National Income (NI)

National Income (NI)

Human wants can be satisfied through consumption of goods and services only. (A good is a tangible or material object like pen, book, shoes, etc. which has economic value whereas service is intangible object like services of teacher, doctor, judge, etc.) Therefore, production of goods and services has been going on since the dawn of economic history to meet unending wants of a society. Thus broadly speaking national income is a measure of value of production activity of a conutry. How? Production generates income, how? Production of goods and services is the result of combined efforts of factors of production (land, labour, capital and enterprise). The net output emerging from production process gets distributed among factors of production in the form of money income (rent, wages, interest and profit). Thus production generates income. With this income factors of production (i.e., factor owners) purchase goods and services for final consumption and investment. Thus income creates expenditure. In short, production generates income, income creates expenditure and expenditure calls forth production. Hence national income can be defined (expressed) in three ways, i.e., in the form of final goods and services (Production Phase), generation of factor income (Income Phase) and consumption of final goods and services (Expenditure Phase) as shown below.

(i) From production point of view, 'National income is the sum total of money value of net flow of all the final goods and services produced by normal residents of a country during a period of account.' (National income is basically a measure of production activity.)

(ii) From income point of view CSO has defined, 'National income is the sum total of factor incomes earned by normal residents of a country in the form of rent, wages, interest and profit in an accounting year.'

(iii) From expenditure (disposition of national income) point of view, Simon Kuznets defines thus, 'National product is the net output of commodities and services flowing during the year from the country's productive system into the hands of ultimate consumers or into the net addition to the country's capital goods'.

In short, national income is cither money value of all the final goods and services produced or sum total of all factor incomes earned or sum total of final expenditure (consumption expenditure + investment expenditure) in a year.