National Incomes

National Incomes

This article deals with ‘National Incomes.’ This is part of our series on ‘Economics’ which is important pillar of GS-2 syllabus . For more articles , you can click here .

Introduction

  • Income level is the most commonly used tool to determine the well-being and happiness of nations and their citizens.
  • GDP, NDP, GNP and NNP are the four ideas/ways to calculate the income of a nation.

Gross Domestic Product (GDP)

  • GDP is the market value of all the final goods and services produced within a country during one year period .
GDP
  • In this , boundary of country matters and not citizenship of person producing it . If good or service is produced within the boundary of nation, then it will be counted in the GDP.
  • Interpretation
    • If Karan Johar is making some Bollywood movie  => Addition in GDP (+) .
    • Chris Gayle (not Indian citizen ) is making some advertisement in India => Addition in GDP (+).
    • Jaguar (Indian Company but doing production in Britain ) manufacturing cars => Not counted in Indian GDP .

Nominal GDP and Real GDP

GDP at Current Price (Nominal GDP) vs GDP at Constant  Price  (Real GDP)

  • After looking at Nominal GDP/ GDP @ Current Price , we cant say whether economy has improved or not . Eg : in the example shown in infographic below, quantity wise production has decreased but  figures are showing that GDP has remained constant.
GDP
  • To rectify this problem, economists set a Base Year (2011 for India) & then use the  production data of present year but price of goods that of base year . Using this process GDP at Constant Price or Real GDP can be calculated
GDP

GDP Deflator

GDP deflator is an index of price changes of goods and services which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.

GDP deflator

 GDP deflator can also be used to measure inflation in the economy

GDP at Factor Cost & GDP at Market Price

GDP at Factor Cost

  • There are four factors of production & each factor will be paid in money
    • Land : Rent
    • Labour : Wage
    • Capital : Interest
    • Entrepreneurship : Profit
  • GDP at factor cost is obtained by adding the value of these factors of productions.
National Incomes

GDP at Market Price

  • But GDP at factor cost  will attract some tax & subsidies which needs to be added and subtracted respectively to get GDP at market price. 
GDP @  Factor  Cost
  • New official GDP of India is GDP AT CONSTANT MARKET PRICE (earlier it was at factor cost) .

Methods to calculate GDP

There are three methods to calculate GDP

GDP calculation methods

In India, we use Income method to calculate GDP.

Method # 1 : Income Method

  • In India, we use Income method to calculate GDP.
  • In any economy, person will get wage (w) for his labour, interest (I) on his capital, profit (P) on his entrepreneurship and rent (R) on his land or building.  Under this method, GDP (at factor cost)  is calculated by adding up all the incomes generated in the course of producing final goods and services.
  • If we add taxes and subtract subsidies and then adjust that for inflation, we will get GDP at constant and market prices.
GDP using Income Method

Method #2 : Expenditure Method

  • An alternative way to calculate the GDP is by looking at the demand side of the products.
  • All the final goods & services produced in the economy will ultimately be purchased . Hence, if we add expenditure of all the persons in an economy, we can calculate GDP (at current price).
  • Under this method, the total expenditure incurred by the society in a particular year is added together .
GDP using Expenditure Method

Precautions

  • Second hand goods: The expenditure made on second hand goods should not be included.
  • Purchase of shares and bonds : Expenditures on purchase of old shares and bonds in the secondary market should not be included.
  • Transfer payments : Expenditures towards payment incurred by the government like old age pension should not be included.
  • Expenditure on intermediate goods : Expenditure on seeds and fertilizers by farmers, cotton and yarn by textile industries are not to be included to avoid double counting.

Method #3 : Gross Value Addition or Production Method

  • The final goods and services are produced by going through value addition in various stages. By adding value added during each step of the finished product, GDP can be calculated. This method is known as GVA or Production Method .
GDP using GVA Method
  • What we get is GDP at factor cost which  can be easily converted to GDP at constant market price by addition of taxes , subtraction of subsidies and adjusting it with inflation.
National Incomes

Gross National Product (GNP)

  • GNP is the total monetary value of all the goods and services produced by NORMAL RESIDENTS of a country. 
  • Here, boundary of territory is not important but normal residency is  important. Hence,
    • Indian earning in India => His income will be counted in Indian GNP.
    • Indian earning in Saudi Arabia => His income will be added in Indian GNP.
    • Earnings of Korean-owned Hyundai car factory in India => It’s earning will not be counted in Indian GNP.
Gross National Product (GNP)

Net National Product (NNP)

  • NNP is obtained by deducting the value of depreciation from the GNP.
  • Whenever something is produced, capital assets get consumed due to wear and tear. This wear and tear is called Depreciation . Naturally, depreciation does not become part of anybody’s income.
Net National Product (NNP)

Net National Product at Factor Cost

  • Through the expression given above, we get the value of NNP evaluated at market prices. But market price includes indirect taxes and subsidies as well . 
  • If we add subsidies and subtract subsidies from NNP evaluated at market prices, we obtain  Net National Product at factor cost.
  • India’s National Income is NNP at Factor Cost .
Net National Product at Factor Cost

Per Capita Income

  • Per Capita Income is the average income of a person of a country in a particular year.
  • Per capita income is obtained by dividing national income (Net National Product at Factor Cost) by population.
Per Capita income
  • India’s Per Capita Income is ₹ 1,35,000 (2019-20).

Personal Income

  • Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in a year.
  • Personal income is derived from national income by deducting undistributed corporate profit, and employees’ contributions to social security schemes and adding transfer payment.

Disposable Income

Disposable Income is  the individuals income after the payment of income tax.

Limitations in measuring National Incomes 

  • Income earned through illegal activities like gambling, smuggling, illicit extraction of liquor, etc., is not included in National Incomes.
  • Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. These Non-marketed activities are not accounted in National Incomes .
  • Barter exchanges which are still prevalent in rural and tribal areas are not accounted in National Incomes.
  • Farmers keep a large portion of food and other goods produced on the farm for self consumption. It is difficult to account these in National incomes.
  • Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Negative externality is also not accounted .
  • National Incomes doesn’t give any picture of distribution of income and income inequality within the economy.
  • The deduction of depreciation allowances, accidental damages, repair and replacement charges from the national income is not an easy task. It requires high degree of judgment.

Rise in national incomes and welfare

  • National Income is considered as an indicator of the economic wellbeing of a country. The economic progress of country is measured in terms of their GDP per capita and their annual growth rate.
  • But the rise in GDP or per capita income need not always promote economic welfare as
    1. The economic welfare depends upon the composition of goods and services provided. The greater the proportion of capital goods over consumer goods, the improvement in economic welfare will be lesser.
    2. Higher GDP with greater environmental hazards such as air, water and soil pollution will be little economic welfare.
    3. Production of war goods will show the increase in national output but not welfare.
    4. Increase in national output can also result from exploitation of labour . This exploitation doesn’t lead to welfare of people.

Indian GDP Trends and Analysis

  • Base year for India is 2011. (there are news of changing it to 2018, but as of now it is 2011)
  • In the recent years, GDP growth rate (at constant price) trends was as follows :-
Indian GDP Trends and Analysis
  • Corona Lockdown
    • In the April-June quarter, output shrank 23.9% from a year earlier
    • Reason : stringent COVID-19 lockdowns =>three sectors which contracted the most were construction (at -50.3%), trade, hotels, transport, communication and services related to broadcasting (at -47%) and manufacturing (at -39.3%). Every single industry and services sector shrank with the solitary exception of agriculture, which grew 3.4%
  • India’s  GDP at Current Market Price is $ 2.9 billion . Target of government is to increase it to $ 5 trillion till 2025.
National Incomes
  • India is the fifth largest economy of the world considering GDP at current prices in US dollars. The top 5 economies are as follows .
National Incomes