National income is the final outcome of total economic activities of a nation. Economic activities generate two kinds of flow in a modern economy namely, product-flow and money-flow. Product-flow refers to flow of goods and services from producers to final consumers. Money flow refers to flow of money in exchange of goods and services. In this exchange of goods and services, money income is generated in the form of wages, rent, interest and profits, which is known as factor earning. Based on these two kinds of flows, national income is defined in terms of:
- Product flow
- Money flow
National Income in Terms of Product Flow
National income is the sum of money value of goods and services generated from total economic activities of a nation. Economic activities result into production of goods and services and make net addition to the national stock of capital. These together constitute the national income of closed economy’. Closed economy refers to an economy, which has no economic transactions with the rest of the world. However, in an open economy, national income also includes the net results of its transactions with the rest of the world, i.e., exports less imports.
Economic activities should be distinguished from the non-economic activities from national income point of view. Broadly speaking, economic activities include all human activities, which create goods and services that can be valued at market price. Economic activities include production by farmers (whether for household consumption or for market), production by firms in industrial sector, production of goods and services by the government enterprises, and services produced by business intermediaries (wholesaler and retailer , banks and other financial organisations, universities, colleges and hospitals. On the other hand, non economic activities are those activities, which produce goods and services that do not have economic value. The non-economic activities include spiritual, psychological, social and political services, hobbies, service to self, services of housewives services of members of family to other members and exchange of mutual services between neighbors.
National Income in Terms of Money Flow
While economic activities generate flow of goods and services, on the other hand, they also generate money-flow in the form of factor payments such as, wages, interest, rent, profits and earnings of self-employed. Thus, national income can also be obtained by adding the factor earnings after adjusting the sum for indirect taxes, and subsidies. The national income thus obtained is known as national income at factor cost.
The concept of national income is linked to the society as a whole. However, it differs fundamentally from the concept of private income. Conceptually, national income refers to the money value of the final goods and services resulting from all economic activities of a country. However, this is not true for the private income in addition, there are certain receipts of money or of goods and services that are not ordinarily included in private incomes but are included in the national incomes and vice versa. National income includes items such as employer’s contribution to the social security and welfare funds for the benefit of employees, profits of public enterprises and services of owner occupied houses. However, it excludes the interest on war-loans, social security benefits and pensions. Instead, these items are included in the private incomes. The national income is therefore, not merely an aggregation of the private incomes. However, an estimate of national income can be obtain by summing up the private incomes after making necessary adjustment for the items excluded from the national income.
Measures of National Income
The various measures of national income are as follows:
Gross National Product (GNP)
There are several measures of national income used in the analysis of national income. Gross National Product (GNP) is the most important and widely used measure of national income. GNP is defined as the value of final goods and services produced during a specific period, usually one year, plus the difference between foreign receipts and payments. The GNP so defined is identical to the concept of Gross National Income (GNI). Thus, GNP = GNI. The difference between the two is that while GNP is estimated on the basis of product-flows, the GNI is estimated on the basis of money flows.
Net National Product (NNP)
Net National Product (NNP) is the total market value of all final goods and services produced by citizens of an economy during a given period of time minus depreciation, i.e., Gross National Product less depreciation.
NNP = GNP – Depreciation
Depreciation is that part of total productive assets, which is used to replace the capital worn out in the process of creating GNP. In other words, while producing goods and services including capital goods, a part of total stock of capital is used up. This part of capital that is used up is termed as depreciation. An estimated value of depreciation is deducted from the GNP to arrive at NNP.
The NNP, as defined above, gives the measure of net output available for consumption by the society (including consumers, producers and the government), NNP is the real measure of the national income. In other words, NNP is same as the national income at factor cost. It should be noted that NNP is measured at market prices including direct taxes. However, indirect taxes are not included in the actual cost of production. Therefore, to obtain real national income, indirect taxes are deducted from the NNP. Thus,
National income = NNP – Indirect taxes