defination of national income
defination of national income
National-income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country. In other words, the total amount of income accruing to a country from economic activities in a year’s time, is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.
Definitions of National Income
The definitions of national income can be grouped into two classes. One, the traditional definitions advanced by Marshall, Pigou and Fisher; and two, modern definitions.
The Marshallian Definition 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 is must be added income from abroad.
Its Defects- Though the definition advanced by
Marshall is simple and comprehensive, yet it suffers from a number of limitations.
First, in the present day world so varied and numerous are the goods and services produced that it is very difficult to have a correct estimation of them, and consequently the national income cannot be calculated correctly.
Second, there always exists the fear of-the mistake of double counting, and hence the national income cannot be correctly estimated. Double counting means that a particular commodity or service like raw material or labour etc. might get included in the national income twice or more than twice.
For example, a peasant sells wheat worth Rs 20000 to a flour mill which sells wheat flour to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells it to the customers. If each time, this wheat or its flour is taken into consideration, it will work out to Rs. 80000, whereas, in actuality,bthere is only an increase of Rs. 20000 in the national income.
Third, it is again not possible to have a correct estimation of national income because many of the commodities produced are not marketed and the producer either keeps the produce for self-consumption of exchanges it for other commodities. It generally happens in an agriculture-oriented country like India. Thus the volume of national income is underestimated.
The Pigovian Definition- Marshall’s follower, A.C.
proved income which’ can’ be measured in terms of money. In the words of Pigou, “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money. “This definition is better than that of Marshallian definition. It has to be more practical also. While calculating the national income nowadays, estimates are prepared in accordance with the two criteria laid down in this definition. First, avoiding double counting, the goods and services which can be measured in money ate included in national income.Second, income received on account of investment in foreign countries is included in national income.
Its Defects- The Pigovian definition is precise, simple and practical but it is not free from criticism.
First, in the light of the definition put forth by Pigou, we have unnecessarily to differentiate between commodities which can and which cannot be exchanged for money.But, in actuality, there h no difference in the fundamental forms of such commodities, no matter they can be exchanged for money.
Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured. According to Pigou, a woman’s services as a nurse would be included in national income but excluded when she worked in the home to look after the children because she did not receive any salary for it. Similarly, Pigou is of the view that if a man marries his lady secretary the national income diminishes as he has no longer to pay for her services. Thus the Pigovian definition gives rise to a number of paradoxes
Third, the Pigovian definition is applicable only to
the developed countries where goods and services are exchanged for money in the market. According to this definition in the backward and underdeveloped countries of thenworld, where a major portion of the produce is simply bartered, correct estimate of national income will not be possible, because it will always work out less than the real level. Thus the definition advanced by Pigou has a limited scope.
Fisher’s Definition- Fisher adopted ‘consumption
as the criterion of national income whereas Marshall andPigou regarded it to be production. According to Fisher, “The national dividend or income consists solely of services is received by ultimate consumer’s, whether from their material or from their human environments. Thus, a piano, or an overcoat made for me this year is not a part of this year’s income, but an addition to the capital. Only the services rendered to definition is considered to be better than that of Marshall or me during this year by these things are income. Fishers Pigou, because Fisher’s definition provides an adequate concept of economic welfare which is dependent on consumption and consumption represents our standard of living.