Concept of National Income

Introduction

National income is uncertain term used interchangeably with national dividend, national ouput and national expenditure. On this basis, it has been defined in a number of ways.

Definitions

National income has been defined into two classes. One, the traditional definition advanced by Marshall, pigou and Fisher.

The Marshallian Definition

According to Marshall "The labour and capital of a country acting on its natural resources produced 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".

Pigouvian definition

According to pigou, "National income is that part of objective income of the community, including of course income derieved from abroad which can be measured in money".

Fisher's Definition

Fisher adopted 'consumption' as the criteria of national income where as marshall and pigou regarded it to be production. According to fisher " The national income dividend or income consists of solely of services as received by ultimate consumers, whether from their material or from their human environments".

Concept of national income

There are a number of concepts pertaining to national income. For instance:

• Gross National Product,
• Net National Product,
• Net National Product,
• Net National Income at factor cost,
• Net Domestic Product at factor cost,
• Personal income,
• Disposable Income and
• Real Income.

A. GNP:This is the total measure of the flow of goods and services at market value resulting from current production during the year in a country.

Approaches to GNP

1. Income Approach to GNP consists of renumeration paid in terms of money to factors of production annually. E.g, Wages and salaries, rents,interest, dividends, undistributed corporate profit,mixed incomes, direct taxes, indirect taxes, depreciation and net income earned from abroad.
2. Expenditure approach to GNP: from the expenditure view point, GNP is the sum total of expenditure incurred on goods and services during one year in a country. E.g, private consumption expenditure, Gross Domestic private investment, net foreign investment, government expenditure on goods and services. It is denoted by a formula  C+I+(X-M)+G
3. Value Added Approach to GNP: In calculating GNP, the money value of final goods and services produced at current prices during a year is taken into account. This is one of the ways to avoid double counting. Note: NNP=GNP-Depreciation.

B. GDP:Income generated (or earned) by factors of production withing the county from its own resources is called Domestic income or domestic product.

Methods of Measuring National Income

1. Product Method 
2. Income Method
3. Expenditure Method and 
4. Value added Method

• Product method: according to this method the total value of final goods and services produced in a country during a year is calculated at market prices.
• Income Method: according to this method, the net income payments received by all citizens of a country in a particular year are added I.e net incomes that accrued to all factors of production by way of rents, net Wages, net interest and net profits are all added together but incomes received in the form of transfer payment are not included in it.
• Expenditure Method: according to this method, the total expenditure incurred by the society in a particular year is added together and includes personal consumption expenditure, net Domestic investment, government expenditure on goods and services, and net foreign investment.
• Value Added Method: another method of measuring national income is the value added by industries. The difference between the value material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.

Problems of measuring National Income

1. Double counting problem I.e, Intermediary and finished good indistinguishability.
2. Lack of data.
3. Non-marketable services e.g, services rendered by house wives.
4. Income earned through illegal activities would not be considered in national income.
5. Gambling and lottery would not be considered.
6. Inflationary or deflationary pressures.

Reasons or important of measuring National Income

1. To determine the strength of an economy.
2. It can be used in sectoral comparison. I.e,contribution of various sectors made to the economy.
3. We need National Income figures to determine the productivity of the economy through planning.
4. It can be used as index of measuring welfare of the people in an economy I.e, standard of living of the people in an economy.
5. It can be used for international comparison e.g, the economy of Nigeria vs the economy of SouthAfrica.
6. It can also be used for regional comparison and contribution.

Reference
M.L Ginghan Principal of Economics