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What is National Income? Concept, definition, measurement and all you need to know

Jagran Josh

What is National Income?

National Income of any country means the complete value of the goods and services produced by any country during its financial year. It is thus the consequence of all economic activities that are running in any country during the period of one year. It is valued in terms of money. In short one can say that the national income of any country is the total amount of income that is accrued by it through various economic activities in one year. It is also helpful in determining the progress of the country. 

It includes wages, interest, rent, profit, received by factors of production like labour, capital, land and entrepreneurship of a nation.

National Income: Concept

There are various concepts of National Income including GDP, GNP, NNP, NI, PI, DI, and PCI which explain the facts of economic activities.

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a. GDP at market price: Is money value of all goods and services produced within the domestic domain with the available resources during a year.

GDP = (P*Q)

Where,

GDP = gross domestic product

P = Price of goods and services

Q= Quantity of goods and services

GDP is made up of 4 Components

  1. consumption
  2. investment
  3. government expenditure
  4. net foreign exports of a country

GDP = C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

b. Gross National Product (GNP): Is market value of final goods and services produced in a year by the residents of the country within the domestic territory as well as abroad. GNP is the value of goods and services that the country's citizens produce regardless of their location.

GNP=GDP+NFIA or,

GNP=C+I+G+(X-M) +NFIA

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

NFIA= Net factor income from abroad.

c. Net National Product (NNP) at MP: Is market value of net output of final goods and services produced by an economy during a year and net factor income from abroad.
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

NFIA= Net factor income from abroad.

IT= Indirect Taxes

d. National Income (NI): Is also known as National Income at factor cost which means total income earned by resources for their contribution of land, labour, capital and organisational ability. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income.

Symbolically or as per the formula 
NI=NNP +Subsidies-Interest Taxes
or, GNP-Depreciation +Subsidies-Indirect Taxes
or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes +Subsidies

e. Personal Income (PI): Is the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits- Social Security Contribution +Transfer Payments.

f. Disposable Income (DI) : It is the income left with the individuals after the payment of direct taxes from personal income. It is the actual income left for disposal or that can be spent for consumption by individuals.

Thus, it can be expressed as: 

DI=PI-Direct Taxes

g. Per Capita Income (PCI): It is calculated by dividing the national income of the country by the total population of a country.

Thus, PCI=Total National Income/Total National Population

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Measurement of National Income

There are three methods to calculate National Income:

  1. Income Method
  2. Product/ Value Added Method
  3. Expenditure Method
  • Income Method

In this National Income is measured as flow of income.

We can calculate NI as:

Net National Income = Compensation of Employees+ Operating surplus mixed (w +R +P +I) + Net income + Net factor income from abroad.

Where,

W = Wages and salaries

R = Rental Income

P = Profit

I = Mixed Income       

  • Product/ Value Added Method

In this National Income is measured as flow of goods and services.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES

  • Expenditure Method

In this National Income is measured as flow of expenditure.

We can calculate NI through Expenditure method as:

National Income=National Product=National Expenditure.

So, above were the concepts of National Income explained in detail. The students of various exams like UPSC, SSC and Bank PO must go through these concepts to excel in their exams. 

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FAQ

What is income method in National Income?

The Income Method can measure national income from the side of payments made to the primary factors of production in the form of rent, wages, interest and profit for their productive services in an accounting year.

How many major classes of National Income are there?

There are 5 major classes of National Income

Is national income the same as GDP?

No National Income is the total value of all services and goods that are produced within a country while Gross Domestic Product is defined as the value of the goods and services generated within a country.

What is the formula of National Income?

The formula of National Income is: NI = C (household consumption) + G (government expenditure) + I (investment expense) + NX (net exports).

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