ESSENTIALS OF NATIONAL INCOME ANALYSIS: CONCEPTS, METHODS, APPLICATIONS

National Income Analysis refers to a bookkeeping system of the government, which helps in the measurement of the economy’s health, economic development, and projected growth during a particular period of time. It aids in the evaluation of the performance of an economy and the flow of money within it. The national income accounts use the principle of a double-entry system.

Concepts of National Income in India

• Gross Domestic Product or GDP

This is the basic measure of national income in India. It refers to the total money value of all final goods and services generated within the geographical boundaries of India during a given period of time. Note that GDP measures only goods and services produced within India’s geographical boundaries, while GNP (Gross National Product) includes those produced within India as well as outside the boundaries.

GDP (Y) = C+ I +G + (X-M)

Where Y is National Income, C is Consumption Expenditure, I is private investment, G is government spending, X is exports and M is imports.

GDP is the most typical measure of the economy. Other measures can be derived from it. These include:

GDP at Market Price: GDP – Subsidies + Direct taxes

GDP at Factor Price: Aggregate of income earned by Factors of production (Land, Labour, Capital and Enterprise) + Subsidies- Indirect taxes.

• Gross National Product (GNP)

It is a measure of the total value of goods and services produced by citizens of the country within a specific period. Thus, this measure includes the production of citizens within India and abroad, while those of foreign nationals within India are excluded.

 GNP= GDP + Factor Income from abroad to India- Factor Income from India to abroad.

• Real GDP

It is GDP expressed as GDP at prices of base year or constant prices:

Real GDP= GDP at constant prices.

• Nominal GDP

It is equal to GDP at the current price

• GVA or Gross Value Added

It is defined as the estimate of output subtracting the amount of inter-mediate consumption.

GVA= GDP-INDIRECT TAXES + SUBSIDIES.

• Net National Income

It is the gross national income minus the depreciation of capital assets. Measures include NNP and NDP.

NNP= GNP- depreciation while NDP= GDP- Depreciation

Alternatives to GDP Measures

• GPI or Genuine Progress Indicator

It measures the environmental impact and social costs of economic production within a country and whether they are conducive to overall well-being and health.

• Gross National Happiness (GNH)

It tries to measure not just economic output but also the cultural growth of citizens, the environmental impact of production, and the strength of political and corporate systems.

• GSDP (Gross Sustainable Development of Product)

This measures the impact of production within the economy on the health of its environment.

• HDI or Human Development Index

It measures the average achievement of the economy in terms of health, education, and standard of living. This measure is published by the UNDP in its annual Human Development Report.

• Social Progress Index (SPI)

Measures the degree to which governments provide for the environmental and social needs of citizens; its focus is on social outcomes instead of measuring inputs.

• Human Capital Index (HCI)

It measures the quantum of human capital that a child can hope to attain when it is 18 years. The measures include survival, quality, and quantity of education and health.

• Green GDP

It is the expression of GDP after adjustments for environmental damage in the economy (loss of biodiversity or impact of climate change).

Methods of Calculating National Income

Simon Kuznets has outlined the following three ways of calculating National Income: Product Method, Income method and Expenditure Method.

• Product Method

It is also called a Product Service Method. As per this method, the net value of final services and goods produced within a country is collected, which is referred to as the total final product. This measure is also called as GDP. This measure adds net income earned by nationals abroad while subtracting depreciation in a year.

Also called as the Value-Added Method, the product method depends on the net value added to the product at all stages of production. For this method, the economy is divided into various sections, such as agriculture, industry, transport, etc.

National income is calculated by adding the total output of sectors of the economy. This method reveals the contribution of each sector to the national income of the economy.

• Income method

As per this method, the total earnings obtained from the different production factors in a given year are estimated. It includes the incomes of both persons who pay taxes or do not pay taxes.

As per this method:

GDP= Wages + Rents + Interests + Profits 

To use this method, groups of persons from various income sources are selected, and on the basis of their income, the national income of the country is calculated. This method reveals the distribution of national income among various income groups in the economy.

• Expenditure method

In this method, national income is determined by adding up the expenditures of the government, companies and individuals. Thus, it adds up consumer expenditure, investments made by companies, government spending and net exports in order to estimate national income.

Applications

• Statistics of NI collated by national income accounting can be used to simplify techniques and procedures used for measuring aggregate output and input of an economy.
• Such data is used for framing the economic policies of the government and also to help recognize the systemic changes occurring in an economy.
• NI accounting offers information on the trends of the level of economic activity. It is possible to explain different economic and social phenomena that help policy makers to frame superior economic policies.
• NI accounting statistics are used by central banks to apply different interest rates and to establish or review Monetary Policy. 
• All the data on expenditure, investment and GDP also aids the government for framing or modifying policies as regards tax rates and expenditures on infrastructure etc.
• NI accounting data also reveals the relative contribution of the various sectors of the economy towards the growth of the economy.

In sum, NI accounts demonstrate the relationship between income, production, and expenditure through the three methods. Ultimately, the calculation of National Income is critical for evaluating the economic performance of an economy and helps in the making of decisions on economic policies.