finding out the Net value of all

commodities and service produced in various sectors of the economy during a year.

• The economy of a country is divided into different sectors such as – agriculture, manufacturing, trade, transport, communication, mining, construction, banking and insurance, electricity, gas and water supply so on.

• In this method estimated only final goods and services are included and intermediate goods are excluded to avoid double counting

2. Income Method• This method is also called Factor Income Method.

Factor Share Method. Income Distributed Method or National Income by Distributive Shares Method.

• This method, we calculate national income from distribution side. In other words, this method measures the national income after it has been distributed and appears as income earned or received by individuals of the country.

• Various factors of production received rewards in terms of rent to land, wages and salaries of employees, profit of entrepreneurs, interest on capital.

3. Expenditure Method

• National income under this method by adding up all the expenditure made on the goods and services during the specific period.1. Personal Consumption Expenditure (C)2. Domestic Private Investment (I) – plant and

machinery3. Net Export of Goods and Service (X – M)

Foreign Investment4. Government Expenditure (G) – Money spend by

govt on purchase of G/S.

GNP = C + I + (X – M) + G

Component of National Income

1. Gross National Product (GNP)2. Gross Domestic Product (GDP)3. GDP at factor cost4. Net National Product (NNP)5. Personal Income (PI)6. Private Income7. Per capita Income8. Disposable Personal Income

1. Gross National Product (GNP)– GNP is defined as the money value at market prices of all

final goods and service produced by an economy during a given year.

– This is the most comprehensive measure of national income and the best known measure of business activity.

– Three point noted here –1. Exclude Intermediate Product2. Exclude non-market output (Housewives services)3. Include imputed value of goods (former produce

goods and kept for self- consumption)

GNP = C + I + G + (X – M) + (R – P)GNP = Gross National ProductC = Consumption GoodsI = Capital goods or Gross InvestmentG = Government ServicesX = Export M = ImportsR = Income receipts from abroadP = Income paid abroad

2. 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 goods and services

produced in the given period of time, therefore it is known as GDP at market prices.

It has been three different ways to measure GDP – product method, income method and expenditure method.

GDP = National product = National income = National expenditure

3. GDP at Factor cost (payments to factors) 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 all owners of factors of production. Thus GDP at factor cost = Net value added +

Depreciation. GDP at factor cost includes – compensation of

employees (wages and salaries) – entrepreneurs profits etc.

4. Net National Product Net National Product refers to the net production of

goods and services in a country during the year. It is GNP minus value of capital consumed or

depreciation during the year.NNP = GNP – Depreciation

NNP is also called National Income at Market Prices. It tells about net increase in the total production of

the country. NNP is a better and a highly useful concept in the

study of growth of economies as it takes into consideration of net increase in the total production of the country.

5. Private Income Private income is income of the private sector obtained from

various private sources - such as private sectors or private firms from any source

Private income generated from domestic product, transfer payments such as (pensions, unemployment allowances, sickness and other social security benefits, gifts and remittances from aboard) undistributed profits & net factors income from abroad.

It includes both factors income as well as transfer payments. It can be arrived at from NNP at Factor Cost by making

certain additions and deductions. Private Income = NNP at factor cost + transfer payments from

the Govt + from abroad + interest on public debt.

6. Personal Income PI is the total income received by the households of a country

from all possible sources before direct taxes. It is also called as spendable income at current prices before

personal taxes are deducted. Its differs from private income in that it excludes

undistributed profits of companies, cooperatives and similar organisation.

This is the actual income received by the individuals and households in the country from all sources.

It denotes aggregate money payments received by the people by way of wages, interest, profit and rents.

PI = NNP = Transfer Payments (R) PI = NI = R = U PI = Personal Income NNP = Net National Product R = Transfer Payments U = Undistributed Profit

7. Disposable Personal Income Disposable Income means the actual income which

can be spent on consumption by individuals and families.

The whole of personal income can’t be spent on consumption because it is the income that occurs before direct taxes have actually been paid.

Thus Disposable Personal Income = Personal Income – direct taxes.

The whole of disposable income is not spent on consumption and a part of it is saved.

DPI = NI – Business Savings - indirect taxes + subsidies – direct taxes – direct taxes on business – social security payments + transfer Payments + Net Income from abroad.

7. Per capita income The average income of the people of a country in a

particular year is called per capital income.

National IncomePCI ______________

Population Real National Income 2009

PCI _______________________ Population in 2009 The per capita income distributed unequal among

the people. A major portion of it goes to the richer sections of

the society and thus income received by the common man is lower than PCI.

Difficulties in measurement of National Income There are a number of difficulties in the measurement of

national income. Broadly speaking, they are grouped into two ways –

conceptual/theoretical and practical difficulties.A. Conceptual Problems – Symon Kuznut

1. Definition about National income NI of a country does not mean only the income generated

within the geographical area. It is also includes the income generated from aboard/other

countries.2. Choice of method for measuring the NI A nation can adopt either any one method or a combination

of different methods to measure the national income.

3. The items to be included in the NI NI not only included material aspects like

commodities/goods but also included services rendered by banking, insurance, financial companies etc.

Marxist approach – material output Capitalistic economies – both material output and

non material output should be included. Services rendered by Housewives – tailoring,

washing, cooking, cleaning house, teaching to their children etc.

4. The stages of economic activities Production stage – distribution stage and

consumption stage

B. Practical problems1. Non-availability of reliable data Inadequate, unreliable and incomplete statistical data one of

the major hindrance of estimation of national income. Most of agricultural and small enterprises sectors are in the

unorganized sectors and most of farmers, laborers & workers are illiterate, ignorant not able to maintained data about their economic activities.

2. Existence of Barter system A well developed marketing system in the economy would help

in the computation of national income. But in India, agricultural sector and industrial sector

particularly small/tiny/unit industry are in the unorganized sector and most of the product do not reach the market for sale – they are kept for self consumption only

3. Double counting Double counting is also a major problem in the calculation of

national income. It refers to a commodity being included in national income

estimate more than once (intermediate commodities). To solve this problem, only value of final goods and services

should be considered.4. Regional disparities Unequal development of region one of the major hurdles to

measurement of national income. Some regions may have highly developed others are

backward in the country.5. Absence of occupational specialization It makes calculation of national income difficult. Many people work as part-time workers and as such they do

not give complete information about all sources of their income.

National Income and Manager

• Business Managers want to get an overview of how total economic activities is faring, they turn to gross domestic product or GDP.

• The broadest measure of economic activity.• GDP is one of the most often cited economic

indicators by business managers.• It recognisition that GDP growth is a summary of

the economic condition of a nation.• Basically, increasing real GDP suggests an

expanding economy while, declining real GDP signifies recession

National Income and Manager…….

• Business entrepreneurs also changes of his business policies as a result of changes in the economy.

• Marketing Managers – personal income taxes and consumer spending.

• Advertising Agency Managers – advertising gear their business plans to the expected sales of their customers.

• Consumer Banking Managers – consumer banking manager would be extremely interested in recent income and expenditure trends (outdated banking with modern banking business such as Credit Card, Debt Card, ATM etc) – this leads to more demand for consumer goods.

National Income and Manager…….

Financial Managers – • A financial manager is sensitive to the

implications of the pace of economic activity on inflation and interest rates.

• Changes in economic fluctuation results to changing of Money Supply and interest rate for example –

1. when Inflation increases – GDP increases – MS increases – interest rate increases

2. Deflation/slowing growth – GDP falling – MS falls – interest rate also falls.