Assignment of M.

COM

Name: Priya
Father’s Name: Subhash Chander
Student I’d: priya08
Class: 1st Sem
Subject: OLMCM – 105S
Topic: National Income
No. of pages: 11
Signature:
Date:
 DECLARATION:

I hereby declare that the project work entitled National Income submitted to GNDU is a record is
an original work done by me under the guidance of my teachers. This project work is submitted in the
partial fulfilment of requirements of the degree of Masters in Commerce. The result embodied
in this project have not been submitted to any University or Institution for the any Degree or
Diploma.
 ACKNOWLEDGEMENT

I should need to express my remarkable thanks of gratitude to my master’s staff as well

as our principal who gave me the golden opportunity to do this wonderful project. All the other
teachers also helped me in doing lots of research for the completion of this project and I came to
know about so many new things and information. I am very thankful to them.
I am also very
thankful to my parents and my friends who have boosted me up morally with their continuous
support and guidance. Also, I would like to thank all of our university faculty members and my
batch mates as well for their kindness and support.
Contents:
 NATIONAL INCOME:

INTRODUCTION:

NATIONAL INCOME is the money value of all final goods and services
produced in an economy during a financial year. At the level of an economy, value of fined
goods and services are equal to the total income of all factors of production of labour, capital, land
and entrepreneurship. This total income is equal to total expenditure on goods and services.
Therefore, in an economy, there are different measures of NATIONAL INCOME. These are
often used interchangeably though conceptually there is some difference among all of them.

The basic purpose of NATIONAL INCOME is to throw light on aggregate output & income and to
provide a basis for the government to formulate its policy and programs to maximize the national
welfare of the people of the nation.

National Income can be used to measure a country’s standard of living, as well as its level of economic
development. It is also used to determine the amount of taxes that individuals and businesses must pay.

Overall, national income is an important economic indicator that helps policymakers make informed decisions
about a country’s future.
 IMPORTANCE OF NATIONAL INCOME:

The importance of calculating national income in an economy is:

 Measure of Economic Performance: National income is used as a measure of a country’s economic

performance and helps in understanding the overall economic growth and development.

 Formulation of Economic Policies: National income data helps in formulating economic policies
related to taxation, government spending, and trade.


 International Comparisons: National income provides a basis for comparing the economic
performance of different countries and determining their relative strengths and weaknesses.

 Resource Allocation: National income data helps in allocating resources efficiently, identifying areas
that require more investment, and boosting economic growth.

 Forecasting: National income data provides a basis for economic forecasting and predicting future
economic trends and challenges.

 Employment Generation: National income data helps in analyzing employment trends and identifying
areas that require more job creation.

 Standard of Living: National income data helps in determining the standard of living of people in a
country and improving it by devising policies that boost economic growth.

 International Aid: National income data is used by international organizations to provide aid and
assistance to countries facing economic challenges.
 Distinctions among Income Concepts:

Before proceeding to a consideration of the chief types of breakdowns used for social income and
of various moot questions in the concepts of social income, we may consider three main types of
distinction among income concepts.

INCOME ‘DERIVED FROM’ vs. INCOME ‘RECEIVED OR RECEIVABLE

IN’ AN AREA:

For any area short of the entire world, it is important to distinguish between
Income ‘derived from’ the wealth and labour employed in it and income ‘received or receivable’ in
it. In the United States since the War the national income received or receivable has been larger
than the national income derived from persons and resources employed. The difference, or net
income derived from abroad, can be estimated from the balance of international payments
statement and certain related information in a manner analogous to that used in estimating the net
value product for any individual enterprise.

The distinction represented by the exclusion or

inclusion of the item income derived from other areas’ is usually referred to as ‘income produced’ vs. ‘income
received’ in an area.
Neither term is entirely accurate. ‘Income produced’ by a nation
is open to the productivity theory implication just mentioned, and ‘income received’ in a nation
may not include all income activating to the inhabitants during the period. The item ‘income
derived from other areas’ may, of course, be either positive or negative.

THE RECEIPT AND ACCRUAL BASES FOR REPORTING INCOME:

A good many items of income may be reckoned on either of two bases, receipt or accrual. For some
items, e.g., payrolls, no substantial difference is involved, at least when the social income for a
year or longer period is under consideration. For a good many other items there is, or may be, a
considerable difference. Thus, we may consider either actual pension payments or credits to the
accounts of prospective pensioners. Again, in connection with interest payments and receipts,
allowance may or may not be made annually for the accumulation of bond discount or for a
reserve for bad debts.
 BASES OF VALUATION:

Income estimates may- be presented on any of several bases of valuation for the various constituent items.
Three principal types of valuation bases may be
suggested:

Current Prices
Stabilized Prices

Valuations that attempt to correct existing data for various distortions they
are assumed to involve in Natiollo.1 Income in the United Sates, 1929-1935 Bureau of Foreign
and Domestic Commerce, overlooks these accruals. It is “The National Income paid out may be
defined as the sum of payments to or receipts by individuals as compensation for economic
services rendered”.

Current prices and values

Most items in a social income estimate the application
of current prices and values raises few problems. For two types of items, however, there is
ambiguity involved in the application of this basis:

Imputed or non-monetary income items

Incomes accruing to the owner’s proprietorship equities.

[i] Imputed items:

When imputed items are included in an estimate of social income what prices
should be used? Thus, in estimating the value of farm produce consumed on home farms should
realization prices at farms or retail prices in adjacent communities be used? The latter alternative
has the advantage of facilitating geographical comparisons of income.

Another important imputed item involving a difficult valuation question is that of net income derived from
home ownership. Should the gross rental used for such an estimate be varied from year to year with the
year-to-year fluctuation in rents? In general it would seem that this item should be more stable
than rents.
 [ii] Proprietorship equity items.

The ambiguity in the case of incomes accruing to the owners of

proprietorship equities may be illustrated for owners of common stock. The owner receives in
addition to cash dividends an item represented by the increase in the value of his equity during
the year or other period.

The three bases chiefly used in determining this income are:

 The book value of the equity assuming standard accounting procedure

 The value of the equity on the security markets
 An adjusted book value of the equity

Assuming that both opening and closing inventories

are valued at an average price for the year and that a kind of replacement accounting is used instead
of depreciation accounting.
If security market value is used, the question arises whether to use
the price at a particular instant or the average of several quotations. Even when an average is
used, variations in market values are so eccentric as to lead to bizarre results.

The use of the adjusted book value basis, in the writer’s opinion, should
properly be considered as a partial stabilization of prices of the general type considered under are as below.
 Stabilized prices:

Variations from period to period in social income as measured in current

prices reflect in part changes in the physical volume of production of the economic system (or
else in the physical volume of the wealth and labour used in production) and in paring changes in
price.

For many purposes it is desirable to attempt to correct dollar volume

variations in income measured at current prices in such a way that they should sell only variations in
physical volumes. This may be accomplished by estimates of what social income would have one fixed
set of prices prevailed throughout the various periods to be compared.

Theoretically, similar corrections might be applied in making comparisons of social income between
communities.

Practically differences in the physical items included in social income in different communities
are likely to be greater than are the corresponding differences in any two nearby periods of time
for the same community.

Hence, such corrections for the geographic comparisons offer

difficulties so great that no comprehensive attempt to make them has yet been offered, to the
writer’s knowledge.
 Even corrections for time comparisons are in a very elementary stage, and
one might rightly hesitate to describe as ‘comprehensive’ any existing attempt to make
corrections for price changes in the estimates of the national any nation for any two years.

Corrected valuations:

Conceivably a great variety of corrections of income estimates may be

attempted through adjusting valuations in individual items. Actually it may be easier to agree
upon the existence of difficulties in the individual income items than upon the corrections to
apply to them.

Thus, some prevalent accounting practices may be regarded as

undesirable, and various efforts might be made to estimate what would have been shown by the
records had better accounting practices been followed.
Somewhat the same thing may be said with respect to corrections for the eccentricities of government fiscal
policy.

Again, existing prices may be felt to reflect monopoly conditions. the unequal distribution
of wealth and income, the failure to outlaw certain socially undesirable practices. etc. Efforts might be made to
make corrections upon the assumption that each of these conditions in turn is replaced by a condition
deemed preferable.
But such corrections are so fraught with difficulty and so likely to pave
arbitrary that there is a strong presumption against making any of them.

1) BY TYPE OF PAYMENT OR DISTRIBUTIVE SHARE

Total social income may be conceived as consisting of three main types of income-
 Employee labour income
 Property income
 Entrepreneurial profits

These correspond roughly to the wages, interest and profits of classical

economic theory. For present purposes pensions and certain other types of compensation may be
included under employee labour income along with payrolls. And in addition to interest and accruals
pertaining to the holding of banns or other forms of indebtedness the income that accrues to owners of
corporate proprietorship equities may be considered property-income.

Entrepreneurial profit is a hybrid type of share including both labour

and property income. These three broad classes of income -employee labour income. Property
income and profits-constitute the chief primary distributive shares in the national dividend.
 Classical economic theory would add a fourth-rent. Actually it is
better to consider rents and royalties as gross income. Since in most cases depreciation and various
expenses paid to other- enterprises (taxes. repairs. etc.) must be deducted from rent and royalty incomes.

Moreover interest and wage payments as well as payments to other

enterprises. may be made out of gross rent and royalty incomes.

The residual after these deductions is more aptly described as net

entrepreneurial profit from the ownership and management of properties than as a fourth main
type of distributive share.

In addition to the primary distributive shares various redistributions of

social income and the ownership of wealth may be made. The chief of these are considered
below.
 BY INDUSTRY:

Social income may be broken down according to the industries from which
primary distributive shares are derived. Such a break-down can be made in more detail and on a
clearer basis for payroll income than for some of the other distributive shares were dependable
basic data for entrepreneurial profits available.

A detailed industrial breakdown for this type of

income could also be made fairly satisfactorily. Difficulties arise, however, in the industrial
apportionment of property incomes, owing bot~ to the vertical integration of the large enterprises
from which much of this type of income is derived, and to the fact that property income, instead
of going directly to individuals, may first pass through the hands of various equity ‘holding’
companies (including banks and insurance companies).

It should be emphasized that the income

derived from an industry does not necessarily represent the industry’s contribution to the
aggregate social income. Nor can any distributive share derived from any industry be assumed
necessarily to represent the contribution of the factor of production remunerated thereby to
aggregate social income or aggregate social production.

If we question whether the contribution

of monopolies to aggregate social income is accurately measured by the income derived from
them, we question also whether the contributions of employees and owners of and of investors in
those monopolies are measured accurately by the incomes derived from them.
 BY AREA

When social income is apportioned geographically, we need to distinguish

between the income derived from an area and the income received or receivable in it. Thus we
may speak of the national income derived from the wealth and people of the United States or
the national income received or receivable by the people of the United States.

Similarly, we may speak of the income derived from farms and persons working on them, or of the income
received or receivable by the farm population.

The former is sometimes referred to as the income

derived from agriculture and the latter as the income of the farm population.
 BY INCOME CLASS

While existing data for the United States provide far from satisfactory
information for the allocation of social income by income classes, the nature of this type of distribution is in
some ways simpler than that of any of the three preceding types.

Classes in the total population. or in families and single persons, or in

income recipients may be set up either by establishing absolute class limits in terms of dollars of income per
annum or by the use of the quartiles. deciles or percentiles in the frequency distribution, and total social
income received or receivable may then be apportioned among the classes so set up.
 BY OBJECT OF EXPENDITURE:

The apportionment of social income by object of

expenditure may, as Dr. Warburton points out to provide very illuminating information
concerning cyclical variations in the operation of the economic system, particularly if the social

income to be distributed is enlarged to represent what may be called the gross value product or
the net value product plus depreciation and depletion. We would have then three main types of
expenditure:

(a) replacements of wealth

(b) savings invested in new wealth
(c) goods and service consumed by ultimate consumers.

It scarcely needs be added that various

crosses of the five types of breakdowns discussed above are both possible and useful.

For this purpose we may use a form f income statement that can be applied somewhat generally
to the various types of enterprise involved, including business corporations, farms, and
conceivably even governments. For simplicity we neglect several possible debit and credit items
arising in connection with. the attempt to put the items here presented upon an accrual basis.
We
may distinguish six main credit or revenue items and ten main debit items which show either
expenses or distributive shares. It is assumed, of course, that the sums of debits and of credits
will balance so that by a rearrangement of these items we may obtain two estimates of. The
national income derived from the operation of the nation’s economic system.

The six credit items are:

Gross revenues from operations not elsewhere specified:

For enterprises other than banks and certain other financial institutions this item will consist chiefly of
operating revenues. As noted above, all rents and royalties will be included here as the operating revenues of
businesses devoted to the ownership and management of properties.

So far as imputed or non-money

income items are to be included in the national income estimates, they will presumably he
included under this item unless they can be treated directly as distributive shares. For the
government, taxes and other revenue receipts would be included under this
item.

(2) Interest income.

This includes all interest income. For banks and certain other financial
institutions it will, of course, represent the main item of operating income.

Interest income is the amount of interest that has been earned during a
specific time period. It is earned from investments that pay interest, such as in a savings account or
certificate of deposit. It is not the same as a dividend, which is paid to the holders of a company's common
stock or preferred stock, and which represents a distribution of the issuing company's retained earnings.

Also, the penalties paid by customers on overdue accounts receivable

may be considered interest income, since these payments are based on the use of the company's funds
(e.g., accounts receivable) by a third party (the customer); some companies prefer to designate this type of
income as penalty income. The interest income total can be compared to the investments balance to
estimate the return on investment that a business is generating.
 (3) Cash dividends received:

A cash dividend is the distribution of funds or money paid to

stockholders generally as part of the corporation's current earnings or accumulated profits.

Cash dividends are paid directly in money, as opposed to being paid as

a stock dividend or other form of value. Most brokers offer a choice to reinvest or accept cash dividends.

Understanding Cash Dividends

Cash dividends paid by public companies abide by a process stipulated by regulatory organizations. The
following dates define the dividend process.

Declaration Date: This is the date an upcoming dividend payment is announced. A liability then appears on the
company's balance sheet.

Record Date: This is the market day on which the company will check their records to see who is eligible to
receive the dividend.

Ex-Dividend Date: Investors must purchase stock before the ex-dividend date to be eligible to receive the
dividend. The Ex-Dividend date is normally 1 business day prior to the record date. Any new purchases of the
stock on the ex-dividend date (or later) will not qualify for receipt of the dividend.

Payment Date: This is the date on which eligible shareholders can expect to receive the dividend in their
accounts. Shareholders' brokerage accounts will be credited on this date. The Payment Date could be several
weeks after the record date.
 (4) Increase in tangible assets during the period.

Increases in tangible assets should be included

as a credit item when they are due to expenditures noted below under items payrolls; purchases
of materials and supplies; taxes, including special assessments.

For short-lived assets that may be

treated on an inventory basis item (4) will represent a figure which, when deducted from
purchases of merchandise and materials and direct labour, will give the expense figure, ‘cost of
goods sold’.

Accountants hesitate to treat item as a revenue item,

preferring to treat it as a deduction from purchases in order to give a net expense item for the period,
thus: purchases plus opening inventory minus closing inventory equals cost of goods sold.

From the point of view of the

economic system as a whole, however, it is important to recognize item as a revenue item or
addition to the gross value product of the industry.
This is true of additions to the long-lived
tangible assets as well as of additions to inventories. This item represents force-account additions
It may be noted that item may include income from appreciation of inventories; but such an item
would exist if inventories were accumulating, even if prices remained constant. With declining
inventories and falling prices this item would assume a negative valuation.
 (5) Subsidy revenues derived from government:

A subsidy is a benefit given to an individual, business, or institution,

usually by the government. It can be direct (such as cash payments) or indirect (such as tax breaks). The
subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest
of the public, given to promote a social good or an economic policy.

A subsidy is generally some form of payment—provided directly or

indirectly—to the receiving individual or business entity. Subsidies are generally seen as a privileged type of
financial aid, as they lessen an associated burden that was previously levied against the receiver or promote a
particular action by providing financial support.

Subsidies have an opportunity cost. Consider the Great Depression-era

agricultural subsidy described later in this story: It had very visible effects, and farmers saw profits rise and
hired more workers. The invisible costs included what would have happened with all of those dollars without
the subsidy. Money from the subsidies had to be taxed from individual income, and consumers were hit again
when they faced higher food prices at the grocery store.
 (6) Valuation readjustment gains from balance sheet items
other than inventories.
Such gains may be shown either
(a) through the sale of an asset at a figure above its book value or the
retirement of a liability at a figure below its book value.

(b) by virtue of a decision to make an adjustment in the book value’

other than that provided for by following the established arrangement for writing off an asset or a
liability during its life through charges ~o depreciation or for the accumulation of bond discount,
the amortization of a bond premium. etc.

The ten debit items are:

(10) Payrolls and other forms of employee labour income:

In employee labour income should be

included wages, salaries, bonuses, commissions, etc.; also, either the employer’s contribution to
employee’s pensions and other benefit funds or the pensions and other benefits paid from
employer contributed funds directly during the period. Compensation for damages should be
excluded.

(11) Purchases of merchandise, materials and supplies, and of the services of other enterprises:

Purchases will include payments for a great variety of things-

freight, communication, advertising. insurance premiums not elsewhere specified. legal and
medical services. electricity. contract repairs. etc.
 (12) Depletion and depreciation of tangible assets not treated as inventories:

It is assumed that except for the short-lived tangible assets depreciation and
depletion accounting procedure is followed. Item may be thought of as the decrease in a
previously established valuation of any piece of tangible wealth other than the short-lived goods
due to its use during the years or to the passage of time. Downward readjustments in an
established valuation. on the basis of which depreciation or depletion is computed. are included
elsewhere.

(13) Taxes paid, including special assessments:

This item may be thought of as a special case of

item but it raises peculiar problems which merit separate discussion below. The line between
those taxes paid by individual entrepreneurs which are to be regarded as paid by enterprises and
those which are to be regarded as paid directly by families and individuals will necessarily
depend· in part upon the national income estimator’s decision as to what items of imputed
income he will recognize.

Thus, if gross rental value of owned homes is included above under

taxes on these homes may properly be included here as a business cost.
 (14) Interest paid:

Interest paid means all interest, acceptance commission and all other continuing, regular or periodic costs, 
charges and expenses in the nature of interest (whether paid, payable or capitalised) including, for the
avoidance of doubt, finance charges relating to finance leases and hire purchase obligations.

(15) Corporate cash dividends paid:

A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or
electronic transfer). This transfers economic value from the company to the shareholders instead of the
company using the money for operations.

However, this does cause the company's share price to drop by roughly the same amount as the dividend.

(16) Damages to employees and others:

Business compensation expense for damages to all persons should be included here either on an outlay basis or
as public liability damage insurance premiums paid.

(17) Gifts and charitable contributions:

Business contributions to charity and case of the government,

certain so called transfer payments belong here.

(18) Valuation readjustment losses:

This item is the converse of item. It may represent either

actual realizations or adjustments in established book valuations. It may arise in connection
with durable tangible assets, with receivables and investments, or with liabilities.
(19 ) Additions to corporate surplus and (for individual business enterprises) profits. For any
enterprise this item should be equal to the balance remaining after deducting the above nine
debit items from the total of the six credit items. For corporation this item plus item 18 minus
item 6 corresponds to additions to surplus in Dr. Kuznets usage.

The above list of items is not

intended to be exhaustive but rather to indicate different types of income statement item that
may be used to estimate the net value product derived from, any
enterprise or industry group.

The advantages of setting up, in accounting form, the net

value product method of estimate, using such a list of items, include:

-first. the possibility where adequate data are available of making two estimates that should check with each
other;

-second, the possibility of using different kinds of items for estimating the net value products of different
industry groups;

-third, the avoidance of oversights of important considerations in making estimates for any industry group even
where data are not adequate for a double estimate

-fourth, the
recognition of the full logical implication of making an assumption or decision respecting the
handling of anyone moot item.

Thus, the bearing of the decision to include or exclude the rental

value of owned homes upon the handling of taxes has just been noted. In the writer’s opinion it is not adequate
to say that, this accounting form has advantages.
It is wise to recognize that failure to use such a double entry
approach is almost certain to lead either to counting items twice or to important omissions, or both.

Since the net value products of all enterprises may by their very
nature be added together to give us a consolidated picture for the entire economic system.
 DAMAGES TO PERSONS:

The item ‘damages to persons’ whether reckoned on a receipt or on an accrual basis, occupies a somewhat
paradoxical position in income estimates. The corresponding item for tangible assets, although not separately
mentioned, represents substantially the same kind of a deduction from the gross value product of industry as
depreciation and depletion.

The payment of damages to persons, however, has been treated as a

distributive share. This implies that, other distributive, shares remaining fixed, the larger the number of people
who are hurt the larger will be the national income. One may question whether it would not be better to treat
this item in the same way as damages to property are treated.

However, since the value of the services of human beings is not

capitalized as a form of wealth, there is no capital sum to depreciate, And more important
money spent for repairing such damages is ordinarily treated as a part of consumer expenditures.

If personal damages were to be regarded as a deduction from

the gross value product instead of as a distributive share, it would be necessary to treat the ownership and
management of a human being (considered as a sum of wealth) as a business, much as the ownership and
management of an owned home may be treated.

Doctor’s bills for repairs of personal damages could then be

treated as an expense deductible from the gross value product of this business of owning human beings. It
seems simpler and more in accordance with common sense to treat damages to persons as a distributive share.

As a corollary of this position, of course, expenses for medical

care are to be treated as a consumer expenditure although such treatment also involves a paradox; namely, the
more medical care the population requires in a given year, the larger the net value product of the medical
profession, and so, ceteris paribus, of social income.
But one may well question whether other things
could remain the same.
 INCOME FROM ABROAD:

It has been customary to estimate income from abroad as the net

receipts of cash dividends and long term interest payments into the United States. There is no logical basis for
the omission of short term interest payments in computing this item. The omission is presumably due to the
difficulties discussed above in reconciling the item ‘interest originating’ in the financial institutions with the
expectations of common sense.

Both a debit and a credit estimate of income from abroad are

possible and consideration of the two methods calls attention to three other types of items that have commonly
been omitted from estimates of net income derived from abroad.

a) Income may flow into or out of the country through migration of the owners of wealth. The capital of
immigrants entering the United States during the year brings about an increase in the
wealth owned in the United States. This increase in wealth is an income item. The ‘dowry drain’, represents an
item operating in the opposite direction.

b) Various types of secondary distribution items or transfer payment may affect the net income
received from abroad; for example, immigrants; remittances and expenditures abroad by the
American Red Cross.

c) Additions to corporate surplus may accumulate to the account

of American investors in foreign corporations. Conversely, downward valuation readjustments
may become necessary in the wealth item ‘foreign bonds held in the United States’.
 Although the balance of international payments provides most
of the data needed both for the debit and for the credit methods.

Payroll income may also flow from one area to another. This
possibility becomes more important as we deal with smaller areas of estimating net income received from
abroad, some items that need to · be taken into account in estimating net income from abroad do not enter into
the balance of international payments; e.g., (c) above. Other illustrations may be afforded by payments of
reparations in kind, by tied loans, etc.

DEFLATION:

Various suggestions have been made for methods of deflating

national income; In the writer’s opinion any attempt to deflate national income should be closely tied to a
definite physical volume concept that it is desired to approximate by the deflation.

This assumes that the employee contribution is deducted from

the distributive share ‘wages’, so that the two items may be added without double counting.

If income received, conceived of as a physical volume of

consumption plus a physical volume of savings, is to be deflated, indexes of the cost of consumption goods and
services should be applied to the volume of consumed income, and wealth indexes to the opening and closing
inventories of wealth, and the difference in the deflated valuations of wealth should be used to measure deflated
savings.
 Such a procedure leads to a -conclusion diametrically opposed to that which W.
L. draws with respect to the relative magnitudes of additions to corporate surplus during the twenties and
withdrawals from corporate surplus since 1929.

Dr. Crum has in mind the general type of deflation employed by Dr.
King. Income derived from an area may be deflated to show changes
in the physical volume of services of labour and wealth employed by the economic system from time to time. If
we may neglect net income from abroad as relatively small, the deflated distributive shares may be compared
with the deflated consumed and saved income to show· changes in the efficiency of operation of the economic 
system.

A part of the argument usually given against including valuation

readjustment gains in total national income in current~ that such items add nothing to the physical volume of
national output. The writer has criticized elsewhere the unqualified proposition; that appreciation
of a fixed amount of land; due to increasing scarcity is not a real item of income.

After distinguishing scarcity appreciation

from appreciation due to discovery or technological change, this criticism. Even scarcity appreciation clearly is
a real factor in the distribution of wealth and income.

The objection to including

it as an item in total income appears to be valid or untenable according to the type of total
income under consideration. It appears valid if we are considering total accrued income in deflated dollars;
mere scarcity appreciation (as distinguished from technological appreciation) is not properly an item of total
real or deflated income.
For income in current dollars, however, scarcity appreciation must be included, both because it is needed to
obtain accurate distribution estimates even for deflated income; and because it is an essential item if we are to
follow good accounting practice and define income so as to
make possible a check with initial and terminal balance sheets,

i.e., if saved income is to equal increase in national wealth. Indeed, if a policy of refusal to incorporate such
valuation readjustment gains in income were
pursued from the beginning of time, current site valuations of real estate would necessarily all be zero.

DEFINITIONS:

 TRADITIONAL DEFINITION OF NATIONAL INCOME:

According to Marshall,”
The labour and capital of a country acting on its natural resources produce annually a certain net
aggregate of commodities, material and immaterial including services of all kinds. This is the
true net annual income or revenue of the country or national dividend.”

 MODERN DEFINITION OF NATIONAL INCOME:

This definition has two sub parts
:
 GROSS DOMESTIC PRODUCT
 GROSS NATINAOL PRODUCT


GROSS DOMESTIC PRODUCT (GDP):

It is the aggregate value of goods and services

produced in a country. GDP is calculated over regular time intervals, such as quarter or a year.
GDP as an economic indicator is used worldwide to measure the growth of countries economy.
Goods are valued at market prices so: All the goods measured in the same units and Things
without exact market value are excluded.

CONSTITUENTS OF GDP:

 Wages & salaries

 Rent
 Interest
 Undistributed profits
 Mixed income
 Direct taxes
 Dividend
  Depreciation

FORMULA:

GDP = Consumption + Investment + Government spending + Exports - Imports.

GROSS NATIONAL PRODUCT(GNP):

It is an estimated value of all goods and services

produced by a country’s residents & businesses. GNP does not include in the services used to
produce manufactured goods because its value is included in the price of finished product. It
also includes net income arising in a country from abroad.

COMPONENTS OF GNP:

 Consumer goods and services.

 Gross private domestic income.
 Goods produced or services rendered.
 Income arising from abroad.

FORMULA:

GNP = GDP + Net income from assets abroad or Net income receipts – Net payment outflow to
foreign assets.
 Sets of Methods for measuring National Income:

 Income Method:

In this, we add net income payments received by all citizens of a

country in a particular year. N et incomes that results in all the factors of production like net
rents, wages, interest & profits are all added together but income received in the form of
transfer payments are omitted.

 Product Method:

In this, the aggregate value of final goods and services produced in

a country during a financial year is computed at market prices. To find out GNP, the data
of all the productive activities agricultural products, minerals, industrial products, the
contribution to production made by transport, insurance, communication, etc. are
accumulated and assessed.

 Expenditure Method:

The total expenditure by the society in a financial year is summed

up together & includes personal consumption expenditure, net domestic investment,
govt. expenditure on goods & services and net foreign investment. This concept is
backed by the assumption that national income is equal to national expenditure.

 Value Added Method:

The distinction between the value of material outputs and material inputs at every stage of production is Value
added.
 DATA COLLECTION AND ANALYSIS OF NATIONAL INCOME:

National Income data are of great importance for the economy of a country. These days the national income of
data are regarded as accounts of the economy that is known as social accounts. Their main
constituents are interrelated and each particular account can be used to verify the correctness of
any other account based very much on social accounts.

National income data form the basis of

national policies such as employment policy because these figures enables us to know the
direction in which the industrial output change and proper measures can be adopted to bring
economy to the right path.

The national income data are also made use of by the research
Scholars of economics, they make use of the various data of country’s input, output, consumption,
savings, income etc. which are obtained from social accounts.

National income statics enable us

to know about the distribution of income in the country. From the data pertaining to wages, rent,
interest and profits we learn of the disparities in the incomes of different sections of the society.
 LIMITATIONS:

National income is a useful tool for measuring the economic performance of a country, but it has certain
limitations. Some of the limitations of national income are:

 Non-Monetary Transactions: National income only takes into account monetary transactions, which
means that it does not consider non-monetary transactions such as unpaid housework or volunteer
work, which can have a significant impact on the economy.

 Informal Sector: National income only considers formal sector activities and does not take into
account the informal sector. This can lead to an underestimation of the actual economic activity in a
country.

 Quality of Life: National income does not take into account the quality of life of the citizens of a
country. It is possible for a country to have a high national income but low quality of life due to factors
such as income inequality, poor living conditions, and lack of basic amenities.

 Environmental Impact: National income does not take into account the impact of economic activities
on the environment. It is possible for a country to have a high national income but also high levels of
pollution and environmental degradation.

 Distribution of Income: National income does not provide information on the distribution of income
within a country. It is possible for a country to have a high national income but also high levels of
income inequality, which can lead to social and economic problems.

 Time Lag: The calculation of national income involves a time lag, which means that the data may not
be up-to-date. This can be a problem in rapidly changing economies.

Therefore, it is important to use national income in conjunction

with other economic and social indicators to get a comprehensive picture of the economic performance of a
country.
 SUGGESTIONS TO OVERCOME THE LIMITATIONS OF NATIONAL INCOME:

1) EFFECTIVE AVAILABILITY OF STATISTICAL MATERIAL:

Some persons like electricians, plumbers, etc., do some job in their spare time and receive income. The state
finds it very difficult to know the exact amount received from such services. This income which, should have
been added to the national income is not recorded due to {be lack of full information of statistics material.
Hence, there is need to effectively collect statistical information to measure national income accurately.

2) ELIMINATING DANGERS OF DOUBLE COUNTING:

While computing the national income, there is always the danger of double or multiple counting. If care is not
taken in estimating the income, the cost of the commodity is likely to be counted twice or thrice and national
income will be overestimated.

3) INCLUSION OF NON-MARKETED SERVICES: 

In estimating the national income, only those services are included for which the payment is made. The unpaid
services, or non-marketed services are excluded from the national income.

4) EFFECTIVE CALCULATION OF DEPRECIATION ALLOWANCE: 

The deduction of depreciation allowances, accidental damages, repair, and replacement charges from the
national income is not an easy task. It’ requires high degree of judgment to assess the depreciation allowance
and other charges.

5) NON-INCLUSION OF TRANSFER EARNINGS:

While measuring the national income, it should be seen that transfer payments should not become a part of
national income. The payments made as relief allowance, pensions, etc. do not contribute towards current
production, hence doesn’t give effective picture of national income.

6) INCLUSION OF SELF-CONSUMED PRODUCTION BOTH UNORGANISED AND

NON-MONETIZED PRODUCTS AND SERVICES:
In developing countries, a significant part of the output is not exchanged for money in the market. It is either
consumed directly by producers or bartered for other goods This unorganized and non-monetized sector must
be added to National income to give actual scenario of national income.
 7) PRICE LEVEL CHANGES:

National income is measured in money terms. The measuring rod of-money itself does not remain stable. This
means that national income can change without any change in output.

8) SYSTEMATIC ACCOUNTS MAINTAINED NEED TO BE MAINTAINED:

Most of the producers do not keep any record of the sale of the products in the market. This makes the task of
national income still more complicated.

9) NO OCCUPATIONAL CLASSIFICATION:
There is no occupational specialization in the under-developed countries. People receive income by working in
various capacities. One person sometimes works as carpenter and at another time as mason. The statisticians
cannot accurately measure the income of such persons which causes loss in actual terms of national income.
Hence, they must be added to national income calculation.

10) UNRELIABLE DATA: 

The statisticians themselves do not feel the importance of figures which they collect They also do not take
much pains for getting the reliable data. The figures of national Income are, therefore, not up-to-date in the
under-developed countries.