Basic Concept of National Income

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Basic Concept of National Income

(i) Gross Domestic Product -It is t h e m o n e y value of final goods & services produced within the geographical boundaries of a country of foreigners , that is, by normal residents as well as non-residents in the domestic territory of a country.

(ii) G.D.P at constant & current prices -When the prevailing prices in a year are used for measuring G.D.P is know as G.D.P at current prices.

When we use the prices of some base year for measuring the value of G.D.P, we

call it as G.D.P at constant prices.

(iii) G.D.P at Factor Cost & G.D.P at Market Price - G.D.P factor cost is arrived at by adding the domestic factor incomes & consumption of fixed capital.

Likewise, the G.D.P evaluated at the price prevailing in the market is called

G.D.P at market price.



(iv) Gross National Product -It is defined as the total market value of all final

goods & services produced by the nationals of the country in a given year.

(v) Net National Product at Market Prices - When we substract depreciation from G.N.P, we get national product. It is the market value of all final goods &services after providing for depreciation.

Thus:- N.N.P = G.N.P – Depreciation.

(vi) Net National Product at Factor Cost- It is nothing but national income of a

country.It is the value of goods & services turned out during an accounting year, counted without duplication. It is really the national income at factor cost

for which we use the term National Income. Thus :- N.N.P (N.I at Factor Cost)= N.N.P at Market Price-Indirect taxes + Subsidies.

(vii) Net Domestic Product – When the value of depreciation is deducted from the

value of G.D.P, we get net domestic product.



(viii) Money Income & Real Income - Measurement of national income requires

us to multiply quantity of output by money prices. If quantity of output &money prices both relate to same year it is called G.N.P at current prices. If the

quantity of output of the current year is multiplied by money prices of the base

year, It is called GNP at constant prices or simply real national product.

Usually changes in money value of national product are caused partly by the

change in physical volume of output of final goods & services & partly by the

change in market price of those goods & services. Money value of national

product which is the result of price change from that part which is due to the change in real output.

Real GNP = Money GNP × Price index in base year/Price index in current year

Year Money GNP

(Rs. In Crores at

Current Prices)

Index

(Number of Prices)

Real GNP

(Rs. In Crores at constant

of Prices)

1993-94

2006-2007

14000

35000

100

175

14000×100/100=14000

35000×100/75=20000



(ix) Concepts of Personal, Disposable & Per Capita Income:

(a) Personal Income: It refers to the sum total of all incomes actually received by

all individual or households of a country during a given year before paying

direct taxes. It should be noted here that personal income is never equal to

national income because personal income includes transfer payments like old

age pensions, unemployment doles, relief payments, interest payment’s on public

debts, etc. Personal income is derived from national income after deducting :-

i. Undistributed corporate profits .

ii. Corporate income taxes.

iii. Contribution to social security schemes.

These three components are excluded from national income because they do

reach individuals. But business & government transfers payments from abroad

like gifts & remittances, windfall gains & interest on public debt are source of

income to all individuals & therefore added to national income. Thus :

Personal Income=National Income - Undistributed Corporate Profits -

Corporate income taxes - Social Security Contributions + Transfer payments.



(b) Disposable Income-It means the actual income which is available to spent on

consumption by individuals & households. It is worthwhile to note here that the whole of the personal income earned by an individual cannot be spent on

consumption because it is the income that accrues before the payment of direct

taxes. Therefore, in order to arrive at disposable income, direct taxes are deducted from personal income. Thus :-

Disposable Income = Personal Income – Personal taxes.

Again, we may not mention here that the whole of the disposable income is not

spent on consumption, a part of it is saved. As such, disposable income is classified into consumption, expenditure & saving. Therefore :-

Disposable Income = Consumption + Saving.

(c) Per Capita Income-It refers to the average income of the citizens of a country

in a given year. It also indicates the measurement of income at current prices &at constant prices & is arrived at by dividing the national income of the

country by its population.



Thus, for example, in order to find out the per capita income of India in 2007 at

current prices, the national income of the country is divided by the population of

the country in that year. For example :

India’s per capita income for 2007= National Income of 2007 ÷ Population in 2007

Likewise, for arriving at Real Per Capita Income, this very formula can be used.

Thus :- Real Per Capita Income for 2007 = Real Per Capita Income for 2007

Population in 2007

It should be noted here that the concept of per capita income enables us to know

the average income & standard of living of the people. But it is not a reliable

index because of unequal distribution of national income in practically all the countries of the world. As a result fairly a large part of the National Income

goes to the richer sections of the society & thus the income received by the common man is lower than the average per capita income.

Basic Concept of National Income

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