by National income is a measure of the economic activity of a country, representing the total value of goods and services produced within a country’s borders over a given period of time. It is an important indicator of the health and performance of an economy, and provides insights into the standard of living of a country’s citizens.
National income is a broad term that encompasses various measures of economic activity. The most commonly used measure of national income is Gross Domestic Product (GDP), which represents the total value of goods and services produced within a country’s borders in a given period of time, usually a year. GDP can be calculated using the expenditure or income approach.
Another measure of national income is Gross National Product (GNP), which includes the value of goods and services produced by a country’s residents, regardless of their location. GNP is calculated as GDP plus net income from abroad.
Net National Product (NNP) is another measure of national income, which adjusts GNP for depreciation of capital assets. NNP represents the value of the output that remains after accounting for the wear and tear on a country’s capital stock.
National Income (NI) is the total income earned by households, businesses, and the government in an economy. It is calculated by subtracting indirect taxes and depreciation from NNP.
Definitions of National Income
There are several definitions of national income that are used to measure economic activity in a country. Some of the most commonly used definitions are:
- Gross Domestic Product (GDP): GDP is the total value of goods and services produced within a country’s borders in a given period of time, usually a year. GDP can be calculated using the expenditure or income approach. The expenditure approach calculates GDP as the sum of household consumption, investment, government spending, and net exports. The income approach calculates GDP as the sum of all income earned in an economy, including wages, rent, interest, and profits.
- Gross National Product (GNP): GNP is the total value of goods and services produced by a country’s residents, regardless of their location. It includes income earned by citizens and businesses of a country abroad, and excludes income earned by foreign residents and businesses within the country’s borders. GNP can be calculated using the expenditure or income approach.
- Net National Product (NNP): NNP is the total value of goods and services produced by a country’s residents, adjusted for depreciation of capital assets. It is calculated by subtracting depreciation from GNP.
- National Income (NI): NI is the total income earned by households, businesses, and the government in an economy. It is calculated by subtracting indirect taxes and depreciation from NNP.
- Personal Income (PI): PI is the income received by individuals in an economy, including wages, salaries, and government transfers. It is calculated by subtracting social security contributions and corporate taxes from NI.
- Disposable Income (DI): DI is the income available to individuals for spending or saving after taxes and transfers have been paid. It is calculated by subtracting personal taxes and non-tax payments from PI.
Theories
There are several theories related to national income that help us understand the factors that influence economic activity in a country. Some of the most influential theories are:
Classical Theory:
The classical theory of national income holds that economic activity is driven by supply-side factors, such as technology, capital, and labor. According to this theory, a country’s productive capacity is the primary determinant of its economic growth, and government intervention in the market should be limited.
Example: The United States during the late 19th century and early 20th century is often cited as an example of the classical theory in action. During this period, the country experienced significant economic growth driven by technological advances, capital accumulation, and the expansion of the labor force. The government played a limited role in the economy, and laissez-faire policies were the norm.
Keynesian Theory:
The Keynesian theory of national income emphasizes the role of demand-side factors, such as consumption and investment, in driving economic growth. This theory asserts that government intervention in the market, through fiscal policy measures such as government spending and taxation, can help to stimulate demand and stabilize the economy.
Example: The New Deal policies implemented by the United States government in the 1930s in response to the Great Depression are an example of the Keynesian theory in action. These policies, which included public works projects, increased government spending, and tax cuts, were designed to stimulate demand and jumpstart economic growth.
Monetarist Theory:
The monetarist theory of national income focuses on the role of money supply in driving economic activity. According to this theory, changes in the money supply can have a significant impact on economic growth, and central banks should use monetary policy measures, such as interest rate adjustments, to stabilize the economy.
Example: The Federal Reserve’s decision to raise interest rates in the early 1980s to combat inflation is an example of the monetarist theory in action. By reducing the money supply, the Fed hoped to slow down the economy and stabilize prices.
Real Business Cycle Theory:
The real business cycle theory of national income holds that fluctuations in economic activity are primarily driven by supply-side shocks, such as changes in technology or natural disasters. This theory asserts that government intervention in the market can be counterproductive and may lead to inefficiencies.
Example: The oil shocks of the 1970s, which led to a significant increase in energy prices, are often cited as an example of the real business cycle theory in action. These supply-side shocks had a major impact on economic activity, leading to a period of stagflation characterized by high inflation and low growth.
New Growth Theory:
The new growth theory of national income emphasizes the role of innovation and technological progress in driving economic growth. This theory suggests that investments in research and development, education, and infrastructure can help to stimulate economic growth and raise living standards over the long term.
Example: The growth of Silicon Valley in the United States in the late 20th century is often cited as an example of the new growth theory in action. The region’s focus on research and development, education, and innovation led to the development of new technologies and industries, driving economic growth and raising living standards.
