Economics - National Income
Qs. Define National Income.OR
Distinguish Between Following
1. Gross national Income and Net National Income.
2. National Income at Market Price and National Income at factor cost.
3. Net National Income at factors cost and Net Domestic Income at factor cost.
4. Personal Income at factor cost.
5. Personal Income and Dispossible Income.
National Income According the can economist Colin Clark
The national income for any period consists of the money value of the goods and services
becoming available for consumption during that period.
According to Pigou.
National Income is that part of the objective income of the community including income
derived from abroad which can be measured in money.
National Income is the aggregate factor income (i.e. earnings of labour and property) which
aries from the current production of goods and services by the nation's economy.
The concept of national income has three interpretations:
1. Reciept Total
2. An expectiture Total
3. A Total Value of Production over the course of one year.
The various concepts of national income are given below.
A. Gross National Product (GNP)
B. Net National Product (NNP)
C. Personal Income (PI)
D. Dispossible Income
E. National Income at factor Cost
Gross National Product (GNP)
According to Camsell
GNP is defined as the total value of all final goods and services produced in a country in
We can say that GNP represents the total market value of all final goods and services
produced by factors of production located with in nation's border during a year.
Problem in Measuring (GNP)
In calculating GNP wefare some problems.
1. Stress on final output
The value of only those good are added in GNP which are in their final stage of production
and are available for consumption for
Table made of wood is the final product while w and is primary good.
2. Value added method.
In order to avoid pitfall of double or multiple counting is to calculate only the added
value of a particular commodity at its every stage of production. (Suppose the price of your
note book is 20Rs, but this include the cost of paper, printing and sending GNP will be same
in both case but if we include again the cost of paper and sending etc it will double.
3. Non-Productive Transactions are excluded from GNP
We should excluded non-productive transaction like a student got money from his father.
4. Other Transactions
There are few other transaction which are not included in GNP. for example A person working
in their own house holds without any payment through the market.
Using the expenditure approach the main components of GNP are as under.
i. Consumption Expenditure. (C)
All goods and services bought by house holds are grouped together consumption.
ii. Gross Private Investment. (I)
This includes investment expenditure by firms or sole properties on capital goods.
iii. Government Expenditure. (G)
Government Expenditure on durable and non-durable goods and services is include.
iV. Net exports
Differnce between export and import (X-M)
Mathematically GNP Can be Defined as
GNP = C + I + G + (X-M)
B. Net National Product (NNP)
Net National product or national income at market prices is the net market money value of all the final goods and services produced in a country during a year GNP at market price depreciation = NNP at market price
NNP = C + G + (Net I) + (X-M)
NNP = GNP - Depreciation
Depreciation means value of goods dective years by year Defortion of the machinary is named as depreciation.
C.National Income at Factor Cost
National Income (NI) or National Income at factor cost is the aggregate earnings of the four factor of production (Land, Labour, Capital and Organization) which arise from the current production of goods and services by nation's economy.
The major component of NI are
1. Compensation of employees (wages, salaries, commission etc)
2. Proprietors income
3. Net income from rentals and royalities.
4. Net interest (excess of interest payments of domestic bussiness system over its interest reciept and net interest reieved from abroad)
D. Personal Income (PI)
Personal income is the sum total of all incomes actually recieved by all individuals or house holds during a year. IF consists of wages, salaries, Interest and rent etc by all household.
PI = NI - (corporate profits, social security, tax corporate taxes) + transfer payment.
Transfer Payment, A payment for which no productive service is made like old age pension, social security payment etc.
E. Dispossible Personal Income (DPI)
DPI is the amount whihc is left will the individuals after paying the taxes to a government.i.e.
DPI = Personal Income - Personal Taxes
DPI = Consumption + Saving.
Qs. What are the different methods of measuring National Income or Gross National Product (GNP)? Point out the difficulties facing the measurements of GNP?
Method of Measuring National Income
Production of goods and services give rise to income and income gives rise to demand for goods and services. Demand gives rise to expenditure and expenditure give rise to further production of goods. Thus there is a certain flow of product income and expenditure.
National Income cane be measured by three ways.
1. Product Method (value added method)
2. Income Method
3. Expenditure Method
1. Product Method (Value Added Method)
Product method is also called value added method or national income at market price method. Which is measure in two ways.
i. Final Product approach.
ii. Value added approach
i. Final Product Approach
If represents the flow of production or value of all final goods over a one year with in the country.
ii. Value Added Approach
Under this method the economy is divide into different sectors such as Agriculture, manufacturing, commerce, transport, banking etc. So the GNP is measured by adding net value at each stage.
The precautions to be avoided are
1. Exluding non market goods and services like father teaching his sons.
2. Depreciation allowances to be set. Depreciation is substracted from GNP.
3. Deduction of indirect taxes, Govt Charges, which is on commodity for sale.
2. Income Method
It measures the total payments made to house holds in the production of final goods and services during a year. GNP is the sum of following types of income.
i. Rental Income earned by individuals for the use of their real effects such as land, building, royalties recieved from copyrights etc.
ii. Wages include income of employees.
iii. Net Interest get from bussiness.
iv. Profit get by the firm.
v. Depreciation is a cost of production.
vi. Indirect bussiness taxes.
We do not include the such thing whihc have no meanings like father giving his son money for education but we include a labour wages in GNP.
3. Expenditure Method
In this method GNP is measured as total spending on final goods and services produced within a country during a year. The spendings are
i. Consumption Expenditure (C)
The households spend their income on consumer durables such as Car, furniture.
ii. Non-Durable Goods
Such as foods, clothing and services.
iii. Investment (I)
iv. Government Expenditure (G)
Net Export (X-M)
So GNP is
GNP = G + I + G + (X-M)
1. Final expenditure only include not intermediate expenditure.
2. Property Income recieved from abroad should be included in GNP.
Difficulties in the Measurement of National Income
These difficulties are,
1. Non-Availibility of statistical material For some services it is difficult to know the exact amount recieved like tutors, income services given in spare time. These are difficult to find out so not include in GNP.
2. The Danger of Double countings The cost of the commodity is likely to counted twice or multiple of it is not taken carefully.
3. Difficulty in assessing the depreciation allowance, accidential damages, repair and replacement charges. If need higher level of Judgement to asses depreciation allowance.
4. Non-Market Service Like tution centre, exclude from GNP.
Rent of House ----> Include from GNP
Purchase of House ----> Exclude from GNP
6. Transper earning exclude from GNP like relief allowance, pensions.
7. Self Consumed Production Like we use other or friends goods.
8. Income from foreign firms (foreign firms invest in the country)
Problems of Measurement Under-Developed Countries
The national income under developed coutries like Pakistan cannot be measured accuratly due to.
i. Self Consumed bartered consumption Some transaction which is not include money like exchange of goods. (Agriculture) are not add in National Income.
ii. No systematic acounts maintained.
iii. No occupational Classification
iv. Unreliable data.
Qs. Define Circular flow of income in a two sector economy. What factors influence the size of National Income.
Circular Flow of Income In a Two Sector Economy
We suppose that there are only two sectors in the economy.
A. House Hold
B. Bussiness Sector
i. The bussiess sector hire the factors of production owned by the household sectors and it is the sole producer of goods and services in the economy.
ii. House hold sector are buyer and purchase from bussiness sector.
iii. Bussiness Sectors sells entire output to house hold sector.
iv. There are no saving and investment in the economy.
v. House hold earn income from bussiness sector.
vi. Bussiness sector earn income from house hold sector.
vii. The economy is closed economy means no international trade.
viii. No inter-action of Government.
Determinants of National Income
There are many factor which influence the size of national income.
1. The stock of factors of Production
GNP depends on quantity and quantity of the country's stock of production. The factors of production are land, labour capital and organization.
Size of national income depends on quantity and quantity of labour in the country.
Its very important that how much capital is on for a firm if firm is large and capital is less than GNP is decline.
4. State of Technical Knowledge
Its technology and technical workers are good, than national income increase.
5. Political Stability
GNP increase if a country have political stability.
Qs What are the main causes of inequalities of income? Suggest measures to reduce inequality?
What are the main causes of inequality of income in a modern society? Discuss role of taxation policy in reducing this inequality?
Inequality of Income Distribution
A country much have to ensure that its income evenly distributed not only increase. Inequality of income is main feature of capitalist economics. The socialist countries like communist china have established system whos aim is to reduce inequalities of incomes.
Causes of Inequality
Causes of inequality of income are
Some person born with a silver spoon and they got lots of money and property after death of their parents. While some are born in poor family and they got burden of payback of his parents after death so this system of inheritance causes inequality.
2. System of Private Property
Under this system a person is free to earn, free to save and free to own property. First a men earns and acquires property and then his property starts earnings (Rent from house)
3. Difference in Natural Qualities
Some peoples are giffed than other so they do work hardered efficiently than other and makes the inequality.
4. Difference In Acquired Talents
A child may born intelligent but if he is not lucky enough to recieve proper education then his ability remain undeveloped.
5. Family Influence
Here in Pakistan and India family contacts make a lot of difference to what people earn. Unskilled person got a good job from the contacts of relative, friends and other.
6. Luck and Opportunity
Some people luckily got good chance and they avail it.
Measures To Reduce Inequality
In order to reduce inequality of income we have some suggestions.
1. Fixing Minimum Wages
Fixing minimum wages will level up the incomes from below.
2. Social Security
By giving social security person get large benefits whose income low. These are free education, free medical, pension, insurance etc.
3. Equality of Opportunity
Some thing may be to done to eliminate the family influence in the matter of choice of profession (example Govt give scholarship)
4. Steeply Gradded Income Tax
By including taxes way may prevent some extent from rich persons. These taxes are super taxes, excess profit tax, capital gain tax.
5. High Taxes on luxuries
Govt may put high taxes on luxuries of life which poor person can be afford.
6. Sleep Death Duty, Succession Taxes and Estates Duty
Government should have to impose taxes on generation to switching of estate.
We can reduce inequality but cannot remove.