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National Income

Theory Of Topic - National Income

National Income refers to the sum total of the income earned in the economy plus the income from abroad. National Income is the Gross National Product popularly known as GNP. GNP is the sum of GDP and Net Factors Income from Abroad.

National Income is the value added to the output of an economy by its citizen plus the value added by citizens abroad. The definition of National Income goes as follows, "The total net value of the goods and services which are produced in a nation over a specific period of time (usually one year), which is a sum of all its income including wages, profits, rent, interest as well as pension payments to the residents of that nation is known as national income of the country."

There are various factors for calculating National Income and different types of outputs can be calculated. These are as follows:

  • The Net Concept and the Gross Concept. In the Net concept, depreciation on capital assets of the country has been deducted from the total output. In the gross concept, the depreciation is not subtracted. This happens as both the concepts give different considerations for the capital goods consumption and treat it differently.
  • The National and the Domestic Concept. In the National Concept, citizens earning income from around the world, which is known as the net factors income from abroad, is added to the total output to derive a National product of income. In the domestic concept, only the income earned domestically is taken into account and the income from abroad by the citizens is ignored. In the domestic concept, only income which falls under the geographical boundaries of the country is accepted.
  • Market Prices and Factor Costs. The prices of goods and services sold in the market can vary depending on the prices we take into account. National Income is valued at both Factor Cost and at Market Prices. When the good and services are valued market prices, it means that indirect taxes and subsidies have been taken into consideration. To arrive to market price from the factor costs, indirect taxes are added and subsidies are subtracted.

There are various approaches to measure National Income. There are three important approaches and methods to calculate National Income across all countries around the world. These three methods of calculating National Income are as follows:

  • Product Method/Product Approach: It is the method in which National Income is calculated in terms of goods and services which are finally consumed and which are not further used in the production process to avoid double counting.
  • Income Method/Income Approach: It is the method is which National Income is calculated by calculating the sum total of all the factors income which includes Rent, Wages, Salaries and profits. It is also called income distribution approach
  • Expenditure Method/Expenditure Approach: It is the method in which National Income is calculated by sum total of the expenditure in the economy which includes investment expenditure, government expenditure, personal household expenditure, government expenditure and net imports (Imports-exports).

Problems Encountered In Solutions To National Income Problems

The calculation of National Income involves many formulas and understanding of different concepts which are extremely time taking and challenging. The main problem while calculating National Income is double counting which means counting the same income twice. The income in the economy flows through various channels. There are high chances of calculating the same income twice. Due to this, all the income and expenditure should be looked thoroughly such that they have not already been added or subtracted. Apart from this, there are many formulas. There are many types of concepts through which income can calculate. Different questions ask different types of National Income which gets confusing. The abbreviations need to be understood properly in order to know what is to be calculated during the problems and to find their perfect solutions. The goods and services are passed on to different production processes which have to be taken into account in order to arrive to the right amount of the national income. The different methods of calculations also need to be kept in mind and one should know which method to use by seeing the given information in the problem.

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