This article on National Income will be useful for all those IAS aspiring candidates who want to brush up their concepts dealt in this chapter. I have tried to include all the important points mentioned in the chapter and have made efforts to summarize them as much as I could. Have a Happy Learning!
To derive economic territory, following are the adjustments made in geographical territory of a country:
1) Include all the embassies and similar government offices of a country located outside its geographical territory. This will include all the Indian embassies and similar offices located in foreign countries.
2) Exclude all the foreign embassies, offices of International organization and similar offices of a country located within the geographical territory of the country. This will exclude all the Indian foreign embassies and offices of International organization located India.
The concept of economic territory is relevant for estimating the domestic product of a country.
Domestic income of a country is the sum of all incomes originating within economic territory of a country.
All factor income generated in the production unit located in the economic territory whether owned by residents or foreigners are included in domestic income.
All individual and institutions whose centre of economic interest lies in a country are treated as the residents of that country irrespective of whether they are citizens of the country or not.
The concept of resident is taken into consideration for estimating national income of a country.
The sum total of factor incomes accruing to the residents of the country both from their activities within the country and outside the economic territory is the national income of the country.
Intermediate Products: These are those which are purchased by one production unit from other production units for resale. The expenditure incurred on the other production unit is a part of the final output value of a product and is termed as the ‘intermediate cost’. E.g.: wheat purchased by a flour mill.
Final Product: All goods and services purchased for consumption and investment and not for resale. E.g. purchases by household and purchase of capital goods by production unit.
Value added = value for output – intermediate cost
Termed as Gross value added at market price. (GVAmp)
The normal wear and tear of any machine/equipment is called consumption of fixed capital (depreciation).
Net Value Added = Gross Value Added – Consumption of Fixed Capital
Market Price: The price which the buyer pays to the production unit (seller).
Seller pays a part of this market price to the government as Indirect Tax.
All taxes levied on production like sales tax, excise duty, octroi, etc. are called indirect taxes. They are so called because although they are levied on the seller but actually paid by buyer.
Subsidies: These are financial help given by the government to the production unit for selling the products at lower prices. Such help is given in case of those selected commodities whose use the government wants to encourage. These are additional receipts (other than MP) available to the production unit for distribution among the factor of production.
Value added at factor cost (NVAfc) = NVAmp – Indirect taxes + Subsidies.
1. Sum total of Gross Value Added at market price of all production unit = Gross Domestic Product at market price.
2. Sum total of Net Value Added at market price of all production unit = Net Domestic Product at market price.
3. Sum total of Net Value Added at factor cost of all production unit = Net Domestic Product at factor cost.
4. Gross Domestic Product at market price = Sum total of Gross Value Added by all production unit.
5. Net Domestic Product at market price = Gross Domestic Product at market price – depreciation
6. Net Domestic Product at factor cost = Net Domestic Product at market price – indirect taxes + subsidies
Domestic Product is a measure of production activity of production units located in the economic territory of a country. Both residents and non residents provide factor services to these units.
However, residents get factor payment from both the economic territory units and foreign territory units.
1. National Product = Domestic Product – factor income paid to the rest of the world + factor income received from the rest of the world.
2. National Product = Domestic Product + net factor income received from abroad.
3. Gross Domestic Product at market price + Net factor income from abroad = Gross National Product at market price.
4. Net Domestic Product at market price + Net factor income from abroad = Net National Product at market price.
5. Net Domestic Product at Factor cost + Net factor income from abroad = Net National Product at factor cost.
Net National Product at factor cost is called the National Income of a country.
NVAfc is a measure of the contribution of a production unit to national income. The NVAfc is distributed among the owners of the four factor of production. Such payments made by the production units are called ‘factor payments’. For the owners of the factor of production who receives such payments, it is ‘factor income’.
Compensation of employees: all monetary and non monetary benefits that accrue to the employees on account of work performed.
Rent: accrues to the owners of land for the use of their land for production of goods and services.
Interest: In national income estimation, the interest payment only against the funds provided to the production units for investments are treated as factor payments.
Profit: The income accruing to the entrepreneur for his entrepreneurial services to the production units. It is the residual income after the factor payments out of the value added in the form of wages, interest, and rent have been made.
Mixed Income: It is an income in which the four factors of production are mixed or merged and counted the accounts of profit. It is mixture of factor income and difficult to allocate among factor incomes.
Operating surplus: the sum of factor payments in the form of rent , interest and profit is termed as operating surplus. It is a measure of factor payments other than the payments made to labor.
Operating surplus = NVAfc – compensation of employees
Operating surplus = Property income (rent & interest) + Entrepreneurial Income (profit).
Final Expenditure: Expenditure on goods and services acquired for final consumption and investment and not for resale.
Intermediate Expenditure: Expenditure on goods and services acquired by production units for reselling.
Purchases for final consumption are made by the households and general government.
Purchases for investment are made by the production unit within the economic territory and by foreigners.
Private Final Consumption Expenditure (PFCE): Includes purchases by households and non-profit institutions serving households.
Final Expenditure classified as:
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Government Final Consumption Expenditure (GFCE): Expenditure on free service provided to the people by general govt. E.g. police, military, road, bridges, etc.
Gross Domestic Capital Formation (GDCF): It is a measure of total expenditure on investment by the production unit within the economic (domestic) territory. it is of 2 types:
1) on fixed assets like building, machines, furnitures, etc. and are called Gross Domestic Fixed Capital Formation (GDFCF).
2) on stocking of raw materials, semi-finished goods and finished goods and are called net addition to stock.
Net addition to stock during the year = Closing stock – Opening stock.
GDFC is gross because the consumption of fixed capital not been deducted from it.
NDFC = GDFC – fixed capital.
Thus NDFC is a measure of the net domestic investment during the year.
In National Income accounting any part of the final products produced during the year but not consumed within the economic territory of the country is treated as Investment.
Net Investment Abroad = Net Exports = Exports – Imports
Investments Disinvestment
Sum total of PFCE, GFCE, GDCF and Net Exports is a measure of the Total final expenditure of a country during a given year.
References:
NIOS Economics Book