National Income

National Income is a precarious term that is often used with the national expenditure, output, and national dividend interchangeably. By understanding the definition of national income, we can easily understand this term. It is the total amount that a country gains from its internal economic activities during a particular financial year. This includes all payment resources including rent, wages, profits, and interests. The national income growth may determine the country’s progress and improvement.  

National Income

There are two definitions of National Income that are traditional and modern definition. Using these two definitions, the concept of national income will be more transparent and clear.

Traditional definition: The country capital and labour act as the natural resources of a country and produce a particular net aggregate annually of immaterial, material services and commodities of all kinds. It is the true revenue or annual net income of a country. As per the concept of Marshall, the calculation of the correct estimation is very complicated as there are a lot of category variations of services and goods. A double-counting chance exists here, thus estimation of national income cannot be performed correctly. For instance, a particular product after getting produced runs through various platforms such as “producer to distributor” then to wholesaler and after that to the retailer. Finally, it reaches customers. In every step of this chain, the product is taken into consideration which increases the national income value.

Modern definition: The modern definition of national income includes GDP and GNP. The GDP refers to the services and goods produced in a single country during a financial year. The constituents of this GDP are interest, wages, rent, salaries, mixed-income, depreciation, undistributed profits, dividend, and direct taxes. On the other hand, for GNP calculation, we need to gain all data from every activity of production such as commodities, agricultural production, transport production contribution, minerals, insurance companies, wood, professionals like teachers, lawyers, and doctors, and communications at the prices of the market. The main continents are consumer services and goods, service rendered or goods produced, gross income of private domestic, and income arising.

Calculating national income

Simon Kuznets states that the calculation of the national income of a particular country follows three methods that are product, income, and consumption method. As per this product method, the total value of services and products produced within the country during a financial year is also called the whole final product. GDP is represented by this.

GDP = I+C+G+(X-M)

GNP = GDP+X-M

M = Income accepted by foreign countries within the nation

GNP=GDP, whether X=M

As per the income method, working people with different commercial enterprises and sectors earned the whole net income that is obtained. The income of both categories such as paying taxes or not paying taxes has been included to get the national income. In this method, sometimes a people group is selected from different income sectors based on their income level, the country’s national income is estimated. In a short manner, by using the income method, adding and collecting receipts as total wages, total profit, whole interest, and rent, the national income is obtained. In the consumption method, the national income is obtained by adding total savings and consumptions. To apply this method, we need customers data about their savings and income. For this cause, to calculate the national income, this method is generally not used.

Types of national income

There are five types of income are included in the national income. These are as follows:

Salaries and wages: it is called employment income as this represents the production value attributed to employers and labours. It is one of the major components of the national income of the country. It includes compensation and gross salary before social security, income tax and PF deduction.

Profits of gross trading: It refers to the publicly or privately owned organizations income that sells their products and services in the market.

Allowance of capital consumption: It implies depreciation. The NNP will arrive if this may subtract from the GNP.

Imputed income: This includes rents obtained from different owning property or occupied houses. It also includes subsidies and taxes, tax adjustment, and transfer income.

Self-Employed Income: It is the smallest source of national income which includes the self-employed person’s income such as doctors, farmers and lawyers etc.

National income at factor cost

This factor cost allows removing the indirect or subsidiary tax effectiveness from the ultimate measure. This factor concept focuses on the production factor cost incurred. This includes the cost of raw material, capital, labour, transportation and land. It does not include the industry’s or firm’s profit. 

Conclusion

In conclusion, the national account of income requires the amount of income, expenditure and services or products that have been brought during a financial year. Generally, three quantities are measured by the national income. These three quantities are total expenditure value, the total value of services or products produced in a particular year, and the whole income that was generated through those services or products.