Saturday, June 5, 2010

Overview of National Income

Definition of National Income:

Traditional Approach:

According to Marshall, “National income is the labor and capital of a country, acting on its natural resources; produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.”

According to Fisher, “The national income consists solely of services as received by ultimate consumers, whether from their material or from their human environments.”

According to Pigou, “National income is that part of the objective income of the community, including income from abroad which can be measured in money.”

Modern Approach:

According to Siman Kuznets, “National income is the net output of commodities and services flowing during the year from the country’s productive system in the hands of ultimate customers.”

According to Lipsey, “National income refers to the total market value of all goods and services produced in the economy during some specified period of time and to the total of all incomes earned over the same period of time.”

According to Samuelson, “National income is the money measure of the overall annual flow of goods and services in an economy.”


Gross National Product (GNP):

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) Consumers’ goods and services to satisfy the immediate wants of the people; 2) Gross private domestic investment in capital goods; 3) Goods and services produced by the Government; 4) Net income from abroad (the difference between value of exports and imports of goods and services).

Approaches of GNP

Three approaches are employed for estimating GNP:

  1. Income approach
  2. Expenditure approach
  3. Value added approach

Since the gross income equals the gross expenditure, GNP estimated by all these methods would be the same with appropriate adjustments.

Income approach to GNP:

The income approach to GNP consists of the remuneration paid in terms of money to the factors of production annually in a country. Thus, GNP is the sum total of the following items:

GNP = Wages and salaries + Rents + Interest + Dividends + Undistributed corporate profits + Mixed incomes + Direct taxes + Indirect taxes + Depreciation + Net income earned from abroad.

Expenditure approach to GNP:

From the expenditure viewpoint, GNP is the total sum of expenditure incurred on goods and services during one year in a country. It includes the following items:

GNP = Private consumption expenditure + Gross domestic private investment + Net foreign investment + Government expenditure on goods and services.

Value Added Approach to GNP:

In calculating GNP the money value of final goods and services produced at current process during a year is taken into account. This is one of the ways to avoid double counting. But it is difficult to distinguish properly between a final product and an intermediate product. For instance, raw-materials, semi-finished products, fuel and services, etc. are sold as inputs by one industry to the other. They may be final goods for one industry and intermediate for others. So, to avoid duplication, the value of intermediate products used in manufacturing final products must be subtracted from the value of total output of each industry in the economy. Thus the difference between the value of material outputs and inputs at each stage of production is called the value added. If all such differences are added up for all industries in the economy, we arrive at the GNP by value added. Its calculation is shown in Table – 1:

Industry

1

Total output ($ crore)

2

Intermediate purchase ($ crore)

3

Value Added ($ crore)

2 - 3

Agriculture

30

10

20

Manufacturing

70

45

25

Others

55

25

30

Total

155

80

75

The table is constructed on the supposition that the entire economy for purpose of total production consists of three sectors. They are agriculture, manufacturing and others, consisting of the tertiary sector. Out of the value of total output of each sector is deducted the value of its intermediate purchases (or primary inputs) to arrive at the value added for the entire economy. Thus the value of total output of the entire economy as per table is $155 crores and the value of its primary inputs come to $80 crores. Thus the GNP by value added is $75 crores ($155 minus 80 crores).

GNP at Market Prices:

GNP at market prices 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) Consumers’ goods and services to satisfy the immediate wants of the people; 2) Gross private domestic investment in capital goods; 3) Goods and services produced by the Government; 4) Net income from abroad (the difference between value of exports and imports of goods and services).

GNP at Factor Cost:

GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. It includes all items includes the income approach to GNP less indirect taxes. GNP at market prices always includes indirect taxes levied by the Government on goods which raises their prices. But GNP at factor cost is the income which the factors of production receive in return for their services alone. It is the cost of production. Thus GNP at market prices is always higher than GNP at factor cost. Therefore, in order to arrive at GNP at factor cost, we deduct indirect taxes from GNP at market prices. Again it often happens that the cost of production of a commodity to the producer is higher than the price of a similar commodity in the market. In order to protect such producers, the Government helps them by granting monetary help in the form of a subsidy equal to the difference between the market price and cost of production of the commodity. As a result the price of the commodity to the producer is reduced and equals the market price of similar commodity. For example, the market price of rice is $30 per kg but it costs to the producers in certain areas is $35. The Government gives a subsidy of $5 per kg to them in order to meet their cost of production. Thus in order to arrive at GNP at factor cost, subsidies are added to GNP at market prices.

GNP at factor cost = GNP at market prices – Indirect taxes + Subsidies.


Net National Product (NNP):

GNP includes the value of total output of consumption goods 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.

NNP at Market Prices:

Net National Product at market prices is the net value of final goods and services evaluated at market prices in the course of one year in a country. If we deduct depreciation from GNP at market prices, we get NNP at market prices = GNP at market prices – Depreciation.

NNP at Factor Cost:

Net National Product at factor is the net output evaluated at factor prices. It includes income earned by factors of production through participation in the production process such as wages and salaries, rents, profits, etc. This measure differs from NNP at market prices in that indirect taxes are deducted and subsidies are added to NNP at market prices in order to arrive at NNP at factor cost. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies (or)

NNP at factor cost = NNP at market prices – Depreciation - Indirect taxes + Subsidies (or)

NNP at factor cost = GNP at factor cost – Depreciation.

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