Component of National Income (Part - 2) - Macroeconomics | Macro Economics - B Com PDF Download

Component # 7. GNP at Market Prices:

When we multiply the total output produced in one year by their market prices prevalent during that year in a country, we get the Gross National Product at market prices. Thus GNP at market prices means the gross value of final goods and services produced annually in a country plus net income from abroad. It includes the gross value of output of all items from (1) to (4) mentioned under GNP.

GNP at Market Prices = GDP at Market Prices + Net Income Earned from Abroad.

Component # 8. 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 mentioned above under Income Approach to GNP less indirect taxes.

GNP at market prices always includes indirect taxes levied by the government on goods which raise 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 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 the 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, if the market price of rice is Rs 3 per kg but it costs the producers in certain areas Rs 3.50.

The government gives a subsidy of 50 paise 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.

Component # 9. 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 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. Thus NNP= GNP-Depreciation.

Component # 10. 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. Thus NNP at Market Prices=GNP at Market Prices-Depreciation.

Component # 11. NNP at Factor Cost:

Net National Product at factor cost 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. It is also called National Income. 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.

= GNP at Market Prices-Depreciation-Indirect taxes + Subsidies.

= National Income.

Normally, NNP at market prices is higher than NNP at factor cost because indirect taxes exceed government subsidies. However, NNP at market prices can be less than NNP at factor cost when government subsidies exceed indirect taxes.

Component # 12. Domestic Income:

Income generated (or earned) by factors of production within the country from its own resources is called domestic income or domestic product.

Domestic income includes:

(i) Wages and salaries,

(ii) Rents, including imputed house rents,

(iii) Interest,

(iv) Dividends

(v) Undistributed corporate profits, including surpluses of public undertakings,

(vi) Mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships, etc., and

(vii) Direct taxes.

Since domestic income does not include income earned from abroad, it can also be shown as: Domestic Income=National Income-Net Income earned from abroad. Thus the difference between domestic income and national income is the net income earned from abroad.

If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic Income + Net Income earned from abroad. But the net national income earned from abroad may be positive or negative. If exports exceed imports, net income earned from abroad is positive.

In this case, national income is greater than domestic income. On the other hand, when imports exceed exports, net income earned from abroad is negative and domestic income is greater than national income.

Component # 13. Private Income:

Private income is income obtained by private individuals from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.

The additions include transfer payments such as pensions, unemployment allowances, and sickness and other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or from horse racing, and interest on public debt.

The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc. Thus Private Income= National Income (or NNP at Factor Cost) +Transfer Payments+ Interest on Public Debt-Social Security-Profits and Surpluses of Public Undertakings.

Component # 14. Personal Income:

Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in one year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income.

Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employees’ contributions to social security schemes.

These three components are excluded from national income because they do reach individuals. But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall gains, and interest on public debt which are a source of income for individuals are added to national income.

Thus Personal Income=National Income-Undistributed Corporate Profits-Profit Taxes-Social Security Contribution + Transfer Payments + Interest of Public Debt. Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits. Thus Personal income = Private Income-Undistributed Corporate Profits-Profit Taxes.

Component # 15. Disposable Income:

Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families. The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct taxes have actually been paid. Therefore, in order to obtain the disposable income, direct taxes are deducted from personal income.

Thus Disposable income=Personal Income-Direct Taxes. But the whole of the disposable income is not spent on consumption and a part of it is saved. Therefore, the disposable income is divided into consumption expenditure and saving. Thus Disposable Income = Consumption Expenditure+ Savings.

If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies, direct taxes on personal and on business, social security payments, undistributed corporate profits or business savings from it and add transfer payments and net income from abroad to it.

Thus Disposable Income=National Income-Business Savings-Indirect Taxes plus Subsidies-Direct Taxes on Persons-Direct Taxes on Business-Social Security Payments+ Transfer Payments + Net Income from Abroad.

Component # 16. Real Income:

Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is the value of goods and services produced as expressed in terms of money at current prices.

But it does not indicate the real state of the economy. It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing to an increase in prices, the NNP might be higher this year.

On the contrary, it is also possible that NNP might have increased but the price level might have fallen, as a result of which national income would appear to be less than that of the last year. In both the situations, the national income does not depict the real state of the country. To rectify such as a mistake, the concept of real income has been evolved.

In order to find out the real income of a country, a particular year is taken as the base year when the general price level is neither too high nor too low and the price level for that year is assumed to be 100. Now that general level of prices of the given year for which the national income (real) is to be determined is assessed in accordance with the prices of the base year. For this purpose the following formula is employed.

Real NNP = NNP for the Current Year x Base Year Index (= 100)/Current Year Index.

Suppose 1993-94 is the base year and the national income for 2004-05 is Rs 20,000 crores and the index 100 number for this year is 250. Hence, Real National Income for 2004-05=20,000x Rs. 8,000 crores. This is also known as National Income at Constant Prices.

Component # 17. Per Capita Income:

The average income of the people of a country in a particular year is called Per Capita Income for that year. This concept also refers to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income for 2005, at current prices, the national income of a country is divided by the population of the country in that year

Per Capita Income for 2005 = National income for 2005/Population in 2005

Similarly, for the purpose of arriving at the Real Per Capita Income, this very formula is employed.

Real Per Capita Income for 2005 = Real national income for 2005/Population in 2005.

This concept enables us to know the average income and the standard of living of the people. But it is not very reliable, because in every country due to the unequal distribution of national income, a major portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita income.