All questions of National Income for UPSC CSE Exam

The correct answer for the economist who proposed the Traditional Definition of national income is option 'D', Alfred Marshall. Let's understand the concept of national income and Alfred Marshall's contribution to its definition.

National income refers to the total value of all goods and services produced within a country's borders in a specific time period, usually a year. It is an important economic indicator that helps in assessing the overall economic performance of a nation.

Alfred Marshall was a prominent economist of the late 19th and early 20th centuries. He made significant contributions to the field of economics, particularly in microeconomics and the study of markets. While he is best known for his work on supply and demand, Marshall also made important contributions to the measurement of national income.

Marshall's Definition of National Income:
Marshall proposed the Traditional Definition of national income, which was later refined and developed by other economists such as Simon Kuznets. Marshall's definition focused on the concept of net income, which is the difference between the total value of output produced and the cost of producing that output.

According to Marshall, national income is the net income generated by the productive activity of a country during a specific period. It includes the income earned by individuals, businesses, and the government through the production and sale of goods and services. Marshall emphasized the importance of deducting the costs of production from the total value of output to arrive at the net income figure.

Marshall's definition laid the foundation for the measurement of national income and provided a framework for understanding the economic activity of a country. However, it had limitations, such as not accounting for non-market activities, household production, and the distribution of income.

Further Developments:
Simon Kuznets, an American economist, further developed the concept of national income and introduced the concept of Gross National Product (GNP) in the 1930s. GNP includes not only the value of goods and services produced domestically but also the income earned by citizens abroad. Kuznets also introduced various adjustments to account for different types of economic activities.

In conclusion, Alfred Marshall, a renowned economist, proposed the Traditional Definition of national income. His definition focused on the concept of net income and provided a framework for measuring the economic activity of a country. However, it was later refined and developed by other economists such as Simon Kuznets to account for various factors and improve the accuracy of measurement.

Net income earned from abroad
Gross National Product (GNP) includes net income earned from abroad, which is not included in Gross Domestic Product (GDP). This component refers to the income earned by residents of a country from their investments or work abroad minus the income earned by foreigners within the country.

Differences between GNP and GDP
- GNP: GNP measures the total economic output produced by a country's residents, whether they are located within the country or abroad. It includes the income earned by residents from foreign investments and work.
- GDP: GDP measures the total economic output produced within a country's borders, regardless of the nationality of the individuals or companies producing the goods and services.

Significance of Net income earned from abroad in GNP
Including net income earned from abroad in GNP provides a more comprehensive picture of a country's economic performance, as it considers the income generated by its residents globally. This component helps to assess the impact of international investments and trade on the country's overall economic well-being.

Example
For instance, if a country's residents earn significant income from investments in foreign companies or properties, this would contribute positively to the GNP. On the other hand, if foreign residents earn substantial income from investments within the country, it would have a negative impact on the GNP.
In conclusion, the inclusion of net income earned from abroad in GNP distinguishes it from GDP and provides a broader perspective on a country's economic activities globally.

National income is considered pivotal because it provides a comprehensive understanding of a country's economic activities and progress, serving as a foundation for economic growth and development strategies.

Key Difference between NNP at Market Price and NNP at Factor Cost

Introduction:
NNP stands for Net National Product, which is a measure of the total economic output of a country. It represents the value of all final goods and services produced by the residents of a country in a given period of time, after deducting depreciation. NNP can be calculated at market price or factor cost, and the key difference between the two lies in the inclusion or exclusion of certain components.

1. Definition and Calculation:
- NNP at Market Price: It is calculated by adding indirect taxes to the GDP (Gross Domestic Product) at market price and subtracting subsidies.
- NNP at Factor Cost: It is calculated by deducting indirect taxes and adding subsidies to the GDP at factor cost.

2. Inclusion of Indirect Taxes and Subsidies:
- NNP at Market Price: This measure includes indirect taxes, such as sales tax, excise duty, and customs duty, which are levied on the sale and production of goods and services. It also deducts subsidies provided by the government to certain sectors or industries.
- NNP at Factor Cost: This measure excludes indirect taxes and includes subsidies, as it focuses on the income generated by the factors of production (land, labor, capital, and entrepreneurship).

3. Impact of Indirect Taxes and Subsidies:
- NNP at Market Price: The inclusion of indirect taxes in this measure reflects the impact of taxes on the final prices of goods and services. It provides a more comprehensive view of the economic output, as it considers the revenue collected by the government through taxes.
- NNP at Factor Cost: By excluding indirect taxes, this measure focuses on the income earned by the factors of production. It provides a clearer picture of the income generated within the country, without the influence of taxes.

4. Implications for Foreign Income:
- NNP at Market Price: This measure takes into account foreign income, such as exports and imports, as it considers the total market value of goods and services produced by the residents of a country, regardless of their location.
- NNP at Factor Cost: This measure does not consider foreign income, as it focuses on the income generated by the factors of production within the country's boundaries.

Conclusion:
The key difference between NNP at Market Price and NNP at Factor Cost lies in the inclusion or exclusion of indirect taxes and subsidies. NNP at Market Price includes indirect taxes and deducts subsidies, while NNP at Factor Cost excludes indirect taxes and includes subsidies. This difference affects the calculation of NNP and provides different perspectives on the economic output and income generated within a country.

The Traditional Definition faced criticism because it had challenges in accurately estimating diverse goods and services, which could lead to the possibility of double counting and underestimation.

National income represents the net outcome of a country's economic endeavors over a specific period. This is essentially the total value of all goods and services produced within a country's borders, usually calculated on an annual basis. Here are the key points to understand the core representation of national income:


- National income serves as a crucial indicator of a country's economic health and performance. It reflects the overall economic activity within the country, including production, consumption, investment, and government spending.


- National income represents the total income generated by individuals, businesses, and the government through various economic activities. This income includes wages, profits, rents, and taxes.


- The level of national income is often used as a measure of a country's standard of living. A higher national income indicates a higher level of economic prosperity and the ability of individuals to afford goods and services.


- Changes in national income over time reflect the economic growth or contraction of a country. Positive growth in national income signifies an expanding economy, while negative growth indicates a shrinking economy.


- National income data is essential for policymakers to formulate economic policies, set fiscal targets, and make informed decisions regarding taxation, public spending, and monetary policies.

In conclusion, national income at its core represents the overall economic output of a country and plays a vital role in assessing economic performance, determining living standards, and guiding policy decisions.

Market price includes indirect taxes like GST and customs duty, while factor cost excludes them.

Simon Kuznets defined national income as "the net output of commodities and services flowing from the country's productive system to the ultimate consumers within a year," focusing on actual output reaching consumers.

Gross Domestic Product (GDP) represents the total value of goods and services produced within a country's borders during a specific period.

Net Domestic Product (NDP) accounts for depreciation or the wear and tear of capital assets due to use or obsolescence when calculating the net output of a country's economy.