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National Income: Meaning and Measurement

Definition of National Income

Pigou has defined as “National Income is that part of objective income of the community, including of course income derived from abroad which can be measured in money.” Marshall defined as “The labour and capital of 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 annual income or revenue of the country or national dividend.”

Let us see few illustrations which could help in ascertaining various aspects that may relate in ascertaining the National Income

Illustration 1

Given below is the data of a nation’s economy, you have to ascertain the following.

1. GNP at Factor Cost, 2. NNP at Factor Cost, 3. Net Domestic Product at Factor Cost, 4. Net Domestic Product at market prices.

 Data Value in Million \$ GNP at Market Prices 195,006 Net Factor Income from Abroad - 402 Capital Consumption Allowance 11,338 Net Indirect Taxes 21,152

Solution

Given that GNP at Market Price                    \$195,006

(i) GNP at Factor Cost is                                GNP at Market Prices – Indirect Taxes

=          \$195,006 - 21,152

=          \$173,854

(ii) NNP at Factor Cost                                   GNP at Factor Cost – Depreciation

=          \$173,854 - 11,338

=          \$162,516

(iii) NDP at Factor Cost                                  NNP at Factor Cost – Net Factor Income

=          \$162,516 – (- 402)

=          \$162,918

(iv) NDP at Market Prices                              NDP at Factor Cost + Indirect Taxes

=          \$162,918 + 21,152

=          \$184,070

Illustration 2

Based on the data relating to a nation’s economy determine the following.

1. GNP at Market Prices, 2. Private Income, 3. Personal Income, 4. Personal Disposable Income.

 Data Value in Million \$ Net Domestic Factor 162,858 Income from Domestic Product accruing to the Government Sector 4,666 Net Factor Income from Abroad - 402 Indirect Taxes 25,752 Subsidies 4,600 Interest on National Debt 1,928 Transfers from Government Administrative Department 3,962 Other Current Transfer from other parts of the Globe 2,542 Corporation Tax 2,502 Undistributed Corporate Profits 928 Direct Taxes paid by the house holds 4,200 Consumption of Fixed Capital 11,398

Solution:

(i) GNP at Market Prices        =          Net Domestic Product at Factor Cost + Net
Factor Income from abroad + Capital
Consumption Allowance or Consumption Fixed
Capital + Indirect Taxes – Subsidies

=          \$162,858 + (- 402) + 11,398 + 25,752 – 4.600

=          \$195,006

To Calculate Private, Personal and Personal Disposable Income, first we have to ascertain the NNP at Factor Cost and since NDP at factor cost is already provided in the given data. Also the total of Transfer Payments needs to be determined.

(a) NNP at Factor Cost           =          NDP at Factor Cost + Net Factor Income from

=          \$162,858 + (- 402)

=          \$162,456

(b) Transfer Payments            =          \$3,962 + 2,542

=          \$6,504

(ii) Private Income                  =          NNP at Factor Cost + Transfer Payments +
Interest on Public Debt – Social Security Contributions
– Income from Government Departments – Profits
and Surplus of Public Corporations

=          \$162,456 + 6,504 +1,928 – 4,666

=          \$166,222

(iii) Personal Income               =         Private Income – Undistributed Corporate Profit
(or Savings of Private Corporate Sector) –
Corporation Tax

=          \$166,222 – 928 – 2,502

=          \$162,792

(iv) Personal Disposable          =         Personal Income – Direct Taxes paid by
Income                                          Households

=          \$162,792 – 4,200

=          \$158,592

Foot Note:

1. Transfer from government administrative departments and other current transfers from the other parts of the globe are under the heading Transfer Payments.
1. Social Security Contributions and Profits and Surpluses of Public Corporations are not given in the problem and hence to be ignored.

Illustration 3

The below tablet is presented with the data of information regarding a nation’s income. You are required to ascertain the following.

1. Net National Product at Market Prices, 2. Disposable Personal Income

 Data Value in Million \$ Net Domestic Product at Factor Price 30,960 Income from Domestic Product accruing to the Government Sector 280 Interest on National Debt 340 Transfer Payments by Government 480 Net Private donations from abroad 60 Net earned income from abroad 160 Indirect Taxes 2660 Direct Taxes 670 Subsidies 200 Taxes on Corporate profits 444 Undistributed Profits of Corporations 210

Solution

(i) Net National Product NNP is calculated as follows

NDP at Factor Price                                                                \$30,960
(+) Net Earned Income from Abroad                         \$     160

NNP at Factor Cost                                                    \$31,120

(+) Indirect Taxes                                                                 \$  2,660

\$33,780
(- ) Subsidies                                                               \$     200

NNP at Market Price                                                             \$33,580

First, in order to compute the Disposable Personal Income, we have to determine the private and personal incomes.

(a) Private Income

NNP at Factor Cost                                                             \$31,120

(+) Transfer Payments by Government                              \$     480
(+) Net Private Donations from abroad                              \$       60
(+) National Debt Interest                                                  \$     340

\$32,000
(-) Income from Domestic product accruing                        \$     280
to government

Private Income                                                                  \$31,720

(b) Personal Income

Private Income                                                             \$31,720

(- ) Taxes on Corporate Profits                                    \$     444
(- )Undistributed Profits of Corporations                      \$     210

Personal Income                                                          \$31,066

(ii) Disposable Personal Income is calculated as follows

Private Income                                                              \$31,066
(-) Direct Taxes on Persons                                          \$     670

Disposable Personal Income                                        \$30,396

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