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Concept of national income and their inter-relationship There are various concepts of national income they are explained below one by one. A. Gross National product (GNP) Gross national product at market prices The GNP of a country is defined as the total money value of all final goods and services produced in a country in a one year period. GNP = GDP plus income received by Pakistanis from abroad minus income of foreigners taken from Pakistan. Suppose GDP = Dh 140 billion Income of UAE national from abroad = (+) Dh 30 billion Income of foreigners taken away ( -) Dh 20 billion GNP = Dh 150 billion National Income and concept Gross National product (GNP) A. i. 2. Aspects of GNP GNP is a flow concept: GNP represents a flow. It is a quantity produced per unit of time. It is the value of final goods and services produced in a country during a given time period. GNP is measures final output: while calculating GNP, the market value of only final goods and services produced in a year are added up. Final goods are those goods which are purchased for final use in the market. B. Net national Product (NNP) Net national product (NNP) is the measure of national production of a country obtained by deducting the amount of depreciation from GNP. As a rough estimate, GNP is very useful indicator of total production of a country. But if we are interested to have an accurate and true measure of what a country is producing and what is available for use, the GNP has a serious defect. It ignores the fact that some capital is used up during the process of production in the form of decrease in the value of machinery, building, etc. e.g. if a bus runs for a year. Its value will definitely decrease and at the end of the year the value will be less than that of a new bus. NNP = GNP – Depreciation GNP = Dh 150 billion Depreciation allowance (-) = Dh 20 billion NNP (Net National Product) = Dh 130 billion C. National Income (at factor cost) National income can be estimated in terms of either output or total income. When national income is measured by adding together all income payments made to the factors of production in a year, in the words of J. Sloman: “National income (NI) at factor cost is the aggregate earning of the four factors of production (Land, labor, capital and organization) which arise from the current production of goods and services by the nation’s economy” NNP Indirect taxes (- ) Subsidies (+) Then national income (at factor cost) = = = = Dh. 130 billion Dh. 15 billion Dh. 5 billion (130 – 15 + 5) = 120 billion We must remember about national income that if government increases indirect taxes. Then the market value of output will increase but the income received by factors will remain the same. D. Personal income (PI) Personal Income is the total income received by the people from all sources. Personal income differs from national income for two reasons. Firstly, there are some deductions from the earnings of persons in the form of social security contribution before they receive their salaries. Then the limited companies do not distribute the whole of the earned profits of firms is also taken away by the government as corporate taxes. Secondly, there are some payments received by the people which they have not earned as incomes in exchange for production of goods e.g. pensions, gifts, Zakat, unemployment allowance, scholarship, etc. these payments are called transfer payments and have to be added to national income to arrive at personal income. Personal Income (PI) = NI – Social security contributions – corporate taxes undistributed profits, + transfer payments. Example: Suppose. National Income (NI) (-) = Dh 120 billion Minus Social security contributions, corporate Taxes etc = Dh 12 billion Plus Transfer Payments (+) = Dh. 27 billion Then Personal Income (PI) = Dh. (120 – 12 + 27) billion = Dh. 135 billion E. Disposable Personal Income (DI) DI is the total net amount left with the individuals and households when they have paid direct taxes e.g. income tax is a personal tax. It is deducted. DI is the amount, which they can dispose of as they like. They may spend or save it. Disposable income (DI) = PI – personal taxes. Example: personal income = Dh. 135 billion Personal taxes ( - ) = Dh 10 billion Disposable Income (DI) = Dh (135 – 10 ) = Dh 125 billion. PER CAPITA INCOME (Average Income) In order to know the average income of people of people in a country, per capita income is calculated i.e. income per head of population. It is obtained when national income is divided by population of the country. Per Capital Income = National Income population Let the national income of the country is Dh 600,000 million and the population estimated as 120 millions. Then per capita income = 600,000/120 = 5000 Dh. Per capita income is annual income is annual income per person. The concept of per capita income is helpful to have an idea of the average standard of living of the people of a country. A high per capita income shows that people have more to consume in terms of goods and services. Lower PCI implies widespread poverty. If PCI of a country is compared over some years, we can know whether the country is making any econo0mic progress and whether people’s living standard is rising or not. If we consider the case of the third world countries their PCI is very low compare to developed countries like in dollar Pakistan PCI is 970 $, India got 590 $ while for USA or Japan it is more then thirty six thousand. There are many economies, social and political causes for low income level. An important factor, which keeps our per capita income low, is the fast rising population. Methods of computing national income There are three methods of measuring national income of a country. They yield the same result. These methods are; 1. The product method. 2. The income method and 3. The expenditure method 4. The product method: Goods and services are counted in gross domestic product (GDP) at their market values. The product approach defines a nation’s gross product as that market value of goods and services currently produced within a nation during a one year period of time.The product approach measuring national income involves adding up the value of all the final goods and services produced in the country during the year. Here we focus on various sectors of the economy and add up all their production during the year. The main sectors whose production value is added up are 1. Agriculture sector 2. Manufacturing sector 3. Construction sector 4. Transport and communication sector 5. Banking sector 6. Administration and defence and 7. Distribution of income. Precautions for this approach There are certain precautions which are to be taken to avoid miscalculation of national income using this method. These in brief are: i. ii. iii. Problem of double counting: when we add up the value of output of various sectors, we should be careful to avoid double counting. This pitfall can be avoided by either counting the final value of the output or by including the extra value that each firm adds to an item. Non-marked production and unpaid services. Goods which are in the process of production. Advantages and disadvantages: This method can be used where there exists a census of production for the year. In many countries, figures of production of only important industries are known. Hence, this method is employed along with other methods to arrive at the national income. The one great advantage of this method is that it reveals the relative importance of the different sectors of the economy by showing their respective contribution to the national income. The Income method Income approach is an other alternative way of computing national income. In the production process we pay to the factors of production Land is paid rent, labor is paid wages , capital is paid interest, and organizer is paid profit if we add all these we will get national through income approach. NI (Income Method) = (Rent + Wages + Interest + Profits) In addition to the above four components of national income , three other items are to be added for to obtain national income. These items are indirect business taxes paid by businessmen, depreciation allowance and net factor payments from abroad. The Expenditure method: The expenditure approach measures national income as total spending on final goods and services produced within nation during an year. Total expenditure thus is the sum of four broad categories of expenditure. i. Consumption expenditure: ii. Investment expenditure: iii. iv. consumption expenditure is the largest component of national income. It includes expenditure on all goods and services produced and sold to the final consumer during the year. investment is the use of today’s resources to expand tomorrow's production or consumption. Investment expenditure is expenditure incurred on by firms on (a) new plants) adding to the stock of inventories and ( C) on newly constructed houses. Government expenditure: (G) it is the second largest component of national income. It includes all government expenditure on currently produced goods and services but excludes transfer payments while computing national income. Net Exports: Total exports minus total imports. National income calculated from the expenditure side is the sum of consumption, investment, investment government and net exports. NI = C+I+G+(X - M) Difficulties in the measurement of national income According to kuznets, the measurement of national income is a complicated problem and is besets with the following difficulties. i. Non-availability of statistical material ii. The danger of double counting. iii. Non-marketed services. iv. Difficulty in assessing the depreciation allowance. v. Housing. vi. Transfer earning. vii. Self-consumed production. viii. Price level changes. ix. Self- consumed-barter consumption. x. No systematic accounts maintained. xi. No occupational classification. xii. Unreliable data.