National income Analysis and Measurement

15/03/2020 1 By indiafreenotes

National income of India constitutes total amount of income earned by the whole nation of our country and originated both within and outside its territory during a particular year. The National Income Committee in its first report wrote, “A national income estimate measures the volume of commodities and services turned out during a given period, without duplication.”

The estimates of national income depict a clear picture about the standard of living of the community. The national income statistics diagnose the economic ills of the country and at the same time suggest remedies. The rate of savings and investment in an economy also depend on the national income of the country.

Moreover, the national income measures the flow of all commodities and services produced in an economy. Thus, the national income is not a stock but a flow. It measures the total productive power of the community during given period.

Further, the National Income Committee has rightly observed, “National income statistics enable an overall view to be taken of the whole economy and of the relative positions and inter-relations among its various parts”. Thus, the computation of national income and its analysis has been considered an important exercise on economic literature.

Estimates of National Income During Pre-Independence Period:

During the British period, several estimates of national income were made by Dadabhai Naoroji (1868), William Digby (1899), Findlay Shirras (1911, 1922 and 1934), Shah and Khambatta (1921), V.K.R.V. Rao (1925-29) and R.C. Desai (1931-40): Among all these pre-independence estimates of national income in India, the estimates of Naoroji, Findlay Shirras and Shaw and Khambatta have computed the value of the output raised by the agricultural sector and then added some portion of the income earned by the non-agricultural sector. But these estimates were having no scientific basis of its own.

After that Dr. V.K.R.V. Rao applied a combination of census of output and census of income methods.

The following table 2.1 reveals various estimates of national income and per capita income of India as prepared by different dignitaries before independence:

All these estimates of national income were conducted out of individual effort and were subjected to serious limitations due to some of its arbitrary assumptions.

All these estimates of national income were conducted out of individual effort and were subjected to serious limitation due to some of its arbitrary assumptions. Although pre-independence estimates of national income in India suffered from various difficulties and limitations but it provided considerable light and insight about the economic conditions of the country prevailing during those period.

Estimates of National Income During the Post-Independence Period: National Income Committee’s Estimates:

After independence, the Government of India appointed the National Income Committee in August, 1949 with Prof. PC. Mahalnobis as its Chairman and Prof. D.R. Gadgil and Dr. V.K.R.V. Rao as its two members so as to compile a national income estimates rationally on a scientific basis. The first report of this committee was prepared in 1951.

In its first report, the total national income of the year 1948-49 was estimated at Rs. 8,830 crore and the per capita income of the year was calculated at Rs. 265 per annum. The committee continued its estimation works for another three years and the final report was published in 1954.

National Income Committee and C.S.O. Estimates:

During the post-independence period, the estimate of national income was primarily conducted by the National Income Committee. Later on, it was carried over by the Central Statistical Organisation. For the estimation of national income in India the National Income Committee applied a mixture of both ‘Product Method’ and the ‘Income Method’. This Committee divided the entire economy into 13 sectors.

Income from the six sectors, viz., agriculture, animal husbandry, forestry, Fishery, mining and factory establishments is estimated by the output method. But the income from the remaining seven sectors consisting of small enterprises, commerce, transport and communications, banking and insurance, professions, liberal arts, domestic services, house property, public authorities and rest of the world is estimated by the income methods.

The National Income Unit of the Central Statistical Organisation (C.S.O.) is now-a-days entrusted with the measurement of national income. Here this unit of C.S.O. estimated the major part of national income from the various sectors like agriculture, forestry, animal husbandry, fishing, mining and factory establishments with the help of product method.

The unit of C.S.O. is also applying the income method for the estimation of the remaining part of national income raised from the other sectors.

Till now we have three different series in the national income estimates of India. These include Conventional Series, Revised Series and New Series.

Again the C.S.O. has prepared another new series on national income with 1993-94 as base year as against the existing series with 1980-81 as base year.

Methodology of National Income Estimation in India:

In India, the estimation of national income is being done by two methods, i.e., product method and income method.

Net Product Method:

While estimating the -gross domestic product of the country, the contribution to GDP from various sectors like agriculture, livestock, fishery, forestry and logging, mining and quarrying is estimated with the adoption of product method. In this method, it is important to estimate the gross value of product, bi-products and ancillary activities and then steps are taken to deduct the value of inputs, raw materials and services from such gross value.

In respect of other sub-sectors like animal husbandry, fishery, forestry, mining and factory establishments, the gross value of their output is obtained by multiplying the estimated output with their market price. From such gross value of output, deductions are made for cost of materials used and depreciation charges so as to obtain net value added in each sector.

In respect of secondary activities, the computations of gross domestic product are done by the production approach only for the manufacturing industrial units (both registered and unregistered). In respect of constructions activity, the estimates of the value of pucca construction are made by the commodity How approach and that of the kachcha construction is made by the expenditure method.

Net Income Method:

In India, the income from rest of the sectors, i.e., small enterprises, commerce, transport and communications, banking and insurance professions, liberal arts, domestic activities, house property, public authorities and rest of the world is estimated by the income method.

Here, the income approach is adopted to estimate the value added from these aforesaid remaining sectors. Here, the process involves the measurement of aggregate factor incomes in the shape of compensation of employees (wages and salaries) and operating surpluses in the form of rent, interest, profits and dividends.

Finally, by adding up the contribution of all different sectors to national income of the country, it is necessary to obtain net domestic product at factor cost. In order to derive the net national income at current prices, it is necessary to add the net income from abroad and net indirect taxes with the net domestic product at factor cost. This same estimate is then deflated at the prices of the base year selected to derive a series of national income at constant prices.

National income: Alternatives Concept and the Measures

 The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.

Measures of National Income

For the purpose of measurement and analysis, national income can be viewed as an aggregate of various component flows. The most comprehensive measure of aggregate income which is widely known is Gross National Product at market prices.

Gross and Net Concept

Gross emphasizes that no allowance for capital consumption has been made or that depreciation has yet to be deducted. Net indicates that provision for capital consumption has already been made or that depreciation has already been deducted.

National and Domestic Concepts

The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year.

It is also possible to measure the value of the total output or income originating within the specified geographical boundary of a country known as domestic territory. The resulting measure is called “domestic product”.

Market Prices and Factor Costs

The valuation of the national product at market prices indicates the total amount actually paid by the final buyers while the valuation of national product at factor cost is a measure of the total amount earned by the factors of production for their contribution to the final output.

GNP at market price = GNP at factor cost + indirect taxes – Subsidies.

NNP at market price = NNP at factor cost + indirect taxes – Subsidies

Gross National Product and Gross Domestic Product

For some purposes we need to find the total income generated from production within the territorial boundaries of an economy irrespective of whether it belongs to the inhabitants of that nation or not. Such an income is known as Gross Domestic Product (GDP) and found as:

GDP = GNP – net Factor Income From Abroad

Net Factor Income from Abroad = Factor Income Received From Abroad – Factor Income Paid Abroad

Net National Product

The NNP is an alternative and closely related measure of the national income. It differs from GNP in only one respect. GNP is the sum of final products. It includes consumption of goods, gross investment, government expenditures on goods and services, and net exports.

GNP = NNP − Depreciation

NNP includes net private investment while GNP includes gross private domestic investment.

Personal Income

Personal income is calculated by subtracting from national income those types of incomes which are earned but not received and adding those types which are received but not currently earned.

Personal Income = NNP at Factor Cost − Undistributed Profits − Corporate Taxes + Transfer Payments

Disposable Income

Disposable income is the total income that actually remains with individuals to dispose off as they wish. It differs from personal income by the amount of direct taxes paid by individuals.

Disposable Income = Personal Income − Personal taxes

Value Added

The concept of value added is a useful device to find out the exact amount that is added at each stage of production to the value of the final product. Value added can be defined as the difference between the value of output produced by that firm and the total expenditure incurred by it on the materials and intermediate products purchased from other business firms.

Methods of Measuring National Income

Let’s have a look at the following ways of measuring national income:

Product Approach

In product approach, national income is measured as a flow of goods and services. Value of money for all final goods and services is produced in an economy during a year. Final goods are those goods which are directly consumed and not used in further production process. In our economy product approach benefits various sectors like forestry, agriculture, mining etc to estimate gross and net value.

Income Approach

In income approach, national income is measured as a flow of factor incomes. Income received by basic factors like labor, capital, land and entrepreneurship are summed up. This approach is also called as income distributed approach.

Expenditure Approach

This method is known as the final product method. In this method, national income is measured as a flow of expenditure incurred by the society in a particular year. The expenditures are classified as personal consumption expenditure, net domestic investment, government expenditure on goods and services and net foreign investment.

These three approaches to the measurement of national income yield identical results. They provide three alternative methods of measuring essentially the same magnitude.