📝 National Income and Its Measurement
Economics begins with the study of how a country produces, distributes, and uses its wealth. To measure this, we need a clear idea of National Income. It acts like a report card of the economy, showing how much wealth the nation produces in a year.
For competitive exams like UPSC, SSC, IBPS, Railways, and State PCS, National Income is one of the most important and recurring topics.
📌 What is National Income?
National Income is the total monetary value of all final goods and services produced within a country during a financial year.
· It represents the economic strength of a nation.
· Only final goods are counted to avoid double counting.
Example: If wheat worth ₹50,000 is produced and then converted into bread worth ₹80,000, only bread (final good) worth ₹80,000 is included in National Income. The wheat value is already included in the bread.
Table of Contents
📌 Importance of National Income
National Income is not just a number; it has real-world importance:
1.
Economic Health Indicator: Shows whether the economy is growing,
stagnant, or declining.
Example: India’s GDP growth of 7% shows expansion,
while negative growth shows recession.
2. Policy and Planning: Helps the government make budgets,
welfare schemes, and five-year plans.
Example: If per
capita income is low, the government may introduce poverty alleviation
programs.
3. International Comparison: Used to compare India’s economy with
USA, China, Japan, etc.
Example: World
Bank compares GDPs to classify nations as developed, developing, or
underdeveloped.
4. Living Standards: Per capita income gives a picture of
how wealthy or poor people are.
Example: India’s
per capita income is much lower than that of developed countries, reflecting
different living standards.
📌 Constitutional Articles Linked to National Income
Although the Constitution does not directly define National Income, some provisions influence it:
· Article 246 & 248 → Union and States can make economic laws.
· Articles 268–281 → Tax distribution, which affects revenue and income.
· Article 280 → Finance Commission decides revenue-sharing between Centre and States.
Example: The Finance Commission’s
recommendations ensure that states get a share of income taxes, which affects
overall national income distribution.
Theory of Economics: Types & sectors explained with examples | Notes & MCQ Quiz
📌 Basic Concepts of National Income
1. Gross Domestic Product (GDP)
· Total value of goods and services produced within India’s borders in one year.
· It includes production by foreign companies operating in India.
Example: Cars produced by Hyundai (a South Korean company) in Chennai are counted in India’s GDP.
2. Gross National Product (GNP): GDP + Income of Indians abroad – Income earned by foreigners in India.
Example: A software engineer from India working in the USA sends money back home. This income is added to India’s GNP. But if an American company earns in India, that amount is subtracted.
3. Net National Product (NNP): GNP – Depreciation (loss of value due to wear and tear of machinery).
Example: If machines in a factory depreciate by ₹1 crore, that amount is subtracted from GNP to get NNP.
4. National Income at Factor Cost (NIFC): NNP at Market Price – Indirect Taxes + Subsidies.
Example: If the government imposes a GST on goods, prices rise, but this tax does not belong to producers. Hence, it is subtracted to get income at factor cost.
5. Per Capita Income
· Average income per person.
· Formula: National Income ÷ Population
Example: If India’s NI = ₹300 lakh crore and population = 140 crore, then PCI = ₹2,14,285 approx.
6. Personal Income & Disposable Income
· Personal Income: All income received by individuals (wages, rent, interest, profit).
· Disposable Income: Personal Income – Taxes.
Example: If a teacher earns ₹60,000/month but pays ₹5,000 as tax, then ₹55,000 is disposable income.
📌 Methods of Measuring National Income
1. Product/Output Method
· Adds up the value of all final goods and services produced in the economy.
· Used in agriculture and manufacturing.
Example: Wheat, sugar, cement, cars → their final values are added to calculate output.
2. Income Method
· Adds all incomes earned: Wages + Rent + Interest + Profits.
Example: A farmer earns rent, a teacher earns salary, and a businessman earns profit. Adding these gives National Income.
3. Expenditure Method
· Adds all spending in the economy:
o C (Consumption)
o I (Investment)
o G (Government Expenditure)
o X – M (Net Exports)
Formula: Y = C + I + G + (X – M)
Example: If households spend on food, government spends on infrastructure, companies invest in factories, and India exports more than it imports → all these expenditures are summed up.
📌 Sectors Contributing to National Income
1. Primary Sector
· Related to extraction of natural resources.
· Includes agriculture, mining, forestry, and fishing.
Example: A farmer growing rice contributes to National Income via the primary sector.
2. Secondary Sector
· Involves manufacturing and industrial production.
Example: Tata Steel producing steel or Hero MotoCorp manufacturing bikes.
3. Tertiary Sector
· Involves services like banking, transport, education, and IT.
Example: Infosys providing IT solutions or SBI providing banking services.
👉 In India, this sector has become the largest contributor to National Income.
📌 Problems in Measuring National Income
1. Unorganized Sector: A large part of India’s workforce is in informal jobs (street vendors, daily wage laborers), which makes data collection difficult.
2. Home Services Not Counted: Work done by homemakers has value but is not included in National Income.
3. Illegal Activities: Black money, smuggling, and other illegal activities remain outside official statistics.
4. Statistical Challenges: Lack of accurate data and outdated methods reduce accuracy.
Example: A woman cooking for her family is not counted, but the same service by a restaurant is counted.
📊 Table: Key National Income Concepts
|
Concept |
Meaning |
Example |
|
GDP |
Goods/services within India |
Hyundai cars made in Chennai |
|
GNP |
GDP + income of Indians abroad |
Salary of Indian engineer in USA |
|
NNP |
GNP – Depreciation |
Factory machines wear and tear |
|
PCI |
NI ÷ Population |
₹2,14,285 in India approx |
|
Disposable Income |
After tax income |
₹55,000 if ₹60,000 earned & ₹5,000 taxed |
📌 FAQs
Q1.
What is National Income?
Ans: National Income is the total value of final goods and services produced in
a country during one financial year.
Q2.
Which methods are used to measure National Income?
Ans: Output/Product Method, Income Method, and Expenditure Method.
Q3.
What is the difference between GDP and GNP?
Ans: GDP is production within India; GNP includes income earned abroad by
Indians and excludes income of foreigners in India.
Q4.
Which sector contributes the most to India’s National Income?
Ans: The Tertiary (service) sector.
Q5.
Who publishes National Income data in India?
Ans: Central Statistical Office (CSO), Ministry of Statistics and Programme
Implementation.
Q6.
Why is Per Capita Income important?
Ans: It reflects the average income per person, indicating standard of living.
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