National Income is defined as the value of all final goods and services produced by the residents of a country, whether operating within the domestic territory of the country, or outside, in a year. National income is thus, a momentary expression of the current achievements of the people of a country expressed through their production activities.

National Income

National Income is the sum of return of all the resources involved in any economic activities. It is qualitative and dynamic concept and related to Flow

National Income = Wage + Rent + Interest + Profit

Basic Concept of National Income : There are following basic concept of National Income

  1. Gross Domestic Product
  2. Net Domestic Product
  3. Gross National Product
  4. Net National Product
  5. Per capita Income
  6. Private Income
  7. Personal Income
  8. Disposable Income

1. Gross Domestic Product (GDP) :

G.D.P is monetary value of final goods and services which is produced by general resident of country in own physical boundary.

GDP = C + I + G
Here C = consumption, I =investment, G = Government Expenditure

Economic Development Rate (EDR)

Rate of change of GDP is known as Economic Development Rate. It shows that how many G.D.P. increased in current with respect to previous year. It is calculated on the basis of Base price and also current price.

E.D.R. = (Change in G.D.P. / G.D.P of Previous Year) X 100

2. Net Domestic Product (N.D.P.) :

It is the difference between G.D.P and depreciation

N.DP = GDP –Depreciation

N.DP = C + I + G – D

Depreciation : It refers to the reduction in the value of capital assets (e.g., machinery building, equipment etc ) due to normal wear and tear and technological obsolescence. Depreciation is also called consumption of fixed capital and capital consumption. Net value is obtained by reducing the values of depreciation from the value.

Net Value = Gross value – Depreciation

3. Net National Product (G.N.P)

G.N.P is the sum of values of all final goods and services which is produced by citizen of a country in financial year and net earned income from aboard.

GNP = C + I G + (X – M)

X – Income earned from export

M – Income expenses on import

4. Economic Growth Rate (E.G.R)

It is the rate of change of net national product. It shows the change in NNP of current year with respect to previous year. It is calculated on the basis of current year price and also base year or constant price. E.G.R is also called growth rate of National Income.

E.G.R = (Change in NNP in current year / NNP of previous year) X 100

5. Per capita Income

It is the average income. It is the ration between National Income and population of country. This is per head per annum income of a country.
Per capita Income = (National Income / Population )

The approximate growth rate of per capita income can estimated by reducing the growth rate of population from the growth rate of National Income.

6. Private Income

Private Income is income obtained by private individuals from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deduction. Thus,

Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest of Public Debt   – Social Security – Profits and Surpluses of Public Undertakings.

7. Personal Income

Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes  in one year. Thus Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribution + Transfer Payments + Interest of Public Debt.

Personal income differs from private income  in that it is less than the latter because it excludes undistributed corporate profits. Thus Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.

8. Disposable Income

Disposable Income or personal disposable income means the actual income which can be spent on consumption by individuals and families. Disposable Income = Consumption Expenditure Savings.

Disposable Income = National Income – Business Savings – Indirect Taxes +Subsidies – Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income from Abroad.

Real Income

Real Income is national income in terms of a general level of prices of a particular year taken as base. National Income is the value of goods and services produced as expressed in terms of money at current prices. But it does not indicate the real state of the economy. It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing to an increase in prices, the NNP might be higher this year. On the contrary, it is also possible that NNP might have increased but the price level might have fallen, as a result of which national income would appear to be less than that of the last year. In both the situations, the national income does not depict the real state of the country. To rectify such as a mistake, the concept of real income has been evolved.

Factor Cost versus market Price

Factor cost (FC) refers to the payments made to the factors of production (i.e. labor, land, capital, and entrepreneurship) of goods and services, while market price (M.P.) refers to the market value of the goods and services produced. Market price of the goods and services is arrived at by adding Net Indirect Taxes (i.e. Indirect Taxes-Subsidies ) in the cost of production (F.C.)

M.P = F.C. + Net Indirect Taxes
E.g. GDPMP = GDPFC + Indrect taxes – Subsidies

Or, GNPMP = GNPFC + Indirect Taxes – Subsidies

Classification of India Economy

1) Primary Sector :

  • Agriculture
  • Forestry and Logging.
  • Fishing
  • Mining and Quarrying

2) Secondary Sector :

  • Manufacturing ( Registered and Unregistered )
  • Construction
  • Electricity, gas and water supply.

3) Tertiary Sector :

  • Transport, storage and communication
  • Trade, hotels and restaurants
  • Banking and insurance
  • Real Estate, ownership of dwellings and business series
  • Public administration and defense
  • Other services

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