It is the summation of the market value of all final goods and services/rewards of factors of production/expenditures of both private and public sectors in an economy during a year within and outside of its national border provided that depreciation allowance and indirect taxes are subtracted from GNP and subsidies are added in GNP.
In other words, if we subtract indirect taxes (IT) from NNP and add subsidies (S) in NNP, we find national income Thus
Subsidies are the financial assistance by the government to the individuals of the country i.e., relief on utility bills etc.
NI = NNP – IT + S
Measuring National Income
“Your knowledge is of meager and unsatisfactory kind if your cannot measure what you are speaking about.”Lord Kelvin
The concept of national income is considered the basic concept of Macro Economics. All the macro concepts revolve around this basic concept. But the question is that whether we can measure national income or not? We must have some measuring rods to measure national income otherwise our knowledge about the concept of national income would be meager and unsatisfactory kind, as pointed out by lord Kelvin.
The economists have consensus that we can measure national income by the following three approaches.
Moreover, the imperial evidence shows that Total Output = Factors income = Total expenditures. It reveals that we find the same calculations of national income by all the approaches. Now we discuss these approaches in detail.
Problems in Measuring National Income
Reliable data of output, factors income and total expenditure are not available in countries. Thus we cannot get accurate figures of national income.
There always exists a risk of double counting which may lead to false estimation.
Many services like looking after the children, laundry and other house hold services are not evaluated in market. Thus, market value of these services is not included and NI is under estimated.
Many products are produced for self-consumption especially in agriculture sector and these are not brought in market for sale. Market value of these products is also not included.
It is very difficult to evaluate the depreciation allowances which should be subtracted form G.N.P.
The component of transfer payments also creates
Illegal earnings like black money from smuggling, hoarding, gambling, etc are not included in G.N.P.
We observe fluctuations in price level due to which market value may change. It leads to increase in money income. It does not represent increase in real national income which is true reflector of economic performance.
Lack of Experts
There is a major shortage of trained and qualified manpower to collect the data regarding national income. Thus, the measurement of NI becomes difficult.
Lack of Specialization
There is the lack of occupational specialization which creates problems in the calculation of national income.
Ignorance and Illiteracy
People are generally ignorant of their responsibilities and they do not maintain a record of their income or expenditure. Also they are illiterate. Thus, calculation is just a guess which may be wrong.
Concealing the Facts
Majority of the people is irresponsible in developing countries. They conceal their actual income due to the fear of income tax department. Thus, calculation becomes inaccurate.
In calculating national income, a good number of public services are also taken into account, Their earnings cannot be estimated correctly. The forces are active, but during peace days they rest in cantonments. Hence their rewards do not match their services.
The services without material gains like treatment of a doctor to his parents, tuition by a teacher to his son also lead to inaccurate calculation of national income.
Barter transactions are still the part and parcel of economic activities of LDCs. It leads to