MEASURES OF NATIONAL INCOME

The commonly discussed measures of national income are Gross National Product, Gross Domestic Product,  Net National Product,  Personal Income, Disposable Income and Real Income

Gross National Product (GNP)

1. GNP, a basic social accounting measure, the most frequently used national income aggregate  economic parlance. GNP at market price is sum total of all the goods and services produced in a country during a year plus net income from abroad expressed in monetary terms. There is no other way of adding up the different sorts of goods and services produced in a year except with their money prices. But in order to estimate accurately the changes in physical output, the figure for GNP is adjusted for price changes by comparing to a base year as is done in case of index numbers.
2. For accurate estimation of gross national product, all commodities and services produced in any given year must be counted only once. Most of the goods go through a series of production stages before being offered to a market. Consequently, parts or components of many goods are bought and sold several times. In order to avoid multiple counting the parts of goods sold , a number of times gross national product only includes the market value of final goods and ignores transactions involving intermediate goods.
3. Final goods are those goods that are purchased for final use and not for resale or further processing. Intermediate goods are those goods that are purchased for further processing or for resale. The sale of final goods is included in gross national product, while the sale of intermediate goods is excluded from GNP. This is because the value of final goods includes the value of all intermediate goods used in their production. For instance, the value of cars includes the value of tire.  The inclusion of intermediate goods would involve double counting and will therefore give an exaggerated estimate of the gross national product.
4. While calculating the GNP the non-productive transactions should be excluded. These are purely financial transactions or transfer payments like old age pensions or unemployment doles.

Three different approaches to measure GNP are:

• ·         Income approach,
• ·         Expenditure approach and
• ·         Product approach

Gross Domestic Product (GDP)  measures both a nation’s total income and its total output of goods and services. It is taken to be one of the best measures of judging an economy’s performance.  It is the sum total of the incomes of everyone in an economy and the total expenditure on an economy’s output of the goods and services.These two quantities, income and expenditure are actually the same for an economy as a whole, since income must be equal to expenditure. Every rupee of expenditure by a buyer must become a rupee of income for the seller. GDP denotes the total market value of a country’s output and is expressed in terms of the market value of all final goods and services produced within a given period of time by factors of production located within a country” GDP as a measure of the total production of an economy provides with a country’s economic report card. Many goods produced in the economy are not classified as final goods, but instead as intermediate goods. One firm for use in further processing by another firm produces intermediate goods. For example, tires sold to automobile manufacturers are intermediate goods. The value of intermediate goods is not counted in GDP.

The GDP is measured at market prices. It is the value of the national product (net of foreign trade and net inflow of foreign exchange from abroad) in terms of money actually spent This is misleading since market prices of most goods include taxes on expenditure or subsidies. Therefore, in order to obtain the value of the national product in terms of the resources used to produce it, it is necessary to make factor cost adjustments. In order to do so indirect taxes must be subtracted and add on the amount of subsidies. After making this adjustment we arrive at a figure known as GDP at factor cost. This is the most commonly used measure of national product. The GDP represents the extent to which resources (or factors) are used in the economy. However, the rent, profit, interest and dividends paid to, or received from abroad may affect national product.

Net national product is  Gross National Product less depreciation,

                       

NNP = GNP- Depreciation

Depreciation is that part of total productive assets  used to replace the capital worn out in the process of creating GNP. In the process of producing goods and services, a part of total stock of capital is used up.  An estimated value of depreciation is deducted from the GNP to arrive at NNP. Thus, NNP provides the measure of net output available for consumption by the society and is the real measure of the national income.  NNP is measured at market prices including direct taxes.

Net National Product is a better concept than gross national product because it makes proper allowance for the depreciation suffered by the capital goods during the period under consideration. This concept gives a proper idea of the net increase in total production of a country. It is therefore, used in analyzing the long-period problems of maintaining and increasing the supply of capital goods in the country.

            In spite of the fact that for some purposes of economic growth NNP is much more important than GNP, it is more difficult to measure statistically, because we have no accurate record of the amount of depreciation that takes place over periods of time. Moreover, we do not have appropriate rates of depreciation for various capital goods. Therefore, the deduction to be made from GNP to arrive at NNP is a matter of judgment rather than of exact measurement. This is why the concept of NNP is not fairly used.

Personal Income

Personal income is the aggregate of all incomes all individuals or households actually receive by during a given year. Personal Income is the income persons actually receive from all sources in the form of current transfer payments and factor income. Personal income  is different from national income. You know that all that is produced by industry and government must necessarily belong to someone, and hence can be regarded as national income received or accrued by the people, but not all of the value of this product is paid to them as money income. Part of the net earnings of the business firms are taken away from them by government in the form of corporate income tax before being paid to the owners of the business firms. These are direct taxes that do not enter into the prices of commodities. In addition, many firms retain part of their earnings in the business, to make additions to their plans or as a reserve for future emergencies, instead of distributing the entire profits to their shareholders. Again, the employees of the business firms are not allowed to receive in money all of the salaries or wages that they earn. The government charges a withholding tax used to finance social security payments to the aged, the unemployed and, certain other persons. Similarly, the government makes some other transfer payments to people of the country.

Personal Income (PI) = Net National Income – Undivided Corporate Profits- Corporate Income Taxes-Social Security Contributions + Transfer Payments

This concept of personal income is useful for special purposes. It shows the ability of people to pay taxes.

Disposable Income is the income remaining with individuals after deduction of all taxes levied against their income and their property by the government. Disposable Income refers to the income actually received by the households from all sources. The individual can dispose this income as he wishes, since it is derived after deducting direct taxes.

The main drawback of the personal income data is that they do not tell us how much is actually at the disposal of people for their personal expenditure.  For this purpose we use the concept of disposal income. After a good part of personal income is paid to government in the form of personal taxes (such as income tax, property tax etc.), what remains of personal income is called disposable income.

            Disposable Income (DI) = Personal Income – Personal Taxes

Disposable income data are useful for studying the purchasing power of the consumers. Since disposable income can either be consumed or it can be saved. It can assist in the amount of consumption and saving that individuals make in the economy.

Real Income

Goods and services produced in terms of money at current prices will not express real state often. Hence, real income is the national income expressed in terms of a general level of prices of a particular year, considered as the base year. When the national income is expressed in terms of the base year’s price index, it is known as real income. Net national income is the money value of the goods and services produced during a given year at the current prices. However, this figure does not indicate the real situation of the economy. Due to an increase in the prices of goods and services, the figure for net national income may be high but real production is not much. The reverse is also possible. To avoid this deficiency we make use of the concept of real income. It is calculated by the following formula

Real Net National Income = Net National Income/ Price Index for that year x 100                                                                    

Thus, the important and traditionally used measures of income are Gross National Product (GNP), Gross Domestic Product (GDP), Net National Product (NNP), Personal Income (PI), Disposable Income (DI) and Real Income

National Income Relationships

(a)    Accounting Units at Market Price

GNP = GNI (Gross National Income)

GDP = GNP – Net Income from Abroad

NNP = GNP – Depreciation

NDP = NNP – Net income from abroad

(b)   Accounting Units at Factor Cost

GNP at factor cost = GNP at market price – net indirect taxes

NNP at factor cost = NNP at market price – net indirect taxes

NDP at factor cost = NNP at market price – net income from abroad

NDP at factor cost = NDP at market price – net indirect taxes

NDP at factor cost = GDP at market price – depreciation

Factors Determining National Income

There are a number of factors that determine the size of the national income in a country. Because of these influences one country may have a larger national income than another. The following are the main influence on the national income:

1.      Quantity and Quality of Factors of Production

The quantity and quality of a country’s stock of the factors of production is one of the most important influences on its national income. The quantity and quality of land, the climate, the rainfall etc., determine the quantity and quality of agricultural produce and the size of the national income. The quantity and quality of labour influence national income both labour as a factor of production and consumer of the goods and services produced. The quality of labour, depending upon inborn intelligence, education and training also influences the volume of industrial production. Similarly, the quantity and quality of capital is one of the greatest influences on total output. Likewise, the quantity and quality of entrepreneurial ability is also an important element in the determination of the size of the national income of a country.

2. The State of Technical Know-how

The state of technical know-how is another influence on output and national income. A country with a poor technical knowledge cannot have a large sized national income, because it will not be in a position to make the best possible uses of its resources.

3. Political Stability

Political stability is an essential prerequisite for maintaining production at the highest level. The economic development of several countries, particularly the South American Republics, has been hindered in the past by political instability.