National Income: Essay on the National Income!
The total income of the nation is called “national income.” The aggregate economic performance of the whole economy is measured by the national income data. In fact, national income data provide a summary statement of a country’s aggregate economic activity.
In real terms, national income is the flow of goods and services produced in an economy in a particular period — a year.
Modem economy is a money economy. Thus, national income of the country is expressed in money terms. A National Sample Survey has, therefore, defined national income as: “money measures of the net aggregates of all commodities and services accruing to the inhabitants of a community during a specific period.”
More elaborately, however, we may say that national income is a money measure of value of net aggregate of goods and services becoming available annually to the nation as a result of the economic activities of the community at large, consisting of households or individuals, business firms, and social and political institutions.
An important point about national income is that it is always expressed with reference to a time interval. It is meaningless to speak of the income of an individual without mentioning the period over which it is earned, say per week, per month, or per year. Similarly, it is meaningless to talk of national income without mentioning the period over which it is generated. This is because national income is a flow and not a stock, i.e., income is generated every year, and at different rates and, therefore, it is necessary to mention the period during which that income is generated. National income is usually measured and shown with reference to a year or as annual flow; it is, thus, an amount of total production per unit of time.
Like many other terms in common use, the concept “national income” has various connotations. For instance, national income is variously described. Sometimes, it is known as “national income” at other times, “national product”, or “national dividend.” As a matter of fact, all these terms mean one and the same thing.
In national income accounting, thus, the concept of national income has been interpreted in three ways, as: (1) National Product, (2) National Dividend, (3) National Expenditure.
National Product:
It consists of all the goods and services produced by the community and exchanged for money during a year. It does not include goods and services which are not paid for, such as hobbies, housewives’ services, charitable work, etc.
National Dividend:
It consists of all the incomes, in cash and kind, accruing to the factors of production in the course of generating the national product. It represents the total of income flow which will exactly equal the value of the national product turned out by the community during the year.
National Expenditure:
This represents the total spending or outlay of the community on the goods and services (of all types, capital as well as consumption) produced during a given year. Since income is the source of expenditure, national expenditure constitutes the disposal of national income, which is evidently equal to it in value or in other words, National Expenditure equals National Income.
Indeed, one man’s income is another man’s expenditure. When a person buys milk, it is his expenditure, but this very expenditure is the milkman’s income. When the milkman spends part of this income in buying sugar, it becomes income for the sugar merchant and so on.
In a sense, therefore, the sum of expenditure of all agents of production is equal to the total income received by the factors of production during that year. National Income can, therefore, be also defined as a sum of the expenditure on producer goods, consumer goods and services of agents of all production.
In fact, there is a fundamental equality between the total income of the community and its total expenditure, as one’s expenditure becomes another’s income in the economy. Hence, there is a large circular flow established in which each expenditure creates an income, which in its turn is spent and creates other incomes. Therefore, this total national income will be equal to the total national expenditure.
Briefly, thus, the identity of the three factors of the flow of national income may be expressed as follows:
National Expenditure = National Product = National Income or Dividend.
When we analyse, the above three concepts, we find that national income is nothing but “the total flow of wealth produced, distributed and consumed.” National income is not a stock but it is a flow. It is not that the income is first earned and then gradually spent or distributed, or alternatively, it is not that the expenditure first takes place and then an income is earned. As a matter of fact, the process of income creation and income distribution goes on at one and the same time.
There are, thus, three alternative definitions of national income. The first definition is that it is the money value of goods and services produced by agents of production during the course of a year. We might call this “total production approach.”
The second definition is that it is the sum of incomes of agents of production, profits of public enterprises, income from government companies. This we might describe as “income approach.”
The third definition is that national income is the sum of total expenditure of agents of production. We might call it “Total expenditure approach.”
Corresponding to these approaches, we observe that national income has been defined in three ways in the publications of the United Nations:
(a) “Net National Product” as the aggregate of the net value added in all branches of economic activity during a specified period, together with the net income from abroad.
(b) “Sum of the distributive shares” as the aggregate of income accrued to the factors of production in a specific period, these payments taking the shape of wages, profits, interest, rent etc.
(c) “Net national expenditure” as the sum of expenditure on final consumption of goods and services, plus domestic and foreign investment.
Incidentally, Keynes has suggested three approaches to national income, which are more suitable and practicable in the macro analysis of income and employment, as follows:
1. Income-expenditure approach: in which total expenditure on consumption and investment goods constitute total income.
2. Factor-income approach: in which national income is measured as the aggregate of incomes received by all the factors of production.
Keynes wrote: Y = F + Ep where, Y stands for national income, F stands for payments received by land, labour and capital owners, and Ep refers to entrepreneurial profits.
3. Sales proceeds minus cost approach: in which Keynes considered that national income is based on aggregate sales minus cost.
In fact, Keynesian analysis has revolutionised thinking on the national income analysis. Prior to Keynes’ General Theory, national income data were not collected officially from the economic analysis point of view. Keynes developed a theory which showed how consumption and investment expenditure can affect the national income flow. From the Keynesian analysis, modern concepts of national income have been evolved which are more dynamic in content.
Modern economists consider national income as a flow in three forms: income, output and expenditure. When goods are produced by the firms, factors of production comprising households are paid income, these income receipts are spent by the household sector on consumption and their savings are mobilised by the producers for investment spending. Likewise, a circular flow is constituted between income and expenditure. Obviously, income, output, and expenditure flows are always equal per unit of time. There is, thus, a triple identity: Output = Income = Expenditure.