Measuring Economic Performance: Understanding National Income

The total income of a nation is called national income. The aggregrate economic performance of the whole economy is measured by the national income data, In fact ,national income data provide a summary statement of a country’s aggregate economic activity. In real term ,national income is the flow of goods and services produced in an economy in a particular period—a year. Moden economy is a money economy. Thus, national income is expressed in money terms. A National sample survey has, thefore, defined national income as :”Money measures of the net aggregates of all commodities and services accruing to the inhabitants of a community during a specific period”

The most important point about National Income is that it is always expressed with reference to a time interval.

It is meaningless to speak of the national income of an individual without mentioning the period over which it is earned , say per week, per month or per year. Like many other terms in common use, the concept “national income “ has various cannotations.

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For inistance , national income is variously described. Sometimes, it is known as “national income”,or “natiomal product”, or “ national dividend”. As a matter of fact, all these terms mean one and the same thing. In national income accounting , thus the concept of national income has been interpreted in three ways , as:

1)National Product,
2)National Dividend,
3)National expenditure.

NATIONAL PRODUCT:
It consist of all the goods and services producedby the commodity and exchanged for money during a year. It does not include goods and services which are not paid for, such as hobbies, house wifes, services, charitable work, etc.

NATIONAL INCOME:

It consist of all the income, in cash and kind, accruing to the factors of production in the course of generating the national product. It represents the total of income flow which will exactly equal the value of the national product turned out by the community during the year.

NATIONAL EXPENDITURE:

This represents the total spending or outlay of the community on the goods and services produced during a year. Since income is the source of expenditure, national expenditure constitutes the disposal of national income, which is evidently equal to it in value or in other words, National Expenditure equals National Income.

INDEED, ONE MAN’S INCOME IS ANOTHER MAN’S EXPENDITURE.

When a person buys some things, it is expenditure , but every expenditure is the income of a some other person .and these process goes on and on and it continuous. Briefly, thus , the identity of the three factors of the flow of national income may be expressed as follows:

NATIONAL INCOME = NATIONAL PRODUCT = NATIONAL EXPENDITURE

When we analyze, the above three concepts, we find national income is nothing but “the total flow of wealth produced , distributed and consumed”.

There are, thus, three alternative definition of national income. THE FIRST DEFINATION is that it is the money value of goods and services produced by agent of production during the cource of year, we might call this “total production approach” THE SECOND DEFINATION is that it is the sum of incomes of agent of production , profits of public enterprise, income from government companies. This we might describe as “income approach”

THE THIRD DEFINATION is that national income is the sum of total expenditure of agents of production. We might call it “total expenditure approach”

CONCEPT ASSOCIATED WITH NATIONAL INCOME

GROSS NATIONAL PRODUCT(GNP)

In calculating national income ,we add up all the goods and services produced in a country. Such a total represents the gross value of final products turned out by the whole economy in a year,which is technically called “ gross national prouct”. The word gross indicates the inclusion of the provision for the consumotion of capital assets, i.e, deperication or replacement allowances. GNP, thus ,may be defined as the aggregate market value of all final goods and services produced during a given year, In an open economy GNP may be obtained by adding up:

(1) The value of all consumption goods which are currently produced. (2) The valve of all capital goods produced which is defined as Gross investment , in the real sense , here implies the increase in inventories plus gross product of building and equipments. It thus include the provision for the consumption of capital assets, i.e, deperication or replacement allowances.

(3) The values of government services which is measured in terms of government expenditure on various goods and services for rendering certain services to the benefit of entire community. (4) The value of net products, viz.,the difference between the total export and total import of the nation.this value may be positive or negative. (5) The net amount earned abroad. This represent the difference between the income received by the nationals from abroad on their forign investment,minus the income paid by them abroad on the foreigner’s investment.

GNP is the basic social accounting measure of the toyal output , it represent the final product , ready for consumption , valued at the current market prices.

GROSS DOMESTIC PRODUCT(GDP):

When we take the sum total of values of output of goods and services in the country,without adding the factor incomes received from abroad , the figure so obtained is called gross domestic product. GDP at constant prices and current pricies.:

When the prevailing pricies or current prices in a year are used for measuring GDP ., is known as GDP at current prices.. however when we use the price of base year for measuring the vale of GDP we called At GDP at constant price. GDP at factor cost and GDP at Market price:

GDP at factor cost is arrived at by adding the domestic the domestic factor incomes and assumption of fixed capital. Like wise ,the GDP evaluated at the price prevailing in the market is called GDP at market price. Conceptually, GDP at factor cost and GDP at market price should be the same. BUT since goods are subject to indirect taxes, the GDP at market price will be more then the GDP at factor cost. Similarly the value of goods may include the subsidy provided by the govermentto the producer.This reducies the price of the commodity in the market and hence the value of GDP. Therefore, in order to arrive at GDP factor cost, we have to deduct indirect taxes and add subsdies to GDP at market price. GDP at factor cost=GDP at market price + (S—T),

Where, S=Government subsidies & T= indirect taxes.

Net national product(NNP):
It refers to the value of the net output of the economy during one year. NNP is obtained by deducting the value of depression or replacement allowance of the capital assets from the GNP. To put it symbolically:NNP=GNP-D, where D=deperication allowances.

Other releated concept & relationship

I. National income(NI):
Personal income is the total income received by individuals in the community.peresonal income is the aggregrate earned & unearned income.

Thus , personal income PI=NI--undistributed profits.

II. Disposable Personal income(DPI):
Disposable personal income is the sum of the consumption & saving of individuals DPI=C+S
Thus disposable income rather than National income is the determinant of consumption, because the consumption of a person depends on his take hapme pay.

III. Personal saving(PI):
Personal saving refers to the difference between disposable income & personal consumption expenditure.

IV. Per capita income(PCI):
Per capita income refers to the average income of the citizens of a country in a given year.it also indicates the measurement of income of current prices and at a constant prices and is arrived by dividing the national income of a country by its population.

Per capita income= national income of a country
Total population

Method of estimating natural income.
We have three methods of estimating natural income.
i. The census of product,
ii. The census of income method &,
iii. The expenditure method.

1] The census of product method or output method.

This method is also known as value added product method or output method.under this method the economy of a country is divided into three major sector. a) Primary sector: which include agriculture , animal husbandary,fishery, forestry, etc. b) Secondary sector: which include consumer goods unit and capital goods units. c) Tertiary sector or service sector: which include service like trade , transport and commerce .

This method consist of a three stage.

1. We estimate the gross value of domestic product in the various sector of the economy. 2. Then ,we determine the cost of materials used and of services rendered to these sector by factor of production and also the annual value of deprication. 3. We then deduct these cost and deperication from the gross value of a production .

And lastly, to the net domestic product we add net income from abroad to get net national product at factor costwhich is called national income.

2] census of income method:

Under the income method ,national income is estimated by summing up to the income of all individual of a country.accordingly national income is measured by adding up rent of land , wages, intrest and salary of a worker – intrest on capital, profit on enterpriners,earning of self employed person dividend to share holder etc. Income method, therefore , approaches national income from the distribution side .this method, as such seeks to measure national income at the stage of distribution and appears as income paid and / or recived by the individual of the country.

3] the expenditure or outlay method:

National income on the expenditure is equal to the value of consumption plus investment. In this method, we have to: 1. Estimate private & public expenditure on consumer goods and services. 2. Add the value of investment in fixed capital & stocks, eith due consideration for net positive or negative inventories, & 3. Add the value of export & deduct the value of import. This method is not as popular as previous ones.

The Bowley Robestorn committee has suggested the adoption of the census of products method for ajor sector of India , & the census of income method for some minor sectors , while the National income committee relied mainly upon the census of Income method. However , none of the above method is perfect . therefore, an integrated computation of them will give a wider persective of the estimate.

Difficulties in national income estimates.

While estimating national income statistication & economists usually encounter the folling sets of difficulties: A. Conceptual or methodological difficulties.

B. Difficulties in estimating national income in a developing country .

A. Conceptual or methodological difficulties:
a) Imputed values:
The self owned and self supplied goods pose a problem . they are given imputed values for their inclusion in national income.

b) Different practices:
Different country resort different practice in calculating national income. This makes international comparsion of national and per capita income less significant.

c) Problem of service not marketed:
Normally goods or service which are not marketed do not form a part of national income ,.eg,. service rendered by house wife are not included as they are not sold in the market for money wages but the expenditure or justice and defence services are included.

d) Problem of double counting:
In order to overcome the problem of double counting only the value of final goods in taken into account while computing national income.

e) Harmful side effect:
National income accounts do not make any adjustment for the negative and harmful side effect production . pollution and consequent health hazard overuse of natural resources leading to future reduction of production are the best example of negative side effect.

f) Iliegal activities:
Many activities are not reported as they are illegal and underground. E.g. tax evasion , smuggling, adulteration. They are therefore , not included in national income statistics.

g) Neglect of human strains and leisure:
National income accounting does not take account important thing like human
leisure, human cost in the form of job stress and strain etc.

B. Difficulties in estimating national income in developing countries:

The developing countries of asia and Africa facies many difficulties in estimating national income , because their economic , social, and administrative structure are still in a backward state.

a. Existence of non-monetised sector:
The difficulties arise due to the existence of non-monetised transaction. Quite the large amount of output in these countries does not rich to the market at all;either yhey are consumed themselves or they are exchanged against other goods in a village. Since this part of the agriculture output cannot be quantified in money terms.

b. Illiteracy:
A majority of small farmers in a underdevelopment country are illiterate, so they are unable to give the right information about the quantity or value of their output. The statisticians can only guess their income or output in calculating GNP.

c. More than one occupation:
Because of economic underdevelopment, occupation specialization is still incompleate. Many persons undertake moe than one economic activity to make the both hand meet. Hence the calculation of national income become more difficult.

d. Lack of adequate statistical data:
The stastical data in a underdeveloped countries are not only inadequate, but theu are also inreliable. Even the statistical information regarding the organized sector is also unreliable. There is in accurate information available regarding consumption , investment expenditure regarding saving of either rural or urban population.

e. Limation of sample method:
The national income is estimated on the basic of data of certain selected sample districts. But in a developing country like India economic condition in the different states are different and even in different district of the state are also different.