Measurement of Growth: National Income and Per Capita Income

Dear Readers, The upcoming important exams are NABARD Grade-A and Grade-B, in which there is a section of Economic and Social Issues. So, for the same, it becomes really important to have an in-depth knowledge of the various important topics given in the syllabus. To help you with this our experts today are providing you with all the necessary information related to the mentioned field which will help you to fetch some good marks. 

The topics we are covering in this post are Chapter -  Measurement of Growth: National Income and Per Capita Income. These notes would be very useful, so we request you to read it before you appear for the exam. 

Measurement of Growth: National Income and Per Capita Income

Economic growth is an increase in the production of goods and services over a specific period. To be most accurate, the measurement must remove the effects of inflation. Economic growth creates more profit for businesses. As a result, stock prices rise. That gives the company’s capital to invest and hire more employees. As more jobs are created, incomes rise. Consumers have more money to buy additional products and services. Purchases drive higher economic growth. For this reason, all countries want positive economic growth. This makes economic growth the most watched economic indicator.

Gross Domestic Product- 

Gross domestic product is the logical extension of measuring economic growth in terms of monetary expenditures. If a statistician wants to understand the productive output of the steel industry, for example, he needs only to track the dollar value of all of the steel that entered the market during a specific period.

Combine the outputs of all industries, measured in terms of dollars spent or invested, and you get total production. At least that was the theory. Unfortunately, the tautology that expenditures equal sold-production does not actually measure relative productivity. The productive capacity of an economy does not grow because more dollars move around; an economy becomes more productive because resources are used more efficiently. In other words, economic growth needs to somehow measure the relationship between total resource inputs and total economic outputs.

The OECD itself described GDP as suffering from a number of statistical problems. Its solution was to use GDP to measure aggregate expenditures, which theoretically approximate the contributions of labor and output, and to use multi-factor productivity (MFP) to show the contribution of technical and organizational innovation.

Gross National Product-

Those of a certain age may remember learning about the gross national product (GNP) as an economic indicator. Economists use GNP mainly to learn about the total income of a country's residents within a given period and how the residents use their income. GNP measures the total income accruing to the population over a specified amount of time. Unlike gross domestic product, it does not take into account income accruing to non-residents within that country’s territory; like GDP, it is only a measure of productivity, and it is not intended to be used as a measure of the welfare or happiness of a country.

National Income: National income is the total value a country's final output of all new goods and services produced in one year.

Per Capita Income as a Measure of Development:

Per capita income is more generally used as a measure of development and is considered as better indicator of the development as the increase in per capita income shows the ability of a country to increase its gross domestic product (GDP) faster than population. Increase in per capita income indicates the overall improvement in the economic well-being of a population, that is, it shows how much extra goods and services are available per head in a country for consumption and investment. It is, however, worthwhile to note that it is real per capita income that is used to measure level of development and therefore growth or development was measured by the increase in real per capita income in a period. The increase in real per capita income is found by adjusting nominal per capita income for the rate of inflation.

The Income Method:

The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.

3. Expenditure Method:

This method focuses on goods and services produced within the country during one year.

GDP by expenditure method includes:

(1) Consumer expenditure on services and durable and non-durable goods (C),

(2) Investment in fixed capital such as residential and non-residential building, machinery, and inventories (I),

(3) Government expenditure on final goods and services (G),

(4) Export of goods and services produced by the people of the country (X),

(5) Less imports (M). That part of consumption, investment and government expenditure which is spent on imports is subtracted from GDP. Similarly, any imported component, such as raw materials, which is used in the manufacture of export goods, is also excluded.

Thus GDP by expenditure method at market prices = C+ I + G + (X – M), where (X-M) is net export which can be positive or negative.

Net Domestic Product (NDP):

NDP is the value of the net output of the economy during the year. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.

Final Goods

Final goods are goods that are ultimately consumed rather than used in the production of another good. 

Differences between GDP and GNP

The two are related. The difference is that GNP includes net foreign income. GNP adds net foreign investment income compared to GDP. GDP shows how much is produced within the boundaries of the country by both the citizens and the foreigners. It is the market value of all the output produced in the territory of a nation in one year. In contrast, GNP is a measure of the value of the output produced by the “nationals” of a country- both with-in the geographical boundaries and outside.

NNP = GNP - Depreciation

National Income is calculated by deducting indirect taxes from Net National Product and adding subsidies. National Income (NI) is the  NNP at factor cost.

NI = NNP - Indirect Taxes + Subsidies

India's per capita income grows by 8.60% to Rs 1.13 lakh in Financial Year 2018. India's per capita income grew at a slower pace of 8.6 percent to Rs 1,12,835 during the fiscal ended March 2018, official data showed in May 2018. The per capita net national income in 2016-17 stood at Rs 1,03,870, witnessing a growth of over 10.3 percent from the preceding fiscal ended March 2016 (at Rs 94,130). 

"The per capita income at current prices during 2017-18 is estimated to have attained a level of Rs 1,12,835 as compared to the estimates for the year 2016-17 of Rs 1,03,870, showing a rise of 8.6 per cent," showed the provisional estimates of annual income, 2017-18 released by the Ministry of Statistics and Programme Implementation (MOSPI). 

The per capita income is a crude indicator of the prosperity of a country. In real terms, calculated at constant prices with base 2011-12, the per capita income grew by 5.4 percent to Rs 86,668 in 2017-18 as compared to Rs 82,229 in 2016-17. "The growth rate in per capita income is estimated at 5.4 percent during 2017-18, as against 5.7 percent in the previous year," the release stated. 

The country's gross national income (GNI) at current prices witnessed a rise of about 10 percent at Rs 165.87 lakh crore during 2017-18 as against Rs 150.77 lakh crore during 2016-17. While on real terms (with the 2011-12 base year), the GNI increased at a slower rate of 6.7 percent to Rs 128.64 lakh crore in fiscal ended March 2018, as against the previous year's estimate of Rs 120.52 lakh crore. For fiscal ended March 2017, the real term GNI grew by 7.1 percent.