NATIONAL INCOME

 The national income of a nation is the value of the contribution through the production units in the country and abroad. It is, thus the flow of net final goods and services resulting from the production activities of the normal residents of a country during the year. National Income is the sum total of all the goods and services produced in a country in a period of one year. The level of national income determines the level of aggregate demand for goods and services. National Income is the sum of factor income earned by the normal residents of a country in the form of remuneration to the factors of production in an accounting year. 

  It the money value of the flow of commodities and services, minus imports becoming available for sale in the period, the value being indicated at current prices minus the sum of the following items:

• the money value of any diminution in stocks that may have taken place during the period;
• the money value of goods and services used up in the course of production;
• the money value of goods and services used to maintain intact existing capital equipment (value being reckoned at current prices);
• receipts of the state from indirect taxation;
• favorable balance of trade including transactions in treasure;
• net increase in country’s foreign indebtedness or the decrease in the holdings of balances and securities abroad whether by individuals or the government of the country.

In other words, national income is the sum of factor incomes arising from the current production of goods and services by the nation’s economy.

Nominal national income vs. real national income

Nominal income is the actual rupee amount that the person receives as income and has not been adjusted for the inflation rate. Inflation represents an increase in the general price level which means that if your income is the same and the price level goes up then the buyer will be able to buy lesser in that income because now the products will be expensive. If a person is given a salary of Rs. 25000 then it generally refers to the nominal income, as it does not account for inflation. The real income shows the purchasing power of the person by relating the income to the goods or services that can buy with it instead of just the rupee amount.

Elements of National Income

A closed economy without government produces only consumer goods. However, in the actual calculation of national income or national product various other items are taken into account. Modern knowledge economies are much more complicated than two sector circular flow model. In addition to the personal consumption expenditure of the household sector, there are purchases of goods and services governments make (for example, highways, education, medicines, and courts of law). Rather than purchase of all productive inputs from households, businesses undertake investment expenditure out of their retained earnings. This enhances their future productive capabilities. In addition, foreigners may both purchase domestic goods and services as well as foreign made products to the domestic market.

The following are the major components of national output or GNP.

1. Capital Goods

Capital goods like plant, machinery, equipment, buildings, furniture etc. are used to produce consumer goods like bread, butter, clothing etc. Capital goods are also known as investment goods. First capital goods are to be produced at a cost. Then these are to be used to produce consumer goods. Thus, both capital goods and consumer goods are to be treated as part of gross national product (GNP). Of course, people of a country do not directly consume capital goods like machines or factories. But, if the stock of capital goods increases society becomes richer than before and it is said to have a greater ability to produce wealth. Thus, investment goods the creators of other goods, are to be counted as part of the national product. Thus, it is quite clear that national product is going to be equal to the output of both consumption and capital goods (C + I).

  

2. Inventories

It is to be emphasized that while calculating national produce all final goods need to be included. For example, bread is a final good because it is consumed finally and is not used for further production as an input.  In the same way textile machinery are final goods because they are not converted into anything else and are consumed over an extended period of time by being used to produce textiles. An adjustment has also to be made for stocks of raw materials and intermediate goods.  While estimating national product the value of the physical increase in stocks is included.

3. Depreciation

The output of capital goods produced in a year is known as capital formation. Capital goods are of two types: fixed capital, such as building and machinery and circulating capital such as stock of raw materials and intermediate goods.  In national income accounts separate treatment is given to these items.  The output of such capital goods as machinery and buildings is exhibited in national accounts as gross domestic fixed capital formation.  In the same manner the national income accounts record the change in circulating capital as the value of physical increase in stocks and work-in-progress. This may be either a positive or a negative value depending upon whether inventories have increased or decreased during the period under consideration.

Capital goods such as plant, machinery, buildings, road etc. wear out through use and need to be replaced. Therefore, an economy must produce a certain amount of capital goods just to replace those that are wearing out. The output of all capital goods produced during the year is referred as gross capital formation. When an allowance for the wearing out of capital is made, we arrive at a figure called net capital formation. The allowance made for the wearing out of capital is known as depreciation. Thus, the two measures of national product are: a gross measure and a net measure. If the output of all final products is added up- both consumer goods and capital goods- we arrive at gross national product. After making an allowance for capital consumption, we get net national product.

4. The Government and the National Product

In addition to household expenditure on consumer goods and business expenditure on capital goods, the single largest consumer of all types of goods is the government. Therefore, while calculating national expenditure, all government expenditure on goods and services (G) is added to the two private components of expenditure i.e. consumption spending © and private investment spending (I). Thus, the total demand for goods and services is C + I + G. Government expenditure includes such things as the cost of new schools, colleges and hospitals, the salaries of school and college teachers, and doctors, the wages of service persons and defense arsenals.  Thus, the bulk of government expenditure consists of wages of all government employees plus the cost of goods that the government buys from the private sector. In addition the government incurs various other types of expenditure such as unemployment allowance, pensioners, and holders of government bonds. Those who receive such payments do not provide anything to the government in exchange. This is the reason such expenditure is known as transfer payment. Such expenditure is not included in national income because these are not payments for current productive services and bear no relation with the creation of national product in the current year.

5. Foreign Trades and the National Product

An open economy trades with the rest of the world. The sale of goods and services abroad creates income for the people in the domestic country. Therefore, such transactions need to be included in the calculation of national product. On the other hand, much of what is spent in India is expenditure on imported goods and services. Such expenditure creates income for people overseas. This is, therefore, subtracted from the national product. The national income may therefore be expressed as:

            Y = C + I + G (X-M)

The difference between the two is called net export or balance of trade. The balance of trade may be favorable, unfavorable or balanced if there is a net inflow of foreign exchange into the country, there will be rise in the national income. The overall size of the national product can either increase or decrease through increase or decrease in the net effect of foreign trade. Like the export of goods and services that earns foreign exchange for a country, the sale of services such as banking, insurance and tourism are also a major source of overseas income for India.

Thus, national income is thus, the sum total of all the goods and services produced in a country, in a particular period of time. The difference between the nominal income and real income lies in the fact that nominal income is the actual rupee amount that the person receives as income and has not been adjusted for the inflation rate. The real income shows the purchasing power of the person by relating the income to the goods or services that can buy with it instead of just the rupee amount. The major elements of the national income include the capital goods, inventories, depreciation, the government and foreign trades.