Meaning; national income is defined as the value
of all final goods and services produced by the residence of a country where
there operating within the domestic territory of the country or outside the
country in a year.
National
income is the total value a country’s final output of all new goods and
services produced in one year.
Monetary
expression
When we say national
income is expressed in monetary term, it adds value of all final goods and
services produced in a country during a year. We cannot add together UNLIKE idem
such as fruits, accessories, services of doctors etc.. because they are
expressed in different units like kg. and meters. Thus in order to aggregate
all goods and services it is important to expressed them in money terms. Such
as RF, $ which is a comment determination.
Final
goods and service
National income
reflects the value of final goods and services.
Final goods and
services are those products which are sold to the final users during the year.
Eg) consumer
products (tools items, cloths)
Intermediate
products
Intermediate
products are those products which are used by the producers as inputs into a
further stage of production.
Eg) fertilizer,
threads
·
To measure national income accurately all goods
and services produce during a year must be counted ones, but not more than
ones. Most products go through a series of production stages before reaching
the market. As a result components of most products are got and sold many
times. Intermediate products are excluded from national income because there
value is already included in the value of final products in which they are
used.
Flow
National income is a flaw concept. It is the flow of goods and
services. A flow is the quantity which is measured over a period of time.
Current out put
National income measures the value of currently produced goods and
services. It excludes pure exchange transaction such as sales purchases of second
hand goods or used goods, purchases and sales of securities and transfer
payments. These transactions are excluded from national income because nothing
new is produce in the current year. Sale and purchased of financial assets both
old and new like bone and shells are also excluded from national income because
these transactions do not directly involve current production. They are not
payments for goods and services. They represent transfer of purchasing power
and ownership rights from one person to another. So if you purchase shares of a
company, you get ownership rights over a part of the company’s resources.
Transfer payments such as social security payments (pension), donation and gift
are received by household, enterprises, and others without making any
corresponding contribution to the production process in the current year. There
are UNI_LATEARL payment for which no productive services are rendered in the
current year.
Residents and domestic territory
National income is the find as the value of final goods and
services produce by the normal residence of the country.
·
Normal residents: normal residents are those persons who
ordinarily reside on country and whose economic interest lies in that country.
They may or may not be the citizen of that country.
·
Domestic territory: refers to the geographical or political
boundary of a country excluding foreign embassy and international institutions
like UN, WHO located within the geographical territory and including the
embassies of the country located out side its geographical territory.
Primarily there are three methods of measuring national income. Which method
is to be employed depends on the availability of data and purpose. The methods
are
·
product method,
·
income method
·
expenditure method.
According to product method, the total value of final
goods and services produced in a country during a year is calculated at market
prices. According to this method only the final goods and services are included
and the intermediary goods and services are not taken into account.
According to income method, the net income payments
received by all citizens of a country in a particular year are added up. The
net incomes earned by the factors of production in the form of rent, wage,
interest and profit aggregated but incomes in the form of transfer payments are
not included in the national income.
According to the expenditure method, the total
expenditure incurred by the society in a particular year is added together.
There expenditures include personal consumption expenditure, net domestic
investment, Govt, expenditure on goods and-services, and net foreign
investments, Govt, expenditure and net foreign investment. According to these
methods total expenditure equals the national income.
The above three methods, it applied give identical results. It is
wise to use any method in measuring national income. The use of the above three
methods depends on the level at which the national income is calculated. The
product method is used at the product level. Income method is used at income
level and expenditure method is used at expenditure level. As all the three
methods are used to measure the lame physical output at three phases, namely
production, distributions and expenditure, they will provide the same national
income. Below is given a chart showing the reconciliation of the three methods
of calculating GDP at market price.
The choice of above three methods depends on the level at which the
national income is calculated. The product method is the principal method used
in underdeveloped economies, whereas income method is generally used in
developed economics for the estimation of national income.
