MCom I Semester Business Environment National Income Study Material Notes

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MCom I Semester Business Environment National Income Study Material Notes

Table of Contents

MCom I Semester Business Environment National Income Study Material Notes: Meaning of National Income Definition of National Income  Various Concepts of National Income Real Growth Rate National and Per Capita Product National Income Estimation in India Table Growth of National Income During Five Year Plans Characteristics of Indian National Income Problems of National income in India Methods of Measuring National Income Long Answer Questions Short Answer Questions Objective :

National Income Study Material
National Income Study Material

CTET Paper level 2 Previous Year Social Science Model Paper in Hindi

National Income

National income is regarded as the most comprehensive measure of the level of economic activity and index of growth of an economy. National income is the income which normal residents of a country earn by rendering factor services in the production process. National income is the flow of goods and services which become available to a nation during a year. National income is the value of all final goods and services produced by the normal residents of a country whether operating within the domestic territory of the country or outside, in a year. National income is, thus, a monetary expression of the current achievements of the people of a country expressed through their production activities.

MEANING OF NATIONAL INCOME

National income is the flow of goods and services which become available to a nation during one year, account being taken of the deduction made due to wear and tear, depreciation of plants and machinery used in the production of goods and service. It is distributed among the factors of production in the form of rent, interest, wages and profits. The larger the national income, other things remaining the same, the larger will be the share of each factor.

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DEFINITION OF NATIONAL INCOME

National income may be defined as follows:

1 According to Prof. Marshall, “The labour and capital of a country, acting upon its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the true national income or revenue of the country or the national dividend.”

2. In the words of Pigou, “The national dividend is that part of the objective income of the community including income derived from abroad, which can be measure in money.”

3. According to Dornbusch and Fisher, “National income is the value of final goods and services produced by domestically owned factors of production within in a given period.”

4. In the words of Prof. J.R Hicks, “The national income consists of a collection of goods and services produced by a community on a common basis by being measure in terms of money.

5. According to Irving Fisher, “The national dividend or income consists solely of services as received by ultimate consumers whether from their material or from their human environments, only, the services rendered during the year by these things are income.”

In brief, national income adds together the value of all final goods and services produced in a country during a year. In order to aggregate all goods and services, it is essential to express them in monetary terms. Thus, it is clear from the definitions that:

1 National income is the national income of a country computed in a year or within a given period.

2. It is the sum total of money value of all goods and services produced in a country.

3. Depreciation is deducted from fixed assets.

4. Net factor income from abroad is added to it. Thus, national income may be expressed as follow :

NI =C+I+G-D+ (X – M)

where, consumption expenditure (C), total investment (I), government expenditure (G) and net income from abroad are added together. X stands from exports and ‘M’ denotes imports.

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VARIOUS CONCEPTS OF NATIONAL INCOME

According to present ideas, national income may be defined as the aggregate of factor income which arises from the current production of goods and services by the nation’s economy. However, there are a number of aggregates related to national income these are inter-related aggregates. The various aspects, and concepts of national income are as follows:

1 Gross Domestic Product : Gross domestic product is the value of all final goods and services produced within the domestic territory of a country during a year. Gross domestic refers to the money value of total consumption, total investment, total expenditure of government on goods and services. Thus National Gross Product = GDP + Exports – Imports.

In a closed economy, gross national product is equal to the gross domestic product because its closed imports and exports are zero. Thus the concept of domestic product is geographical in character. Modern economies are open economies, having interactions with the rest of the world in the form of exports and imports, inflows of factor incomes etc. Thus gross domestic product of India is the value of output produced by all enterprises located within the Indian territory. The difference between the factor income received from rest of world and the factor income accruing to rest of the world is the net factor income from abroad. Hence, the difference between gross national product and gross domestic product is equal to the net factor income from abroad.

2. Gross National Product: This is the basic social accounting measure of the total output or aggregate, supply of goods and services. Gross national product is defined as the total market value of final goods and services produced in a year. It is the measure of the current output of economic activity in the country. Generally, gross national product is measured on two basis-national Product at Market price and national at factor cost. Market price of goods are inclusive of indirect taxes and exclusive of subsidies granted by the government.

In every economy,, production is the result of the cooperation of factors ction. The payment made to these factors for their contribution to the process is called factor cost and the resultant product is called produs actor cost. To get GNPmp from GDPmp, we have to add to GDPmp the ncome earned from abroad. It measures contribution of both nationals and non-nationals in total production. Market value of goods and services differs from the earning of factors of production to the extent to the net direct taxes Indirect taxes minus subsidy are known as net indirect taxes. Therefore national product at fact or cost differs from national product at market price to the extent of net indirect taxes.

Thus, Gross National Product at factor cost = GNP at market price-indirect taxes + subsidies

3. Net National Product (NNP): In the production of gross national product of a year, we consume or use up some capital, i.e., equipment, machinery etc, The capital goods like machinery wear out or depreciate in value as a result of its consumption or use in the production process. This consumption of fixed capital or fall in value of capital due to wear and tax is called ‘depreciation.’ When charges for depreciation are deducted from the gross product we get net national product. It means the market value of final goods and services after providing for depreciation. Therefore, it is called ‘national income at market price’. Thus :

NNPmp = GNP – Depreciation.

Suppose, in a year GNP of country at market price is 1,500 crore and depreciation value is 500 crore. The NNPmp would be:

= NNPmp = GNP – Depreciation

= 1500 – 500 = 1,000 crore

4. National Income or National Income at factor cost(NNP) Or (NI): When we calculate the value of all final goods and services produced by the normal residents of a country, whether operating within the domestic territory of a country or outside it, at their factor cost, it is called net national product at factor cost or national income. National income at factor cost means the sum of all incomes earned by resources supplies for their contribution of factors which go into the year’s net production. In other words, national income shows how much it costs society, in terms of economic resources, to produce net output. It is really the national income at factor cost for which we use the term ‘National income.’ The difference between national income (at factor cost) amount and net national product (at market price) arises from the fact that indirect taxes and subsidies causes market prices of output to be different from the factor incomes resulting from it.

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Thus national income (national income at factor cost) is equal to net national product minus indirect taxes plus subsidies, therefore;

National income at factor cost (NNP) = NNP – Indirect taxes + subsidies.

5. Personal Income (PI): Personal income is defined as the sum total of all current incomes received by persons or households from all sources, it is the income actually received by persons from all sources in the form of factor incomes and current transfer payments during a year.

The income which the households actually receive is different from what they have earned during the year. The reason is simple that some income which is earned is not actually received by households and conversely, some income which is received is not currently earned. Thus, items of income w part of personal income are as follows:

(i) Social security contributions : These items are directly deducted from the wages by the entrepreneurs.

(ii) Corporate tax: Apart of the income of the firms is used to pay corporate tax on the profit earned. It is called corporate profit tax.

(iii) Undistributed profit: Some part of the income earned by the firms or corporations is not distributed among the shareholders. A part of it is retained by the firms for further investment in the firms. It is called ‘undistributed profits or retained earnings.’

Some payments are received by households and others without making any contribution to the production process in the current period. They are known as ‘transfer payments.’ Old age pensions, unemployment relief, welfare payment, gift etc. are all transfer payments. We must subtract from national income these three types of incomes which are earned but not received and add incomes received but currently earned. Therefore, Personal Income = National Income – Social Security Contribution – Corporate Taxes – Undistributed Profit + Transfer Payments.

6. Disposable Income: Personal disposable income is that part of personal income which is available to the individuals to be used the way they like. In other words, it is the income available to the households which they can spend on consumption or can save as they desire. A part of the personal income is taken away by the government by way of direct taxes, only that part of individual income which remains after payment of direct taxes and miscellaneous payments to the government which is the actual amount available for spending by the households, it can be expressed in following formula:

Disposable Income = Personal Income – Direct taxes.

Households can use personal disposable income on consumption and savings. It can be expressed as follow :

Disposable Income = Consumption + Saving.

7. Per Capita income: Per capital real income is traditionally taken as index of or measure of economic welfare and economic development. It enables us to know the average income and the standard of the people on in average. An increase in per capit                      a income leads to an improvement in the living standards of people as well as economic development, per capita income is average income of the normal residents of a country in a particular year.’ It is income per head of population. It is obtained by dividing national income of a country by its population.

National income of year 2014 Per Capita Income of year 2014 = =

Population of year 2014

8. Real Income: National income is calculated at current price. National income at current price is the money value of all final goods and services produced in a country during that year. National income at current price can change partly because of a change in the physical quantities of final goods and services produced and partly because of change of the market price at which these goods and services are valued, therefore, national income at current price does not reflect growth in real national output. But national income at constant price is affected by changes in physical quantities of final goods and services only. Consequently, an increase in national income at constant prices indicates a real increase in the physical quantities of goods and services. That is why national Income at Constant price is known as real national income. Thus, national income at constant price reflects real growth of an economy.

National income at current price is converted into national income at constant price by eliminating the effect of price changes on national income with the help of suitable price index. Price index is that number which measures the changes in prices between different year.

The price index of base years invariably taken as 100. Currently, in India year 2011-12 is the base year. The price index of the current year is obtained by multiplying the ratio of current prices to the price of the base year by 100.

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NATIONAL INCOME ESTIMATION IN INDIA

Several estimates of national income were prepared in the British period Notable among the estimators were -Dadabhai Nauroji (1868) William Digby (1899), Findlay Shirras (1911) and V.K. Rao (1931-32). The assumptions of most of these estimators were arbitrary and hence devoid of any scientific bases. Most of these estimates were the result of efforts of individuals and as such they suffered from serious limitations. The arbitrary assumptions of the author undermined the reliability of the estimates. Besides these estimates were based on statistics from the agriculture which were highly undependable.

Soon after independence, the Government of India appointed the National Income Committee in 1949, so as to compile authoritative estimates of national income. The Committee consisted of Pro. P.C. Mahalanobies, Prof. D.R. Gadgil and Prof. V.K. Rao. The national income estimates are now prepared by the Central Statistical Organisation (CSO) at 2011-12 prices which are available for the period 1950-51 to 2014-15.

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CONTRIBUTION OF DIFFERENT SECTORS IN GROSS DOMESTIC PRODUCT

In order to understand the economy of a country and its growth rate, it is necessary to analyse the structure of domestic product, for this very purpose the business and sectors of economy are classified in three sectors-Primary, secondary and tertiary sector. Primary sector comprises agriculure, forestry, fisheries etc. Industries, manufacturing activities are the part of secondry sector. Tertiary sector is the service sector which includes banking, education, transport, communication etc, contribution of these sectors is gross domestic product and is shown in the following table :

Table

Sectional Contribution to GDP at Current Prices

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It is clear from the above table that the share of primary sector in went down from 59.19 percent to 17.6 in last sixty four years while that o seconday sector improved marginally from 13.29 percent to 29-7 percent. However, the share of tertiary sector has moved upward from 27.52 percent to 52.7 percent. Obviously, the tertiary sector becomes the more dominant contributor to GDP.

REAL GROWTH RATE

Structure of GDP makes it clear that during the last 64 years, comparative contribution of agriculture reduced and industry registered mark growth. The service sector which is quite heterogeneous steadily grew over the period. There has been a significant compositional shift in favour of services, in this period, agricluture lost its dominated position. Some development economists argue that the growth of services sector in India in recent 3 decades reflects the structural transformation that normally occurs in a developing economy as it moves to somewhat higher level of development. Hence growth of service sector in this country is a positive development and it should be further encouraged as it may transform India’s ogranised economy into a modern developed economy which will not be vulnerable to vageries of the monsoon. Annual growth rate of various sector of G.D.P. is shown in the following table :

Table

Annual Growth Rate of Various Sectors of GDP 

The above table shows that over the year, share of primary sector in GDP has declined. Agriculture’s share in India’s gross domestic product has declined. The output of the manufacturing units has not only increased substantially over the years but their contribution to GDP also steadily rose. The growing shares of service sector to the GDP reflect the expansion of economic infrastructure in the country.

Since the independence, the Indian economy has become less geared to the primary sector and its dominant component-agriculture. It is now more attained to the secondary and tertiary sectors. This may be registered from the the development point of view a progressive change in the structure of the economy.

NATIONAL AND PER CAPITA PRODUCT

The growth of the national product at constant price is an index of the total productive effort on the part of the community and indicates the rate of growth of goods and services in the country, the growth of per capita income at constant price is an indicator of the change in the standard of living of the people.

In 1950-51 gross national product was 9,829 crore only and it rose to 1,12,17,079 crore in 2014-15. During this period GNP (2011-12=100) rose from 2,69,724  crore of 94,00.266 crore. Comparative study of GNP, NNP and per capita national product is shown in the following table

Table

GNP, NNP and Per Capita Income at Factor Cost

It is clear from above table that NNP at current price was 10,360 crore in 1950-51 and it rose to 1,24,98,662 crore in 2014-15. India’s per capita income at current price was 274 in 1950-51 and rose to 88,533 in 2014-15.

GROWTH OF NATIONAL INCOME DURING FIVE YEAR PLANS

Plan-wise study of growth of real income in India, indicates an encouraging! fact that the increase in the national income was progressive and steady. The country has completed its Eleven five year plans and Twelfth plan is in progress. Growth performance in five year plans is shown in following table :

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Table

Annual Growth Rate in National and Per Capita Income in Five Year

Plans

It is clear from the above table that the annual rate of increase in national income was pretty low in first four plans. In Third Plan crop failure once again brought down the output level considerably. Third plan period turned out to be only 3-3 percent growth only. The economy has performed better during these two decades as compared with the earlier decades. The period of Tenth and Eleventh Plan has registered a significant growth in national income.

CHARACTERISTICS OF INDIAN NATIONAL INCOME

The above description of the national income trends during due past five and half decades clearly highlights the main features of the growth in the country. We now summarise as follows:

1 Increase in national income and per capita income : National Income at current price, National Income at constant price, Per Capita Income at current price and Per Capita Income at constant prices all are increasing. National Income at current price was 10,360 crores in 1950-51, it increased to * 1,24,98,662 crores in 2014-15. It indicates growth of over 1,206 times. On the other hand, Per Capita Income at current price was 274 crores in 1950-51, it increased to 88,533 crores in 2014-15. It indicates the growth of over 323 times. This is the real indicator of growth in standard of living of the economy

2. Per-dominance of agriculture : Although the percentage of income generated in the agricultural sector has declined over the year, the fall is not steady. Agricultural sector still remains the single largest sector in the Indian economy in terms of its share in the country’s new domestic product. During the post-independence period, the share of the agriculture in the gross domestic product has varied from the maximum of 59-2 percent in 1950-51 to the minimum 17-6 percent in 2014-15.

3. Contribution of Public Sector in national income : The gradual increase in the share of the government sector is the direct result of the expansion of the economic activities of the State both in the side of enlarging administrative services and of increasing productive activities in public enterprises. The share of government sector in NNP was 8-5 percent in 1950-51, it rose to 20 8 percent in 2008-09.

4. Unequal distribution of national income : Inspite of planned development, India’s national income is unequally distributed. Still 68 percent of total national income is concentrated in 100 big business houses of the country. Still one-fourth of population is living below the poverty line.

5. Regional disparities : In reference to the national and per capita income, regional disparity is very high in India. In some states per capita national income is very high while in other states, its is very low. For example, at current prices, the per capita income in the year 2013-14 in Punjab was 92,638, in Maharastra it was 1,14,392 while in Bihar, Jharkhand and Odisha, it was 31,229, 46,131 and 54,241 respectively.

6. Impact of population on national income : During last 64 years, the annual growth rate of population is nearly 2 percent while annual growth rate of national income is only 7.4 percent. The growing population counter affects the growing national income. As a result population growth adversely affects the economic development in the country.

7. Lion share of national income is spent on food items : At least 53 percent of national income is spent on food items. Unproductive consumption is also very high. In fact, planning in India has failed to remove the obstacles in the path of economic development.

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DIFFICULTIES OR LIMITATIONS OF NATIONAL INCOME ESTIMATION IN INDIA

Estimation of national income is quite a complicated task. It is beset with difficulties of various kinds. These difficulties can be broadly classified into two categories:

1 General difficulties: Some of the general difficulties are:

(1) Estimation of service : There is a basic problem of what services should be included in output. National income largely includes those goods and Services for which payment in money form is made. There are many services for which no payment is made in money form. One of these is the service of housewives in their own homes. Similarly men do many services for themselves and for the family members. No payment is made for these services and therefore, not included in national income.

(ii) Commodities not included in base year : For the estimation of national income in India the base year have been changing from time to time. India is a developing country and a number of new products are produced. The base year includes only those commodities which are produced in that particular year. Therefore, estimates of national income have the stamp of guess-work and arbitrary imputation.

2. Specific difficulties : Some of the specific difficulties are:

(i) Non-monetised sector : The large unorganised and non-monetised sector of developing economy like India serves as a biggest bogey for national income calculation. A very large part of production does not come to the market for sale. It is partly kept by producers for their personal consumption and is partly exchanged for other goods, such goods and services which do not enter the market need to be included in national income. The absence of data about such goods and services makes the computation all the more difficult.

(ii) Lack of statistical data: Data in respect of consumption, saving and investment, expenditure, working population, rent, wages, profit etc, are incomplete, inadequate and deficient, moreover, a large number of enumerators entrusted with the task of collecting data at the village level are semi-illiterate and untrained in the collection of data. They do not possess requisite knowledge of collecting, classifying and analysing data. It is the most important difficulty in the estimation of national income.

(iii) Lack of public cooperation : Sometimes people distort facts and provide false information about their income to evade income tax and wealth tax. The income generated there goes unreported income. Obviously, national income estimates to that extent have an element of underestimation.

(iv) Lack of professional specialisation: Because of underdevelopment, occupational specialisation is still incomplete so that there is a lack of differentiation in economic functioning. A substantial proportion of working population undertakes more than one activity during a year. This makes the estimation of national income difficult. For instance, an individual may receive income partly from farm ownership, partly from manual work industry in the slack season.

(v) Diversity in income pattern of different states : There are wide variations as regard land, soil, climatic conditions, pattern of living, industrial production, customs, natural resources etc. Therefore it is very difficult to collect proper data related to income of different states.

(vi) Unreported illegal income: Sometimes people give false information about their income to evade taxes. This leads to generation of black money i.e., income which is evaded from income tax. A significant part of the Indian economy operates as the paralled or hidden economy and the income generated there goes unreported income and c ates problems of accounting national income in India.

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PROBLEMS OF NATIONAL INCOME IN INDIA

In comparison to the developed countries, national and per capita income of India is very low. The slow rate of growth of national income can be due to the follwing factors:

1 Increasing unemployment: With constant increase in population there has developed a situation of chronic unemployment and underemployment. Economic growth is usually expected to generate employment. However, in India most of the time growth has been jobless. More and more labour displacing production technique have been favoured and as a result growth has been jobless.

2. Exessive dependance on agriculture: Still agriculture contributes a large share in national income and at least 50 percent of population derive its livelihood from agriculture. But agriculture is based on orthodox methods of production. In the absence of the use of modern methods and technology agriculture results in poor per capita income.

3. Regional diversity : India is a big country. There is diversity in social and cultural factors. Due to diversity related to nature resources, business, trade and other economic activities, it is difficult to collect accurate data of production and income. Further the collected data are less reliable.

4. Barter System : While calculating national income, the assumption normally made is that the bulk of the commodities and services produced are exchanged for money. In a developing country like India a considerable portion of the output is bartered away with other producers in exchange for other goods and services. To ignore this portion of the output in agriculture would reduce the national income considerably.

5. Inadequate and incomplete data : There is a general lack of adequate statistical data and this adds to the difficulties of estimating national income. National income data in many cases are incomplete and full of deficiencies and in some cases non-existent.

6. Increasing population: The population explosion is the concrete reality in India and its implications are considered to be serious for the further economic development of country. Under these circumstances many of people find themselves being pushed below the poverty time.

7. Political causes: Politics has great impact on socio-economic activities. The political philosophy of economic planning in India has been patently wrong given the nature of the Indian state and existing class relations and class dominance, government policies are likely to be sabotaged both at programming and implementation levels.

8. Social reasons : Due to the existence of social evils, the people lack initiative in doing any work. Their lethargy and laziness result in low output and income. Moreover, ignorance and fatalism make them conservative and they do not exert much to improve their standard of living. It also stands in the way of increasing in the national income.

9. Administrative reasons: Political interference and bureaucratic style of decision making and implementation have not resulted into the creation of work culture among people and additional avenues of employment have not been created. There is a dearth of agencies and statistical organisations collecting! national income data.

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CAUSES OF LOW RATE OF NATIONAL AND PER CAPITA INCOME

It can be concluded that the per capita income of developed countries is around 10 times the per capita income of India. Even among the underdeveloped countires India’s position is not enviable. For example, the per capita income in USA is 52,308 dollars, in Germany, it is 43,049 dollars while in india, per capita income is only 5,150 dollars. The causes of low capita income in India are as follows:

1 Backward state of agriculture : India’s agriculture is still in a state of backwardness. Productivity per hectare and per worker is extremely low. The techniques employed are age-old and traditional. Because of low productivity, agriculture merely provided subsistence to the farmers and had not become commercialised.

2. Lack of capital : Capital plays special role in the establishment of industry, transport, irrigation and other means of development. Hence the main factor accounting for the economic backwardness of India is the deficiency of capital. It can be argued that the efficiency of the economy is fairly high, but such a view is fallacious because much of the increase in output has been obtained by increased capacity utilization. The possibility of further improving it via this route is severely limited and therefore, the economy has to undertake heavy investment in capital goods and infrastructure sector to enlarge capacity.

3. Slow growth of industrialisation : As industrialisation spreads, it brings about an improvement in the share of industry and services. Indian economy is passing through this process of transition from an agricultural economy to an industrial one. In this process, a structural change in the composition of national income is inevitable. This structural change is taking place, though at a low pace. The main reason for the slow rate of structural change in domestic output is the slow rate of growth of the manufacturing output.

4. Population growth : Population has been increasing in India at the rate of 2-0 percent per annum. In the effort of development, there is no doubt that the labour force of the country makes a positive contribution, but it is equally true that rapidly growing population retards the process of development. The impact of rising population acting as a drag on economic resources is felt in a variety of ways. According to some experts, population explosion is the biggest road block in the path of economic progress.

5. Lack of entrepreneurs : In order to bring about an increase in national income, capital accumulation is necessary, moreover, for the fuller utilisation of investment, competent enterpreneurs are required who can bear risk. India lack efficient enterpreneurs. As a result, investment, production etc. have been badly affected

6. Political and administrative reasons: The structure and quality of growth demand more attention to human development, employment generation, poverty reduction and long-term sustainability. Pressures are developing in India to reduce the damage caused due to the development process which has not educed problems of conservation, pollution, inequality, unemployment, Corruption But the governments of various political parties are not interested in solving these problems.

7. Market limitations: Limitation of markets in India reduces the volume of national income. In addition, Indian producers have to face stiff competition in world market. The new economic policy and globalisation have made the competition more tough.

8. Unutilisation of natural resources : India has large deposits of natural resources but they are not fully exploited. As a result rational income is low.

9. Problem of unemployment: A maior development issue in India is to eliminate unemployment and provide gainful employment to millions of people who are without work. Economic development in the sense of rise in real GNP and per capita income is by itself of not much significance in India unless we remove unemployment and underemployment also.

10. Lack of means of transport and communication :In modern world, transport alongwith communications is the basic infrastructural requirement for industrialisation. Accordingly the developing countries have accorded it an important place in their programmes of economic development. They exercise a unifying and integrating influence upon the economy. In India due to insufficient resource allocation or of funds and poor management transport and communication infrastructure have remained poor. As a result national income and per capita income are low.

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METHODS OF MEASURING NATIONAL INCOME

There are four possible measures of national income:

(a) Income method, NY

(b) Census or production method,

(c) Social accounting method and

(d) Expenditure method.

All these methods arrive at same result. Which of these methods is adopted in actual practice in calculating the national income of a country depends on the nature and condition of its economy as well as the purpose of undertaking this exercise. We discuss below these methods briefly :

1 Income method : This method approaches national income from the distribution side. This method measures the national income after it has been distributed and appears as income earned or received by individuals of the country. Thus, according to this method, national income is obtained by summing up of the incomes of all individuals in the country. Individuals earn income by contributing their own services and the services of their property such as land, capital etc. to the national production. Therefore, national income is calculated by adding up the rent of land, wages and salaries of employees undistributed profits of entrepreneurs including undistributed profits of joint-stock companies, income of self-employed people, direct taxes net income from abroad etc.

The method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists etc.

2. Census or production method: By this method national income arrive by adding up all the output of various sectors. According to this method, the economy is divided into various sectors-primary, secondary and tertiary. Then the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given period.

In order to arive at the net value of production of a given industry, the purchases of the producers of this industry from producers of other industries or sectors are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industries and sectors of the economy plus the net income from abroad will give us the gross national product, By substracting the total amount of depreciation from the gross national product, we get the net national product or national income.

To avoid the problem of double counting, intermediate products are excluded from national income. Intermediate products are those goods and services which are used by the producers as inputs into a further stage of production.

3. Social accounting method : The world-wide depression of 1930s induced economists to develop a new ideology in economic sector. As a result social accounting has assumed great importance in modern times. It is only with the help of social accounting that one can trace the effects of changes in one section of the economy on its other sections. The prominent economists like Richard Stone, Peacok and J.R. Hicks have propounded the social accounting method of measuring national Income. In social accounting, we are concerned with statistical classification of the economic activity so that we are able to understand easily and clearly the operation of the economy as a whole. In the words of Stone and Murray, “The term social accounting is used in general sense to denote an organised arrangement of all transactions, actual or imputed. in an economic system. In such a system distinctions are drawn between; (i) forms of economic activity, namely production, consumption and accumulation of wealth; (ii) sectors or institutional division of the economy; and (iii) types of transactions, such as sales and purchase of goods and services, gifts, taxes and other current transactions etc.”

There is no doubt that the task of preparing social account is beset with difficulties, but as the data improves both qualitatively and quantitatively, we may succeed in preparing national accounts in which errors are reduced to minimum and the accounts become more reliable and dependable.

4. Expenditure method : This method arrives at national income by adding up all the expenditure made on goods and services during a year, income can be spent either on consumer goods or investment goods. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals as well as the government of a country during a year. Hence, the gross national product is found by adding up:

(a) What private individuals spend on consumer goods and services, is called personal consumption expenditure;

(b) What private business spend on replacement, renewal and new investments is called gross domestic private investment;

(c) Exports minus imports. This is called ‘Net foreign investment;

(d) What the government spend on purchase of goods and services, i.e., government expenditure ?

It may be expressed in the following way also:

Net Domestic Income = Consumption expenditure + Net internal investments.

Net National Income = Consumption expenditure + Net internal investment + Net foreign investments.

Gross National Income = Consumption expenditure + Net foreign investment + Net internal investments + Replacement expenditure.

However, in practice national income is calculated by the above said methods but independent of each other using output data or income data or expenditure. Therefore, they may not give an identical total, that is why different estimates of national income contain a component of statistical discrepancy to reconcile the calculation of these methods.

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PROBLEMS OF MEASURING NATIONAL INCOME

There are conceptual and practical problems that crop up when we start measuring the national income of a country. Some of these problems are enumerated as follows:

1 Illiteracy : Because of illiteracy adequate and reliable data for the measurement of production and income are not available.

2. Large part of unorganised sector: Among the unorganised enterprises are included all unincorporated enterprises and household industries and which do not maintain annual account and balance sheets. It creates the problem of collecting account data.

3. Use of current prices : National income is calculated at current prices as well as at constant prices. Price index number is that number which measures the changes in prices between different years. Index number does not represent the changes in prices of various goods. As these estimates are not real.

4. Different methods : The different methods used for the estimation of national income, they may not give an identical total.

5. Non-absorption of illegal and undeclared goods : Studies about black economy pertaining to India have shown that a significant part of the economy consists of illegal and undeclared goods.

6. Non-absorption of unsold goods in calculation: There is no objective method of finding out the total output of food crops and the amount consumed at home.

7. Difficulties in absorption of non-monetary goods: While calculating national output, the assumption normally made is that the bulk of commodities and services are exchanged for money. In an underdeveloped economy like India, a large portion of products is bartered away for other goods and services. Hence the difficulty arises is to find out the imputed value of the produce of the non-monetised sector.

8. Depreciation of capital goods: Estimation of depreciation is also a very difficult task. The national income statistician has to face the problem of finding a suitable method for providing depreciation.

These different ways of measuring national income are different points at which the flow of income round the whole circuit or circular flow of income is measured. All these methods give the same measure of national income but they refer to conceptually different activities in the economy and provide different ways to look at national income. Therefore, each method is important in its own ways.

MCom I Semester Business

SUGGESTIONS TO RAISE THE NATIONAL INCOME IN INDIA

We are accustomed to judging a country’s economic progress from the rate of growth in GNP. Therefore, following measures should be adopted to raise the GNP :

1 Agriculture sector should be modernised.

2. Labour intensive technique should be adopted for industrial development,

3. Population control measures should be made effective.

4. Effective measures should be adopted for scientific and technical development.

5. Social evils should be removed and level of education should be improve

6. There should be an integrated development of villages.

7. Political and social awareness should be promoted.

8. Specific efforts should be made for the collection of reliable and adequate data.

In order to attain a higher rate of economic growth, it is necessary that different sectors of economy grow simultaneously. Otherwise one sector would act as a bottleneck in the growth process of the other sector. Positive steps should be taken to attain a higher rate of growth in freeing trade of country. In view of social justice, the distribution of national income and wealth should be equitable.

MCom I Semester Business

EXERCISE QUESTIONS

Long Answer Questions

1 Define national income and explain its various concepts.

2. Throw light on the changes of structure of national income.

3. What are the components of national income? Explain their relative importance.

4. What are the difficulties faced in estimation of national income?

5. What are the methods of estimation of national income in India ?

6. Define the national income and show its importance in planned economy.

7. Explain the various methods of measuring national income.

8. Explain gross domestic product (GDP) and gross national product (GNP).

9. What steps have been taken to increase the national income during five year plans?

Short Answer Questions

1 What is the meaning of National income?

2. Explain trends of national income.

3. What is the meaning of national product ?

4. Write the causes of the slow pace of growth of national income in India.

5. Explain the usefulness of national income. Objective Questions

MCom I Semester Business

Select the Correct Alternatives :

 1Gross domestic product is:

(a) GDP

(b) NSP

(c) GSP

(d) NDP.

2. Census or production method measures :

(a) Gross domestic income

(b) National income

(c) Net income

(d) None of these.

3. Problem of non-monetized sector creates the problem in assessment of:

(a) National income

(b) Foreign income

(c) Gross domestic income

(d) None of these.

4. The sum total of income accrued from the activities of primary, secondary and tertiary sectors estimates :

(a) Gross domestic product

(b) Gross product

(c) National income

(d) All of above.

[Ans. 1. (a), 2. (b), 3. (a), 4. (a).]

MCom I Semester Business

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