National Income

The national income is the sum total of the value of all the final goods produced and services of the residents of the country in an accounting year. National Income includes the contribution of three sectors of the economy - Primary sector, Secondary sector and Tertiary sector. National Income shows how the income is distributed between the wages, interest, profit and rents. Production is necessary for National Income. Production is achieved through the combination of land, labor, capital, and organization. A country produces many goods and services. When more is produced, the availability of goods and services increases. National income is the total amount (in monetary form) of goods and services produced in a country in a financial year. When production increases, national income increases. National income comes from the agricultural, industrial, and service sectors. The increase in national income is called economic growth. More production leads to economic growth. If national income reduces, the government will cut down the taxes so that citizens will have more income to spend. 

The national income is calculated in two ways.

1. Those based on current prices ie the price prevailing in the year to which the estimates is related.

2. National income is measured at constant prices with a base year.

Objectives of calculating national income:

■ To assess the contribution of various sectors in the economy.

■ To study the problems faced by the economy

■ To help the government in planning and implementing various projects

■ To find out the limitations and advantages of economic activities such as production, distribution, and consumption

Economic Sectors

The economy is mainly divided into three basic sectors - primary sector, secondary sector and tertiary sector. National income is related to the three sectors. The Central Statistical Office (CSO) categorizes economic activities into primary, secondary and tertiary sectors and calculates national income.

1. Primary sector: Activities that directly utilize natural resources are called primary sector. Agriculture is the foundation of the primary sector. In India, the primary sector is the sector that provides employment and produces the necessary food at all times. The primary sector is also known as the agricultural sector because of its importance to agriculture.

Example: Agriculture and allied activities, forestry, fishing, mining.

2. Secondary sector: The secondary sector is the sector where the production of new products is carried out using the products of the primary sector as raw materials. Industry is the foundation of the secondary sector. Because of its importance to industry, the secondary sector is known as the industrial sector.

Example: Industry, power generation, building construction.

3. Tertiary sector: The sector that procures and distributes the products of the primary and secondary sectors is known as the tertiary sector or service sector. The tertiary sector contributes the most to the Indian economy.

Example: Trade, transportation, hotels, communication, warehousing, banking, insurance, business, real estate, social service activities

National Income Calculation Methods

National income is the total value of goods and services produced in a country in a year. Three alternative methods are used to calculate national income - production method, income method, and expenditure method (consumption method).

Production Method: Production is the process of providing goods and services to satisfy various human needs. The ultimate goal of production is to fulfill human needs. The production method is a method of calculating national income by finding the total monetary value of goods and services produced in a country in the primary, secondary, and tertiary sectors in a year. The production method helps to assess the contribution of various agricultural, industrial, and service sectors to national income and which sector contributes more. The monetary value of goods and services can be counted more than once while passing through various stages of the production process (double counting).

Income Method: The labor, natural resources, and man-made objects used in the production of a good are called factors of production. Income is the reward received by the factors of production. Lease is the reward received by the land as a factor of production. Lease is received by the owner of the land. The reward received through labor is wages or salaries. Wages are received by the worker. Interest is the reward of capital. Interest is received by the individual or institution. Profit is the reward of the organization. Profit is received by the organizer. Income method is a method of calculating national income on the basis of rent, wages, interest, and profits received from the factors of production. Income method helps to identify the contribution of each factor of production to national income. 

Expenditure Method: Expenditure method is a method of calculating national income by finding the total amount spent by individuals, institutions, and the government in a year. In economics, investment is considered as an expense along with the cost of purchasing goods and services. Total expenditure is the sum of consumption expenditure, investment expenditure, and government expenditure.

In India, a combination of production method and income method is used for estimating national income. Factors determining national income are capital formation, natural resources, technical know-how and political stability. First scientific attempt to calculate National Income was done by Dr. VKRV. Rao. The first official attempt was made by Prof. PC. Mahalanobis in 1948-49. Today National Income is calculated and published by Central Statistical Organisation.

Central Statistical Organisation

The Central Statistical Organisation (CSO) is the government agency responsible for calculating the national income of India. It was established on 2 May 1951. The CSO is currently known as the Central Statistical Office. It is headquartered in Delhi. The CSO operates under the Ministry of Statistics. The CSO is mainly responsible for compiling national and per capita income statistics, conducting economic censuses and compiling consumer price indices.

Main functions of the Central Statistical Office

■ Compilation and analysis of statistical data.

■ Collection of statistical data in all sectors and their systematic use for planning purposes.

■ Estimation of national income using statistical data.

■ Conducting economic censuses

■ Preparing consumer price indices

Various concepts of National Income

Gross National Product (GNP): Gross National Product is the total monetary value of all final goods and services produced in a country in a year.

Gross Domestic Product (GDP): Gross Domestic Product is the total monetary value of all final goods and services currently produced within the domestic territory of a country during a given period. While calculating GDP in India, the income of those working abroad and the profits of Indian firms and enterprises operating abroad are excluded.

Net National Product (NNP) at Factor Cost (National Income):  Net National Product (NNP) at Factor Cost is known as national income. Net National Product (NNP) at Factor Cost is the sum of the wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year.

Net national product = Gross national product - Consumption Expenditure

Net National Product (NNP) at Market Price : It is the money value of all final goods and services after providing for depreciation. Depreciation charges are the expenses required to replace the wear and tear of machinery and other goods due to their age. Net National Product is obtained when depreciation charges are deducted from the gross national product.

Personal Income : It is the sum of all incomes actually received by an individuals or households during a given year.

Disposable Income : From personal income if we deduct personal taxes like income taxes, personal property taxes etc what remains is called disposable income.

Per Capita Income : This concept measures the average income of the people of a country in a particular year.

Per Capita Income = National Income/Population