984 words free sample essay on National Income

The concept of National Income is worth elaborating as it is the index of economic development. Innumerable verities of goods are produced in an economy in a year. These goods or output are expressed in monetary terms. The aggregate of monetary values of all verities of goods produced in a country during a given period, usually a year is called National product. For the production of innumerable verities of output, four factors of production have heir respective contribution for which they are paid in terms of rent, wage, interest and profit. The summations of their enumerations constitute the national income. This total income is spent on buying the output produced (National Product). Thus the total income will be the total expenditure made on the national product. Therefore National Product = National Income = National expenditure.

Traditional definitions:-

There are three main definitions of national income by Marshall, Pigou and Fisher.

1. Marshall’s definition:-

Marshall defines national income as the labour and capital of country acting on its natural resources produce annually 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.

According to Marshall all types of goods and services whether they come to market or not are included in the national income to him national income means net national income. The net total out put are added up from different productive activities in order to arrive at national, income. Net national income can be found out by deducting the charges of depreciation and wearing out of the machinery. Incomes from abroad should be added in the national income.

Defects:-

(i) It is too easy though not impossible to calculate the national product or national income as the number of goods and service produced is numeric varied and uncountable.

(ii) National income is also difficult to estimate more accurately as a substantial part of some commodities do not come to the market for sale. These outputs are either kept for self-consumption or for barter with other goods.

(iii) There is danger of double counting. This means that a particular commodity may be counted twice in national income. For example jute as an agricultural product is included in the total agricultural production. As industrial raw material it is also included again in the total industrial production. Thus without being slightest careful the national income becomes faulty as jute gets included twice in the computation of national income.

Pigou’s Definition:-

According to Pigou there incomes which can be expressed in terms of money are included in national income. “According to Pigou” The national dividend is that part of the objective income of the community including of course income derived from abroad, which can be derived in money.

Features:-

(i) Only those goods and services are included in the national income of the country which can be measured in terms of money.

(ii) Incomes received from foreign investments by the citizens of the country are to be included in the national income of the country.

(iii) Pigou’s definition is precise and convenient than the one given by Marshall.

Defect:-

(i) Pigou makes the national income estimation uncertain. There are certain goods which are exchangeable for money and certain goods which are not exchangeable for money. Pigou considers that only those goods and services which can be. Expressed in terms money and included in national income. For example a woman’s income as an office clerk gets included in the national income but her service as a house wife cannot be included in the national income.

(ii) This definition is not applicable for those countries where there is, barter of goods and services.

(iii) The definition also counters a paradox. A woman as a maid servant earns some income for her service but when she gets married to her owner, she performs the same work but is not paid. The national income falls short to the extent of that income.

Fisher’s definition:-

Fisher defines national income on the basis of consumption of commodities. Consumption is the basis of estimating national income. According to Fisher “The national dividend or income consist solely of services as received by ultimate consumer 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 me during this year by these things are income”. Fisher’s definition is more accurate and correct than that of Marshall and Pigou. According to Fisher national income of a country is determined not by its annual production, but by its annual consumption.

Features:

(i) Fisher includes in the national income only the money value of the actual consumption of a good in a year.

(ii) A durable good exists for a number of years to come. This good is produced in a particular year but continues for some years. Thus the good in question should not be included in the national income of the year in which it is produced. Rather that part of the good which is actually consumed during that year should get included in that year’s national income. Thus the national income should include the series of consumption of a durable commodity over a large number of years.

Defects:-

(i) Fisher’s definition has little practical value. It is rather difficult to calculate the money value of the annual consumption of a good.

(ii) It is also difficult to measure the value of consumption of a durable commodity over years.

(iii) Durable goods are likely to change from one hand to another thus changing the ownership of the good in question.

Marshall and Pigou measure national income from production end. Their definitions give an idea of the factors that influences economic welfare, but Fisher’s definition compares economic welfare in different year.