National Income
National income is known as the market value of all goods and services created in an economy during a particular period of time, usually a year. According to Alfred Marshall, national income is the aggregate net products of and the sole source of payment for all the agents of production. Sir John Hicks explained that national income is made up of a collection of goods and services produced on a common basis which is measured in terms of money. From the above definitions, it is appropriate to say that national income is the money value of the end result of all economic activities of a nation. Economic activities in any country result into a large number of goods and services, and make a net addition to the national stock of capital. Such goods and services constitute the national income of a closed economy. The closed economy is an economy which has no economic transaction with the rest of the world. National income in open economy includes also the net results of a nation’s transactions with the rest of the world (i.e., exports less imports). Alternatively, national income is called national product. Incomes are generated from the production of goods and services. This value of products represents incomes to households in form of wages, salaries, rent, interest, or profits. Thus, the total of all incomes must be exactly equal to the value of all goods and services produced in an economy within a particular year.
Concepts of National Income
Gross National Product (GNP)
The gross national product (GNP) refers to the value of all goods and services produced during a specific period of time, usually one year, plus the difference between foreign receipts and payments. The GNP is, therefore, identical to the concept of gross national income (GNI); hence, GNP =GNI. Thus, while the GNP is estimated on the basis of product flows, the GNI is estimated on the basis of money income flows, i.e. wages, profits, rent, interest, etc.Gross Domestic Product (GDP)
It refers to the value of total output of goods actually produced in the whole economy over a period of time, usually one year. It is the gross because allowance has not been made for the consumption of fixed capital used up in the production. When the value of the production is measured at the market price, we have what is commonly referred to as gross domestic product cost; it is regarded as gross domestic product at factor cost. The difference between the two lies in the fact that GDP as factor cost excludes the excess of indirect taxes over subsides that may
have been levied on the goods and services, while the other does not.Net National Product (NNP)
This is regarded as national income proper. It refers to the sum of all incomes accruing to all factors of production that are supplied by the residents of a given country over a period of time, usually a year, after deducting depreciation. Depreciation herein refers to the value of wear and tear of capital and machinery replacement after the year of use.
Therefore,
GNP – Depreciation = NNP.
NNP = GNP – Depreciation.
Depreciation is, in essence, that part of total productive assets which are used to replace worn-out capital in the process of creating the GNP. Hence, in the process of producing goods and services (including capital goods), a part stock of capital is used up. Depreciation is therefore the term used to denote the worn-out or used up capital. An estimated value of depreciation is deducted from the GNP to arrive at the NNP. The NNP is then the measure of net output available for consumption by the society. The NNP is usually the same as the national income at factor cost. The NNP is the usually measured at market prices, while direct taxes and indirect taxes are deducted. Hence, NNP – indirect taxes = national income.Personal Income
Personal income is the total national income of a particular country or total GNP less payment of indirect taxes, less undistributed profits, less profits of public parastatals plus transfer payments (i.e. by government and business organizations), such as social security allowance, unemployment benefits, etc. Personal income refers to the income accruing to individuals, which can be used for paying taxes, consumption and savings. It constitutes the rewards earned by individuals due to their contribution to the productive sector of the economy.Disposable Income
This refers to the income from all sources that accrue to households and private non-profit institutions after deducting direct taxes and other transfers. In essence, disposable income constitutes that amount which an individual can use for the purchase of goods and services and also for savings. In a frugal economy it is regarded as: Y=C+S. Identify and explain the various concepts associated with national income
Accounting Relationships in National Income
Relations at Market Price
GNP = GNI (gross national income)
GDP = GNP less net income from abroad
NNP = GNP less depreciation
NDP (Net Domestic Product) =NNP less net income from abroadRelations at Factor Cost
GNP at factor cost = GNP at market price less net indirect taxes
NNP at factor cost = NNP at market price less net indirect taxes
NDP at factor cost = NNP at market price less net indirect taxes
NDP at factor cost = GDP at market price less depreciation
The Significance of National Income Analysis
It reflects the extent to which goods and services are valued in monetary term in any given economy. National income measures the entire value of goods and services produced in an economy over a particular period of time (usually a year). This can be appreciated from GDP, GNP or NNP analysis, as highlighted above. National income explains the performance of business organizations which constitute the unit that produces goods and services in any economy. It enables the business organization to appreciate their contribution to the different sectors of the economy.
CONCLUSION
From the foregoing analysis, you can understand the meaning and essence of national income. You can also appreciate the reasons which inform the determination of national income, and the role it plays in the economy and business operations in any country.
SUMMARY
This study unit has discussed the meaning of national income. It also discussed the various concepts associated with national income and the accounting relationships among such concepts. Lastly, the unit also discussed the need for the determination of national income.
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