National Income

1- Meaning and Definition of National Income 

National income is the sum of incomes of all the citizens of a country. In other words, it is the sum of factor incomes that are received by owners of factors of production in the forms of wages, salaries, interests, rents, profits, and other mixed incomes for their contribution in national production in a specific time period. To say more precisely, it is the net amount of income acquired from all economic activities like agriculture, industry, trade, transport, service etc in a certain period of time usually one year. 

In relation to national income Simon Kuznets has given a definition as “The net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.” 

Similarly, Marshall, Pigou and Fisher have also defined national income in their own words. 

“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 national income or revenue of the country or national dividend.” ---Marshall 

“National income is that part of the objective income of the community, including of course, income derived from abroad, which can be measured in money.”---Pigou 

“The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Thus, a piano, or an over-coat made for me this year is not a part of this year’s income, but an addition to capital. Only the services rendered to me during this year by these things are income.” --- Fisher 

Marshall’s definition indicates national income as all types of goods and services produced in a country during a year. Similarly, according to Pigou, the value of goods and services which are measured in terms of money and income from abroad is the national income. Likewise, Fisher emphasizes that national income is the part of national annual produce which is consumed during the year. 

By studying above definitions we can come to conclusion that national income refers either to the money value of overall flow of goods and services in the economy during a year. In other words, the sum of money income received by all factors of production during a year, or the sum of expenditures made on consumption, investment and government purchases is known as national income.

1.2- Concepts of National Income 

a. Gross domestic product at market prices (GDPMP) 

Gross domestic product at market prices (GDPMP) is the sum of market value of all final goods and services produced in a country during a given period of time or generally in a year. It implies that GDP is calculated by multiplying the quantity of all final goods and services produced in an economy by their current market prices. 

Symbolically 

GDPMP = Q1P1 + Q2P2+ Q3P3……...+ QnPn 

Or, GDPMP = C + I + G + NX 

Where, 

C     = Consumption expenditure, 

I      = Gross private domestic investment expenditure 

G     = Government expenditure and, 

NX  = net exports (NX = X – M) 

b. Gross domestic product at factor cost (GDPFC) 

Gross domestic product at factor cost refers to the sum of factor income and depreciation during a year. In other words it is the sum of compensation of employees, interests, rent, profits, mixed income and depreciation. 

Symbolically, 

GDPFC = wages + salaries + interests + rents + profits + mixed income+ depreciation. 

Or, GDPFC = GDPMP – IT + Subsidies 

Where, 

GDPFC  = Gross domestic product at factor cost, 

GDPMP = Gross domestic product at market prices, 

IT         = Indirect taxes, 

c. Net domestic product at market prices (NDPMP) 

Net domestic product at market prices is the sum of market value of all final goods and services produced by all factors of production in the economy during an accounting year minus capital consumption allowances or depreciation. In other words, it is the net domestic product valued at prevailing market prices. The net domestic product at market prices can be expressed as;

NDPMP = GDPMP – Depreciation 

d. Net domestic product at factor cost (NDPFC) 

Net domestic product at factor cost is the sum of net value added to the current flow of goods and services by all productive units (factors of production) in the domestic territory of a country during an accounting year. In other words, it refers to sum of the net factor payments to the owners of factors of production for their contribution to the production of goods and services in the economy during a year. 

Net domestic product at factor cost (NDPFC) is calculated by subtracting depreciation from gross domestic product at factor cost (GDPFC) or it can also be calculated by deducting indirect taxes from net domestic product at market prices (NDPMP) and adding subsidies to it. Net domestic product at factor cost can be presented in a symbolical expression as follows. 

NDPFC = GDPFC – Depreciation, 

Or, NDPFC = NDPMP – IT + Subsidies, 

Where, 

GDPFC  = Gross domestic product at factor cost, 

NDPFC   = Net domestic product at factor cost, 

NDPMP = Net domestic product at market prices, 

IT         = Indirect taxes, 

e- Gross national product at market prices (GNPMP) 

Gross national product at market prices may be defined as the sum of market value all final goods and services produced in a country during a year, including net exports and net foreign receipts. In other words, it is the annual aggregate production of goods and services by all domestic factors of production either in the domestic country or in rest of the world. 

Symbolically, GNP at market prices can be expressed as; 

GNPMP        = C + I + G + NX +NFR 

Or, GNPMP = C + I + G + (X - M) + (R – P) 

Where,

C   = Consumption expenditure, 

I    = Gross private domestic investment expenditure, 

G   = Government expenditure and, 

NX= Net export (NX = X – M), 

NFR = Net foreign receipt (NFR = R – P) 

f- Gross national product at factor cost (GNPFC) 

Gross national product at factor cost is the sum of factor incomes that the owners of factors of production annually receive from their productive services rendered in the domestic economy as well as in rest of the world. In other word, it is the sum of money incomes equal to the amount obtained by adding subsides to and deducting indirect taxes from gross national product at market prices. GNP at factor cost can be expressed symbolically given as, 

GNPFC = GNPMP – IT + Subsidies, 

Where,

GNPFC = Gross national product at factor cost, 

GNPMP= Gross national product at market, 

IT = Indirect taxes 

g- Net national product at market prices (NNPMP) 

Net national product at market prices refers to the net money amount of all final goods and services, annually produced in an economy, valued at their market prices including net exports and net foreign receipts. In other words, it is equal to the amount obtained by deducting depreciation from gross national product. 

GNP at market prices includes the amount of capital consumption allowances or depreciation. By deducting the amount of depreciation from gross national product at market prices we can calculate net national product at market prices. The symbolical expression of NNP at market prices is as given here. 

NNPMP = GNPMP – Depreciation 

h- Net national product at factor cost (NNPFC) 

Net national product at factor cost is the sum of net factor incomes received by the owners of factors of production for their contribution to the production of goods and services produced in a domestic country and abroad. It, being the sum of net factor incomes of a nation, is also called national income. It includes all sorts of factor incomes earned in the form of wages, salaries, pension, rents, interests, mixed incomes and so on including net foreign receipts from factor services. As like GNP at factor cost, NNP at factor cost excludes indirect taxes and includes subsides. Therefore, indirect taxes are deducted from and subsidies are added to NNP at market price to arrive at NNP at factor cost. NNP at factor cost can be expressed symbolically as follows. 

NNPFC = NNPMP – IT + Subsidies, 

Or, NNPFC = GNPMP – IT + Subsidies – Depreciation 

Where,

NNPFC = Net national product at factor cost, 

NNPMP= Net national product at market prices, 

GNPMP= Gross national product at market prices, 

IT = Indirect taxes 

I. Personal Income (PI) 

Personal income is the sum of all kinds of incomes received by each individual persons of a country from all sources of incomes during a certain period of time, generally one year. While calculating personal income, corporate income tax (CIT), corporate undistributed income (CUI) and social security contribution (SSC) are deducted from net national product at factor cost to arrive at personal income. Contrary to this, transfer payments (TP) which are received by individuals are included to net national income at factor income. The symbolical expression of personal income is as follows. 

PI = NNPFC or NI – CIT – CUI – SSC + TP 

Where,

PI     = Personal income, 

NI    = National income, 

CIT  = Corporate income tax, 

CUI  = Corporate undistributed income, 

SSC  = Social security contribution, 

TP    = Transfer payments, 

J-Disposable income (DI) 

Disposable income is that part of personal income which can be spent independently on the consumption of goods and services and on others by individuals and families. In fact, the whole of personal income is not liable to be spent on consumption of goods and services because it includes direct taxes (DT) which have to be paid to the government as an income tax by individuals. Therefore direct taxes are deducted from personal income in order to calculate disposable income. Therefore, disposable income is expressed in symbolical form as follows. 

DI = PI – DT 

Where,

DI = Disposable income, 

PI = Personal income, 

DT = Direct taxes, 

k-Per capita income (PCI) 

Per capita income is the people’s average share of national income of a country in a particular year. It is calculated by diving national income (NI) of a country in a particular year by the size of population (SP) of that country in that particular year. Hence, PCI can be expressed as: 

PCI = (NI of a particular year ÷ SP of the year) 

Where,

PCI= Per capita income, 

NI  = National income, 

SP  = Size of population,