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Definition and Concept of National Income - Macroeconomics | Macro Economics - B Com PDF Download

National income is the sum total of money value of all the final goods and services produced within the domestic territory of a country in an accounting year plus the net factor in come from abroad.

National Income = Value of Goods + Value of Service + Net Factor Income from Abroad

 

What is National Income?

  • It is the sum total of the value of all the final goods and services produced in an economy during one year.

  • All goods and services and measured in terms of money.

  • It includes net factor income from abroad.


Factor Income/Payment – Factor payments are rewards received by the owners of factors of production like land, labour, capital and entrepreneurship from industries abroad. They may be in form of:

 

 

 

 

 

 

 

  • Employee compensation
  • Profit
  • Interest
  • Rent

 

The people residing in India also give factor payments for using factors of production owned by people abroad like payment for importing goods, use of foreign technology etc.


Net Factor Income from Abroad (NFIA) – It is the difference between Factor Income received from abroad by residents of a country and the factor payments made by the residents of a country for factor services rendered by non-residents.

 

Basic Concepts of National Income

(1) Gross Domestic Process (GDP) – It refers to the money value of all the goods and services that are produced within the domestic territory of a country during a certain period usually a year.

The goods and services in question may be consumer goods and services or capital goods and services, they may be durable or non-durable products, they may be produced by private sector or public sector but it does not include value of intermediate goods and services.

 

(2) Net Domestic Product (NDP) – When depreciation on fixed capital used in production of goods and services is deducted from the GDP (gross domestic product) of a country we get Net Domestic Product

NDP = GDP – Depreciation

GDP = NDP + Depreciation

 

(3) Gross National Product (GNP) – When we add the net factor income from abroad (NFIA) to the GDP of a country we get Gross national Product.

GNP = GDP + NFIA

GDP = GNP – NFIA

 

(4) Net National Product (NNP) – It refers to the total value of all the final goods and services produced in an economy during a certain period after deduction of depreciation.

NNP = GNP – Depreciation

 

(5) Net Domestic Product (NDP) – It we deduct the net factor income from abroad from the net national product we get Net Domestic Product.

NDP = NNP – NFIA

NNP = NDP + NFIA

 

(6) NDP at Factor Cost and NDP at Market Price

Net Domestic Product @ Factor cost – It refers to the total value of earnings received by all the factors of production within the domestic territory of a country during a year. NDP @ FC includes cost of Compensation of Employees + Operating Surplus + Mixed Income

Net Domestic Product @ Market Price – It refers to the market value of all the final goods and services produced within the domestic territory of a country during a year.

For a stable economy the NDP @ FC and NDP @ MP must be equal.

NDPfc = NDPmp – Indirect taxes + Subsidies

NDPmp = NDPfc + Indirect taxes – Subsidies

 

(7) Personal Income – It is the income actually received by the individuals or households in a country during one accounting year, but undistributed profits of enterprise and Taxes are deducted from private income as they are not distributed.

Personal Income = Private Income – Undistributed profits – Corporate Profits – Retained earnings of foreign companies – Taxes

 

(8) Private Income

Private Income = National Income – Income from Property, Entrepreneurship, commercial and administrative enterprises – savings of non-departmental enterprise of the government + Interest on National Debt + Net current transfers from Government + Current Transfers from Abroad

 

(9) Personal Disposable Income (PDI) – Portion of Income from Personal Income that is available for individuals for actual consumption.

PDI = Personal Income – Personal Taxes – Direct Taxes – Fines, fees, receipts of Govt.

 

(10) Other:

Real Income – National Income expressed in terms of general level of prices.

Definition and Concept of National Income - Macroeconomics | Macro Economics - B Com

Operating Surplus = Rent + Interest + Profit + Dividend and Other similar income

Mixed Income = Labour Income + Property Income

Net Indirect Taxes = Indirect taxes + Subsidies

The document Definition and Concept of National Income - Macroeconomics | Macro Economics - B Com is a part of the B Com Course Macro Economics.
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FAQs on Definition and Concept of National Income - Macroeconomics - Macro Economics - B Com

1. What is the definition of national income in macroeconomics?
Ans. National income in macroeconomics refers to the total value of all goods and services produced within a country's borders during a specific time period, usually a year. It includes the income earned by the residents of the country, both domestically and abroad, from various economic activities.
2. How is national income calculated?
Ans. National income can be calculated using different methods, such as the income approach, expenditure approach, and production approach. The income approach sums up all the incomes earned by individuals and businesses, including wages, profits, rents, and interest. The expenditure approach adds up all the spending on goods and services by households, businesses, and the government. The production approach calculates national income as the value-added at each stage of production across all sectors of the economy.
3. Why is national income important in macroeconomics?
Ans. National income is important in macroeconomics as it provides a measure of a country's economic performance and standard of living. It helps policymakers, economists, and analysts to understand the overall health of the economy, track changes in income distribution, and assess the impact of economic policies. National income data also serves as a basis for making informed decisions related to fiscal and monetary policies, investment planning, and international trade.
4. What are the limitations of national income as a measure of economic welfare?
Ans. While national income is a useful indicator, it has certain limitations as a measure of economic welfare. It does not account for non-market activities like unpaid household work, volunteer work, and the informal sector. National income also fails to capture the distribution of income and wealth within a country, and therefore does not reflect the level of inequality. Additionally, it does not consider factors like environmental degradation, quality of life, and social well-being, which are important for assessing overall welfare.
5. How does national income impact economic growth and development?
Ans. National income plays a crucial role in economic growth and development. Higher national income indicates increased production and consumption within an economy, which can lead to job creation, improved living standards, and a rise in overall economic welfare. National income data helps policymakers identify sectors with growth potential, allocate resources efficiently, and design policies to promote economic development. It also serves as a basis for international comparisons and attracting foreign investment.
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