Importance of national income. Importance of National Income 2019-01-04

Importance of National Income Essay

Their main constituents are inter-related and each particular account can be used to verify the correctness of any other account. National income estimates provide not only a single figure showing the national income, but also supply the detailed figures in regard to the various components of the national income. Three strategies have been used to obtain the market values of all the goods and services produced: the product or output method, the expenditure method,and the income method. The income method works by summing the incomes of all producers within the boundary. Throughout macroeconomics the terms income, output and expenditure are interchangeable.

Importance of National Income Studies : 11 Reasons

The services of the owner-occupied house are included in national income as if the owner sells to himself as a tenant its services. All this process is termed depreciation or capital consumption allowance. Second, certain consumption goods are durable and last for many years. Thus we find that the total gross value added of an economy equals the value of its gross domestic product. The actual usefulness of a product its use-value is not measured — assuming the use-value to be any different from its market value. Third, the Pigovian definition is applicable only to the developed countries where goods and services are exchanged for money in the market.

Explain the importance of national income

Govt takes to deficit or surplus budget to arrest depression or inflation in an economy. They also include corporate profits and taxes on production and import. National income and welfare …………………. Interest on national or public debt is also considered a transfer payment because it is paid by the government to individuals and firms on their past savings without any productive work. In one country there are several individuals who consume a particular good and that too at different places and, therefore, it is very difficult to estimate their total consumption in terms of money. The first and foremost usefulness of national income estimates lies in the fact that they provide basic information for several analytical and other purposes.

Importance of National Income

The Planning Commission in India also kept in view the national income. With a view to removing these personal and regional disequibria, the decisions to levy more taxes and increase public expenditure also rest on national income statistics. The estimate of national income by industry of origin reveals the inter-sectoral growth of the economy. Similarly, capital losses are not taken into account while estimating national income. But expenses on defence equipment are treated as consumption expenditure because they are consumed during a war as they are destroyed or become obsolete. Expenses on roads, canals, buildings, etc. National accounts Main article: National accounts Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation.

Reasons for Growing Importance of National Income Studies

The problem is to find out which expenditure is consumption expenditure and which investment expenditure is. The imputed net rent is calculated as that portion of the amount that would have accrued to the house-owner after deducting all expenses. But the process of production uses up a certain amount of fixed capital. Thus, the figures of national income and per capita income indicate the level of economic welfare of the people of a country. But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall gains, and interest on public debt which are a source of income for individuals are added to national income. Their sum gives an alternative way of calculating the value of final output. All of the transactions in an economy can be looked at in this way, giving us three ways to measure national income.

Why Is National Income Accounting Important?

These taxes are included in the price of commodities. Again, if indirect taxes Rs. The need for such planning is all the more in the case of underdeveloped countries. However, this is a typical profile for a developed economy — the more developed the economy the more that income is allocated towards purchasing services rather than manufactured goods. To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. There are two main reasons for this.

National Income

It enables us to know the relative importance of the various sectors of the economy and their contribution towards national income. To rectify such a mistake, the concept of real income has been evolved. The National Income estimate is Valuable in assessing the performance of different production sectors e. For the Economy: National income data are of great importance for the economy of a country. Distribution of Grants-in-aid and Others. There are many divergent views on this issue. To avoid the problem of double counting, only the value of the final stage, the retail price, is included, and not the value added in all the intermediate stages - the costs of production, plus profits.

Measures of national income and output

According to this definition, in the backward and underdeveloped countries of the world, where a major portion of the produce is simply bartered, correct estimate of national income will not be possible, because it will always work out less than the real level of income. For example, in Kenya, sugarcane for a farmer is the final goods. Thus depreciation lowers the national income. But can one extrapolate the remarkable growth rates of the Asian giants indefinitely into the future? Thus this method establishes the importance of intermediate products in the national economy. The study of national income is basic to study of Keynesian theory of employments as the total performance of an economy is judged by an increase in income and employment.

Explain the importance of national income

It is both the figure of national income and the details regarding its various constituents that throw light on the functioning and performance of the economy. This amount must equal the value of everything produced. It enables us to know the relative importance of the various sectors of the economy and their contribution towards national income. This avoids an issue often called '', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. Similarly, any imported component, such as raw materials, which is used in the manufacture of export goods, is also excluded. Distribution of Grants-in-aid: National income estimates help a fair distribution of grants-in-aid by the federal governments to the state governments and other constituent units.

Importance of National Income Studies : 11 Reasons

It also wants to compare its own economic performance with that of other countries so as to judge likely repercussion on its trade and balance of payments and so on. Smaller nations like the — Hong Kong, Singapore, South Korea and Taiwan — had already achieved rapid economic growth from the 1960s onward by becoming export dynamos and focusing on their competitive strengths. In short, national income is the value of all the final output of goods and services produced in one year. Goods meant for Self-consumption: In under-developed countries like India, farmers keep a large portion of food and other goods produced on the farm for self-consumption. On the contrary, with the fall in the price level, the national income also falls, though the national production might have increased. Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured. It has to deal with international institutions, particularly for participating in internal capital flows.