The following points highlight the top four views about national income by prominent economists. The views are: 1. Marshall’s Views on National Income 2. Pigou’s Views on National Income 3. Fisher’s Views 4. Keynes’s Concept.
1. Marshall’s Views on National Income:
Marshall defined national income in his Principles of Economics in the following words:
“The labour and capital of a country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds…..and net income due on account of foreign investments must be added in. This is true net national income or revenue of the country, or the national dividend.”
Marshall’s concept of national income or national dividend is theoretically sound, simple and quite comprehensive. A review of his definition of national income makes clear the deep insight which Marshall possessed.
However, Marshall’s concept of national dividend suffers from the following practical difficulties:
(i) Difficulty in Conducting a Detailed Census of Production:
It is really very difficult to make a statistically correct estimate of the production of all the commodities and services turned out in a country during a specific year. It involves arrangements for a detailed and most comprehensive census of production in the economy covering all production units.
Not to speak of less developed countries where the imperfections in the structure and organisation of the economics do not permit such a large scale data collection, the conduct of census of production even in advanced countries is not an easy task.
(ii) Difficulty in Aggregation:
The aggregation of the outputs of goods and services is also not easy. The different commodities and services constitute heterogeneous statistical units (wheat in tonnes, cloth in metres, cotton in bales, petroleum in gallons and electricity in kilowatts). In this heterogeneity of the units of measurement of outputs the aggregation may be considered much difficult. However, this difficulty is surmountable. If all the physical weights are converted into monetary units, the aggregation no longer poses any problem.
(iii) Difficulty in Monetary Evaluation of Goods and Services:
There are a number of commodities which are produced but whose output is not evaluated before consumption. A farmer, for instance, retains a part of the total produce for self – consumption. This portion of the produce is not evaluated by the normal market operations. Thus even if a higher level of output has been achieved, the amount of marketed produce may remain the same and therefore the estimate of national output cannot be regarded as accurate.
(iv) Double Counting:
The major difficulty in adopting Marshall’s definition was the possibility of double counting of the products. Since industries are related to other industries and since a product has to pass through a number of successive stages of production, there is likelihood of double counting in the aggregate output of the community. The repeated inclusion of the same products at different stages of production is called double counting.
2. Pigou’s Views on National Income:
Pigou defined the national income or dividend as “that part of the objective income of the community including, of course, income derived from abroad which can be measured in money”. The Pigovian definition of national income was considered as quite practicable, elastic and convenient. It does not give any rigid concept of national income.
According to it, all the goods and services which are transacted in a specific year in exchange of money may be included in the national dividend of the country.
Pigou’s emphasis upon monetary exchange was thus a definite advance over the Marshallian concept of national income. In fact, this definition attempted to remove the difficulties of measuring national dividend which were inherent in Marshall’s definition.
Pigou’s definition, however, suffered from the flaw that the distinction between the goods exchanged for money and those not exchanged for money was artificial. After all, the goods exchanged for money do not differ in kind in any fundamental way. If a housewife cooks the meals for her own family, her services do not form a part of the national dividend. But if the same meals are being prepared to be served in a hotel or restaurant, the services do become a part of it.
Similarly, when a housewife cooks the meals for her own family member, these services are not a part of national dividend but if she also prepares the meals for a paying guest, a part of the services rendered definitely becomes a part of national dividend. If the housewives in a locality decide to purchase the meals from one another, the services of all such housewives would form a part of the national dividend.
The same thing can be said about the well-known illustration given by pigou about the maid servant marrying her master and continuing the same services. Since her services will no longer be paid, they become excluded from the national dividend of the country.
Secondly, Pigou’s definition of national income is of very limited significance in the poor countries where a very large proportion of goods and services might be exchanged through barter.
3. Fisher’s Views on National Income:
Fisher made a very significant departure from the line followed by Marshall and Pigou. He adopted the level of satisfaction as the basis for measurement of national income in place of the stock of goods and services produced during a year. In his words, “… the national dividend or income consists solely of services as received by ultimate consumers, 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 capital. Only the services rendered to use during this year by these things are income.” This definition gave a new perspective to the concept of national income as it measured the welfare of the community rather than its economic performance in respect of the production of goods and services.
But adoption of this approach makes objective measurement of national income much more difficult. The measurement of income through goods and services is much more specific and meaningful than that through the flow of subjective satisfaction. The difficulties might be aggravated by the durable goods for which the measurement of the spread of satisfaction over time cannot be easily determined.
4. Keynes’s Concept of National Income:
While explaining the concept of national income, Keynes made a departure from the earlier thinking on the concept. He adopted an approach which helped in the aggregative analysis of income and employment. Keynes had suggested three approaches to national income in his book known as the General Theory.
1. Aggregate expenditure (on consumption and investment goods) Approach.
2. Factor incomes approach.
3. Sale proceeds minus cost approach.
1. The Aggregate Expenditure Approach:
Keynes had explained the aggregate expenditure approach through the following algebraic relation
(A-A1) + (G’- B’-G) = Y
Here A stands for aggregate sale proceeds received by all the entrepreneurs in the community and A1 is the amount of aggregate purchases made by the entrepreneurs from other entrepreneurs. These purchases are in the form of raw materials, tools, equipment’s and other intermediate products. If A1 is deducted from A what remain is the purchases made by the consumers from the entrepreneurs or consumer’s outlay.
G’- B’ the net value of the capital goods carried over from the previous production period before any expenses are incurred on the maintenance and improvement while G is the actual value of capital equipment’s at the end of the current production period. Thus G’-B’-G is the capital consumption during the current production period.
In order to maintain the country’s capital intact, it is essential to offset this capital consumption by an equivalent amount of investment. If G is just equal to (GB’), it shows that investment in the current period was only enough to offset capital consumption.
If G <(G’-B’), it implies that net investment in current production period falls short of the amount necessary for the maintenance of plant and equipment. In case G exceeds (G ‘B), there is some positive investment exceeding the amount required for depreciation etc.
Thus (A – A1) shows consumers’ outlay and (G’ – B’ – G) represents net investment outlay. So the components of income can be written as
(A-A1) + (G’-B’- G) = Y
or Consumption + Investment = National Income
2. The Factor Income Approach:
Keynes’ second approach to national income is in terms of the incomes received by all the factors of production. He has expressed the national income aggregate as the sum of the receipts of factors of production like land, labour and capital plus the earnings or profits accruing to the entrepreneurs’ i.e.
Y = F + Ep
where F denotes payments received by land, labour and capital and Ep shows the entrepreneurial profits.
3. The Sale-proceeds Minus Cost Approach:
Keynes’s third approach to national income is based on aggregate sales minus cost. The view implies that national income of a community lies somewhere between the gross national product and the net national product. National income falls short of GNP but exceeds NNP. Keynes does not deductant of GNP the whole of depreciation and replacement cost, but only a part of it which he terms ‘user’s cost.’
User’s cost (U) constitutes the difference between the depreciation in the value of capital assets when these are used and the depreciation which would occur if these were allowed to remain idle plus the amount spent on their maintenance. We illustrate the concept of user cost through a numerical example.
Let us suppose that a plant worth Rs. 1 lakh suffers a depreciation to the extent of Rs. 20,000 during the process of production in a year. Had the plant not been put to operation, even then the depreciation would have occurred due to disuse and rusting etc. We suppose that the plant depreciates by Rs. 4,000 and during the year Rs. 1,000 are spent on the upkeep of the plant. The user’s cost in this case amounts to Rs. 20,000 – (4,000+ 1,000) = Rs. 15,000.
If the user’s cost thus calculated for all the individual business units is aggregated, it will determine the aggregate user’s cost. Keynes observed that the income of the community can be calculated by deducting user’s cost from the aggregate sale proceeds. Income is denoted as
Y = A – U
This concept of income is a significant correlate of the level of employment. However, its importance is greatly limited when the community is to make a decision about how much should be spent on consumption. For estimation of net national income, it is necessary to deduct the supplementary costs also from A – U. Thus net national income is
Y = A -U-V
Y = A- (U+V).
In the process of production, the entrepreneurs face two types of losses e.g.
(i) Involuntary and unexpected losses and
(ii) Involuntary and not unexpected losses.
The former losses are of the nature of windfall losses which occur on account of uncertain and uncontrollable factors. The latter are of the type of destruction due to fire or sinking of cargo ship etc. Such losses are more or less anticipated by the entrepreneurs.
The expenses incurred for such losses are debited to the business account. The costs incurred to off-set the involuntary but not unexpected losses are, according to Keynes, the supplementary costs (V) which must be included in user’s cost so as to have an estimate of the total cost. By deducting user’s costs plus supplementary costs from the aggregate sales, the net national income of the community can be estimated.