National Income

National income is defined as the total monetary worth of all final products and services generated in a country over time. As regards the term 'final goods and services', productive activities generate a large number of goods and services. While certain goods and services are reused during the production process, others are converted into capital. In all circumstances, national income is calculated using just final products and services. It may be defined as the total of all factor incomes. Goods and services are produced using factors of production such as land, labor, capital, and entrepreneurship. The use of factors of production creates factor incomes such as rent, wages, interest, and profit. These component incomes combine to make up a country's national income. The aggregate of these factor incomes yields an estimate of national income.

Measuring national income is a highly complex and difficult endeavor that involves both conceptual and practical issues. Let’s see below a few terms frequently used on the topic of national income.

1. Gross Domestic Product (GDP): It is the measure of the total market value of all final goods and services produced in the domestic economy during one year plus income earned by the foreigners in the country minus income earned by countrymen from abroad.

2. Gross National Product (GNP): It is the measure of the total market value of all final goods and services produced in the domestic economy during one year plus incomes earned abroad by the citizens minus income earned by the foreigners in the country.

3. Net Domestic Product (NDP): It is defined as GDP less depreciation. Depreciation is the portion of total productive assets that is utilized to replace the capital worn out during the process of production. An estimated value of depreciation is deducted from the GDP to arrive at NDP.

4. Net National Product (NNP): Similar to NDP, NNP is defined as GNP less depreciation.  

Methods to Measure National Income

There are three methods to measure the national income of an economy. 

1. Production method or Value-added method, 

2. Income method

3. Expenditure method. 

Each of these methods corresponds to a flow taking place in the economy. In actuality, these three approaches are just three perspectives on the same variable—national income. Although the statistical information and instruments used in each of the three methods to calculate national income may differ, each will theoretically produce the same outcome.

Significance of National Income:

• Measurement of economic performance: A nation's national income is used to gauge its economic performance and provides insight into the general trends in the growth and development of the economy.

• Economic policy formulation: Taxation, government expenditure, and trade policies are all formulated with the aid of national income data.

• Forecasting: Estimating future economic trends and challenges is made possible by national income data.

• Resource allocation: Data on national income can be used to identify areas that need more investment, allocate resources more effectively, and stimulate economic growth.

• Employment generation: Data on national income is useful for examining employment patterns and pinpointing regions needing increased job creation.

• Standard of living: By formulating policies that foster economic growth, national income data assists in assessing and raising the standard of living of citizens in a nation.