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Understanding National Income: Importance, Benefits, and Limitations #1 Best Sociology Optional Coaching
August 12, 2020

Understanding National Income: Importance, Benefits, and Limitations #1 Best Sociology Optional Coaching

The interrelated constituents of social accounts can be used to verify the correctness of any other account. Assessing economic output also helps investors understand the factors driving an economy. For example, over two-thirds of the US economy depends on consumer spending. Knowing this can help investors make better-informed decisions about investing in consumer goods and services. By analyzing economic indicators, investors can get an insight into the strengths and weaknesses of an economy and make better-informed investment decisions.

  1. Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employee’s contributions to social security schemes.
  2. In the modern economy, money is used in the process of exchange, e.g., money acts as a medium of exchange.
  3. They enable us to compare the standard of living of the people in different countries or the people living in the same country at different times.
  4. We know that GDP measures the value of goods and services produced in a year.

GDP also includes the market value of the housing services provided by the economy’s existing housing stock. For rental housing this value is equal to both the tenant’s expenditure and the landlord’s income. There is a continuous flow of goods and payments between the producers of goods and services, which we call businesses, and individuals, who typically live in family units called households. The nature and direction of these exchanges are presented in the circular flow model of Income and output. In the U.S., the Bureau of Economic Analysis (BEA), a part of the Department of Commerce, prepares and publishes national income accounts. Global economic figures are aggregated and distributed by the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD).

Problem of Collection of Correct Data

The income method, also known as the Gross National Income (GNI) method, involves adding up all the incomes earned by individuals and businesses within a country during a specific period. This method measures the income earned by residents of a country, regardless of where the income was earned. In order to count a good or service, it is necessary to assign value to it. The value that the measures of national income and output assign to a good or service is its market value – the price it fetches when bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-value to be any different from its market value. It is the entire value of products and services generated in a given economy over a specific period.

Personal Income

They throw light on the data pertaining to the country’s gross income, output, saving, consumption etc. The economy is generally divided into different sectors and sub-sectors. Through national income statistics, we can obtain a clear picture of the sectoral contribution to gross national product.

Though the concepts of national income are very clear in India there is difficulty is measuring it because there is a considerable non monetized section. The central statistical organization (CSO) who estimates the national income has gradually fined the method of estimation and has made estimates more accurate. After a good part of personal income is paid to government in the form of personal taxes like income tax and personal property taxes, what remains of personal income is called disposable income. In short, we have explained the circular flow of a closed economy with no savings and no role of government. We can introduce these complications and see how the circular flow takes place in the working of the real-world economy.

To obtain this figure, we must deduct from GNP those components which do not accrue to factor owners as income. These are indirect taxes, less subsidies (that is, net indirect taxes) and depreciation. According to this method, the incomes accruing to all the factors of production during the process of production are aggregated together to arrive at the national income of the country. In the era of planning, national income statistics are regarded as a comprehensive tool of economic policy.

It includes not only the part of the production which is brought to the market for sale but also that part of the product that is kept for self-consumption. The firm or productive enterprise is the basic producing unit in economic life; it may be a grocer’s shop, a cotton textile mill or an agricultural farm. The chief characteristic of the firm is that it gets together resources or factors of production with a view to producing a particular good or goods. This policy is controlled by the monetary authority that is the Central Bank. This policy aims to enhance the strength of the country’s currency and to stabilize prices. The central bank can buy and sell bonds to circulate wealth and create an equilibrium.

National income accounting is used to measure economic growth and activity. It can also be useful in tracking trends and guiding monetary policy, such as policy tax rate setting. The data so arrived at enables us to understand, analyse and interpret the working of an economy. That is why the subject of macroeconomics should begin with a study of national income accounting. Also, some households receive income that is not currently earned by them.

Non Availability of Goods and Services for Exchange

However, the GDP deflator has limitations, such as the exclusion of goods and services that are not included in GDP and the difficulty in determining the base year. Despite its limitations, GDP is still an important economic indicator that is used to measure a country’s economic growth. A high GDP indicates that a country is producing a large quantity of goods and services, which can lead to higher employment and higher standards of living. However, it is important to note that a high GDP does not necessarily guarantee economic well-being for all members of society. These accounting systems allow countries to assess their living standards, income distribution throughout a population, and the effects of various economic policies. Finally, net factor income from the rest of the world (ROW) is added to the net domestic product (NDP) at the factor cost to produce net national product (NNP).

A mismatch between the two can indicate either a run-up in financial markets ahead of fundamentals or markets lagging behind. Investors can use this information to make investment and asset allocation decisions. For instance, https://1investing.in/ if the income earned by domestic residents from investments abroad is $50 billion and the income earned by foreign residents from investments in the domestic economy is $20 billion, then the NFIA would be $30 billion.

Indian Economy on the Eve of Independence Notes PDF Class 12

On the other hand, if the NDI is low, it could indicate a lower standard of living and reduced economic growth. NFIA refers to the difference between the income earned by the domestic residents from investments abroad and the income earned by foreign residents from investments in the domestic economy. It includes net income earned from factors of production such as labor, capital, and land.

It can be obtained from NNP at factor cost by making certain additions and deductions. It is the sum total of net values added by each producer in the productive process of an economy during one year period. This circular flow of money, also known as Wheel of Wealth, is common to all modern economies. It exists whether resources are owned publicly or privately and whether the economies be free-enterprise economies or planned economies.

Economists and policymakers use national income accounting to track the performance of the economy and make informed decisions to improve economic growth and welfare. Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output. This avoids an issue often called ‘double counting’, wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100.

When Maruti Udyog Limited produces and sells a new car, the value of the car is included in GDP. When an individual or a company sells a used car to another person, the value of the used car is not included in GDP. But government includes these owner-occupied houses in GDP by estimating their rental value. This means that GDP importance of national income accounting is based on the assumption that the owners, in effect, pay rent to themselves. For this reason such notional rent is included both in their expenditure and in their income. An accurate measurement of the economy’s performance is also important to private businesses because failure to do that can lead to wrong decision making.

In case of a balance between the demand and supply of a product, the production decreases, and the price becomes stagnant. This method focuses on the production of goods and services involving capital, land, labour, etc. Another parameter is mixed-income, which is earned by businessmen and self-employed professionals. Private income includes income earned privately from abroad, national debt interest, current transfers from government, and net transfers from the rest of the world. Another important measure related to NNP is the per capita NNP, which is calculated by dividing the NNP by the country’s population. This provides an indication of the average income level within a country and is often used to compare standards of living across countries.

As a result, parts or components of many goods are bought and sold many times. Hence to avoid counting several times the parts of goods that are sold and resold, gross national product only includes the market value of final goods and ignores transactions involving intermediate goods. There is no other way of adding up the different sorts of goods and services produced in a year except with their money prices. But in order to know accurately the changes in physical output, the figure for gross national product is adjusted for price changes. Per capita income can be calculated using different measures of income such as Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP) or Net Domestic Product (NDP). These measures take into account different factors that contribute to the income of a country such as goods and services produced within the country, income earned by citizens living abroad, and depreciation of capital assets.

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