Measurement of National Income (Income approach)

-

National income may be defined as the sum of income of all individuals in a country in a period of time whereas individual income may be defined as monetary value of his/her earnings from productive activities. In other words, national income is defined as sum of income paid to/received by various factors of production in a country in a period of time. National income includes the following attributes: 

  • Wages, salaries, commission, bonus and other form of compensation to workers before deduction of tax and social security contribution. 

  • Net income from rent and royalties earned by fixed factors of production. 

  • Net interest income from any type of services 

  • Profit of partnership and proprietorship before deduction of tax 

  • Income from nonprofit making activities.  

Summation from the above five points gives us Total Personal income 

Total personal income + Undistributed profits of private business organization= Total Private Income 

Total Private income+ Undistributed profits+ Other income= Gross National Income

Still, some omissions and inclusions should be made to arrive the fiscal figure of national income. 

  • National income does not include transfer payments ( Payments given to persons and organizations for which no goods and services are exchanged for it. Eg. Unemployment allowance, elderly allowance, disability allowance etc.) Corporate bailouts and subsidies are normally not considered as transfer payment 

  • National income does not include capital gains and losses (Excess money over the purchase price e.g. Depreciation of fixed assets, appreciation of land etc.) 

  • National income does not include receipts from sale of assets. 

  • National income does not include cost of production 

  • National income does not include Public borrowing

After making additions and omissions, we now get net domestic income 

Net domestic income+ Net factor income from abroad = Net national income (National income) 

Net factor income from abroad (NFIA) is the difference between factor incomes received from abroad and factor income paid from abroad. It is the difference between what normal residents of Our country earns from abroad and what foreign residents earn from our country. 

Therefore, National income is the income of normal residents of a country from their participation in world economic activities.

Location: Nepal

Comments

Post a Comment

Popular posts from this blog

Ratchet effect and Demonstration effect

-
Image
According to Dussenberry’s Relative income hypothesis, consumption function is not independent but is interdependent upon the relative position in the society. The consumption habits may change if the relative position of individuals changes in the society. It is explained through Ratchet effect and demonstration effects . Every man wants to imitate the higher standard of living of their neighbors. He wants to live up their Joneses. This is called as demonstration effect in consumption behavior. There is another influencing behavior in the consumption. When a man regards himself as equals to the neighbors, he was to express his superiority. Thus, when income level increases, the consumption level is likely to go up.   Another feature of Dussenberry’s consumption function is that once the higher standard of living of the consumer is achieved, it cannot come down with the decrease in their income. This is called ratchet effect of consumption function. Under such conditions, a fal...
Read more

Lancastrian Demand Theory and Linier Expenditure function

-
Image
Lancastrian demand theory was developed by Australian Economist Kelvin Lancaster. He published an article on Journal of Political Economics in 1966 entitled “ A new approach in consumer theory ” and also published a book called    “ Consumer Demand: A new approach ” in 1971. According to Lancaster, A consumer chooses to buy a particular product not only because of its Utility and cost but based on the combination of attributes which includes Taste, color, size, weight, price, etc. Thus, U = f ( Taste, color, price, weight, size, etc. ) He explained it further by taking in consideration of why an individual buys a particular food item. Let consumer buy the food item based on two nutritional factors: Vitamin (a 1 ) and Calories (a 2 ). Suppose there are three items in consumption basket x, y and z. Then, a 1 = a 1 x x + a 1 y y+ a 1 z Z a 2 = a 2 x x+ a 2 y y + a 2 z Z Where, a 1 x = the vitamin obtained from good x a 1 y = he vitamin obtained from good ...
Read more

Nash equilibrium and The Prisoner’s Dilemma

-
Image
Nash equilibrium was a concept developed by John Forbes Nash who was awarded novel prize in economics in 1994 for his contribution in developing game theory. It is the concept in game theory that determines the optimal strategy in a non-cooperative game in which each player lacks any incentive to change his/her strategy. It conceptualizes the behavior and interactions between game participants to determine the best outcomes and also helps in predicting the decision of players if they are making decisions at the same time and the decision of player takes into account the decision of other players. Under Nash equilibrium, a player does not gain anything from deviating from the initial chosen strategy assuming that the other player keeps their decision intact. There may be Single or Multiple Nash equilibrium Single Nash equilibrium Imagine two competing companies: A and B. Both the companies want to determine whether they should launch a new advertising campaign for their products. ...
Read more