Introduction

National is the sum total of factor income earned by Normal Residence of the country (as
reward for rendering their factory service) during the period of an accounting year.
The national income of a country can be measured by three methods:-
Product Method, Income Method, Expenditure Method

The Marshallian Definition:

According to Marshall: The labour and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or revenue
of the country or national dividend. In this definition, the word net refers to deductions
from the gross national income in respect of depreciation and wearing out of machines.
And to this, must be added income from abroad.

Its Defects:
Though the definition advanced by Marshall is simple and comprehensive, yet it suffers
from a number of limitations. First, in the present day world, so varied and numerous are
the goods and services produced that it is very difficult to have a correct estimation of
them.

Consequently, the national income cannot be calculated correctly. Second, there always
exists the fear of the mistake of double counting, and hence the national income cannot
be correctly estimated. Double counting means that a particular commodity or service
like raw material or labour, etc. might get included in the national income twice or more
than twice.

For example, a peasant sells wheat worth Rs.2000 to a flour mill which sells wheat flour
to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells it to the
customers. If each time, this wheat or its flour is taken into consideration, it will work out
to Rs.8000, whereas, in actuality, there is only an increase of Rs.2000 in the national
income.

Third, it is again not possible to have a correct estimation of national income because
many of the commodities produced are not marketed and the producer either keeps the
produce for self-consumption or exchanges it for other commodities. It generally happens
in an agriculture- oriented country like India. Thus the volume of national income is
underestimated.

Methods of calculation of National Income

Product Method

Income Method

Expenditure Method
Product Method:
In this method, national income is measured as a flow of goods and services. We
calculate money value of all final goods and services produced in an economy during a
year. Final goods here refer to those goods which are directly consumed and not used in
further production process.

Goods which are further used in production process are called intermediate goods. In the
value of final goods, value of intermediate goods is already included therefore we do not
count value of intermediate goods in national income otherwise there will be double
counting of value of goods.
To avoid the problem of double counting we can use the value-addition method in which
not the whole value of a commodity but value-addition (i.e. value of final good value of
intermediate good) at each stage of production is calculated and these are summed up to
arrive at GDP.
The money value is calculated at market prices so sum-total is the GDP at market prices.
GDP at market price can be converted into by methods discussed earlier.
Product Method of Measure National Income
The second approach to estimate national income consists of measuring the output of all
producers and to deduct from this total the intermediate purchases. An unduplicated
figure of this kind can be obtained separately for each producer. This represents the value
of the intermediate products with which he starts and hence his contribution to the total
value of production.
The sum of all final products measured at factor costs, net of 'depreciation on fixed
capital assets and corrected for income payments to and from abroad, would equal
national income.
Income Method
Under this method, national income is measured as a flow of factor incomes. There are
generally four factors of production labor, capital, land and entrepreneurship. Labor gets
wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as
their remuneration.
Besides, there are some self-employed persons who employ their own labor and capital
such as doctors, advocates, CAs, etc. Their income is called mixed income. The sum-total
of all these factor incomes is called NDP at factor costs.

Income Method of Measure National Income

Incomes generated by unduplicated production must equal the net value added at each
stage of production. The production of bread, for Instance, has three stages that entirely
different from one another. First, the farmer produces the wheat and sells it to the floor
mill. Second, the rifer turns it into flour and sells it to the baker. Third, the baker makes
the bread and sells it to the final consumer. Mk: can either take the final price of the
bread paid by the consumer and break it down into its component parts or take value
added at each successive stage of production. In stage one, the value of wheat less cost,
represents income to the farmer. In stage two, the value added by the millers equals the
sale of flour less the cost of wheat, depreciation on equipment and other expenses. At
stage three, the value added by the baker equals the sale price of bread less the value of
flour etc. The value added at each stage can now be allocated to various factors of
production. The incomes of the farmer, miller and baker represent: their profits, wages of
their employees, rent of land and buildings, and interest on capital employed.
Thus, the same total can be reached by either summing up the value added at each stage
of production or summing up all the factor incomes generated in the process of
production.
Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP is sum-total
of private consumption expenditure. Government consumption expenditure, gross capital
formation (Government and private) and net exports (Export-Import).

Expenditure Method of Measuring National Income

National income can also be measured as sum of expenditure on final goods and services
less depreciation of capital assets. This involves drawing a distinction between final and
intermediate purchases and transaction. In the above example, bread was a final product
and its purchase by the consumer is a final transaction and hence a part of the final
expenditure. The transaction between the farmer, miller and baker are intermediate
transactions. As a broad rule, all purchases charged to current expense by business are
treated as intermediate goods added to stock within the accounting period represent an
addition to capital and though. They may not leave the business premises, expenditure on
them will be a part of the final expenditure.
In other words, national expenditure in a closed economy is the sum of nation's
consumption and its investment. However, in an open economy having foreign trade,
adjustments will have to be made for imports and exports. National expenditure is
recorded at market prices. To derive estimates at factor costs, an adjustment has to be
made for indirect taxes net of subsidies, if any.
Above, we have discussed the various methods of estimating of national income,
whatever method may be used for the estimation of national income, double counting
must be avoided.
Double counting means the counting of the value of goods and services at more than one
stage that, at final and intermediate stages. In the example if bread, if the price paid by
the consumer to the baker and the price paid by the miller to the farmer and that paid by
the baker to the miller are all counted, it is "double counting". Either the price paid by the
final consumer to the baker or the value added at each stages i.e., the value of wheat, the
value added by the miller and baker should be counted.
Aggregate related to the national Income

a. GDPmp :- refers to the sum total of value added by all production unit within the
domestic territory of a country during the period of an accounting year. Inclusive
of depreciation and estimated at market price.

b. NDPmp :- refers to the maket value of the final goods and services produced by
all the producing unit within the domestic territory of country during the period of
an accounting year. Exclusive of depreciation

c. GDPfc;- refers to the sum total of factor incomes generated within the domestic
territory of a country during the period of an accounting year.
Compensation of employees+ rent+ interest+ profit

d. NDPfc;- refers to the sum total of factor incomes generated within the domestic
territory of a country during the period of an accounting year.
Compensation of employees+ rent+ interest+ profit

e. GNPmp:- refers to the sum total of the GDPmp and net factor income from
abroad. (inclusive of depreciation and estimated at factor cost)

f. NNPmp:- is the sum total of (i) market value of the final goods and service
produce within the domestic territory of a country during an accounting
year(exclusive of depreciation). (ii) net facor income from abroad.
g. GNPfc:- is the sum total of (i) market value of final goods and services produced
within the domestic territory of country during an accounting year year. (inclusive
of depreciation and estimated at factor cost). (ii) net factor income from abroad.

h. NNPfc:- is the sum total (i) market value of final goods and good services
produced within the domestic territory of a country during an accounting year
(exclusive of depreciation and estimated at factor cost) (ii) net factor income from
abroad.

i. National Disposable Income (Gross and Net)

National Disposable income refers to the net income at market price available to
country for disposal. It is the sum total of national income, net indirect taxes and
net current transfer from the rest of the world.

Gross = National Disposable Income = National Income + Net indirect takes + net
current transfers from the rest of the world
Net National Disposable Income = Gross National Disposable Income Current
Replacement cost (which is depreciation at the level of economy as a whole)
Importance of National Income Analysis

For the Economy:

National income data are of great importance for the economy of a country. These days
the national income data are regarded as accounts of the economy, which are known as
social accounts. These refer to net national income and net national expenditure, which
ultimately equal each other.
Social accounts tell us how the aggregates of a nations income, output and product result
from the income of different individuals, products of industries and transactions of
international trade. Their main constituents are inter-related and each particular account
can be used to verify the correctness of any other account.

National Policies:
National income data form the basis of national policies such as employment policy,
because these figures enable us to know the direction in which the industrial output,
investment and savings, etc. change, and proper measures can be adopted to bring the
economy to the right path.

Economic Planning:
In the present age of planning, the national data are of great importance. For economic
planning, it is essential that the data pertaining to a countrys gross income, output,
saving and consumption from different sources should be available. Without these,
planning is not possible.

Economic Models:
The economists propound short-run as well as long-run economic models or long-run
investment models in which the national income data are very widely used.

Research:
The national income data are also made use of by the research scholars of economics.
They make use of the various data of the countrys input, output, income, saving,
consumption, investment, employment, etc., which are obtained from social accounts.

Per Capita Income:

National income data are significant for a countrys per capita income which reflects the
economic welfare of the country. The higher the per capita income, the higher the
economic welfare of the country.

Distribution of Income:
National income statistics enable us to know about the distribution of income in the
country. From the data pertaining to wages, rent, interest and profits, we learn of the
disparities in the incomes of different sections of the society. Similarly, the regional
distribution of income is revealed.
It is only on the basis of these that the government can adopt measures to remove the
inequalities in income distribution and to restore regional equilibrium. With a view to
removing these personal and regional the decisions to levy more taxes and increase
public expenditure also rest on national income statistics.
 Bibliography

Macroeconomics T.R. Jain, Dr. V.K. Ohri. By VK Global Publications Pvt. Ltd. Edition
2103