What is National Income?
National income of a country means the sum total of incomes earned by the citizens of that country during a given period, usually over a year.
- It is Net National Product (NNP) at Factor Cost (FC)
- It does not include taxes and depreciation
Measurement of National Income
National Income (GDP or GNP) can be calculated by 3 methods:
- Income Method
- Expenditure Method
- Production Method.
Measurement of National Income – Income Method
This method sums up the incomes of all individuals in an economy to obtain the National IncomeI.
Individuals earn incomes by utilising their own services or the services of their factors of production i.e. land, capital etc, which is added to the national production.
It is estimated by adding all the factors of production i.e. rent, wages, interest, profit and the mixed-income of self-employed.
Formula for it:
National Income (NI) = Employee compensation + Corporate profits + Proprietors’ Income + Rental income + Net Interest
Measurement of National Income – Production Method
Under the production method, National Income is computed by adding the values of output produced or services rendered by the different sectors of the economy during the year. So this method is also called “Output Method”.
Note that while calculating the values of output figures, only the value added by each firm in the production process is taken into account. Thus, this method makes use of the concept of Value-added.
Value-added = Value of Output – Value of (non-factor) inputs
This gives GDP at Market Price (MP) – because it includes depreciation and taxes.
Now to get National Income (that is, NNP at FC)
Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
Subtract Depreciation: NNP at MP = GNP at MP – Dep
Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
Measurement of National Income – Expenditure Method
National Income from this method is calculated by calculating the expenditure done by different stakeholders in the economy. The formula to calculate it is:
National Income (NI) = Personal Consumption Expenditure (C) + Investments (I) + Government Expenditure (G) + Exports (X) – Imports (M)
or
NI = C + I + G + (X-M),
This method assumes that the income earned by an individual is either spent on consumer goods/services or saved and invested.
Any of these methods can be used in any of the sectors, however the choice of the method depends on the convenience of using that method in a particular sector.
Items not included in Measurement of National Income
Intermediate goods, Transfer payments (unilateral payments made without expectations of return; like gifts, unemployment allowance, donations, etc), sale and purchase of old goods and existing services (shares are not included unless they are through an IPO), windfall gains (lottery income), Black money (cannot be estimated) and Work done by housewives
Important Facts about National Income
- A first rough estimate of National Income was done by Dadabhai Naoroji for 1867-68; published in his book Poverty and Unbritish rule in India (famous for its Drain of Wealth theory)
- The first scientific estimate made by Prof V K R V Rao (1931-32)
- The Indian government estimated the National Income for the first time in 1948-49 through the Ministry of Commerce
- National Income Committee was set up in 1949 (Chairman – Dr. P C Mahalanobis)
- P C Mahalanobis was also the chairman of Indian Statistical Institute
- Currently, the National Statistical Office (NSO) estimates National Income
- It publishes National Accounts Statistics annually
- Under the Ministry of Statistics and Programme Implementation
- Now, CSO has been merged with the National Sample Survey Organization to form the National Statistical Organization
Limitations of Using GDP
GDP has several limitations as a measure of economic activity and overall well-being. These include:
- Underground Economy:
- The underground economy includes unrecorded cash and barter transactions often tied to illegal activities, such as trade in drugs or weapons.
- This sector is rarely included in GDP calculations, leading to understated economic outputs, especially in nations with large black markets.
- Environmental Abuses:
- GDP captures increases in production but overlooks environmental damage caused by unsustainable practices, such as pollution.
- In many developing economies, economic growth is prioritized over environmental concerns, which GDP fails to account for, misrepresenting sustainability.
- Increases in Product Quality:
- Technological advancements improve product quality without corresponding price increases, which GDP does not capture.
- For instance, a higher-quality smartphone with better features at the same price provides greater utility but is not reflected in GDP figures.
- Non-Market Production:
- GDP excludes goods and services produced for personal use, like homegrown food or self-produced electricity.
- This limitation causes GDP to underrepresent economies with significant non-market activities, such as those reliant on subsistence farming.
These limitations indicate that while GDP is a useful metric, it is not a comprehensive measure of a nation’s economic health or societal progress.
New GDP Series
In 2015, the Ministry of Statistics and Programme Implementation (MoSPI) introduced a revised GDP calculation methodology, incorporating the following major changes:
- Change in Base Year:
- The base year for GDP calculation was updated from 2004-05 to 2011-12.
- Market Prices Replacing Factor Costs:
- The new series calculates GDP using market prices, whereas the earlier series relied on Factor Costs.
- Expanded Data Pool:
- The earlier methodology used data from the Annual Survey of Industries (ASI), covering approximately two lakh factories.
- The revised methodology utilizes data from MCA21, a database of around five lakh companies registered with the Ministry of Corporate Affairs, providing an enterprise-level perspective instead of a factory-level one.
These updates have significantly impacted GDP figures. For instance, India’s GDP growth rate for the financial year 2013-14 was reported as 4.7% under the old methodology but revised to 6.9% using the new approach.
Alternatives to GDP
Due to shortcomings of GDP to measure the welfare and well-being of the people, several other indicators have been proposed and are being used. Some of these indices are discussed below.
Gross National Happiness (GNH)
- Gross National Happiness (GNH) attempts to measure the sum total not only of economic output but also of net environmental impacts, the spiritual and cultural growth of citizens, mental and physical health, and the strength of the corporate and political systems.
- The term was first coined by Jigme Singye Wangchuck, the King of Bhutan in the early 1970s.
Gross Sustainable Development Product (GSDP)
- Gross Sustainable Development Product (GSDP) measures the economic impacts of environmental and health degradation or improvement; resource depletion, depreciation; the impact of people’s activity on the environment; quality of environment, etc.
- It has been developed by the Global Community Assessment Centre and the Society for World Sustainable Development.
Human Development Index (HDI)
- Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development, viz:
- Health: Measured through – Life expectancy at birth
- Education: Measured through – Mean years of schooling, and Expected years of schooling
- Standard of Living: Measured through – Gross National Income per capita on a PPP basis.
- It was developed by Indian Economist Amartya Sen and Pakistani economist Mahbub ul Haq.
- It is published annually by the United Nations Development Programme (UNDP) as part of its Human Development Report.
Social Progress Index (SPI)
- The Social Progress Index (SPI) measures the extent to which countries provide for the social and environmental needs of their citizens.
- It focuses exclusively on indicators of social outcomes, rather than measuring inputs.
- It has been developed by the Social Progress Imperative.
Human Capital Index (HCI)
- The Human Capital Index seeks to measure the amount of human capital that a child can expect to attain by the age of 18.
- It measures three components:
- Survival: Measured by under-5 mortality rates.
- Expected Years of Quality-Adjusted School: Combines information on the following two aspects of education.
- Quality: Measured by harmonizing test scores from major international student achievement testing programs
- Quantity: Measured by the number of years of school that a child can expect to obtain by age 18 given the prevailing pattern of enrollment rates across grades in respective countries.
- Health: Measured using two indicators – adult survival rates, and rate of stunting for children under age 5 years.
Green GDP
Green GDP is a term used generally for expressing GDP after adjusting for environmental damages such as biodiversity loss, climate change impacts, etc. Thus, it is an indicator of economic growth with environmental factors taken into consideration.
In conclusion, much more than just a numerical figure, National Income (NI) is a comprehensive reflection of a country’s economic vitality. Though the current measures of NI have some shortcomings, they play a crucial role in guiding governments, businesses, and individuals in making informed economic decisions. As we strive for a more holistic understanding of progress, research & development should be carried out to develop more comprehensive measures of National Income (NI) that encompass social well-being and environmental sustainability.
FAQs on National Income
What is National Income?
National income refers to the total monetary value of all goods and services produced by a country within a specific time period, typically one year. It includes wages, rent, interest, and profits earned in the economy. Common measures of national income are Gross Domestic Product (GDP), Net National Product (NNP), and Gross National Income (GNI).
How to calculate National Income?
It is calculated by summing up the values of all the final goods and services produced in an economy during a financial year.
Who calculates India’s National Income?
The National Statistical Office (NSO), under the Ministry of Statistics and Program Implementation (MoSPI), calculates the NI in India.
Why is National Income Important?
National income is important because it reflects the economic health of a nation. It is used to assess a country’s production level, evaluate the standard of living, and compare economic performance over time or with other countries. It also helps policymakers make informed decisions regarding economic planning and resource allocation.