Economics

What Is National Income In Economics

Methods of measuring national income

National Income denotes the sum of the value of goods and goods produced in an economy during a particular year. National income estimates help us to understand the economic conditions and position of the people of an economy.

The term ‘National. Income’ is expressed in two ways — Gross National Income and Net National Income. Gross National Income refers to the sum of the money value of goods and services produced in an economy during a year. On the other hand, Net National Income refers to the sum of the real value of goods and services expressed in terms of output produced in an economy during a given year. Net National income is obtained by deducting the value of depreciation and replacement from the Gross National Income.

Different definitions have been put forwarded by several economists. They are mentioned as below:

Marshall’s Definition: Marshall is the first economist who gave a clear-cut definition of National Income. His definition on National Income is quoted as follows :

“The labour and capital resources of a 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 of the natural dividend”.

Marshall defined national income from production end. The word ‘net annual income’ in his definition gives scope for inclusions of raw and finished goods. These words also include wear and tear and depreciation of plants involved in production.

Pigou’s Definition : Prof. Pigou also defined national income from production end. His definition is stated as follows :

“The National Dividend is that part of the objective income of the community including of course, income derived from abroad, which can be measured in money”.

Pigou considered that national income is the sum of the goods and services which have exchange value. He has not included the entire production value of goods services. That means he included only those goods and services which can be produced and exchanged. Both Marshall and Pigou defined National Income from production end.

Fisher’s Definition : As against this Prof. Irving Fisher defined National Income from the consumption end. His definition is mentioned as follows :

“The National Dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environments. Thus, a pioneer on overcoat made for me this year is not a part of this year’s income, but an addition to capital. Only the services rendered to me during this year by these things are income”.

According to Fisher, National Income of a country is determined by its annual consumption. For instance, the value of a house is $5000/- and is useful for 5 years. Then the income received from its use by the owner will be $1000/- a year. Then $1000/- will be taken into account for calculating National Income.

Kuznet’s Definition : Simon Kuznets defines national income as below

the net output of commodities and services flowing during the year from the country’s productive system into the hands of ultimate consumers or into net additions to the country’s stock of capital goods.

The definition given by National Income Committee of India in 1951 is considered a simple one. It runs as follows : “National income estimate measures the volume of commodities and services turned out during a given period counted without duplication“.

But the definitions mentioned above have certain defects. Marshall’s definition is a comprehensive and easier one. However it does not enable us to measure the innumerable goods and services produced in a country. Besides it is not considered a realistic one as it excludes goods and services produced without payment of money.

Pigou’s definition is considered an illusory one. It does not consider the non-saleable portion of the output. Moreover his definition is not applicable to the economies where barter system is prevalent. It also introduces artificial division of goods and services on the basis of money measurement. Some goods and services can’t be measured while others can be measurable. Both of them influence the national income. There are some similarities between Marshall’s and Pigou’s definitions. Both agree to measure national income on the basis of production. Both excluded the services rendered on non-monetary considerations in the computation of national income.

But Marshall’s definition is considered a wide and comprehensive one. Pigou viewed all goods and services offered for sale as national income. But Marshall considered all kinds of goods and services as national income.

Fisher’s definition also comprises the following detects. According to this definition, it is not possible for us to know the ultimate consumers as the production of a commodity will become a consumer’s good. It is not possible, to estimate correctly the durability of goods in the long run. Thus each definition has its own defects. It is difficult to decide which definition is the best and perfect one. It depends on the aims and objectives of National income estimates. If we wish to know the factors influencing economic welfare of the people, we have to refer the definitions of National income as given by Marshall and Pigou.

Fisher’s definition is useful for us if we want to know whether how many Consumers are actually enjoying the national income. To conclude, all the definitions mentioned above are useful for us in understanding and analyzing the national income estimates.

The size of National Income is not same and uniform in all the countries. If differs from country to country. Several factors are responsible for this. The factors which determine the size of national income are mentioned as follows .

  • 1. Natural resources
  • 2. Efficiency of labour
  • 3. Capital stock
  • 4. Entrepreneurial ability
  • 5. Level of Technology
  • 6. Social and political conditions

3 Methods of measuring national income

1.Product Method

2. Income Method

3. Expenditure Method

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