In this article we will discuss about the various concepts of national income along with the formulas.
Answer 1. Concepts of National Income:
The following are the concepts of national income which are used for the computation of national income:
(1) Gross National Product (GNP):
The concept of national income is frequently used in economics. It is the total volume of goods and services produced during a year and calculated in terms of market price.
The following things should be kept in mind while calculating the GNP:
(i) The GNP is calculated in terms of money. The value of all goods and services produced during a year is expressed in terms of money and it is added at current prices.
(ii) The calculation of GNP should take into consideration the value of all goods and services which are in the final hands of consumers. It is done in order to avoid double counting.
(iii) Free gift of goods and services are not included in GNP because the value of such goods and services cannot be easily calculated.
(iv) Transfer payment are also not included in GNP because such transactions are not concerned with the production of current production. Insurance allowance, pension, etc., are not included in the calculation of GNP.
(v) Profit and losses on account of change in market value of capital assets are also not included while calculating the GNP.
(vi) Illegal income on account of speculative activities, smuggling, hoarding, etc., is also not included in GNP.
Methods of Calculation of GNP:
The GNP can be calculated by the following methods:
(i) Income Method of GNP:
On the basis of this method the incomes of all the factors of production during a year are added.
This method can be used for the calculation of GNP as given under:
GNP = Wages and Salaries + Rents + Interests + Profits of unincorporated firms + Dividends of corporated business firms + Undistributed corporate profits + Corporate taxes + Indirect taxes + Depreciation payment.
(ii) Expenditure Method of GNP:
According to this method GNP can be calculated on the basis of expenditure made on various goods and services during a year.
This is the total of expenditure on goods and services as given below:
GNP = Private personal consumption expenditure (C) + Gross domestic private investment (I) + Net foreign investment (X-Z) + Government expenditure (G) or GNP = C + I (X-Z) + G.
(2) Net National Product (NNP):
This concept of national income is calculated by deducting wear and tear of machinery or depreciation from the GNP. The following formula is used for the calculation of NNP.
NNP = GNP — Depreciation
(3) National Income (NI):
On the basis of the receipts in the form of wages, rent, interest, profit or loss and salary are added and the national income is calculated. It is called national income at factor cost.
The NI is calculated on the basis of the following formula:
NI = NNP — Indirect Taxes + Subsidies
(4) Personal Income (PI):
Personal income is that part of income received by individual during a year. Social security benefits in the form of unemployment allowances, old age pension and widow pension known as transfer payments are added to personal income and those amounts which are not distributed to the factors of production are deducted.
The following is the formula for calculating the personal income:
PI = National income – Corporate income taxes – Undistributed corporate profits – Social security contribution + Transfer payments.
(5) Disposable Personal Income (DPI):
The income received by an individual or household is not the disposable personal income because he has to pay direct taxes and to that extent his income is reduced and this is the income which is spent.
It is calculated on the basis of the following formula:
Disposable Income = Personal Income – Personal Taxes
(6) Per Capita Income (PCI):
The per capita income is calculated on the basis of the following formula:
Answer 2. Concepts of National Income:
National income is the sum of wages, rent, interest and profit or the sum of the earnings of the factors of production. In the other words, national income refers to the aggregate of factor income earned by people of the country during a given period of time as a result of their productive services.
Some of the experts in this field have defined national income from production or output side. According to experts, national income of the country can be defined as the market value of final goods and services produced in the economy. Final goods and services means all goods and services must be counted only once. There should not be double counting of goods.
There are various concepts of national income which we shall study one by one.
(1) Gross National Product (GNP) at Market Price:
It refers to the total value of final goods and services produced in the country during a given period of time. According to W.C. Peterson, gross national product may be defined as value of all goods and services produced by the economy during a given period. If we express the value of total output in terms of money it will be called the gross national income. In simple words, GNP is the sum total of the money value of final goods and services produced by a nation in a particular period say one year.
Thus, in order to calculate the gross national product, we multiply the quantities of different goods and services with their respective price. Symbolically,
GNP = P x Q
GNP = Gross National Product
P = Market price
Q = Final goods and services produced
The following are the features of gross national product:
I. It includes depreciation. Depreciation means loss of value of machinery due to wear and tear, which occurs during the production process.
II. It does not include transfer payments.
III. GNP includes only those goods and services which are brought for sale in the market.
IV. It includes only final goods and services. Intermediate goods are not included in the GNP. Intermediate goods are those goods which are used for further production of goods and services.
It refers to the total of market value of all final goods and services produced within the domestic territory of a country during a given period of time. According to Dernburg, gross domestic product at market price is defined as the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.
It can be calculated with the help of following formula:
Gross domestic product at market price = value of gross output in domestic territory – value of intermediate consumption.
The following are the features of GDP at market price:
I. GDP includes only final goods.
II. Transfer payments are not included in GDP.
III. The value of second-hand goods is not included.
IV. It includes only those goods and services which are sold in the market.
Thus, the above analysis may infer that:
GDP at market price = GNP at market price – net factor income from abroad.
It is the difference between market value of final goods and services produced in the domestic territory of a country during an accounting year and consumption of fixed capital. According to Dernburg, net domestic product at market price is the market value of final goods and services produced in the domestic territory of a country by its normal residents and non-residents during an accounting year. Thus,
Net domestic product at market price = Gross domestic product at market price – Depreciation.
Similarly, net domestic product at market price can be calculated with the help of the following formula:
Net domestic product at market price = Net national product at market price – Net factor income from abroad.
It is the sum total of income payments made to the factors of production. The sum total of goods and services produced with the help of factors of production at factor cost during one year in a country is known as net national product. In other words, NNP at factor cost is the total of income received by the factors of production in lieu of their productive services in the process of production. These payments are in the form of wages, salaries, rents, interest and profits.
According to Dernburg, national income is the factor income acquiring to the residents of the country during a year. It is the sum of domestic factor income and net factor income from abroad.
It can be calculated with the help of following formula:
Net national product at factor cost = Net domestic product at factor cost + Net factor income from abroad.
Money value of net flow of final goods and services produced within the domestic territory during a year is called domestic product. From income method point of view, domestic income is defined as the sum total of factor incomes and earned within the domestic territory of a country during a year.
Thus, it refers to domestic territory of country within which it is earned irrespective of whether the producer of goods and services (or income) is normal resident or foreigner (non-resident). That is why domestic product is understood as territorial concept.
In other words, it is the sum total of earnings received by factors of production as wages, rent, interest and profit. NDP at factor cost is equal to NNP at factor cost less net factor income from abroad.
It can be calculated on the basis of the following formula:
NDP at FC = NNP at FC – Net factor income from abroad
It refers to the income obtained by private individuals from any source whether productive or unproductive. It can be arrived at from NNP at factor cost by making certain additions and deductions. According to C.S.O., private income is the total of factor incomes from all sources and current transfers from the government and rest of the world acquiring to private sector.
It includes both factor income as well as transfer payments. Thus, in order to get private income from national income we add NNP at factor cost, transfer payments, interest on public debt and subtract from national income, social securities and profits and surpluses of public undertakings.
It can be calculated with the help of the following formula:
Private income = National income (NNP at factor cost) + Transfer payments + Interest on public debt – Social securities – Profits and surpluses of public undertakings.
In common language, it may be termed as the actual income which can be spent on consumption by individuals and families. An individual cannot spend whole his income on consumption because, it is the income that accrues before the income tax has been actually paid. Therefore, disposable income is the part of income which is left after the deduction of direct taxes. But whole of the income is not spent on consumption, a part of it is saved.
In the words of Peterson, disposable income is the income remaining with individuals after deduction of all taxes levied against their income and property by the government. Disposable income comprises of the income that the households actually receive from all sources. They can either spend it or save it. It is obtained by subtracting direct taxes and miscellaneous receipts of the government in the form of fees, fines etc. from personal income. Therefore,
Disposable income = Personal income – Direct taxes (income tax and property tax) – Miscellaneous receipts of the government administrative departments (fees and fines paid by the individuals).
Per capita income of a country may be defined as an average earning of an individual in a particular year.
The formula for the calculation of per-capita income is as under:
(9) Personal Income (PI):
Personal Income is the sum of all incomes actually received by all individuals or households during a given year.
National income, that is, total income earned and personal income, that is, income received must be different because some incomes which are earned such as social security contributions, corporate income taxes and undistributed corporate profits are not actually received by households, and conversely, some incomes which are received like transfer payments are not currently earned (examples of transfer payments are old-age pensions, unemployment compensation, relief payments, interest payments on the public debt, etc.).
Obviously, in moving from national income as an indicator of income earned to personal income as an indicator of income actually received, we must subtract from national income those three types of income which are earned but not received and add incomes received but not currently earned. Therefore,
Personal income = National income – Social security contributions – Corporate income taxes – Undistributed corporate profit + Transfer payments.
Answer 3. Concepts of National Income:
(1) Gross National Product:
GNP is the most important and widely used measure of national income. It is the most comprehensive measure of the nation’s productive activities. It is the total value of final goods and services produced by domestically owned factors of production during a specific period, usually one year, plus incomes earned abroad by the nationals minus incomes earned locally by the foreigners. The GNP so defined is identical to the concept of gross national income (GNI). Thus GNP = GNI. The difference between the two is only of procedural nature. While GNP is estimated on the basis of product flows, the GNI is estimated on the basis of money income flows.
Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not — they are intermediate goods used to make the final good. The same tires, if sold to a consumer, would be a final good. Only final goods are included when measuring national income.
If intermediate goods were included too, this would lead to double counting – for example, the value of the tires would be counted once when they are sold to the car manufacturer, and again when the car is sold to the consumer. Only newly produced goods are counted. Transactions in existing goods, such as second-hand cars, are not included as these do not involve the production of new goods. Income is counted as part of GNP according to who owns the factors of production rather than where the production takes place.
For example in the case of a German-owned car factory operating in the US, the profits from the factory would be counted as part of German GNP rather than US GNP because the capital used in production (the factory, machinery, etc.) is German owned. The wages of the American workers would be part of US GNP, while the wages of any German workers on the site would be part of German GNP.
(2) Gross Domestic Product (GDP):
The broadest measure of aggregate economic activity, as well as the best-known and most often used, is the gross domestic product, or GDP. GDP measures the value of output produced within the domestic boundaries India. It includes the output of the many foreign owned firms that are located in the India, following the high levels of foreign direct investment in the country but excludes incomes earned abroad by the nationals.
The concept of GDP is similar to that of GNP with a significant procedural difference. In case of GNP the incomes earned by the nationals in foreign countries are added and incomes earned locally by the foreigners are deducted from the market value of domestically produced goods and services. In case of GDP, the process is contrary- incomes earned locally by foreigners are added and incomes earned abroad by the national are deducted from the total value of domestically produced goods and services.
(3) Net National Product (NNP):
NNP is defined as
GNP less depreciation i.e.
NNP = GNP – Depreciation
Depreciation is that part of total productive assets which is used to replace the capital worn out in the process of creating GNP. In other words, depreciation is the reduction in value of an asset through wear and tear. An estimated value of depreciation is deducted from the GNP to arrive at NNP.
Thus NNP gives the measure of net output available for consumption by the society. NNP is the same as the national income at factor cost. NNP is measured at market prices including direct taxes. Indirect taxes, however, not a point of actual cost of production. Therefore, to arrive at real national income, indirect taxes are deducted from the NNP. Thus NNP – indirect taxes = National Income.
(4) Disposable Income:
Disposable income is the total income that actually remains with individuals to dispose off as they wish. It differs from personal income by the amount of direct taxes paid by individuals.
Disposable income = Personal income – Personal taxes
DI = PI – T
So PI = DI = T
Usually, people divide their disposable income between consumption spending and personal saving.
PI = DI + T
DI = C + S
PI = C+ S + T
National income- Accounting Relationships:
(a) Accounting Identities at Market Price:
GNP = GNI
GEP = GNP less Net Income from abroad
NNP = GNP less depreciation
NDP = NNP less net income from abroad
(b) Accounting Identities at Factor Cost:
GNP at factor cost = GNP at market price less net indirect taxes
NNP at factor cost = NNP at market price less net indirect taxes
NDP at factor cost = NNP at market price less net income from abroad
Answer 4. Concepts of National Income:
The key concepts associated with national income accounting are:
(1) Gross National Product (GNP):
The GNP is the most important measure of a country’s annual output of goods and services. In modern terminology, it is equal to an economy’s aggregate supply. GNP is the total money value of all final goods and services produced in an economy in an accounting year.
It may be expressed as follows:
GNP = price of bread × quantity of bread + price of orange × the quantity of orange + price of cars × the number of cars produced + price of haircuts × the number of haircuts done and so on.
Four points may be noted in this context:
i. Measurement at Market Prices:
Since different goods and services have different units of measurement, money is used as the common measuring rod (yardstick). Thus GNP can be defined as a collection of goods and services reduced to a common basis by being measured in terms of money.
Since GNP is a monetary measure, if we are to accurately measure the changes in the volume of output, between two years, say 2012 and 2013, new GNP has to be adjusted for the annual rate of inflation.
ii. Avoidance of Double Counting:
Recall that while measuring GNP accounting it is necessary to count all goods and services produced in an accounting year only once, not twice or several times. No doubt many goods pass through different stages of production before reaching final buyers.
As a result parts and components of various goods such as TV sets, cars, refrigerators, mobile phones, etc. are bought and sold a number of times. To avoid such double or multiple counting, it is necessary to include only final goods and exclude all purchases involving intermediate goods and raw materials.
The final goods are those which are not used for further production, i.e., production of any other good and is destroyed after consumption or use. By contrast, an intermediate good is one which is used for further production, i.e., production of final goods and services.
Intermediate goods are excluded from GNP simply because the money value of all final goods itself includes the money value of all intermediate goods (and, of course, raw materials). For example, if we calculate the market value of cars produced, we need not calculate the value of tyres and tubes, paint, steel, glass, etc., which have gone into the production of a final good — the finished car.
If, through mistake, we calculate the market value of all the parts and components of cars, along with the market value of cars, there will be counting of the same item twice or a number of times and we will arrive at any exaggerated value (inflated figure) of GNP.
iii. Time Period:
Since GNP has a time dimension (i.e., so much per period), it is a flow variable. GNP is a measure of the total value of goods and services produced in an economy in an accounting year.
Therefore two things are to be excluded from GNP:
(i) Purchase and sale of old goods such as old houses, factories, cars, refrigerators and other second hand goods. [Such second hand goods may be both consumption goods and capital goods like machines, or even steel or automobile assembly plant.]
(ii) Purchase and sale of financial assets such as fixed interest bonds or equity shares.
The reason is easy to find out. The above two transactions do not involve any current production of goods and services. Recall that GNP is the market value of all currently produced goods and services in an accounting year.
iv. Net Factor (Property) Income from Abroad:
GNP is the total market value of goods and services produced by the normal residents of a country. These residents may be owners of domestic and foreign companies. No doubt, many foreign companies have set up production units in India such as KFC, McDonalds, Sony, Ford, Marks and Spencer and so on.
These companies are largely owned by foreigners but carry on business in India. They produce various goods and services from their plants located within India s domestic territory. They generate income for Indians who work in such companies. At the same time such companies repatriate a portion of their profits to their countries of origin— the USA, Japan, the UK etc.
Just as Indians earn income from foreign companies located within India’s domestic territory, foreigners earn incomes from Indian companies located in foreign countries. Thus on the one hand we receive factor income from abroad and, on the other hand, we make payments to foreigners. The difference between the two is known as net factor income from abroad (NFIFA).
It has the following four components:
(i) Net compensation (consisting of wages, salaries, bonus to employees, etc.) which is the income of labour or the suppliers of the human factor.
(ii) Net income from property, i.e., rent and interest.
(iii) Net income from entrepreneurship, i.e., from risk taking and uncertainty bearing and includes profits and distributed dividends.
(iv) Net undistributed dividends or net retained earnings of the Indian companies carrying on business in foreign countries.
A few examples will make the concept of NFIFA clear:
(i) Many Indians who are working in Gulf countries send a portion of their incomes to India for the maintenance of their family members.
(ii) If an Indian buys a share from an American company and earns a dividend of say, $ 1,000 in the current year, it will be a part of India’s national income or GNP.
(iii) If a German engineer works in India in a certain project such as construction of a bridge or a new railway network, he will receive income from India. And he may send a certain portion of his income to Germany for the maintenance of his family there.
(iv) If Mr. L. Mittal sends a portion of profits earned from his steel plants located in the UK, to India, it will be part of India’s factor income (earned from abroad).
The following steps are involved in arriving at national income from GDP process:
Step 1: Deduct depreciation to arrive at NDP at market price.
Step 2: Subtract indirect taxes and add subsidies to arrive at NDP at factor cost.
Step 3: Add net factor income from abroad to NDPFC to arrive at NNPFC which is indeed national income.
It may now be noted that GNP has the following four components:
(i) Household Consumption Expenditure (C):
The value of final consumer goods and services produced in a year and consumed by domestic households. This is denoted by the symbol C. This is the largest component of GNP in any country.
(ii) Gross Private Investment (I):
The money value of all new capital goods produced in India in an accounting year such as machines, transport equipment, structures, as also new factories set up within a year. To these we have to add the inventories of goods such as raw materials (paint), semi-finished goods (such as chasis) as also inventories of consumer goods such as cars produced but not sold in the current year. All these come under the broad heading gross private investment (I).
(iii) Government Purchase of Goods and Services (G):
The value of goods and services produced by the central government (not state or local governments), denoted as G.
(iv) Net Exports (X-M):
Net exports (NX) are equal to the difference between the value of goods exported by India (in an accounting year) and the value of goods imported by it.
(v) Net Factor Income from Abroad (NFIA):
It is the difference between the factor incomes earned from abroad less factor payment made to foreigners in an accounting-year. Factor incomes are earned by Indians from abroad in various ways. Indian workers employed abroad earn wages and salaries.
Similarly many Indian individuals and corporations have acquired foreign assets—both physical and financial. They have acquired factories, buildings, offices, commercial space, etc. located abroad. They have also invested in foreign bonds, stocks, etc. and deposited money in foreign banks. From these they earn rent, interest and dividends. Indian companies also earn profits from the factories they have set up in foreign territories.
Factor incomes are paid to foreigners because both foreign individuals and companies from the USA, Japan, Germany and other countries have not only been employed by Indians in their enterprises located in India but also because foreigners have acquired real assets in the form of property such as factories, office buildings, land as also financial assets such as bonds and shares of Indian companies. Two types of income accrue to them from such factors, viz., rent and interest. Foreigners also earn profits from the enterprises which they have set up in India.
The difference between the two—factor incomes earned from abroad and factor payments made to foreign—is NFIFA. This is the last component of GNP.
Gross domestic product is the total money value of all final goods and services produced by both resident Indians as also non-resident Indians within India’s own domestic territory. It does not include NFIFA. If NFIFA is zero, which is highly unlikely, the two will be equivalent.
So it is important to note the following:
GNPMP = GDPMP – NFIFA
or, GDPMP = GNPMP + NFIFA
It is interesting to note that in most countries NFIFA is just 0.5% or so of GDP. Therefore there is not much difference between the two except in case of Kuwait. If NFIFA is negative, then we arrive at a surprising result: GNP is less than GDP. A simple example will make the point clear. Suppose GDP of India now is Rs. 1,000 crore at market price and NFIFA is Rs. 100 crore.
Then GNP = GDP – NFIFA
= Rs. 1,000 cr. – Rs.100 cr.
= Rs.900 cr.
If by coincidence, GDP = GNP, then NFIFA must be zero.
Thus we arrive at GDP by adding up the first four components of GNP.
GDP = C + I + G + NX
where NX = (X – M)
In Fig. 2.8 we show four different concepts of national product.
If we subtract depreciation or consumption of fixed capital from GNP at market price, we arrive at net national product at market price. Depreciation refers to the wear and tear of fixed capitals, such as plants, equipment and machinery due to their use in the production of various goods and services. If no provision is made for annual depreciation, a society’s stock of capital will completely disappear after some time and the flow of goods and services’ cannot be maintained.
(4) National Income (NI) [at Factor Cost] or NNPFC:
National income is measured at factor cost, by adding the incomes of the four factors—land, labour, capital and organisation—which make their respective contributions to current year’s net production. Although rent, wage, interest and profit are incomes of the productive factors, from the producing units’ point of view, these are factor payments or factor costs. For example, wage is the income of the labourer.
But for the company making wage payment, it is wage (labour) cost. In a broad sense, i.e., from a society’s point of view, national income at factor cost, or simply national income shows the cost incurred by society in terms of payments made to various economic resources used to produce NNR In this context, we may note the difference between two measures of national income, viz., the market price measure and the factor cost measure.
(5) Net Indirect Business Taxes and Factor Cost Adjustment:
There is a divergence between national income at market price and national income at factor cost due to the fact that the market price of almost everything which is produced and sold includes indirect business taxes, i.e., indirect taxes paid by the producers to the government less subsidies received by them.
Indirect taxes and subsidies create distortions by causing market price of output to be different from the factor incomes generated through the production process. It may be noted that indirect taxes such as sales tax or VAT cause the market prices of the taxed goods and services to exceed their true costs.
By comparison, subsidies’ (negative taxes) cause market prices of the subsidised items to fall below their true costs. A simple example will make the point clear. Suppose the sales (retail) price of an electric fan is Rs. 495. It includes a VAT of 10% or Rs. 45. (The ex-factory price was Rs. 450).
This means that even if the fan is sold at Rs. 495, the factors of production employed (or used) in the production and distribution of it would receive only Rs. 450 per fan. By contrast, a per unit subsidy causes the market price to be less than the factor cost.
Suppose there is a subsidy of Rs. 25 on cooking gas cylinder and it sells at Rs. 350. In this case even though the consumers pay Rs. 350 for cylinder, the factors employed in the production and distribution of gas cylinder will receive Rs. 375 (= Rs. 350 + Rs. 25).
This means the value of a gas cylinder would be equal to its ex-factors price plus the unit subsidy paid on it. From this it follows that national income at factor cost or, simply, national income is equal to NNP at market price ± net indirect taxes (i.e., indirect taxes paid by producers less subsidies received by them). Thus we can write
National income at factor cost = NNP at market price – indirect taxes + subsidies
or, National income = NNP ± net indirect taxes
(where net indirect taxes are the difference between indirect taxes paid by producers and subsidies received by them). Suppose, for example, a hypothetical economy’s net national product at market prices is Rs. 5,000.
If some producers have paid indirect taxes of Rs. 500 cr. and other producers have received subsidies of Rs. 350 cr, net indirect taxes will be – Rs. 150 cr. (= – Rs. 500 cr. + Rs. 350 cr.). Therefore the country’s national income will be Rs. 4,850 cr. (= Rs. 5000 cr. – Rs. 500 cr. + 350 cr.).
If, on the other hand, subsidies amount to Rs. 500 cr. and indirect taxes sum up to Rs. 350 cr. then national income will be Rs. 5,150 cr. Thus it is clear that since net indirect taxes may be negative or positive, national income may be less or greater than NNP at factor cost.
(6) Personal Income (PI):
Personal income is the sum of all incomes received by individuals or households in an accounting year. Such incomes have both earned and unearned components. This is why national income is not the sum of all personal incomes.
For example, personal income includes certain incomes which are received but not earned such as unemployment benefit, pensions, cash subsidies and other types of transfers (such as interest on government bonds.)
At the same time personal income does not include social security contributions such as employers’ contribution to provident fund, medical insurance and medical benefits, income taxes paid by companies, interest paid by companies to banks and other financial institutions and that part of net profits of companies which are not distributed as dividends among the shareholders (i.e., undistributed profits or retained earnings of corporations).
The reason is that these do not represent any income earned or received by households. So we cannot arrive at national income just by adding up all personal incomes. In moving from national income to personal income we have to include those incomes which are received but not earned and subtract those incomes which are earned but not received. And an exactly opposite procedure has to be followed if we are to move from personal income to national income.
Fig. 2.9 shows how we arrive at personal income from national income. We also refer to another concept of income, viz., and personal disposable income in this context. It is shown in this figure and explained below.
Thus we see that:
Personal income = National income – social security contributions – corporate income taxes -interest paid by corporates – undistributed corporate profits (retained earnings) + transfer payments received from private and household sectors.
It may be noted that households receive transfer payments from both private sources and from the government. For example, an individual may receive a gift of Rs. 10,000 from his father who is also a resident of India. This is a part of personal income but not a part of India’s national income.
The same statement is true in case of capital gains (and, of course, loss). If an individual sells shares in the stock exchange and makes a capital gain of Rs. 10,000 this will be a part of his personal income but not a part of India’s national income. The reason is that there is transfer of money from the seller to the buyer of certain stocks.
Similarly an individual may receive unemployment compensation or pension from the government. These are examples of government transfer. These are all included in personal income.
(7) Personal Disposable Income:
Personal disposable income is that part of personal income which is available to household after paying taxes and fulfilling certain contractual obligations such as making provident fund contributions and paying interest on house loan or car loan.
The term ‘disposable’ implies that households can dispose of their income as they wish. And disposable personal income is largely spent on consumption goods and partly saved, as shown in Fig. 2.9. And what is not spent on consumption goods is automatically saved.
So saving is a residue. It is that part of personal income which is not spent on consumption goods. This is why Paul Samuelson calls consumption and saving the mirror image concepts. This means that at a fixed level of PDI more consumption means less saving and vice-versa.
PDI = PI – personal taxes and all other deductions made from PI in the form of provident fund contributions and interest payments made by consumers.
Normally, we ignore all those deductions which are very small in magnitude and say that PDI = PI – personal taxes (such as income and property taxes).
In modern times, a number of concepts have come to be associated with the study of national income and social accounting. These concepts have made the study of national income broad-based and comprehensive.
The main concepts of national income are explained below:
(1) Gross Domestic Product at Market Price (GDP at MP):
Gross Domestic Product at Market Price is the money value of the final goods and services produced within the domestic territory of a country during a year. According to Hansen, “By gross domestic product we mean value of all the final goods and services produced in any given period usually in a year in the domestic territory of a country.”
In order to calculate the value of gross domestic product, all goods and services produced are multiplied by their prices. Symbolically, GDP at MP = P x Q, where GDP at MP is Gross Domestic Product at Market Price, P is market price, and Q is final goods and services.
Gross Domestic Product includes three types of final goods and services- (a) Consumer goods and services to satisfy immediate wants of the people; (b) Capital goods consisting of fixed capital formation, residential construction, and inventories of finished and unfinished goods, and (c) Goods and services produced by the government.
(i) GDP is stated in money terms, it is the money value of total goods and services produced within the country.
(ii) GDP comprises the value of only final goods and services produced during a period of time.
(iii) The value of final goods and services is calculated at the current market price. That is why GDP is also known as GDP at Market Price.
(iv) GDP includes only those goods and services which have market value and which are brought in the market for sale.
(v) GDP does not include depreciation of capital goods during the course of production.
(vi) Transfer payments, like pension, maternity benefits, unemployment allowance, etc. which do not contribute in any way to production, are not included in GDP.
(viii) GDP does not include capital gains.
(2) Gross National Product at Market Price (GDP at MP):
Gross National Product at Market Price is the money value of all final goods and services produced annually in a country plus net factor income from abroad. GNP is a broader concept than GDP. GNP is GDP (i.e., the final goods and services produced within the domestic territory of a country in a year) plus net factor income from abroad.
Net factor income from abroad is the difference between the factor income earned by our residents from foreign countries and the factor income earned by the foreigners from our country.
Gross National Product at Market Price = Gross Domestic Product at Market Price + Net Factor Income from Abroad.
or GNP at MP = GDP at MP + Net Factor Income from abroad.
(3) Net National Product at Market Price (NNP at MP):
Net National Product at Market Price is Gross National Product at Market Price less depreciation. In the production process, certain amount of fixed capital is used up. This is called depreciation of fixed capital or consumption of fixed capital.
By deducting the value of depreciation from the value of Gross National Product in a year, we get the value of Net National Product.
The term ‘net’ refers to the exclusion of depreciation from total output.
Net National Product at Market Price = Gross National Product at market price – Depreciation.
or NNP at MP = GNP at MP – Depreciation.
(4) Net Domestic Product at Market Price (NDP at MP):
Net Domestic Product at market price is the difference between Net National Product at Market Price and net factor income from abroad.
Net Domestic Product at Market Price = Net National Product at Market Price – Net Factor Income from Abroad.
or NDP at MP = NNP at MP – Net Factor Income from Abroad.
(5) Net Domestic Product at Factor Cost (NDP at FC):
Net Domestic Product at Factor Cost or Domestic Income is the income earned by the factors of production in the form of wages, profits, rent, interest, etc. within the territorial limits of the country.
Domestic income includes- (a) rent, including imputed rent ; (b) compensation of employees or wages and salaries; (c) interests; (d) dividends to the shareholders or distributed profits; (e) reserve fund of firms or corporate saving; (f) corporation and other direct taxes; (g) mixed income of self- employed persons; (h) profits of government enterprises; (i) property income of the government; and (j) savings of non- departmental enterprises.
Net Domestic Product at Factor Cost (NNP at FC) or Domestic Income = Rent (along with imputed rent) + Compensation of Employees or Wages and Salaries + Interest + Dividend + Reserve Fund of the Firms or Corporate Saving + Corporate or other Direct Taxes + Mixed Income of the self Employed + Property and Entrepreneurial Income of the Government + Savings of Non- Departmental Undertakings.
(6) Gross Domestic Product at Factor Cost (GDP at FC):
If depreciation or consumption of fixed capital is added to the Net Domestic Product at Factor Cost, we get Gross Domestic Product at Factor Cost.
Gross Domestic Product at Factor Cost = Net Domestic Product at Factor Cost + Depreciation.
or GDP at FC = NDP at FC – Depreciation.
(7) Gross National Product at Factor Cost (GNP at FC):
Gross National Product at Factor Cost is obtained by adding net factor income from abroad to the Gross Domestic Product at Factor Cost.
Gross National Product at Factor Cost = Gross Domestic Product at Factor Cost + Net Factor Income from Abroad.
or GNP at FC = GDP at FC + Net Factor Income from Abroad.
(8) Net National Product at Factor Cost or National Income (NNP at FC or NI):
Net National Product at Factor Cost or National Income is the total earnings of all factors of production in the form of wages, profits, rent, interest, etc. plus net factor income from abroad.
In other words, Net National Product at Factor Cost is obtained by adding net factor income from abroad to the Net Domestic Product at Factor Cost. Net National Product at Factor Cost or National Income can also be calculated by deducting depreciation from Gross National Product at Factor Cost.
Net National Product at Factor Cost or National Income = Net Domestic Product at Factor Cost + Net Factor Income from Abroad.
or NNP at FC or NI = NDP at Fc + Net Income from Abroad,
or Net National Product at Factor Cost or National Income = Gross National Product at Factor Cost Depreciation
or NNP at FC or NI = GNP at FC – Depreciation.
(9) Private Income:
Private income is the income of the private sector obtained from any source productive or otherwise and the retained incomes of the corporations. Private income includes income from domestic product accruing to the private sector, transfer earnings, undistributed profits, and net factor income from broad. Thus, private income includes both factor income as well as transfer payments.
Private income can be obtained from Net National Product at Factor Cost by making certain addition and deductions. The additions include- (a) transfer earnings from the government; (b) interest on national debt and (c) current transfers from the rest of the world.
The deductions include- (a) property and entrepreneurial income of the government; (b) savings of the non- departmental undertakings, and (c) social security contribution.
Private Income = Net National Product at Factor Cost or National Income + Transfer Payments from the Government + Transfer Payments from the Rest of the World + Interest on National Debt – Property and Entrepreneurial Income of the Government – Savings of the Non-Departmental Undertakings – Social Security contributions.
(10) Personal Income:
Personal income is the total income received by the households of a country from all possible sources before direct taxes. The main difference between private income and personal income is that while private income includes undistributed profits, personal income does not.
Personal Income = Private Income – Undistributed Profits (i.e., Corporate Profits Tax + Corporate Savings) – Retained Earnings of Foreign Companies.
(11) Disposable Income:
Disposable income is that part of the personal income which the households can spend the way they like. It refers to the purchasing power of the households.
Disposable Income = Personal Income – Direct Taxes
The whole of disposable income is not spent on consumption. Some part of it is saved. Thus,
Disposable Income = Consumption Expenditure + Saving
National Product at Market Price refers to the market value of the final goods and services produced in a year. National Product at Factor Cost refers to the income received by the factors of production in the form of wages, profits, rent, interest, etc.
The two concepts need not be the same. In order to calculate National Product at Factor Cost, we have to deduct net indirect taxes (i.e., indirect taxes minus subsidies) from National Product at Market Price.
I. Indirect Tax:
Indirect taxes (such as sales tax, excise duty, etc.) are levied on commodities. They are included in the market price but are received by the government. Thus the market value of national product exceeds the incomes paid to the factors of product by the amount of indirect taxes. Therefore, in order to arrive at the Net National Product at Factor Cost, we have to deduct indirect taxes from Net National Product at Market Price.
Subsidies are the opposite of indirect taxes. They are the money aid given to the producers with a view to lower the prices of certain products in the market. Subsidy causes market price to be lower than the factor cost. Thus, in order to arrive at Net National Product at Factor Cost, we should add subsidies to the Net National Product at Market Price.
III. Net Indirect Taxes:
The difference between indirect taxes and subsidies is called net indirect taxes. Thus, while calculating National Product at Factor Cost or National Income, net indirect taxes are deducted from Net National Product at Market Price.
Net National Product at Factor Cost = Net National Product at Market Price – Net Indirect Taxes (i.e., Indirect Taxes – Subsidies)
or NNP at FC = NNP at MP – Net Indirect Taxes
= NNP at MP – Indirect Taxes + Subsidies.
Regarding the relative significance of the two concepts, J.R. Hicks has remarked- “When economic welfare of a nation is to be measured, it is more appropriate to use the concept of Net National Product at market prices, and when the productivity of an economy is to be measured it is more appropriate to use the concept of Net National Product at factor cost.”
Relation between Different Concepts of National Income:
1. Gross Domestic Product:
Market Value of Final Goods and Services Produced within the Domestic Territories.
(+) Net Factor Income from Abroad
2. Gross National Product:
3. Net National Product at Market Price:
(-) Net Factor Income from Abroad
4. Net Domestic Product at Market Price:
(-) Net Indirect Taxes (i.e., Indirect Taxes minus Subsidies)
5. Net Domestic Product at Factor Cost or Domestic Income:
6. Gross Domestic Product at Factor Cost:
(+) Net Factor Income from Abroad
7. Gross National Product at Factor Cost:
8. Net National Product at Factor Cost or National Income:
(-) Property and Entrepreneurial Income of the Government
(-) Savings of Non-Departmental Enterprises
(-) Social Security Contributions
(-) Net Factor Income from Abroad
Income from Domestic Product Accruing to Private Sector:
(+) Interest on National Debt
(+) Transfer Earnings from the Government
(+) Current Foreign Transfer Payments
(+) Net Factor Income from Abroad
9. Private Income:
(-) Corporate Tax
(-) Saving of Corporation.
(-) Retained Earnings of Foreign Companies
10. Personal Incomes:
(-) Direct Taxes
(-) Miscellaneous Receipts of Government Administration
11. Disposable Income:
= Consumption + Saving