NATIONAL INCOME

Presented by

Raja Ram Sharma

INTRODUCTION OF NATIONAL INCOME

Human wants can be satisfied by goods and services only. Production of goods and services has been going on since the dawn of economic history to meet unending wants of a society. Thus, national income is a measure of money value of production activity of a country. Production generates income, how ? Production of goods and services is the result of combined efforts of factors of production (land, labour, capital and entrepreneurship). The net output emerging from production process gets distributed among factors of production in the form of money income (rent, wage, interest and profit). Thus production generates income. With this income factors of production (factor owners) purchase goods and services for final consumption and investment. Thus, income creates expenditure.

NORMAL RESIDENTS

A normal resident is said to be a person or an institution who ordinarily resides in a country and whose centre of economic interest lies in that country.

Normal Residents of India include –

(a) Citizens or institutions of India

(b) Citizens of other countries who normally reside in India for more than a year and whose centre of economic interest lies in India

(c) Citizens of India working in – international bodies, foreign bodies (like banks, enterprises) operating in India and foreign embassies located in India

DOMESTIC OR ECONOMIC TERRITORY

Economic territory is the geographical territory administered by a government within which persons, goods and capital circulates freely.

Economic territory includes –

(a) Territory lying within the political frontiers of a country (terrestrial waters and air space)

(b) Ships & aircraft owned and operated by the resident between two or more countries

(c) Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation

(d) Embassies, consulates and military establishments of the country located abroad

CONVERSION OF DOMESTIC INCOME INTO NATIONAL INCOME

Domestic income is the sum of factor incomes generated by all the producing units located within domestic territory of a country in an accounting year.

AGGREGATES RELATED TO NATIONAL INCOME

When domestic product is estimated as the sum total of market value of the final goods and services produce in a domestic territory within an accounting year.

GDPMP = SUM TOTAL OF MARKET VALUE OF GOODS AND SERVICES IN A DOMESTIC TERRITOTRY

GDPFC = GDPMP - NIT

 GNPMP = GDPFC + NFIA

GNPFC = GDPMP + NFIA - NIT

NDPMP = GDPMP - D

NDPFC = GDPMP – D – NIT

NNPMP = GDPMP – D + NFIA

NNPFC = GDPMP – D – NIT + NFIA

NATIONAL DISPOSABLE INCOME

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

=

Gross National Disposable Income

= Net National Disposable Income

- Current replacement cost

FACTOR INCOME FROM NET DOMESTIC PRODUCT ACCRUING TO PRIVATE SECTOR

FACTOR INCOME FROM NET DOMESTIC PRODUCT ACCRUING TO PRIVATE SECTOR

= Net Domestic Product at factor cost

- Income from property & entrepreneurship accruing to the government departmental enterprises – savings of non-departmental enterprises

Public Sector comprises –

1. Government Administrative Departments

2. Departmental Enterprises (railways, post and telegraph)

3. Non-departmental Enterprises (like HMT, Indian Oil Corporation)

PRIVATE INCOME

It is the income of the private sector obtained from any source, productive or otherwise and the retained income of the corporation.

= Factor income from NDP accruing to private sector + net factor income from abroad

+ interest on national debt

+ current transfer from the rest of world

+ current transfer from the government

PERSONAL INCOME & PERSONAL DISPOSABLE INCOME

Personal Income

= private income

- Undistributed profits

- Corporation tax

Personal Disposable Income

= personal income

- Direct personal tax

- Miscellaneous receipts of the government administrative department or miscellaneous fees and fines paid by the households

METHODS OF CALCULATING NATIONAL INCOMEMethods of calculating national income/domestic income –

A. Product Method or Value Added Method

B. Income Method or Distribution Method

C. Expenditure Method or Disposition Method

VALUE ADDED METHOD

Domestic income is first calculated by totaling net value added at factor cost by all the producing units during an accounting year within the domestic territory. This total is called Net Domestic Product. When we add NFIA, get national income.

NVAFC = Gross output

- Intermediate consumption

- Depreciation

- Net Indirect Taxes

Value of Output = Sales + Change in stock

(GVAMP)Value Added = Value of output – Value of intermediate goods

NVAMP = GVAMP – Depreciation

PRECAUTIONS IN VALUE ADDED METHOD

Items included in NVA –

1. Imputed rent of owner occupied houses because all houses have rental value irrespective of its use by self or tenant.

2. Imputed value of goods and services produced for self consumption or for free distribution.

Items excluded in NVA –

3. Sales and purchases of second-hand goods.

4. Sales of bonds by a company.

5. Income of smuggler.

INCOME METHOD It is also called distributed share method or factor payment method. According to this method, national income is measured in terms of factor payments to the owners of factors of production during an accounting year.

Classification of Factor Incomes

Compensation of Employees

(i) wages and salaries in cash – Remuneration in cash includes wages & salaries, DA, bonus, city compensatory allowance, HRA, leave travelling allowance etc.

(ii) payment in kind – includes rent free quarter, free water and electricity, free uniform, free services of vehicles, amount of interest on interest-free loans etc.

(iii) employers’ contribution to social security schemes – consists of contribution to life insurance, casualty insurance , provident fund etc.

(iv) pension on retirement

INCOME METHOD

Operating Surplus –

1. Rent and Royalty – Rent is a factor income earned from lending the services of land, building whereas royalty is the income earned by landlord for granting leasing rights of subsoil assets.

♣ Imputed Rent – The rent of owner-occupied houses is called imputed rent.

♣ Royalty – subsoil (deposits of coal, iron, natural gas etc.) and use of patents, copyrights etc.

2. Interest – Interest is the price for the funds borrowed.

3. Profit

Profit – Dividends, Corporate profit tax and undistributed profit

Profit – Profit is the residual factor payment to owners of production units. Thus, profits are the income of the factor input called entrepreneurship for organizing production and undertaking attendant risks. It is reward that owners of firms get being in business and taking risk involved therein.

Corporate (Profit) Tax – The net profit of a corporate enterprise is used mainly for three purposes – (i) corporate tax, (ii) dividend and (iii) reserve fund (undistributed profit). Profit tax is a direct tax levied by the Government on the profit of a company. The company pays it out of its total profit. Profit tax, thus, is a part of domestic income since it is actually earned by the company. Profit tax is also called corporate tax.

Dividend – It is that part of profit of a corporate enterprise which it pays to its shareholders in accordance with number of shares held by the letter. By the virtue of owing shares, the shareholders become owners of the company.

Undistributed Profit – A company, after paying profit tax and distributing dividend out of its total profit, keeps the balance as reserve fund which is known as undistributed profit (or corporate savings or retained income). The reserve fund is maintained and augmented to meet unexpected contingencies, to expand the size of production and to provide social security benefits to the employees.

Mixed Income from self-employed (MISE) – Income of own account workers like farmers, doctors, barbers etc. and unincorporated enterprises like small shopkeepers, repair shops, retail traders etc. is known as mixed income.

PRECAUTIONS OF INCOME METHOD

1. Transfer earnings like old-age pensions, unemployment allowance etc. should not be included in national income.

2. Income from illegal activities like theft and gambling is not included in national income.

3. Commission paid on the sale and purchase of second hand goods are to be included in national income.

4. Brokerage on the sale/purchase of shares and bonds is to be included in national income.

5. Income in terms of windfall gains should not be included in national income.

EXPENDITURE METHOD

According to this method, national income is measured in terms of expenditure on the purchase of final goods and services produced in the economy during an accounting year. It is also called consumption and investment method or income disposal method.

Classification of Final Expenditure

Private final consumption expenditure (PFCE)

Government final consumption expenditure (GFCE)

Gross domestic capital formation (GDCF)

Net exports

Net factor income from abroad (NFIA)

Depreciation (-)

Net indirect taxes (-)

PRECAUTIONS OF EXPENDITURE METHOD

Following five items of expenditure should not be included –

1. To avoid double counting, expenditure on all intermediate goods and services is excluded. For example, purchase of eatable items by a restaurant, expenses on electricity by a factory are not included as they are intermediate consumption.

2. Government expenditure on all transfer payments such as scholarship, unemployment allowance, old-age pension etc. is excluded because no productive services are rendered by the recipients in exchange.

3. Expenditure on second-hand goods is excluded.

4. Expenditure on purchase of old shares/bonds or new shares/bonds etc. are excluded because it is not payment for goods or services currently produced.

5. Imputed expenditure on own account output should be included.

THANK YOU