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Methods of Measuring the National Income

Updated on June 1, 2014

Meaning of National Income

National income refers to the amount of goods produced by the people of a country during the course of a year. It represents annual addition to the wealth of the nation. National income is also known as national dividend. National income is expressed usually in terms of money. Sometimes, national income is defined as a “collection of goods and services reduced to a common basis by being measured in terms of money.”

Marshall defined national income as follows: “The labor and capital of the country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds…This is true net annual income or revenue of the country, or the national dividend”.

Importance of the Concept

National income is a very useful concept in economics. For it is the one single figure that tells us many things about the economy of a country. From the national income of a country, we can tell whether the country is rich or poor. Not only that, it is the measure of the economic welfare of people in a country. Further, we can judge the economic growth of a country by looking at the increase in the national income. For example, our government implements economic plans to improve the standard of living of the people in the country. That, it wants to do by increasing the national income of the country during every plan period. For instance, one of the main from the rate of increase in the national income, we can find out whether there has been any economic growth. Again, national income is the source from which all factors of production (land, labor, capital and organization) are rewarded in the form of rent, wages, interest and profits.

It is not merely the size of the national income that is important. The composition of national income gives us a clear picture of the nature of the economy. The increase in national income does not always improve the welfare of people. For example, the national income of a country may increase during a period. But suppose the price level increases faster than the increase in the incomes of the people, people may not be better off. Again, if a major portion of the increase in income goes to a small section of the people then a majority of the people will suffer. We get per capita income (i.e., income per person per year) by dividing national income by the population of the country.

Measurement of National Income

There are three main methods of measuring national income. They are:

  1. Output Method
  2. Incomes Received Method and
  3. Consumption and Investment Method.

The output method measures the value of all commodities and services that are produced in a country during a given period, say, a year. This total is called the Gross National Product (GNP). But the whole of the GNP will not be available for distribution. Some of that has to be kept aside for replacing worn out capital and so on. This should be deducted from the GNP. The resulting figure is known as Net National Product.

The incomes received method measures the national income after it has been distributed. In this method, we include even the income of government and undistributed profits of companies.

The third method of measuring national income is to measure consumption plus investment. Consumption gives the total amount of money spent on consumer goods. Investment refers to that part of wealth devoted to further production of wealth. So consumption plus investment should equal national product.

Comparison of National Income: Sometimes a comparison of national incomes of different countries is made. The comparison helps us to know about the economic position and performance of different countries. But before comparing the national incomes of two countries, we have to see first of all whether they have been calculated in the same manner. Otherwise, adjustments have to be made for true comparison. Further, we have to take into account the population of a country also.

For most purposes, we should divide the national income by population. That is to say, it is better to compare per capita incomes. The best thing is to compare real national income per head. For that, allowances should be made for differences in price levels. Just because money incomes of people are high in any country, we cannot say they are better off than those in other countries are. For price level might be very high in that country. A higher income may reflect inflation, which is bad for people.

© 2013 Sundaram Ponnusamy

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