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National Income

Introduction


National income is the value of the commodities and services produced by a nation in a given fiscal year. Thus, it is the net result of a country's economic activities over the course of a year and is measured in terms of money. National income is an uncertain term and is often used interchangeably with the national dividend, national output, and national expenditure.


According to Marshall: “The labour 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.”

In this definition, the word ‘net’ refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this must be added foreign income.


The national income accounting equation illustrates the relationship between an economy's income and expenses and other categories. It is expressed by the equation below:

Y = C + I + G + (X – M) (X – M)


Accounting


The Central Statistics Office under the Ministry of Statistics and Programme Implementation is responsible for measuring National Income and other related macroeconomic aggregates.


In 2015, India chose to make significant modifications to its compilation of national accounts and to align the entire procedure with the 2008 United Nations System of National Accounts (SNA). The SNA is the internationally accepted standard set of guidelines for compiling economic activity measures. It describes a coherent, consistent, and integrated set of macroeconomic accounts within the context of a set of internationally agreed concepts, definitions, classifications, and accounting rules.


Prior to the adoption of the new methodology, India measured GVA at 'factor cost,' but GVA at 'basic prices' is now the primary measure of economic output. GVA at basic prices will include production taxes and exclude production subsidies. GVA at factor cost did not include taxes and did not eliminate subsidies.


The base year has also been changed from 2004-2005 to 2011-2012.


The NSO offers quarterly and annual estimates of GVA output. It provides sectoral classification data on eight main categories, which comprise both produced and delivered commodities and services.


These are:

  1. Agriculture, Forestry and Fishing.

  2. Mining and Quarrying.

  3. Manufacturing.

  4. Electricity, Gas, Water Supply and other Utility Services.

  5. Construction.

  6. Trade, Hotels, Transport, Communication and Services related to Broadcasting.

  7. Financial, Real Estate and Professional Services.

  8. Public Administration, Defence and other Services.


Methods


Following are the methodologies used to calculate national income:


1. Product method

The product method, also known as the value-added method, is based on the net value added to the product at each stage of production. Typically, the product method divides the economy into distinct industry sectors, such as fishing, agriculture, and transportation. The national income is computed by aggregating the total output of the economy's sectors. The approach illustrates the contribution of each sector to the national income, indicating the relative significance of various sectors.


2. Income method

In accordance with the income method, the national income is calculated by summing the pretax income generated by people and businesses. It consists of wages, rent on buildings and land, interest on capital, earnings, etc. during a given accounting period. The income method illustrates the national income distribution among various income groups.


3. Expenditure method

In the expenditure method, the national income is measured by adding up the expenditures made by individuals, companies, and the government. In order to compute the national income, consumer expenditure, corporate investment, net exports, and government spending are combined.


GDP and GVA


GVA is the difference between the value of production minus the value of intermediate consumption. It is employed to estimate the output or contribution of a specific sector. When the GVA of all sectors is added together and the required adjustments for taxes and subsidies are made, the GDP of the economy will be determined. If the government earned more from taxes than what it spent on subsidies, GDP will be higher than GVA. If, on the other hand, the government provided subsidies in excess of its tax revenues, the absolute level of GVA would be higher than the absolute level of GDP.


Technically, GDP at Market Prices = ∑ GVA at basic prices + product taxes – product subsidies.


  • GVA is for a certain sector.

  • ∑GVA is for the economy

  • GDP is for the economy


When the value of taxes on products (minus product subsidies) is added to the gross value added, the value of gross domestic product is equal to the total of gross value added for all resident units (GDP). After adjusting for taxes and subsidies, the Gross Domestic Product (GDP) of each nation is the sum total of gross value added (GVA) in all sectors of that economy for the given year.


While GVA depicts the condition of economic activity from the perspective of producers or the supply side, GDP depicts it from the perspective of consumers or the demand side. Both measures need not match because of the difference in treatment of net taxes.


Significance of GVA


GVA is regarded a more accurate indicator of the economy. A large growth in GDP may be attributable to increased tax receipts, which may be the result of improved tax compliance or coverage, rather than the actual output situation.


A sector-by-sector analysis provided by the GVA metric assists policymakers in determining which sectors require incentives or stimuli, and in formulating sector-specific policies accordingly. However, GDP is an essential metric for cross-country comparison and comparing the earnings of various economies.


GVA is a vital and necessary indicator of a nation's economic performance from the perspective of global data consistency and standards. Any government seeking to attract foreign capital and investment must adhere to the global best practises in national income accounting.


Concerns with GVA


The accuracy of GVA relies greatly on the data sources and the precision of the various data sources.


GVA is just as prone to vulnerabilities caused by the application of improper or faulty methodology as any other metric.


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