1.1National Income and its Components

Dive into the foundational concept of National Income and its Components in this insightful blog post. Explore the definition of national income, its key components such as GDP, GNP, NNP, and more, and understand its significance in measuring a country’s economic performance. This post is essential reading for students and professionals in economics, business, and finance, offering a clear and concise breakdown of a core macroeconomic concept. This topic is equally important for the students of economics across all the major Boards and Universities such as FBISE, BISERWP, BISELHR, MU, DU, PU, NCERT, CBSE & others & across all the business & finance disciplines.

National Income and its Components

National Income

Total income of the country in a given period of time is called National Income. In other words, sum of the value of all goods and services produced in a given period of time is called National Income. Sum of all payments received by households as a reward such as rent, wages, interest and profit in a year is called National Income. National Income is also called national output and national production.

Pioneer of National Accounting Simon Kuznet defined National Income as, “The net output of commodities and services flowing during the year from the country’s production system in the hands of ultimate customers”

According to Samuelson, “National income is total of factors earnings in the form of wages, interest, rent and profit that are costs of producing society’s final products.”

Components or Concepts of National Income

Different components or concepts of national income are given below:

• GDP (Gross Domestic Product)
• GNP (Gross National Product)
• NNP at Market Price (Net National Product)
• NI at Factor Cost (National Income)
• PI (Personal Income)
• DI (Disposable Income)

GDP (Gross Domestic Product)

First measure of National Income is GDP. GDP means the total value of final goods and services produced in a given period of time within the country. Income received by nationals against goods and services from abroad are not accounted in GDP. Similarly, all incomes generated against goods and services within the country by foreign companies are included. For example, income of Deewan Salman Group as a National Company is included and income generated by Honda and Toyota within the country is also included.

GNP (Gross National Product)

GNP Gross National Product is the wider term and superior measure of national income. It means sum of the market value of all final goods and services produced within and outside the country by the nationals or residents. All the incomes taken away by the foreigners from the country are excluded. For example, salary taken by a Pakistani Doctor or Engineer from outside the country is also included. Similarly, income taken away by the foreigner from the country is excluded. It is yardstick for the comparison of different countries economic position.

 GNP = GDP + Income received by Nationals from abroad – Income received by foreigners from the Country

NNP (Net National Product) or National Income at Market Price

NNP Net National Product or National Income at market price is the difference of GNP Gross National Product and Depreciation allowance. Depreciation is a wear and tear value of the physical fixed assets over a period of time due to deterioration. However, GNP is still considered as best measure for national income due to two reasons:

1. In practice, it is impossible to get the exact amount of depreciation from all over the country.
2. Firms, normally overstate the amount of depreciation for the tax relaxations.

NNP = GNP – Depreciation Allowance

National Income at Factor Cost

When indirect taxes are subtracted and subsidies are added to the Net National Product, the result is National Income at Factor Cost.

National Income at Factor Cost = N.N.P – Indirect Taxes + Subsidies

Total value of NNP is not distributed among the people because government subtracted indirect taxes such as sales tax. Similarly, subsidies are price relaxations given by the government to the industries so these must be adjusted in order to get the National income at factor cost.

Personal Income

Personal income is an income which is received by the people from all sources but there are some deductions and additions.

• First, social security contributions are deducted from the salaries of the people.
• Second, Corporate taxes are deducted from the profits by the State.
• Third, all remaining profits are not distributed because part of profit is taken out as reserve fund by the companies. This part of profit is called undistributed profit.
• Fourth, some payments are earned by the people other than regular income such as Zakat, Gifts, Pensions, Scholarships etc. These are called transfer payments.

So the Formula for Personal Income shall be as follows:

Personal Income P.I = N.I – Social Security Contributions – Corporate Taxes – Undistributed Profits + Transfer Payments

Disposable Personal Income D.P.I or Disposable Income D.I

Disposable Personal Income D.P.I or Disposable Income D.I is an income which is left after deducting direct taxes from personal income. Direct or personal taxes are the taxes directly paid by the individuals to the State such as income tax, property taxes etc. The formula for D.P.I or D.I is given as follows:

Disposable Personal Income D.P.I or Disposable Income D.I = P.I – Direct or Personal Taxes

Difference between Nominal and Real GNP

Nominal GNP

GNP measured in current prices of final goods and services is called nominal GNP. It is considered as ineffective measure of GNP because of price fluctuation.

Real GNP

GNP measured in static or constant price of final goods and services is called real GNP that is considered as good measure of GNP.

Per Capita Income

Per Capita Income is the quotient of national income and total population of the country. It is an important measure to calculate the average annual income earned by the individuals of the country. The formula for Per Capita Income is given as follows:

According to World Bank, Per Capita Income of Pakistan is $1588.9 in 2022.

Source:https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2022&start=1960&view=chart

Per Capita Income is helpful measure in order to know the standard of living of the individuals of the country. Higher per capita income indicates higher standard of living and vice-versa. For comparison here are per capita incomes of different countries given below:

Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2022&most_recent_value_desc=false&start=1960&view=chart

Related Articles

Evolving different thoughts of Economics

2.1 Theory of Consumer Behaviour

2.2 Total Utility, Marginal Utility, Point of Satiety & Types of Utilities

2.3 The Law of Diminishing Marginal Utility DMU

2.4 The Law of Equal Marginal Utility EMU

3.1 Demand, Individual Demand, Aggregate Demand, Law of Demand

3.2 Change and Shift in Demand, Extension and Contraction in Demand, Rise and Fall in Demand

3.3 Elasticity of Demand

3.4 Point and Arc Elasticity of Demand

3.5 Income Elasticity of Demand, Cross Elasticity of Demand

4.1 Law of Supply

4.2 Extension and Contraction, Rise and Fall in Supply