Output and employment in a country depending on the size of national income Dr. Alfred Marshall defines National income (or National Divided) thus: Labour and capital of a century acting on its natural resources, produce annually a certain net aggregate of commodities material and immaterial including services of all kinds. The word net means that from the gross value of the output deprecation of capital must be deducted.

The concept of national income has three interpretations.

1) It represents a receipts total

2) It represents an expenditure total

3) It arises out of the fact that every expenditure at the same time is a receipt by another and if goods or services bought are valued at their sales prices, we have three fold identities that the value received equals the value paid, equal the value of goods and services are given in exchange.

Definition of national income: According to present ideas, national income may be defined as the aggregate factor income (i.e. earnings of labor and property) which arises from the current production of goods and services by the nation's economy.

There are three measures of national income of a country:

a) As the sum of all incomes, in cash and kind, accruing to factors of production in a given time period, i.e. the total of income flows;

b) As the sum of net output arising in several sectors of the nation's production;

c) As the sum of consumer's expenditure, government expenditure on goods and services, and net expenditure on capital goods.

Concept of national income: Five important concepts of national income, viz., the Gross National Product, Net National Product, National Income, Personal Income, and Disposable Income can be studied

1. Gross National Product (GNP): This is the basic social accounting measure of the total output or aggregate supply of goods and services. Gross National Product is defined as the total market value of all final goods and services produced in a year. It is a measure of the current output of economic activity in the country.

Two things must be noted in regard to a gross national product:

(i) It measures the market value of the annual output. In other words, GNP is a monetary measure.

(ii) For calculating the gross national product accurately all the goods and services produced in any given year must be counted once but not more than once.

Another important thing to be born in mind while calculating the GNP is those non-productive transactions should be excluded. These are purely financial transactions or transfer payments like old-age pensions, or unemployment doles which are merely grants or gifts or transactions relating to existing shares or second-hand shares.

GNP= wages and salaries + rents + interests + profits of unincorporated firms + dividents + undistributed corporate profits + corporate taxes + indirect taxes + depreciation – transfer of payments

2. Net National Product (NNP): When charges for depreciation are deducted from the gross national product, we get the net national product. Which means the market value of all final goods and services after providing for deprecation. Therefore, it is called national income at market prices. Thus             NNP= GNP – depreciation

3. National Income or National Income at Factor cost (NI): It means the sum of all incomes earned by the resource suppliers for their contribution of land, labor, capital, and entrepreneurial ability which go into the year's net production. National Income shows how much costs society, in terms of economic resources, to produce net output. It is really the national income at factor cost for which we use the term "National Income". Thus, national income (or national income at factor cost) is equal to net national product minus indirect taxes plus subsidies.

National Income = NNP- indirect taxes + subsidies

4. Personal Income (PI): It is the sum of all incomes actually received by all individuals or households during a given year.

Personal Income = National income – Social security contributions – Corporate income taxes- Undistributed corporate profits + Transfer payments.

5. Disposable Income (DI): After a good part of personal income is paid to the government in the form of personal taxes like income tax, personal property tax, etc, what remains of personal income is called disposable income

Disposable Income = Personal income- Personal taxes

Disposable income can either be consumed or saved. Therefore,

Disposable Income = consumption + saving

Measurement of national income: There are three possible measures of national income:

1. Total income flow

2. Net outputs, and

3. Final expenditures

All these methods arrive at the same result. Which of these methods is adopted in actual practice i.e.

calculating the national income of a country depends on the nature and conditions of its economy as well as the purpose of undertaking this exercise?

1. Production or output method: According to this method the economy is divided into different sectors such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication, and other services. Then, the gross product is found out by adding up net values of all the production that has taken place in these sectors during a given year.

The aggregate or net value of production of all the industries and sectors of the economy plus the net income from abroad will give us the gross national product. By subtracting the total amount of depreciation from the figure of gross national product, we get the net national product or national income.

This method can be used where there exists a census of production for the year. The one great advantage of this method is that it reveals the relative importance of the different sectors of the economy by showing their respective contribution to the national income. This method is called national income by industrial origin.

2. Income method: According to this method national income is obtained by summing up the incomes of all the individuals in the country. Therefore, national income is calculated by adding up the incomes of land, wages, and salaries of employees, interest on capital, profits of entrepreneurs (including undistributed profits of joint-stock companies), and income of self-employed people. This method has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc., therefore, this is called national income by distributive shares.

3. Expenditure method: According to this method we can get the national income by summing up all consumption expenditure and investment expenditure made by all individuals as well as the government of a country during the year. Hence, the gross national product is found by adding up:

1. What private individuals spend on consumer goods and services? This is called personal consumption expenditure.

2. What private businesses spend on replacements, renewals, and new investments? This is called gross domestic private investment.

3. What the government spends on the purchase of goods and services i.e., government purchases.

4. What the foreign countries spend on the goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports minus imports.

Difficulties of measurement: There are some conceptual problems that crop up when we start measuring the national income of a country.

1. The first problem relates to the treatment of non-monetized transactions such as the services of housewives to the members of their families and farm output consumed at home. On this point, the general

agreement seems to be to exclude the services of housewives while including the value of farm output consumed at home in the estimate of national income. This, however, gives rise to certain anomalies.

2. The second difficulty arises with regard to the treatment of the government in national income accounts.

3. The third major problem arises with regard to the treatment of income arising out of activities of the foreign firm in a country. Should their income/ income of foreign firms form a part of the national income of the country in which they are located or should it belong to the national income of the country owing to the firms? On this point, the IMF viewpoint is that production and income arising from an enterprise should be ascribed to the territory in which production takes place. However, the profits earned by foreign branches and subsidies are credited to the parent concern.