Comprehensive National Income (NI) Theory in Economics -2023

Introduction

In Economics, National Income is the backbone of any country. We can understand the growth chart of a country over past years. It provides us a true image about the aggregation of financial value of all goods and services produced within a country in a specific period of time. In this article, we will get depth knowledge about National Income and its advantages and disadvantages.

Definition of National Income (N I)

National Income is the summation of all incomes earned by a particular person in a year within a geographical boundary of a country. Income can be rental, interest on savings, labour work, etc.

National Income is a part of macroeconomics. In macroeconomics we generally know about how country’s total production and employment are corelated to goods and services price, interest earning on our savings, labour rates, etc.

In India National Income is determined by Central statistics office (CSO), headquartered at New Delhi under the Ministry of Statistics and Programme Implementation in India. 

Father of economics

Adam Smith was the founder of modern economics. His biggest achievement on economy was- An Enquiry into the Nature and Cause of the Wealth of Nations. This book was written by him in 1776.

Quotes on National Income by Adam Smith

“Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer “

“Labour was the first price the original purchase money that was paid for all things. It was not by gold or by silver but by labour that all wealth of the world was originally purchased.”

Types of Goods

  1. Consumption Goods
  2. Capital Goods
  3. Final Goods
  • Consumption Goods: – Goods which are consumed by us are called consumption goods. E.g.  like cloths, food, etc.
  • Capital Goods: – These are those goods which never consumed but they play an important role in producing the final product on the production line. Like production machines. We can say them an intermediary goods.
  • Final Goods: – These are the final product of the production line. These are produced for the final use.

Importance of National income

  • With the help of National Income, we can understand the growth chart of any country.
  • It is a better decision maker system through which our government can predict the future demand of required products.
  • National Income helps in differentiating between the living standards of people all over the world.
  • Proper data helps in bringing up our economy by making different policies.

Measurement methods of National Income

The National Income or we can say GDP can be measured through three different measuring methods namely: –

  1. Value added or the Product method
  2. Expenditure method
  3. Income method

Explanations: –

  • Value added method / Product Method: – It is a method in which we calculate only the final value of the product. It does not include intermediate values to keep the double counting error at its zero value.

Example: – Car selling price = final cost (not including intermediate values of production) + margin

  • Expenditure method: – The Expenditure method is a simple technique to count National Income. It is the total expenditure value of all the goods and services purchased by households.

Example: – We buy consumable products every month as per our needs. On an average the total value of expenditures done to fulfil our basic needs in a year is that value which in turn goes to the firms in form of money and that is further used for future production.

  • Income method: – As the term Income creating an image in our mind that the Income earned by a person through a job, business or different kinds of income sources per year is known as Income method.

Example: – Income = salary + interest on savings + rental income + profit earned on stocks – taxes

Some important terms used in National Income

  • Factor cost: – It includes all the production costs which is used to produce the final product but it does not include any taxes value. (Factor cost = production cost – taxes + subsidy)
  • Market price: –It is the real transferred value of final products. (Market price = factor cost + taxes – subsidy)
  • Basic price: – It includes production taxes only.
  • Depreciation: – It is that value in which actual value of goods and services get reduced due to faults in production machines, tools repairing costs, etc. These extra costs bring down the value of actual profit. (Gross value = Net + Depreciation)

Major Concepts / Factors of National Income

It has five different concepts which play an important role to understand it completely.

These are: –

  1. GDP – Gross Domestic Product
  2. GNP – Gross National product
  3. NDP – Net Domestic Product
  4. NNP – Net National Product
  5. GVA – Gross Value Added

GDP – Gross Domestic Product: – Gross Domestic Product is the final monetary value of goods and services produced in a country within a year.

It has two types namely- Nominal GDP and Real GDP

Nominal GDP calculates final value of goods produced by considering same year of production whereas,

Real GDP calculates final value of goods produced by considering a fix year (any past year) of production.

GDP Deflator: – The ratio of nominal GDP to real GDP and ratio is multiplied with 100 is called GDP deflator.

GNP- Gross National product: – Gross National product is the measurement of value of goods produced in a country in addition to foreign produced goods within a year.

GNP = Income from own country + Income from other country

OR

GNP = GDP + Income from other country

NDP- Net Domestic Product: – Net Domestic Product is value left after subtracting the depreciate value from gross domestic product value.

NDP = GDP – Depreciate value

NNP – Net National Product: – Net National Product is value left after subtracting the depreciate value from gross national product value.

NNP = GNP – Depreciate value

GVA – Gross Value Added: – Gross Value Added is the final value of goods and services after subtracting the intermediate values of goods and services used during the production of a product.

GVA = GDP – Intermediate values

Methods to find National Income factors value

  • Factor cost (F C) = Market Price (M P)– Indirect Taxes + Subsidies
  • GDP at Factor cost = GDP at M P – Indirect taxes + Subsidies
  • GNP at Factor cost = GNP at M P – Indirect taxes + Subsidies
  • NDP at Factor cost = NDP at M P – Indirect taxes + Subsidies
  • NNP at Factor cost = NNP at M P – Indirect taxes + Subsidies
  • NIA Factor cost = NNP at MP – Indirect taxes + Subsidies
  • GVA at market price = GDP
  • GVA at basic price = GDP – Product Taxes
  • GVA at factor cost = GDP – Production Taxes

Types of National Income

  1. Personal Income
  2. Personal Disposable Income
  3. Private Income
  4. National Disposable Income

EXPLANATIONS

  • Personal Income (PI): – NI – Undistributed profits – Net interest- Taxes + Transfer payments
  • Personal Disposable Income (PDI): – PI – Personal tax payments
  • Private Income: – N D P at Factor cost valuing to the private sector + Debt interest + income from abroad+ Transfer Payments
  • National Disposable Income: – NNP at market price + Transfer Payments

Formula for National Income (N I)

  • GDP ≡ ∑ W + ∑P + ∑ IN + ∑R

Where:

W = Wages

P = Profits

IN = Interest earned on savings

R = Rental income per month

We can calculate the National Income very easily by using this above formula.

Also, we can find National Income by using below method

  • GDP = C + I +G +X -IM

Where:

C = Consumption

I = Investment Expenditure

G = Government Expenditure

X = Exports

IM = Imports

Drawbacks in calculating National Income

  • As we thought, that everywhere in India payments are done through cash or online mode in modern generation. But there our system is still lacking in poor areas where people do not have enough money to pay. They do their payments in exchange form to buy goods from shops. That is why this kind of transactions do not count in National Income System.
  • There are two types of earning method. One is legal system means Proper earning after deduction of taxes and another system is illegal i.e. so many people earn profit on their money by giving it someone at debt and the interest they earned on that debt money per year is also too high and its value is much more than the bank fixed deposits. Therefore, the illegal earnings do not count into the National Income System, and it becomes too difficult to knowing the exact scenario of our GDP.
  • The GDP of India is calculated on average basis due to no availability of exact value of household incomes.
  • Domestic servant income also not counted into the National Income.

Steps to Improve National Income

  • GDP should be calculated by GDP at market price.
  • Every person connected to the stock market, mutual funds, provident fund, Sukanya Samriddhi Yojana, etc. has to share their personal ID’s information. By which all data gets updated into the Government system time to time.
  • Government is taking every possible step in the budget policy to make a bigger Indian Economy.

Major recessions in Indian Economy History

  • The Post World War Recession: (November 1948 –October 1949)
  • The Oil Crisis Recession: (November 1973 – March 1975)
  • The Energy Crisis Recession: (July 1981 –November 1982)
  • The Gulf War Recession: (July 1990 – March1991)
  • The 9/11 Recession (March 2001 – November2001)
  •  Great Recession: 2007

Business Cycle and its different phases

These cycles are called the volatility into the economy system over a specific period of time.

An economic cycle is called the Trade Cycle.

Business cycles are evaluated by the National Bureau of Economic Research Headquartered at the United States.

Phases of Business Cycle: –

  • Expansion: – When availability of employment, productions, increases is called Expansion Business Cycle.
  • Top: – When economy hit its all times high means an extreme level of growth, then it becomes slow for further growth. This scenario is called peak/ top / zenith phase of Business Cycle.
  • Recession: – When economy goes down slowly and slowly from all time high and falls downside is called recession in Business Cycle.
  • Depression: – it is just opposite to the Expansion Business Cycle. The phase in which the availability of employment, productions decrease to a large extent is called depression phase of the Business Cycle.
  • Trough: – It is the time of recovery after a big depression or we can say it a recovery point.
  • Recovery: -When economy again starts growing slowly and possibilities of jobs, employments increase.

Inflation and its effects on Economy

  • Inflation is that, when the purchasing power of money gets reduced and the product price gets higher. It is inversely proportional to the deflation.

Inflation effects on Economy

Positive impactsNegative impacts
Moderate inflation increases growth.Real income value gets decreases
Moderate inflation allows price adjustments.Major cause of creating in income equalities into the system
Moderate inflation allows wages adjustments.Bank Interest rates get increase
Inflation is good for Economy Growth but within the certain limit approx. 5%Living standards of people gets decreases

Steps to Enhance GDP of India

These are following

Improving Business system: –

  • By adopting revised co. bills
  • By Implementing foreign laws
  • By adopting National Competition Policy 
  • By conducting cross countries Government training programmes

Improving Public Governance & Regulation

  • Implementing a transparent system
  • Reducing administrative work load
  • Taking important steps in the field of corruption to minimize it

Build up strong innovations

  • By Improving our trading system
  • By increasing investments
  • By supporting our youth financially
  • Improving business models

Decreasing the poverty

  • By Providing subsidies to the poor people
  • Providing jobs, education to poor persons
  • By making a policy regarding lowering poverty and inequality in the country

More Health Care facilities

  • By providing health insurances
  • By providing medicines on time
  • By improving health care centres

Financial sector improvement

  • By opening new branches of Banks in rural areas
  • By providing seminars on financial terms

Challenges to Indian Growth

  1. Among the BRICS Nations, India’s growth rate is still relatively better because today India GDP growth rate is getting down but in opposite foreign investors are still doing investments in Indian Stock Market.
  • World Economic Forum’s (WEF’s) Global Risks Report 2020 said that there are global risks over the coming decade.

Conclusion

National Income is a measurement for economic growth of a country in all over world. It gives us complete information about how can we implements new ideas, tools to boost economy of our country. With the help of different measurement methods, we can easily find out GDP of any country.

FAQ’s

  1. Who fix the Budget Presentation Date?

    Answer – President

  2. What is the Base Year for measuring Inflation at Wholesale Prices Index (WPI) in India?

    Answer – 2011-12

  3. Increasing Unemployment & Inflation is a situation of?

    Answer – Stagflation

  4. Which Budgeting process demands each Manager to justify his entire Budget in detail from beginning?

    Answer – Zero Base Budgeting

  5. A “Closed Economy” is an economy in which?

    Answer – Neither Export nor Import takes place

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