Concept of National Income | Famous Books for UPSC Exam (Summary & Tests) PDF Download

National Income: An Overview

At its core, national income represents the net outcome of a country's economic endeavors over a specific period, usually one year, measured in monetary terms. Often used interchangeably with terms like national dividend, national output, and national expenditure, national income encompasses the total income earned by all resources in the form of wages, interest, rent, and profits.

Understanding National Income Definition

The definition of national income can be viewed from two perspectives, the Traditional Definition and the Modern Definition.

Traditional Definition

According to the traditional definition proposed by Marshall, a renowned economist, national income is the net aggregate of all commodities, both tangible and intangible, including various services produced within a country. However, this definition has faced criticism due to the challenges in accurately estimating diverse goods and services, leading to the possibility of double counting and underestimation.

Modern Definition

Simon Kuznets, another influential economist, offers a modern definition of national income as "the net output of commodities and services flowing from the country's productive system to the ultimate consumers within a year." This definition provides a more refined perspective, focusing on the actual output reaching consumers.

Measuring National Income: GDP and GNP

Two primary metrics are widely employed to gauge a country's economic performance: Gross Domestic Product (GDP) and Gross National Product (GNP).

Gross Domestic Product (GDP)

GDP represents the total value of goods and services produced within a country's borders during a specific period, generally a year. It is calculated at market prices and comprises various components such as wages, rent, interest, undistributed profits, mixed-income, direct taxes, dividends, and depreciation.

Gross National Product (GNP)

GNP considers the total value of goods and services produced by a country's residents, both within and outside its borders, during a year. In addition to the components used in GDP calculation, GNP includes net income earned from abroad. This metric offers a broader perspective on a nation's economic performance, encompassing income generated globally by its residents.

GDP and GNP at Market Price and Factor Cost

The calculation of GDP and GNP can be done using either market prices or factor costs.

• Market Price: Market price refers to the actual transacted price, including indirect taxes like GST and customs duty. These taxes tend to increase the overall prices of goods and services in the economy.
• Factor Cost: Factor cost considers the cost of factors of production, such as wages for labor, interest on capital, rent for land, and profits for stakeholders. The factor cost is arrived at by deducting net indirect taxes (i.e., indirect taxes net of subsidies) from the market price.

Net Domestic Product (NDP) and Net National Product (NNP)

• NDP represents the net output of a country's economy during a year, accounting for depreciation or the wear and tear of capital assets due to use or obsolescence. It is calculated by deducting a percentage of investment depreciation from the GDP.
• NNP, on the other hand, reflects the accumulation of all factors of income earned by residents, including income from abroad. NNP at Factor Cost is obtained by deducting net indirect taxes from NNP at Market Price.

Conclusion

National income is a pivotal economic measure that provides a comprehensive understanding of a country's economic activities and progress. By analyzing GDP, GNP, and other related metrics, economists and policymakers gain valuable insights to formulate strategies for economic growth and development. A robust national income serves as a foundation for a flourishing and prosperous nation.