National Income Meaning and Measurement
MeaningNational income is an uncertain term which is used interchangeably with national dividend, national output and national outlay. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a nation. In other words, the total amount of income accruing to a nation from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.
Concepts of National Income
- G.D.P – Gross Domestic Product
(a) Nominal and Real GDP
When GDP is measured on the basis of current prices, it is called GDP at current prices or nominal GDP. Conversely, if the GDP is computed on the basis of fixed prices in some year, it is called GDP at constant prices or real prices.
And the Formula for computing Real GDP is as below.
Real GDP = GDP for the Current year x Base Year (Which is equal to 100)
Current Year Index
Let us an illustration under this concept.
Illustration 1:
Presume the year 2000 – 2001 as the base year and GDP for 2010 – 2011 is $ 500,000 and the price index for this year is 500. Compute the Real GDP for the year 2010 – 2011.
Solution
GDP for the current year = $500,000
Base year index 2000 – 2001 is taken as 100
Price index of the current year = 500
By substituting these values in the above formula, we obtain as under:
500,000 x 100
500
Real GDP for the year 2010 – 2011 = $100,000
(b) GDP Deflator
This is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.
Thus the formula for computing GDP Deflator is as below.
Nominal (or Current Prices) GDP x 100
Real (or Constant Prices) GDP
Let us see an illustration of this model.
Illustration 2
Calculate the GDP Deflator for the year 2010 – 2011, if the nominal GDP or current price is $250,000 and that of the Real or Constant price is $125,000.
Solution
Nominal GDP or Current Price = $250,000
Real GDP or Constant Price = $125,000
Substituting the values in the above formula, we obtain as under.
= 250,000 x 100
125,000
= $200 Hence the GDP Deflator for the year 2010 – 2011 = $200
- Gross National Product or GNP
- Consumer’s goods and services to satisfy the immediate wants of people.
- Gross private domestic venturing in capital commodities comprising of fixed capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods.
- Goods and services produced by the government and
- Net Exports of goods and services i.e. difference between value of exports and imports of goods and services, known as income from abroad.
Measuring National Income
Measuring the level and rate of growth of national income (Y) is important for seeing:- The rate of economic growth
- Changes to average living standards
- Changes to the distribution of income between groups within the population
- Gross domestic product (GDP) is the total value of output in an economy
- GDP includes the output of foreign owned businesses that are located in a nation following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear contributes to the UK’s GDP
There are three ways of calculating GDP - all of which should sum to the same amount:
National Output = National Expenditure (Aggregate Demand) = National Income
(i) The Expenditure Method - aggregate demand (AD)The full equation for GDP using this approach is GDP = C + I + G + (X-M) where
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
The Income Method – adding together factor incomes
GDP is the sum of the incomes earned through the production of goods and services. This is:
Income from people in jobs and in self-employment
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by factor incomes)
Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:
- Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and other welfare assistance such housing benefit
- Private transfers of money from one individual to another
- Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.
- Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded – including subsistence farming and barter transactions
- There are three main wealth-generating sectors of the economy – manufacturing and construction, primary (including oil& gas, farming, forestry & fishing) and a wide range of service-sector industries.
- This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .
Value added = value of production - value of intermediate goods
Say you buy a pizza from Dominos at a price of £9.99. This is the retail price and will count as consumption. The pizza has many ingredients at different stages of the supply chain – for example tomato growers, dough, mushroom farmers and also the value created by Dominos as they put the pizza together and deliver to the consumer.
Some products have a low value-added, for example cheap tee-shirts
that you might find in a supermarket for little more than £5. These are
low cost, high volume, low priced products. Say you buy a pizza from Dominos at a price of £9.99. This is the retail price and will count as consumption. The pizza has many ingredients at different stages of the supply chain – for example tomato growers, dough, mushroom farmers and also the value created by Dominos as they put the pizza together and deliver to the consumer.
Other goods and services are such that lots of value can be added as we move from sourcing the raw materials through to the final product. Examples include designer jewellery, perfumes, meals in expensive restaurants and sports cars. And also the increasingly lucrative computer games industry.
GDP by output – the distribution of GDP from different industries
The UK is an economy where the majority of GDP comes from the service industries such as banking and finance, tourism, retailing, education and health. In 2008 less than half of one per cent of our GDP came from agriculture. Manufacturing accounted for less than 15 per cent of GDP and construction a further 6 per cent. In contrast, the service industries now contribute nearly three quarters of national income.
Manufacturing and service industries are not separate! For example the health of a car exporting business will have a direct bearing on demand, output, profits and jobs in many service businesses such as transportation, design, marketing and vehicle retailing. Equally service businesses such as online banking require plenty of physical inputs such as machinery and infrastructure to be successful.
The main service sector industries in the UK are:
- Hotels and restaurants, and a range of services provided by local government
- Transport, logistics, storage and communication
- Business services and finance, motor trade, wholesale trades and retail trade
- Land transport and air transport, post and telecommunications
- Real estate activities, computer and related activities, Education, Health and social work
- Sewage and refuse disposal
- Recreational, cultural and sporting activities
Notice in the chart above how there are long-term shifts in the value added from the three main sectors – the pattern of GDP depends on many factors including the stage of a country’s development and the extent to which a nation has built up industries of competitive advantage in the world economy.
Gross National Income (GNI)
- Gross National Income (GNI) measures the final value of incomes flowing to UK owned factors of production whether they are located in the UK or overseas.
- Gross Domestic Income is concerned only with the incomes generated within the geographical boundaries of the country. Fr example the value of the output produced by Toyota in the UK counts towards our GDP but some of the profits made by overseas companies with production plants here in the UK are sent back to their country of origin – adding to their GNP.
GNI = GDP + Net property income from abroad (NPIA)
- NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from our assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK.
- There has been an increasing flow of direct investment (FDI) into and out of the UK. Many foreign firms have set up production plants here whilst UK firms have become multinational organisations.
- When we want to measure growth in the economy we have to adjust for the effects of inflation
- Real GDP measures the volume of output. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth. Consider this example
In 2008, the money value of GDP expands to $4,500m but during the year, inflation is 3% causing the general index of prices to rise from a 2007 base year value of 100 to 103 in 2008.
The real value of GDP in 2008 is calculated thus:
Real GDP = money value of GDP in 2008 x 100 / general price index in 2008
= £4,500 x 100/103 = $4,369 (measured at constant 2007 prices)
Note here that the real GDP data is expressed at constant prices which mean that we have made an inflation adjustment. Look for this in the data response questions in the exam.
Total and Per Capita – Measuring Income per capita
How much does each person earn on average? We use per capita measures to give us a guide to this. Income per capita is a way of measuring the standard of living for the inhabitants of a country.
Gross National Income per capita = Gross National Income / Total Population
Our next chart shows two pieces of economic data
- The level of UK gross national income (GNI) which has been expressed in real terms (i.e. it is inflation adjusted) and is measured in pounds sterling
- The annual rate of change of real gross national income measured in percentage terms
Real Gross National Income for the UK Economy –
During the recession (2008 to 2009) GDP per head decreased by 5.5 per cent
Remittances and Gross National IncomeDuring the recession (2008 to 2009) GDP per head decreased by 5.5 per cent
Remittances are transfers of money across national boundaries by migrant workers. Despite a dip because of the global recession, remittance flows have grown in the world economy over the longer-term as the scale of migration between countries has grown. For many developing countries, money coming in from remittances is an importance source of income.
Using data from the World Bank, for the world as a whole in 2010:
- Stock of immigrants: 215.8 million or 3.2 percent of population
- Females as percentage of immigrants: 48.4 percent
- Refugees: 16.3 million or 7.6 percent of the total immigrants
Top 10 remittance recipients in 2009 (percentage of GDP): Tajikistan (35.1 percent), Tonga (27.7 percent), Lesotho (24.8 percent), Moldova (23.1 percent), Nepal (22.9 percent), Lebanon (22.4 percent), Samoa (22.3 percent), Honduras (19.3 percent), Guyana (17.3 percent), and El Salvador (15.7 percent)
Importance of National Income Computation in Modern Economic Analysis
The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for there regular preparation. The following are some of the important uses of national income statistics:Level of Economic Welfare
The national income estimate reveals the overall performance of the country during a given financial year. With the help of this statistics the per capita income i.e. the income earned by every individual is calculated. It is obtained by dividing the total national income by the total population. With this we come to the level of economic welfare in terms of its standard of living.
Rate of Economic Growth
With the help of national income statistics we can know weather the economy is growing or declining. In simple words it helps us to know the conditions of a country economy. If the national income is growing over a period of year it means that the economy is growing and if the national income has reduced as compares to the previous it reveals that the economy is detraining. Similarly the growing per capita income shows an increasing standard o living of the people which is a positive sign of a nations growth and vice versa.
Distribution of Wealth
One of the most important objectives that is achieved after calculating national income is to check its distribution among different categories of income such as wages, profits, rents and interest. It helps to understand that how well the income is distributed among the various factors of the economy and their distribution among the people as well.
Ease in Planning
Since the national income estimates also contain the figures of saving, consumption and investment in the economy so it proves to be a valuable guide to economic policy relating to planning and active government intervention in the economy. The estimates are used as a data for future planning also.
Formation of Budget
Budget is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. Further we can asses and evaluate the achievements or otherwise of the development targets laid down in the plans from the changes in national income and its various components.
Conclusion
Thus we may conclude that national income statistics chart the movement of a country from depression to prosperity its rate of economic growth and its standard of living in comparison with rest of the world.
DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME
The correct estimation of national income is by no means an easy task. Difficulties of various kinds are generally faced in the measurement of national income. These difficulties may be classified into two categories:
(i) Conceptual difficulties or Theoretical difficulties, and
(ii) Practical difficulties.
While the theoretical difficulties a ear in almost all countries the practical difficulties are generally’ witnessed in the underdeveloped countries.
Conceptual difficulties. These difficulties relate to the various concepts of national income. Some of the important conceptual difficulties are as follows:
(i) Determination of intermediate and final goods. The national income of a country consists of only final goods and services. Final goods refer to those goods which are readily available for consumption. Final goods are required for their own sake. While estimating the national income, it is always not possible to make a clear distinction between intermediate goods and final goods. For example, cotton used at a surgical Clinic is the final product for a doctor, but if the same cotton is used by the cotton milt to manufacture cloth, it will be treated as intermediate product. To stretch this example further, if this cloth manufactured by Delhi Cloth Mills is used by Wings or Liberty company to manufacture ready-made garments, this cloth will be regarded as an inter- mediate product.
(ii) Services without remuneration. In our daily life we observe a father teaching his son, a mother taking care of her child, a housewife looking after the household affairs, and so on. No factor payment is made for these services, and therefore, they do not form part of the national income. But if the same services are provided by a tutor, a baby-keeper and a house-maid, respectively, factor payments shall have to be made. So, in the changed circumstance the same services will be included in the national income.
(iii) Transfer payments. Transfer payments refer to those payments for which e receive has not to perform any economic’ activity. Pocket allowance given to a son, by his father, or the pension paid by the government to the retired employees, are a few examples of transfer payments. Transfer payments are the sources of income for the households and the business firms, but these do not form part of the national income.
(iv) Pricing of products. Valuation of the final products for the purposes of national income estimation is a difficult task. We know that the prices change every month, every week, and in certain cases from day to day; therefore, which price should be chosen to ascertain the money value of the products, is really a tough choice. Besides, we find different typed of prices existing in the market, e.g., wholesale price, retail price, ,etc.
Practical difficulties. Different types of practical difficulties arise in the estimation of national, income. More important difficulties are as follows:
(i) Non-monetised sector. A large part of the underdeveloped countries consists of non- monetised sector, Nan-monetised sector refers to that part of the economy where the exchange transactions are not performed in money or in order words, barter system of exchange prevails in the non-monellsed sector. Goods which do not enter into the monetary sector are thus excluded from the national income.
(ii) Lack of occupational specialisation. It means that a person performs a number of economic activities at one and the same time. Consequently, an individual has different sources of earnings at one and the same time. Far example, a teacher teaches in the school and also takes private tuitions in extra time, or a farm-laborer works on the farm and also works in a factory in the off season, and so on. It becomes impossible to trace out, the main source of earning of an individual in such cases. In the absence of adequate information about the source of income, a large part of income remains excluded from the national income.
(iii) Non-availability of reliable data. This difficulty arises mainly in the underdeveloped countries where majority of people are living in the world of dark letters. Illiterate people neither understand the importance of the income-data, nor can they maintain proper records in this respect. Sometimes, the producers, in order to evade income tax, deliberately distort information relating to their incomes. Sometimes, the enumerators do not possess requisite knowledge of collecting, classifying and analysing the data. Enumerators and investigators vitiate investigations by suing their personal bias and prejudices. National income estimation based upon inadequate and inaccurate statistics need not be dependable.
(iv) Goods for self-consumption. Producers of final goods retain a part of their produce for self- consumption. Far example, a farmer retains a part of the total crap far personal consumption, or a weaver retains a part of the produced cloth far self-consumption, and the like. Goods which, are retained by the producer for personal consumption do not fetch, money price, and are therefore excluded from the national income.
(v) Double counting. Many goods and services appear mare than once in the national income estimation. It is not always possible to make a clear distinction between intermediate goods and final goads. Likewise, whether the durable goods like building, furniture, machines, etc., should form part of a year’s national income or should be continuously included in the national income till these are finally consumed. We ‘can further take the example of goods and services which satisfy communal wants The government constructs roads, parks, hospitals, bridges, etc., far the welfare of the masses, but different people derive different utilities from these services. How to make allowance for such services in the national income is again a difficult problem
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