Concepts of National Income

Written By Fathimath Sama on Saturday, 22 June 2013 | 20:47

There are a number of concepts pertaining to national income. They are: 
  • 1. Gross National Income (GNP) 
  • 2. Net National Income (NNP) 
  • 3. Gross Domestic Product (GDP) 
  • 4. Personal Income 
  • 5. Disposable Personal Income 
  • 6. Per Capita Income 

1. Gross National Income: 

GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad, GNP includes four types of final goods and services: (1) Consumer’s goods and services to satisfy the immediate wants of the people. (2) Gross Private Domestic Investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods.(3) goods and services produced by the government and (4) net exports of goods and services that is, the difference between value of exports and imports of goods and services, known as net income from abroad.

In this concept of GNP there are certain factors that have to be taken into consideration. 
  • First, GNP is the measure of money, in which all kinds of goods and services produced in a country during one year are measured in terms of money at current prices and then added together. 
  • Second, in estimating GNP of the economy, the market price of only the final products should be taken into account. 
  • Third, goods and services rendered free of charge are not included in GNP, because, it is not possible to have a correct estimate of their market prices. 
  • Fourth, the transactions which do not arise from the produce of current year or which do not contribute in any way to production are not included in GNP 
  • Fifth, the profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices are not included in the GNP if they are not responsible for current production or economic activity. 
  • Lastly, the income earned through illegal activities is not included in GNP. 
GNP is the most frequently used national income concept. It is a better index than any other concept because it expresses the actual condition of production and employment in a country during a specific period. It provides a general idea of the performance of the economy. 

2. Net National Income (NNP): 

GNP includes the value of total output of consumption and investment goods. But the process of production uses up a certain amount of fixed capital. Some fixed equipment wears out, its other components are damaged or destroyed and still others are rendered obsolete through technological changes. All this process is termed as depreciation or capital consumption allowance. In order to arrive at NNP, we deduct depreciation from GNP. The word ‘net’ refers to the exclusion of that part of total output which represents depreciation. So , NNP = GNP- Depreciation. 

3, Gross Domestic Product (GDP): 

Income generated by the factors of production within the county from its own resources is called domestic income or domestic product. Gross domestic product includes: 
  1. Wages and salaries 
  2. Rents, including imputed house rents 
  3. Interest 
  4. Dividends 
  5. Undistributed corporate profits including surpluses of public sector undertakings 
  6. Mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships etc. 
  7. Direct taxes 
Since gross domestic product or income does not include income earned from abroad, it can also be shown as: 

Domestic Income = National Income – Net Income from Abroad 

Thus the difference between domestic income and national income is the net income earned from abroad may be positive or negative. If exports exceed imports, net income from abroad is positive. In this case national income is greater than domestic income. On the other hand, when inputs exceed exports, net income earned from abroad is negative and domestic income is greater than national income. 

4. Personal Income: 

Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year. The entire national income will not be available for consumption. National income is different from personal income. In order to arrive at personal income several deductions are to be made. For example, corporations have to pay income-tax from the corporate profits before declaring dividends. Likewise a part of the corporate profits available for distribution is reduced. Similarly salaried persons and wage earners pay a certain percentage of their income towards social security contribution. To that extent income available to the employees and workers is reduced. Against this, the government may give social security benefits such as unemployment allowances, old age pensions etc. These payments are called transfer payments are called transfer payments. These are to be added to arrive at personal income. Therefore. 

Personal Income = National Income – Corporate income taxes – undistributed corporate profits-social security contributions + transfer payments. 

The concept of personal income is a useful concept. It helps in estimating the potential purchasing power of the households in an economy. The weakness of this concept is that it does not clearly tell us the actual amount of money available for disposable personal income. 

5. Disposable Personal Income: 

Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families. The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct taxes have actually been paid. Therefore, in order to obtain the disposable income, direct taxes are deducted from personal income. Thus: 

Disposable income = personal income – direct taxes 

But the whole of the disposable income is not spent on consumption and a spent on consumption and a part of it is saved. Thus, 

Disposable income = consumption expenditure + savings expenditure. 

6. Per Capita Income: 

The average income of the people of a country in a particular year is called per capita income for that year. This concept also refers to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income at current prices, the national income of a country is divided by the population of the country in that year. 

Per capita Income = National income÷ population 

This concept enables us to know the average income and the standard of living of the people. But it is not very reliable, because in every country due to unequal distribution of national income a mojor portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita income.


Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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