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Various Definitions of National Income

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Some of the definitions of National Income are as follows:

To begin with, let us be familiar with the origin of income, i.e., how is income generated? Human wants can be satisfied through consumption of goods and services only.

Therefore, production of goods and services is a must to meet unending wants of society if human race has to survive. Thus, broadly speaking, national income is a measure of value of production activity of a country.

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It is in the production process of goods and services that income is generated or we can say production generates income. Remember, production is the result of combined efforts of four primary inputs, also called factors of production—land, labour, capital and enterprise. Whatever is produced jointly by factors of production (i.e., net value added at factor cost), the same gets distributed among them as factor income in the form of rent, wages, interest and profit.

Since factors of production are paid their remuneration out of what they have produced, it is said that income is generated in the production process. This is how income is first generated in the production process and then distributed among factor owners for rendering productive services. Income gives rise to expenditure for purchase of goods and services to satisfy wants. Expenditure, in turn, leads to further production. In this way, there are three phases in circular flow of national income—production phase, income phase and expenditure phase.

Accordingly, national income can be defined in three different ways—as a flow of goods and services produced, as a flow of income (distributed) and as a flow of expenditure as described here:

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(i) From production point of view, “National income is the sum of money value of net flow of all the final goods and services produced by normal residents of a country during a period of account.” (National income is briefly a measure of production activity.)

(ii) From income point of view. Central Statistical Organisation (CSO) has defined, “National income is the sum of factor incomes earned by normal residents of a country in the form of rent, wages, interest and profit in an accounting year.”

(iii) Prom expenditure (disposition of national income) point of view, Simon Kuznets defines thus, “National product is the net output of commodities and services flowing during the year from the country’s productive system into the hands of ultimate consumers or into the net addition to the country’s capital goods.” It is calculated by adding up final consumption expenditure and final investment expenditure on final goods and services produced by normal residents of a country in an accounting year.

In short, national income is either money value of all the final goods and services produced or the sum total of all factor incomes earned or the sum total of final expenditure (consumption expenditure + investment expenditure).

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