National Income: Various concepts of national income

National income refers to the total income of the nation in a particular period of time. National income data reveals the aggregate economic performance of the economy as a whole. National income – represents a receipts total, expenditure total and the total value of production. Since one person’s income is another person’s expenditure and each commodity is bought and sold at its market prices, a
national income accounting is based on the fundamental three fold identity: (i) The value received equals, (ii) The value paid equals, and (iii) The value of goods and services given in exchange.

Hence, National income = National expenditure = National Product

Marshall, Pigou & Fisher, has defined the traditional definitions of national income. According to Marshall, national income is, “The labor and capital of 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.” Pigou’s definition of national income includes that income which can be measured in terms of money. According to Pigou, “National income is that part of objective income of the community, including of course income derived from abroad, which can be measured in money.” Fisher defined on the consumption basis. According to Fisher, “The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Thus, a piano, or an overcoat made for me this year income, but an addition to the capital. Only the services rendered to me during this year by these things are income.” This definition of national income is better than Marshall and Pigou because it is near to the concept of economic welfare.

Simon Kuznets and Samuelson have given the modern definitions of national income. According to Simon Kuznets, “National income is the net output of the commodities and services flowing during the year from the country’s productive system in the hand of the ultimate consumers.” In the words of Prof. P. A. Samuelson, “National income or product is the final figure you arrive at when you apply the measuring rode of money to its land, labor and capital resources.” Modern economists view national income as a flow of output, income and expenditure. When the firms produce goods, the factors of production are paid income in the form of wages, profits, interest, rents, etc. Households on consumption goods spend a part of these income receipts and other part is saved. The producers for investment spending mobilize the savings. Thus, there is circular flow of production, income and expenditure. 

Hence, Total output = Total income = Total expenditure.

Various concepts of National Income

In modern times, a number of concept have come to be associated with the study of national income and social accounting which have made the study of national income broad based and comprehensive. The main concepts of national income are explained below:

i) Gross Domestic Product (GDP): It is a measure of the total flow of final goods and services produced within a country over a specified time period, generally one year. It can be obtained by valuing output of goods and services at market prices and the summing that up. It includes final consumption and investment goods but it excluded intermediate product because they are already implicit in the prices of final products. In short GDP can be listed as:
  • GDP is expressed in money terms; it is the money value of final total goods and services produced within the country during a period of time. The value of final goods and services is calculated at the current market price; hence it is called GDP at market price.
  • GDP includes only those goods and services which have market value and which are brought in the market for sale.
  • GDP does not include depreciation of capital goods and services during the course of production as well as transfer payment and capital gains are not included under GDP.
Hence, GDP = Total agriculture product + Total industrial product + Total product of tertiary sector. By sing expenditure method, it can be shown as:

GDP = C + I + G

Where, GDP = Gross Domestic Product

C = Consumption Expenditure

I = Investment Expenditure and

G = Government Expenditure

ii) Gross National Product (GNP): Gross National Product is the total measure of the flow of final goods and services at market value produced during the year in a nation plus net foreign incomes. GNP is a broader concept than GDP. The net foreign income is the difference between the factor income earned by our residents from foreign countries and the factor income earned by the foreigners from native country.

Hence, GNP = GDP + Net foreign income

Or, GNP = C + I + G + (X – M)

Where, C = Consumption expenditure

I = Investment expenditure

G = Government expenditure

X = Total export earnings

M = Total imports expenses, and

X – M = Net income from abroad

iii) Net National Product (NNP): In the production process, certain amount of fixed capital is used up. This is called depreciation of fixed capital or consumption of fixed capital. By deducting the value of depreciation from the value of GNP in a year, we get another measure of output called Net National Product.

Hence, NNP = GNP – Depreciation

Further, NNP at market price = GNP at market price – Depreciation

iv) National Income (NI): National income is called national income at factor cost because the national income is calculated on the basis of the remuneration of factors of production. Since National Income is the result of the joint efforts of factors of production, it is distributed among the factors. The owners of labor, land, capital and entrepreneurs receive wage, rent, interest and profit respectively. Hence, national income is the sum of income received by factors of production. In other words, national income can be expressed as, 

National Income (NI) = Net National Product + Subsidies – Indirect taxes

Or, NI = NNP + S – IT

Where, NNP = Net National Product, S = Subsidies and IT = Indirect taxes

v) Personal Income (PI): Personal income is the sum of all income actually received by all individuals or households during a given year. However, all income earned by a person does not constitute personal income. It only refers to the income received by the individuals.

Hence, Personal Income (PI) = National income – Corporate income taxes – Undistributed profits – Social security contribution + Transfer payments.

vi) Disposable Income (DI): The entire amount received by the individuals and households are not available for consumption expenditure because some part of the personal income should be paid to the government in the form of direct tax (income tax). Hence, the income remained after paying direct taxes from personal income is called disposable income.

Hence, Disposable Income (DI) = Personal Income (PI) – Direct taxes.

The total disposable income is not spent on consumption. Some part is saved. Thus,

DI = C + S

Where, C = Consumption expenditure and S = Saving

vii) Per Capita Income: Per capita income of a country usually refers to the average earning or income of individuals in a particular year. It is obtained by dividing the national income of the country by the total population.

Hence, Per capita income = National Income/Total Population

Hence, per capita income of the people is useful to compare people’s standard of living in different countries.

Calculation of GDP, GNP, NNP, NI, PI and PDI
($ in million)
1. Gross Domestic Product (GDP)440
Net Factor income from aborad+ 41
2. Gross National Product (GNP)481
Depreciation- 20
3. Net National Product (NNP)461
Net indirect taxes (indirect taxes - subsidies)- 6
National Income(NI)455
Corporate profit taxes, undistributed profits, and valuation adjustment- 2
Social security contribution- 3
Transfer payments to persons+ 6
Personal interest income+ 2
5. Personal Income (PI)458
Personal taxes (direct taxes)- 111
6. Personal Disposable Income (PDI)347

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