CONCEPTS OF
NATIONAL INCOME AND THEIR INTERRELATIONSHIP
There are various basic
concepts of national income which are used in measuring the total income of a
nation, these concept are:
(1) Gross domestic product
(2) Gross national product
(3) Net national product at market
prices
(4) Net national product at factor
cost
(5) Personal income.
(6) Disposable personal income.
These
concepts of national are now discussed in brief.
(1) GROSS DOMESTIC PRODUCT (GDP)
It is a key concept used in the
measurement Of total income of a nation. Gross domestic product is the total
market value of all final goods and services produced within a country in a
given period of time. According to Shapiro “GDP is defined as a flow variable,
measuring the quantity of final goods and services produced during a year? The
essential features of GDP are:
(i) GSP IS THE TOTAL MARKET VALUE. It measures the total
market value of output at current market prices.
(ii) ALL GOODS AND SERVICES. GDP measures the market value of
all goods (cloth, furniture etc.) and services (accountant, doctor, etc.
services) produced on the economy.
(iii) FINAL GOODS. GDP includes the value of only
final goods. The value of intermediate goods (yarn for example to avoid double
counting)
(iv) CURRENTLY PRODUCED GOODS. GDP
includes only the value of those goods and services which are currently
produced. For example, a person sells his old house to another person he value
of the house is not include in GDP.
(V) DOMESTIC TERRITORY. It includes the value of output of
goods and services produced by all enterprises whether resident or non-resident
located within the domestic territory of a country.
(vi) TIME PERIOD. GDP includes the value of all final
goods and services produced in a given period of time is usually a year.
(vii) FLOW CONCEPT. GDP measure the flow of income
produced by all producing enterprises during a year.
COMPONANTS OF GROSS DOMESTIC PRODUCT
There are four categories of
expenditure which are added together to measure the gross domestic product (GDP)
at market price. These four components of GDP
(i) Consumption (c)
(ii) Investment ( I )
(iii)
Government purchases (G)
(iv) Net
export (X-M) These four types of expenditure are explained in brief.
(i) CNSUMPTION ( C ) Consumption expenditure includes all spending
by households on goods and services in a period of one year. Goods include both
durable consumer goods such as car, television and non-durable consumer goods
such as clothing, fruits, etc. services on which households spend money are
intangible items as teachers services, legal services transport and
communication etc.
(ii) INVESTMENT (I). Investment
is an addition to capital stock. It is the expenditure incurred by business on
the purchases of goods which are used to produce more goods and services in the
future. Thus investment includes purchase of new capital and inventories (
increase in the stock of goods on hand ).
(iii) GOVERNMENT EXPENDITURE (G). The
government expenditure includes all types of expenditure which are incurred by
federal, provincial, local bodies on the purchases of goods and services. It
includes wages and salaries paid to the employees and spending on public works.
(iv) NET EXPORTS. Net
exports are the difference between value of exports (X) and value of imports
(M) = (X-M). The expenditure on exports generate income for the residents
working in our country. The expenditure on imports generate income of the
countries from where the goods are imported.
Thus GDP =
C +1+G+NX(X-M).
(2) GROSS NATIONAL PRODUCT (GNP)
The concept of gross national product
(GNP) at market prices is more
comprehensive than GDP Gross domestic product (GDP) Is the total value,
measured in current price, of all final goods and services produced in the
economy during a given time period. It includes all factor incomes of
non-residents paid to foreigners.
Gross national product, on the other
hand, measure the total income earned by the permanent residents of a country
in a given time period. GNP includes factor incomes earned from abroad by the
residents of a country and excludes income that foreigners earn from here. In
other words when net factor income from abroad is added to GNP, we and thus
GNP=GDP+ Net factor income earned from abroad.
(3) NET NATIONAL PRODUCT AT MARKET PRICE (NNP)
Net national product is equal to
gross national product – (depreciation allowance). The purpose of deducting
from the gross national product is simply because the value of machinery
depreciates throughout the year by its use and sometimes even amounts to complete depreciation through wear and
tear. Thus, in order to arrive at the exact value of machinery at the close of
the year, it is advisable to deduct the depreciation from GNP, NNP can be
symbolically expressed as follows:
NNP
= C + IN + G + (X-M)
Here in represents net investment (i.e.
Gross investment-Depreciation allowance). Other symbols are the same.
Another
definition of net national product
Net national product or national income at
market price is the net market money value of all the final goods and services
produced in a country during a year. It is found out by subtracting the
amount of depreciation of the existing capital in a year from the market value
of all final goods and services. For a continuous flow of money should be set
aside from the gross national income for meeting the necessary expenditure of
wear and tear of all capital and it should remain intact. If we deduct
depreciation allowance from gross national product at current market price, GNP
at market price depreciation = NNP at market price.
Depreciation allowance and maintaining
capital intact, here a question can be asked as to what we actually
mean by depreciation allowance and maintaining capital intact, (the words which
we have used in explaining NNP). It is known to every one of us that when
production is doing value of capital equipment does not remain the same. A
decrease in value because of wear and tear through, use, rusting, accident or
through action of elements, gradually take place in the building and other
equipment of business. A certain sum of money based on the value of the capital
equipment and its longevity is set aside every year from the gross annual
income so that when machinery is worn out, a new capital equipment can be wear
and tear, deterioration of the machinery is named as depreciation allowance, we
can make this concept for manufacturing cloth for Rs. 10000 only. He expects
that this machinery will last ten year and after that period, it will be
partially or completely worn out. He sets aside Rs. 10000 and with that money
he replaces the old capital income as a depreciation reserve of the capital
equipment. After the expiry of ten years, he accumulate Rs. 10000 and with that
money he replaces the old capital equipment which has lived its useful life and
maintains capital intact. The sum of money, i.e. Rs 10000 which he
annually deducts from the gross annual income, is known as depreciation
allowance.
It is often pointed out by economists
that the calculation of depreciation allowance every year is a difficult task.
For example, a person expects the longevity of the capital equipment, say for
ten years. There is a possibility that machinery may last longer or it may go
out of use earlier. So they say what needed is an approximate decision
regarding the depreciation allowance. This decision should be based on high
degree of judgment and guessing about the future.
Maintains
Capital Intact, by maintaining capital intact we do not mean that capital
equipment should remain the same. It should neither increase nor decrease. This
can only by possible in a static society. in a progressive society, the total
capital equipment of a country must increase every year, otherwise the national
income will be affected adversely. In Economics,
by the phrase ‘maintaining capital intact’ is meant to make good the physical
deterioration which has taken place in the capital equipment while creating
income during a given period. This
can only be made by setting aside a certain amount of money every year from the
annual gross income so that when the income creating equipment becomes obsolete
a new capital equipment may be created out. If the depreciation allowance is not
set aside every year, the flow of income would not remain intact. It will
decline gradually and whole county will become poor.
NNP = GNP – DEPRECIATION
(4) NATIONAL PRODUCT AT FACOTR COST
National income is a measure of the sum of all
factor incomes earned by the residents of a country both from within the
country as well as abroad. It is infact an alternative name for net national
product and factor cost. National income at factor cost or net national product
at cost is the total income earned by a nation’s residents in the production of
goods and services. It is inclusive of net factor income earned from broad. The
main components of national income at factor costs, (i) wages and salaries paid
by the firms to the employees (ii) Interest which is the payment for the use of
funds (iii) rent and (iv) profit.
(5) PERSONAL INCOME
National income is the sum of all
factor income. In other words, it is the income which individuals receive for
doing productive working the form of wages, rent, interest and profit, personal
income, on the other hand, includes all income which is actually received by all
individuals in a year. It includes income which is not directly earned
but is received by individual. For example, social security payments, welfare
payment are received by households but these are not elements of national
income because they are transfer payments.
In the same way, in national income
according, individuals attributed income which they do not actually receive.
For example, undistributed profits, employees contribution for social security
corporate income taxes etc. are elements of national income but are not
received by individual. Hence they are to be deducted from national income to
estimate the personal income, personal income thus is:
P1 = NI +
Transfer payment – corporate retained earnings income taxes, social security
taxes.
(6)
DISPOSABLE PERSONAL INCOME
Disposable personal income is the
amount which is actually at the disposal of households to spend as they like.
It is the amount which is left with the households after paying personal taxes
such as they income tax, property tax, national insurance contributions etc.
thus:
Disposable
personal income = personal income – personal taxes
DPI = PI –
Personal taxes
The concept of disposable personal income is very important for studying
the consumption and saving behavior of the individuals. It is the amount which
households can spend and save.
DI = C + S.
