Meaning and Various Concept of National Income

Meaning of national income

National income is one of the macroeconomic variables that measures the total amount of money earned within a country within a year. More precisely, it is the total value of all goods and services produced within a country in a specific time frame, representing the sum of wages, interest, profits, rents and pension payments to the residents of the nation. National income is the basis of formulating economic policies and planning, evaluating and monitoring existing economic activities, formulating monetary and fiscal policies, studying the pattern of inflation and deflation. It provides a summary of the aggregate national economy as a whole.

National income has been defined by many economists in a different manner. The different dimension of definition helps us to understand the meaning of national income more clearly.

We can categorize these definitions into the traditional and modern definition.

1. Traditional definition

According to Marshall, “The labor and capital of country acting upon 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 of revenue of the country or national dividend.”

A.C. Pigou defines National income in terms of money. According to him, “National dividend is that part of the objective income of the community including, of course, income derived from abroad, which can be measured in money.”

Fisher, on the other hand, defines national income in terms of consumption. In the words of Fisher, “The true national income is that part of the annual net product which is directly consumed during that year.”

2. Modern definition

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.

Prof P.A. Samuelson defines national income as “National income or product is the final figure you arrive at when you apply the measuring rod of the economy to its land, labor, and capital resources.”

General features of National Income

1. In real term, it is the flow of goods and services produced in an economy within a year.
2. In money term, it is the monetary measure of all goods and services produced within a country in a year.
3. It is measured over a period of one year.
4. It is not a fixed quantity but a continuous flow.
5. There is a triple identity, i.e. National output=National income=National expenditure.

Different concepts of National Income (NI)

Gross Domestic Product (GDP)

GDP is defined as the sum of the market price of all final goods and services produced within a country in a year. GDP includes only currently produced goods and services. It is the measure of output in a year and includes goods and services produced during that particular year. Similarly, GDP includes income earned by foreign residents in the country while the income earned abroad by the resident is excluded.
GDP at market cost and GDP at factor cost.

GDP at market price include the price that is paid to buy goods and services from the market. Market price includes the elements of indirect taxes and subsidies. The addition of indirect taxes to GDP at factor cost, it makes the GDP at market prices higher.

GDP at market price= GDP at factor cost + Indirect taxes - Subsidies

On the other hand, GDP at factor cost includes the payments to the factor of production like wages, interest, rent, profits, etc. It thus excludes indirect taxes and adds subsidies as they artificially lower production costs.

Net Domestic Product (NDP)

Often called the most accurate measure of national income, NDP is simply GDP minus depreciation of capital goods of the country. The fixed capital assets like machines, buildings, and vehicles are prone to decrease in value due to wear, tear and obsolescence. Because there is always depreciation in capital goods, the rate of growth of NDP will always be less than the growth of GDP. Net domestic product measures the growth of national economy. A smaller difference between GDP and NDP indicate the most efficient economy. The amount of depreciation can be lowered by producing high-quality goods that last longer, which also lessens the need for replacement.

NDP= GDP-depreciation

Net Domestic Product at factor cost is the total income earned by the factors as wages, interests, profit, rent within the territory of a country. Besides the above four remunerations, it also includes (i) reserve fund or corporate saving of firms, (ii) corporation and other direct tax, (iii) mixed income of self- employed, (iv) profits from Government, enterprises, (v) Property of the Government, and (vi) savings of non-departmental enterprises.

NDP at market price is the difference between net national product at a market price and net factor income from abroad. Net national product at market price is the gross national product at market price minus depreciation.

NDP at market price = Net national product at market price - Net factor income from abroad.

Gross National Product (GNP)

GNP is the total value of all final goods and services by domestically owned factors of production within a time period. The concept of GNP is similar to GDP but with a significant difference. GNP includes earning of Nepalese firms overseas and Nepalese residents working overseas but GDP does not.

GDP and GNP can be clearly understood through the definitions mentioned below:

GNP = Market value of domestically produced goods and services plus incomes earned by residents of country in the foreign country minus incomes earned by foreigners in the country

GDP = Market value of goods and services produced by the residents country plus incomes earned in the country by the foreigners minus incomes received by the residents of a country from abroad.

GNP at market price is the market value of all the final goods and services produced in the domestic territory of a country by residents of that country during one year including net factor income from abroad.

GNP = GDP at market price + Net factor income from abroad

GNP at a factor cost market value of all the final goods and services produced in the domestic territory of a country by residents of that country during one year including net factor income from abroad minus net indirect taxes.

GNP= GNP at market price - Net indirect cost

Net National Product (NNP)

NNP is another concept of measuring national income which is often used in macroeconomic analysis. It is closely related to the concept of GNP. GNP is gross of depreciation while the NNP is the net of depreciation. It is the measure of net national income which is available for investment and consumption. It is, therefore, the actual measure of national income. NNP divided by total population of the country gives per capita income. It is calculated by deducting the value of depreciation from the value of GNP.

Hence, NNP=GNP-Depreciation

NNP at market price is GNP at the market is calculated by deducting depreciation from the price.

NNP=GNP at market price-depreciation

NNP at factor cost is the total of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services within a year. It is calculated as:

NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.

References

Dwivedi, D. N. (2010). Macroeconomic theory and policy. New Delhi: Tata McGraw-Hill Education.
Kharel, K. R., Ghimire, Y., Bhattarai, D., Jnawali, S., & Paudel, K. (2010). Business Economics. Kathmandu: Sukunda Pustak Bhawan.