MASTER THE BASICS – ECONOMY 02.08.2020

NATIONAL INCOME

What is National Income: Basic Concepts

National Income is total amount of goods and services produced within the nation during the given period say, 1 year.

National Income is total amount of goods and services produced within the nation during the given period say, 1 year. It is the total of factor income i.e. wages, interest, rent, profit, received by factors of production i.e. labour, capital, land and entrepreneurship of a nation.

Concepts of National Income

There are various concepts of National Income, such as GDP, GNP, NNP, NI, PI, DI, and PCI which explain the facts of economic activities.

GDP at market price: Is money value of all goods and services produced within the domestic domain with the available resources during a year.

GDP = (P*Q)
Where,
GDP = gross domestic product
P = Price of goods and services
Q= Quantity of goods and services
GDP is made up of 4 Components
• consumption
• investment
• government expenditure
• net foreign exports of a country
GDP = C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

Gross National Product (GNP): Is market value of final goods and services produced in a year by the residents of the country within the domestic territory as well as abroad. GNP is the value of goods and services that the country’s citizens produce regardless of their location.

GNP=GDP+NFIA or,
GNP=C+I+G+(X-M) +NFIA
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
NFIA= Net factor income from abroad.

Net National Product (NNP) at MP: Is market value of net output of final goods and services produced by an economy during a year and net factor income from abroad.

NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
NFIA= Net factor income from abroad.
IT= Indirect Taxes

National Income (NI): Is also known as National Income at factor cost which means total income earned by resources for their contribution of land, labour, capital and organisational ability. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income.
Symbolically,

NI=NNP +Subsidies-Interest Taxes
or, GNP-Depreciation +Subsidies-Indirect Taxes
or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes +Subsidies

Personal Income (PI): Is the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits- Social Security Contribution +Transfer Payments.
Disposable Income (DI) : It is the income left with the individuals after the payment of direct taxes from personal income. It is the actual income left for disposal or that can be spent for consumption by individuals.

Thus, it can be expressed as:
DI=PI-Direct Taxes

Per Capita Income (PCI): Is calculated by dividing the national income of the country by the total population of a country.

Thus, PCI=Total National Income/Total National Population
Measurement of National Income

There are three methods to calculate National Income:

1. Income Method

2. Product/ Value Added Method

3. Expenditure Method

INCOME METHOD

In this National Income is measured as flow of income.
We can calculate NI as:

NET NATIONAL INCOME = Compensation of Employees+ Operating surplus mixed (w +R +P +I) + Net income + Net factor income from abroad.
Where,

W = Wages and salaries
R = Rental Income
P = Profit
I = Mixed Income

Product/ Value Added Method

In this National Income is measured as flow of goods and services.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES

Expenditure Method
In this National Income is measured as flow of expenditure.
We can calculate NI through Expenditure method as:
National Income=National Product=National Expenditure.

ABILITY CHECK:

1.) Which sector contributes the most to India’s economy?

(A) Service sector
(B) Manufacturing sector
(C) Agricultural sector
(D) Small scale industries

Answer A

Explanation: The service sector contributes 60% of India’s economy.

2.) If the contribution of the agricultural sector is decreasing in a country’s economy, then what conclusion can be drawn?

(A) The country is growing in the direction of being a developed nation
(B) The country is moving towards becoming developing nation
(C) The country is moving towards becoming less developed nation
(D) The economic growth rate of the country has stopped

Answer A

Explanation: The country is growing in the direction of being a developed nation. Contribution of Agriculture in the GDP of developed nations decreases and the contribution of service and manufacturing sector is very high.

3.) Which is not added in the calculation of national income of India?

(A) The value of goods and services
(B) The sold value of the old fridge
(C) Services rendered by the housewives
(D) Both b & c

Answer D

Explanation: In the calculation of national income, the value of goods and services produced in a year is added, while the value of old sold goods and the services of the Housewife are not added.

4.) Which state of India currently has the highest Per Capita Income?

(A) Goa
(B) Delhi
(C) Maharashtra
(D) Punjab

Answer A

Explanation: The figures for the FY 2016-17 issued in May 2017 shows that an average person in Delhi earns more than Rs 3 lakh, which is three times the national average. Delhi succeeded Goa in this regard.

5.) Which Ministry is responsible for calculating GDP in India?

(A) Ministry of Finance
(B) Ministry of Commerce and Industry
(C) Ministry of Central Statistical and Program Implementation
(D) Ministry of consumer Affairs

Answer C

Explanation: The work of computing the GDP is done by the Central Statistical Organization (CSO) which is under the Ministry of Statistical and Program Implementation.

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