income means the net annual income of a country.docx

8/10/2019 income means the net annual income of a country.docx

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income means the net annual income of a country. Different concepts related to national income are discussed in this unit. Theseill be discussed in this unit. Apart from national income, some important indicators of our country such as population size,

density, sex ratio, literacy rate, unemployment problem and poverty will also be discussed in this unit.

NATIONAL INCOME

In our day-to-day lives, we consume various products. We buy goods like- books, torchlight, batteries, foods, clothes etc. Similarly, weconsume the services of a barber, cobbler, lawyer, nurse etc. to fulfil our necessities. For all such products, we make payments. Thisconstitutes our personal or individual household expenditures of consumption of goods and services. Roughly speaking, the aggregate ofall such expenditures of consumptions of goods and services by the total population or total households of a country during a specific

period of time (generally a year), constitutes the national income of that country.

Definitions of National Income

Definitions of National Income

Different economists put forward different views of National Income. Marshall used the term National Dividend in the samesense as the term National Income. According to him, National Income is "the labour and capital of a country acting on its natural

resources produce annually a certain net aggregates of commodities, material and immaterial, including services of all kinds. Thisis the true net annual income or revenue of the country; or the national dividend". According to 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".Both Marshall and Pigou regarded National Income in the line of production, while Fisher adopted consumption as the criterion

of National income. According to Fisher, "The National Dividend or income consists solely of services as received by theultimate consumers, whether from their material or from their human environments. Thus, a piano or an overcoat prepared in thecurrent year is not a part of this year's income but an addition to the capital. Only the services rendered to me during this year bythese things are income". But the definitions put forwarded by Marshall, Pigou and Fisher are not free from shortcomings. From

the modern pint of view, Simon Kuznets has defined National income as" the net output of commodities and services flowingduring the year from the country's productive system in the hands of the ultimate consumers". Though there are many views ofnational income, all will give the same national income if different items are measured correctly.

Concepts Related to National Income

Concepts Related to National Income

Some important concepts related to national income are discussed below before discussing detail about

the measurement of national income.

Gross Domestic Product (GDP): GDP refers to the gross value added by individuals and enterprises within the domesticterritory of the country within a specific period of time (generally a year). Such individuals and enterprises include both residents



and non-residents. GDP therefore, includes the value added by the non-residents individuals and institutions.This means that value additions by foreign national staying in India, will add to the GDP of India. Similarly, value added by thenormal residents and their property abroad is a part of the GDP of the respective country. For example, an Indian earning income

in USA will be the part of the GDP of USA.

LET US KNOW

Gross Value Added : Gross value added is defined as total factor income. It is the difference between the total value

of output and the value of secondary inputs like raw material, fuel, transportation costs, etc. Thus,

Gross value added = Value of Output ( – ) Secondary Inputs

Net Factor Income from Abroad: It is the difference between the income earned by normal residents abroad and the income earned by

non-residents in the country concerned. Suppose, in a year, the income earned by Indians residents and enterprises residing in foreigncountries is Rs. 15000 crores. And the income earned by all foreign individuals and institutions residing in India is Rs 12000 crores. Thismeans that the net income from abroad for India in that particular year is Rs 3000 (Rs.15000 - Rs.12000) crores.

Thus: Net factor income from abroad = Income by normal residents abroad (-) Income by non-residents (foreigners) in thecountry.

Gross National Product (GNP): GNP is defined as the aggregate market value of all the final goods and services produced by theeconomy during a specific period of time. It is obtained by adding Net factor inocome from abroad with GDP.

Thus: GNP = GDP + Net factor income from abroad.

Net National Product (NNP) or National Income at Market Prices: When charges for depreciation are deduced from the GNP, we get net national product. Thus, NNP gives the market value of all finalgoods and services after providing for depreciation. That is why, NNP is also called national income at market or current prices.

Thus: NNP at market price = GNP at market prices - depreciation

LET US KNOW

Depreciation: As we use the capital goods (machineries,equipments etc.) in the production process, their value decreases due to theirwear and tear, age and obsolescence. Such decreases or losses of value of the fixed factors are calculated annually in money terms and

are called depreciation.

National Income or National Income at Factor Costs : National income at factor cost which is also simply called

national income is the sum of all incomes earned by resource suppliers for their contribution of land, labour capital and

entrepreneurial activities, which go into the year's net production.

The difference between national income at factor costs and national income at market prices arises from the fact that indirecttaxes and subsides cause market prices of output to be different form the factor incomes resulting from it.

Thus:

National Income

The relation among these four concepts of national income can be shown with the help of the following figure 3.1:



Here, NFIA = Net Factor Income from Abroad; D = Depreciation; ID = Indirect Taxes; and Sub = Subsidies.

Per Capita Income

Per Capita income of a country is the average income of the people of that country in a year. For instance, in order to find out per capita income for the year 1993-94, the national income of a country is divided by the population of the country in thatyear.

National Income at Current and Constant Prices

National Income at Current and Constant Prices

National income can be expressed either at current price or at constant price. When we work out national income for a particular

accounting year, we take into account the output and price of that particular accounting year. The value of the output or thenational income, is then, expressed at current prices.

One important reason for calculating national income is to compare these figures over a period of time, such that we can know

the rate of growth of the economy. As the price level keeps on changing, it becomes difficult to compare figures of nationalincome at current prices over a period of time. Therefore, instead of using current year prices to obtain national income, wesometimes use a particular normal year (say, 1993-94 in India) to obtain national income of various accounting years. Then thenational income is said to be expressed at constant price.

Wholesale price index number can be used to convert the national income at current price to national income at constant price.



Measurement of National Income

Measurement of National Income

The economic performance of a country can be measured by GNP. GNP can be estimated by three different methods. They are

discussed below.

GNP as a Sum of All Expenditures

From the expenditure view point, GNP is the sum total of expenditures incurred on goods and services during one year in acountry. It includes private consumption expenditure on durable goods, single used consumer goods and also expenditure onservices of all kinds. Gross domestic private investment on construction of houses, factory building, all types of machineries,

plants and capital equipments. In particular, the increase or decrease in the inventory is added to or subtracted from it.

Government expenditures of all types are included in it. It also includes net foreign investment which is the difference betweenexport and import.Thus, GNP according to Expenditure Method =Private consumption expenditure (C) + gross domestic private investment (I) + government expenditure on goods and services

(G) + net foreign investment (X-M)

GNP as the Sum of All Incomes: According to this approach, GNP is equivalent to the total income created by the current

productive activity and the allocations of this income among the various economic groups in the community in the form ofages, interest, profit or rents. But this method cannot be applied to activities, which does not directly generate income.

GNP as the Sum of Values Added: this method takes into account all goods and services produced. In this approach the money

value of all goods produced through agriculture, industry, mines and of different services are calculated and then added up. Thesum of values added by all the firms and industries in the economy will always equal the value of the output of the final goods.

NATIONAL INCOME OF INDIA AND ITS SECTORAL

COMPOSITION



It has been already discussed that national income is the aggregate factor income which arises from the current production of

goods and services in the national economy. National income has been calculated in India by Central Statistical Organization(CSO) and before independence, national income was estimated by National Income Committee. The CSO has released the newrevised 1993-94 based NNP series. The trends in national income figure and per capita income figures of India at current andconstant prices are shown by Table 3.A below.

Q=Quick estimates

Source: Dhar, P.K., Indian Economy and its Growing Dimensions

National income of India in terms of Gross Domestic Product (GDP) is composed of contributions made by three sectors namely, primary sector, secondary sector and tertiary sector. The primary sector consists of agriculture, forestry, fishing, mining andquarrying. Secondary sector includes manufacturing, construction and electricity, gas and water supply, while the tertiary sectorcomprises of trade, transport etc, finance & real estate, community and personnel services. From table 3.B it can be seen that the

contribution of primary sector has decreased from 65.4 percent in 1950-51 to 21.7 percent in 2005-06.On the other hand, thecontributions of secondary and tertiary sector have increased during that period. Within the primary sector, it is the agriculture

hose contribution is highest. In 1950-51, its contribution was about half percent of total contribution to GDP. One interesting point here is that, the contribution of tertiary sector has increased almost two times during 1950-51 to 2005-06.

Table 3.B: Distribution of Gross Domestic Product at Factor Cost Percentage Distribution (At 1980-81, 1993-94 and 1999-2000 prices)



* At 1999-2000 PricesSource: Source: Dhar, P.K, Indian Economy and its Growing Dimensions

LET US KNOW

United Nation defines national income on the basis of the systems of estimating national income, as net national product,

as addition to the shares of different factors and as net national expenditure in a country in a year's time.

In the pre-independence period, various attempts were made by individual economist, official and non official bodies tomake an estimate of India's national income. Dadabhai Naoroji was the pioneer in this field.

Thus in the above, we have discussed that

National income is a measure of the total output of commodities and services during a given period, reckoned withoutduplication.

There are three methods to estimate national income namely, product method, income method and consumption method.

In India, national income is calculated yearly by CSO.

The sectors that contribute to national income are primary, secondary and tertiary sector.

ACTIVITY 3.1



Which ingredient should be deducted from GNP to arrive at NNP?

Does an increase in National Income always lead to an increase in per capita income? Justify your answer.

What are the various sectors that contribute to National Income in India? Which sector contributes most and which sector

is experiencing decline in contribution?

CHECK YOUR PROGRESS 3.1

Write the answers and put tick mark where necessary.

1. Are GNP and NNP same? (Yes/No).

2. For how many years national income is calculated in India? (One year/Two years).

3. Examine Table 3.2 and find which sector contributes highly to the economy of India at present.

INDIAN POPULATION AS PER 2001 CENSUS

Census is conducted at an interval of every ten years by Government of India. Some important findings of the census of 2001 a rementioned below.

Size of Population

Size of Population

India's population is very large in size. It is also growing rapidly. As per 2001 census, the population of India stood at 102.70crores which is about one sixth of total world population. The decadal growth rate of population, which was 13.31 percent in

1951 (compared to 1941) has increased to 21.34 percent in 2001 (compared to 1991). India is the second largest populatedcountry in the world after China. While India's population is 16.7 percent of the world population and it covers only 2.4 percentof total world geographical area. India's population is larger than the combined population of USA, UK, Japan and Germany.Statistics shows that India produces each year same number of population which is approximately equivalent to Australia total

population



Density of Population


Density of population is the number of population per square kilometer. It is derived by dividing the number of total population

by the total land area of a region or a country. The density of population has been increasing over the decade. It was 117 per sq.km. in 1951, 142 sq. km. in 1961, 177 sq. km. in 1971, 216 sq. km. in 1981, 274 sq. km. in 1991 and according to 2001 census ithas increased to 324. Density of population is the highest in West Bengal (904) followed by Bihar and Kerela. The lowest density

is observed in Arunachal Pradesh (13).

Sex Ratio

Sex Ratio

Sex ratio means the number of female per 1000 males. Over time, the number of females per 1000 males has been falling except

for the decade 1971-81 and the decade 1991-2001. According to 2001 census, there are 933 females per 1000 males in India. Themale-female ratio differs widely in different parts of the country. Again there is also gap in the male-female ratio between urbanand rural areas.


Literacy Rate

Loosely speaking, a person who can read and write for convenience is called literate. There are several standards to determineliteracy rate. In India, according to the 1991 census while determining literacy rate, persons in the age group 7 and above areconsidered and literacy rate is calculated by using the following formula.

Literacy Rate = (persons in the age group 7 and above/Total Population) X 100

As per 2001 census of India, the literacy rate is 65.5 percent which shows a 13.3 percent increase than the previous rate of 1991at 52.2 percent. Generally, literacy rate is more in urban areas than the rural. Eagerness, ability to read and learn and availability

of educational facility are the primary factors of literacy rate.

LET US KNOW

In 1901 India's population was 23.8 crore only.



According to 2001 census, sex ratio was highest in Kerala (1058) and lowest in the union Territory of Daman & Diu(710)

The highest literacy rate in India in 2001 was in Kerala (90.90%), while the lowest literacy rate was 47.00 % for Bihar

Thus in the above, we have discussed that

As per 2001 census, India is the second most populas nation in the world. Density of population is defined as the number of person per square km and the density of population in India is 324 according to the census of 2001.

Sex ratio means the number of female per 1000 males and there are 933 females per 1000 males in India.

In India, a person is called literate if he or she can read or write for convenience. The current literacy rate in India is 65.5spercent.

ACTIVITY 3.2

What do you mean by literacy rate?

Is sex ratio favourable in India? Put your arguments.

Check Your Progress 3.2


1. Which state in India has the highest density of population? (West Bengal/Assam).

2. What is the literacy rate of India? (65.5 percent/52.2 perent)

CONCEPT OF EMPLOYMENT AND UNEMPLOYMENT

n simple language, if a person is willing to work at the existing wage rate and gets work, he is said to be employed and the

opposite is called unemployed. There are various views to define unemployment. Recognizing the inadequacy of theconventional definition of unemployment, National Sample Survey Organisation (NSSO) uses three concepts to define the

unemployment in India. One, on the basis of Usual Status (US), a person is considered unemployed if he/she was not working butas either seeking or was available for work for a relatively longer time or throughout the reference year. The second definition

is based on Current Weekly Status (CWS), where reference period is a week. A person is considered unemployed if he/she hasnot worked even for one hour during the week, but was seeking or available for work. Third, on the basis of Current Daily Status(CDS) which records the activity status of a person for each day of the seven days preceding the survey. A person who worked

for one hour or more during a day, the person was considered having worked for half a day. If the person worked for four hoursor more during a day, he or she was considered as employed for the whole day.

Causes of Unemployment



Most of the unemployment problems in India are structural in nature. The main causes of unemployment are

Increase in population

Inappropriate selection of technology

Low level of development

Inappropriate educational system and

Lack of interest in self employment

Suggestions for reduction of unemployment include-

Accelerating the growth rate of GDP

Emphasis on special employment programme

Control on population growth

Emphasis on job oriented education and

Development of cottage and small scale industries

CONCEPT OF POVERTY

Poverty can be defined as a social phenomenon in which a section of society is unable to fulfil the basic necessities of life. Whena substantial segment of society is deprived of the minimum level of living and continues at a bare subsistence level that society

is said to be plagued with mass poverty. Conceptually the notion of poverty is a complex phenomenon in its content and scope.The concept of poverty was first introduced by Charles Booth, an English Sociologist. Booth identified those who lived at or

below-the 'poverty line' as having an average income (at 1889) prices) of 21 to 22 Shillings per week for a very small family orup to 25 to 26 Shillings for one of a larger family.

In India, poverty line has been determined on the basis of private consumption expenditure for buying both food and non-fooditems. Thus, it is observed that in India poverty line is the level of private consumption expenditure which ensures a food basketthat would ensure a minimum amount of calories. The minimum average calories for rural and urban persons are fixed at 2400and 2100 calories respectively. This amount of consumption expenditure to meet the minimum calorie requirement for person is

called the poverty line.

There are two types of poverty: i) absolute poverty and ii) relative poverty. When the level of income of people of a country is solow that they cannot meet even their basic minimum requirement, it is absolute poverty. Thus, absolute poverty means having

almost nothing. On the other hand, when we compare the incomes of people we find that some people are poorer than others, it iscalled relative poverty.

Causes of poverty

There are several causes responsible for poverty. They are

Low level of economic development

Unequal distribution of income and assets

Growth of population



Backwardness of agriculture

Regional imbalance

Laws of inheritance and

Other political factors

Some Measures for Eradication of Poverty:

Poverty can be controlled by the following measures-

Accelerating the pace of economic growth

Reducing income inequality

Ensuring balanced regional development

Proving more employment opportunities

Increasing agricultural productivity and

Proving essential commodities by fair price shops

LET US KNOW

Some special employment programmes in India are Community development programme (CDP), Small farmersdevelopment agency (SFDA), Food for work programme (FFWP) and Jawahar Rozgar Yojana (JRY).

To eradicate poverty, government of India has introduced several programmes like Twenty point programme, Nationalrural employment programme, Antodaya Yojana, Prime Minister's Rozgar Yojana, Nehru Rozgar Yojana etc.

Thus, in the above we have discussed that -

Unemployment is a major problem in India. Several factors are responsible for it. Unemployment itself creates some social problems. It also contributes to the formation of the problem of poverty.

Poverty can be called a major social problem. There are two types of poverty- absolute and relative. Government of India

has already taken several steps to eradicate poverty.

ACTIVITY 3.3

Can you conclude from the reading of this section that there is direct relationship between poverty and unemployment? Givereasons

CHECK YOUR PROGRESS 3.3


a) Mention two special programmes introduced in India for eradication of unemployment problem.

b) The highest literacy rate has been found in Kerela in 2001.(True/False).



LET US SUM UP

National income is a measure of the total output of commodities and services during a given period, reckoned withoutduplication.

There are three methods to estimate national income namely,

product method, income method and consumption method. In India, national income is calculated yearly by CSO.

The sectors that contribute to national income are primary, secondary and tertiary sector.

As per 2001 census, India is the second most populas nation in the world. Density of population is defined as the number of persons per square km and the density of population in India is 324 according to the census of 2001.

Sex ratio means the number of females per 1000 males and there are 933 females per 1000 males in India.

In India, a person is called literate if he or she can read or write for convenience. The current literacy rate in India is 65.5 percent.

Unemployment is a major problem in India. Several factors are responsible for it. Unemployment itself creates some social

problems. It also contributes to the formation of the problem of poverty.

Poverty can be called a major social problem. There are two types of poverty- absolute and relative. Government of India

has already taken several steps to eradicate poverty.

ANSWERS TO CHECK YOUR PROGRESS



1 . Check Your Progress 3.1

(a) No

(b) One year

(c) Tertiary sector.

2. Check Your Progress 3.2

(a) West Bengal

(b) 65.5 percent

3. Check Your Progress 3.3

(a) Community Development Programme (CDP) and Jawahar Rojgar

Yojana (JRY)

(b) True

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income means the net annual income of a country.docx