Page 209 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 13.1 Concept of National Income

We may define national income as the aggregate of money value of the annual flow of final
goods and services in the national economy during a given period.

The well-known writer, Paul Studenski, writes: "National income is both a flow of goods and
services and a flow of money incomes. It is therefore called national product as often as national
income". The flow of national income begins when production units combine capital and labour
and turn out goods and services. We call this Gross National Product (GNP), it is the value of all
final goods and services produced by domestically owned factors of production within a given
period. It includes the value of goods produced such as houses and food grains and the value of
services such as broker's services and economist's lectures. The output of each of these is valued
at its market price and the values are added together to give GNP. At the same time, the
production units which produce goods and services distribute money incomes to all who help in
production in the form of wages, rent, interest and profit — we call this as Gross National
Income.
GNI is the sum of the money incomes derived from activities involving current production in an
economy in a given time period.
It may be noted from above that
1. National income is an aggregative value concept: It makes use of the value determined by
the money as the common denominator.
2. National income is a flow concept: It represents a given amount of aggregate production
per unit of time, conventionally represented by one year and relates to a particular year.

3. National income represents the aggregate value of final products rather than the total
value of all kinds of products produced in the economy.
We would not want to include the full price of an automobile producer to put on the car.
The components of the car that are sold to the manufacturers are "intermediate goods" and
their value is not included in GNP.

In practice, double counting is avoided by working with the "value-added".

!
Caution At each stage of manufacture of goods only the "value added" to the good at that
stage of manufacture is counted as part of GNP.

It should be noted that the sum of the value added at each stage of processing will be equal to the
final value of the bread sold. The flour that is directly purchased by households for baking in the
home is counted as the contribution towards GNP since it represents a final sale. It indicates that
national income is an unduplicated total that does not involve any double counting. Obviously
there are three different stages or phases in the flow of output and income in the national
economy.
1. There is production of goods and services by all production units by the use of labour,
capital and enterprise,
2. There is distribution of incomes to all the factors who are suppliers of labour, capital, etc.
this distribution takes the form of wages, interest, rent and profit,

3. There is spending of incomes on the goods and services produced by the economy;
this expenditure is classified into consumption goods (c) and expenditure on investment
goods (I).

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