National Income concepts

WELCOME TO YOU

I heartily welcome you to read this post on concepts of "National Income". It helps to understand why few countries achieve more national income and vice versa. National income of a country determines the standards of the people and quality of resources. It is the net result of all economic activities during an year. It is one of the main indicator to measure the Economic development of a country.

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National income

National income is the total (Aggregate) value of all final goods and services which are produce in a country during in a financial year. It measures in terms of money value (monetary value)

Per capita income

when we divide total income with total population in the country, we obtain/get the value of per capita income. 

Per capita income = national income / total population.

It indicates the living standards of the people in a country (Economy).

Disposable income

Disposable income = personal income-personal taxes. i.e. DI = consumption + savings. generally personal income which we earn is not available to use completely for our savings or spending. So, tax must be deducted or subtracted to get disposable income. Then we can use it fully without any extra charges on it to subtract.

Depreciation

Depreciation is the loss of value due to Wear and tear of a fixed capital generally refers to machinery. Firms continuously use the physical assets in production process. so, The term depreciation refers to the loss of assets or fixed capital is called as depreciation.

Circular flow of income or (Circular flow)

It is an economic model which explains the flow of income in an economy. There is a flow of income from firms to households and from households to firm. Households are the main sources to form an organization.

Subsidies or Subsidy

It is a benefit which is given to an individual or a business firm by the government. Share of government in price of a commodity is called as subsidy. for example, agricultural products.

Measurement of national income (Computation)

National income is estimated based on:

• Current year prices
• Base year prices.

Current year is the year where national income is estimated. Base year means the government decided year is called as base year. we will know the year where there is less rate of inflation by considering the base year.

Concepts of national income

1. Gross domestic product (GDP): C+I+G+(X-M). income from abroad is excluded. *market values.
2. Gross national product (GNP): GNP = GDP + NFIA or GDP = C+I+G+(X-M)+ NFIA. production by the residence of country is considered. income from abroad is included.
3. Net domestic product (NDP):  NDP = GDP - depreciation. or we can write like this NDP = C+I+ G - Depreciation. 
4. Net national product (NNP): NNP = GNP - Depreciation. or NNP = C+I+G+(X-M)+NFIA. 
5. Personal income (PI): Personal Income = National income - undistributed profits - Social security contributions - Corporate Taxes + Transfer of payments. 
6. Disposable income (DI): Disposal Income = Personal Income - Direct Taxes or DI = consumption + savings.
7. Per capita income (PCI): national income / total population. 

Methods for measuring, estimating or computing national income

A country can perform any of the 1 method or combination of methods based on the availability of the data (Information). but all methods gives the same value of national income.

National Income=Product Method=Income Method=Expenditure Method.

• Product method/Output method/value added method: NI= P1Q1 +P2Q2 +P3Q3 +...+PNQN
• Income method/ Factor payment method: NI= R + W + I + P
• Expenditure method (Consumption and saving method, consumption and investment method or Disposable income method): J.M Keynes. NI = EH+EF+EG.

Components of national income

Economists not only measures the flow of national income as final value of all goods and services in terms of money value but also studies about the allocation of this amount (output) among different alternative uses.

That's why these spending or incurring are  called as the components of national income.

Following are the 4 components of national income or classification of expenditure:

Consumption (C)

It refers to the expenditure on goods and services by the households. it includes:

• nondurable goods: the goods which can be stored or used for less time or short period of few hours are called as nondurable goods. example, food, vegetables, fruits, etc.
• Durable goods: which can be used or stored for long time for example, cars, machines, computers, benches in the college, etc.....
• Services: work done by a person to satisfy a consumer's want. example, haircut, teaching, etc. it has a grater value.

Investment (I)

investment refers to the expenditure incurred on purchase of capital such as machinery. according to Macro economics, investments increases new capital which leads to more employment and more national income.

Government expenditure (GE)

expenditure made by the governments or the production of goods by the government.

Exports and imports (X M)

Imports means the purchase of goods from foreign countries. exports refers to the sending goods to foreign countries to earn income.

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The end

Thanks for reading. Hope it is helpful to you.