National Income is the aggregate value of all goods and services produced by firms in a given financial year. It can be stated that when the aggregate revenue generated by the firms is paid out to factors of production, it equals aggregate income or National Income. The National Income can be calculated by using either of the three methods: Value-added or Product Method, Income Method, and Expenditure Method.
According to Marshall, “The labor 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.”
Items Included in National Income
| Items Included in National Income | Reason |
|---|---|
| Broker’s Commission on the purchase/sale of second-hand goods or financial assets. | These items are included in National Income because the services rendered by the brokers are productive. |
| Services provided by the owners of production units, such as imputed rent of the owner-occupied house, interest on own capital, production for self-consumption, etc. | These items are included in National Income because they contribute to the current output of goods and services of an economy. Also, imputed values are added to the National Income of an economy because they are related to productive activities. |
| Capital Formation (Investment), such as the purchase of machinery by a firm, water pump purchased by a farmer, addition to stock, construction of a new house, etc. | These items are included in National Income because they are a part of the Gross Domestic Capital formation. |
| Payment of Bonus, free clothes given to workers, contribution to provident fund by employer, house rent allowance, rent free home given by the employer, subsidized lunch served to workers, free medical facilities provided to employees. | These items are included in National Income because they are a part of the compensation given by employers to their employees for their productive services. |
| Payment of bus fare by households, insurance premium paid by employees, examination fees paid by students, etc. | These items are included in National Income because they are a part of the Private Final Consumption Expenditure. |
| Profit earned by an Indian company from its branches abroad, rent received by Indian residents on their buildings rented out to foreigners, profits earned by a branch of an Indian bank in London, etc. | These items are included in National Income because they are a part of the Factor Income from Abroad. |
| Free services by the government, including dispensary, education, etc., and government expenditure on street lighting. | These items are included in National Income because they are a part of the Government Final Consumption Expenditure. |
| Expenditures incurred by a foreign tourist in the country | As the expense made by foreign tourists and goods exported are produced within the domestic boundaries of the country, they are included in the determination of an economy’s output. |
| Interest on loans paid by Commercial Banks | Interest is paid on loans taken by commercial banks for productive purposes. |
Items not Included in National Income
| Items Included in National Income | Reason |
|---|---|
| Transfer Incomes and Payments like scholarships, old age pension, unemployment allowance, expenditure on birthday/marriage, meals to beggars, compensation given to accident victims, etc. | Transfer Incomes and Payments are not included in National Income because they are not connected with any kind of production activity. Also, there is no value addition from these incomes and payments. |
| Compulsory Transfer Payments like interest tax, indirect taxes, and capital gains tax. | Compulsory Transfer Payments are not included in National Income because these are just transfer payments and the government does not promise any service in return. |
| Sale and Purchase of financial assets like bonds, shares, debentures, etc. | Sale and Purchase of Financial Assets are not included in National Income because these transactions do not make any contribution to the current flow of goods and services. These are just paper claims, and its sale and purchase change the title of the asset only. |
| Windfall gains like winning from lottery, contests, horse races, etc. | As no productive activity is involved with windfall gains, these are not included in National Income. |
| Non-Market Transactions like kitchen gardening, domestic services rendered by housewives, a parent teaching his/her child, or leisure time activities like making art, painting house, etc. | Non-Market Transactions are not included in National Income because ascertainment of their market value is difficult. Besides, the non-market transactional services are not rendered with the motive of earning income. |
| Intermediate Consumption Expenditure like electricity or advertisement expenses of a production unit, expenditure on the repair of assets, milk purchased by a dairy shop, purchase of chocolates by a school canteen, etc. | Intermediate Consumption Expenditure is already included in the final expenditure; therefore, these are not included in National Income to avoid double counting. |
| Sale or Purchase of second-hand goods like old car, old machinery, old house, old scooter, etc. | Sale and Purchase of second-hand goods are already included in the year when the original transaction of sale or purchase was made. Therefore, they are not included in the National Income of the current year. However, any commission, brokerage, etc., on these transactions are included, as they are made for rendering productive services. |
| Capital Loss like destruction of factory, land, machinery, etc., by natural calamities | As capital losses do not affect the National Income of an economy directly, they are not included in National Income. |
| Capital Gains like profits due to an increase in the price of land, building, shares, or income from the sale of financial goods, second-hand goods, etc. | Capital gains do not add anything to the flow of goods and services in the economy; therefore, they are not included in the National Income. |
| National Debt Interest or the interest paid by households to the commercial banks. | Any interest paid on the loans taken for consumption purposes is not included in the National Income. |
Example:
Determine whether or not the following transactions/items will be included in the National Income of an economy. Give reason for the same.
1. National Debt Interest.
2. Imputed rent on a self-occupied house.
3. Old age pension.
4. Sale of a second-hand car.
5. Earning from an internship in a company by a student.
6. Rent received by the residents of India on the buildings (in India) rented out by them to foreigners.
7. Advertisement expenses made by an organization.
8. Dividend received by shareholders of a company.
9. Expenditure on the construction of an office building.
10. Destruction of buildings because of natural calamities.
Solution:
1. It will not be included in the National Income of an economy because it is the interest paid by the government on the loans taken to meet its consumption purposes.
2. Imputed rent on a self-occupied house will be added to the National Income because people living in this house are enjoying housing services similar to the rented houses.
3. Old age pensions will not be included in the National Income of an economy because it is a transfer payment made the Government, and is a transfer income for the person receiving pension. Also, there is no value addition from these incomes and payments.
4. The money received from the sale of the second-hand car will not be included in the National Income of an economy because it was already included in the year it was originally purchased by the owner. Besides, this sale does not make any change to the current flow of goods and services.
5. It will be included in the National Income of an economy because the student has received income for the productive services provided by him to the company.
6. Rent received by the Indian residents for the buildings rented out to the foreigners in India is a part of factor income from abroad. Hence, it will be included in the National Income.
7. Advertisement expenses will not be included in the National Income of an economy as they are intermediate consumption expenditures and are already included in the final consumption expenditure.
8. Dividend received by the shareholders of a company will be included in the National Income because it is a part of the profits made by the company’s production units, distribute among its owners.
9. It will be included in the National Income of an economy as it is a part of capital formation. However, any expenditure made on the repair of the building will not be included.
10. It will not be included in the National Income of an economy as it does not affect the national product directly.
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