Question

Discuss the key components of national income.

Short answer

The key components of the national income are :

• The Expenditure method
• The Income Method
• The Value Added Method

Step-by-step solution

Content Introduction

The total worth of goods and services generated by a country during its fiscal year is referred to as its national income. It is thus the result of all economic activity that takes place in a country over the course of a year. It is valued in monetary terms.

Content Explanation

The key components of National Income are:

GDP at market price is the monetary value of all products and services produced in the domestic domain with available resources over the course of a year.

GNP: Gross National Product (GNP) is the market value of final goods and services generated in a year by the people of a country both within and without the country's borders.

NNP at MP is the market value of an economy's net output of final products and services generated over the course of a year, as well as net factor income from overseas.

National Revenue (NI): Also known as National Income at Factor Cost, this term refers to the overall income earned by resources in exchange for their contributions of land, labor, capital, and organizational capacity.

Personal Income (PI) is the total monetary income obtained by individuals and households in a country before direct taxes from all conceivable sources.

Disposable Income (DI) is the money left over after direct taxes have been deducted from personal income. It is the amount of money that has been left over for disposal or that can be spent on personal consumption.

PCI (Per Capita Income): It is computed by dividing the country's entire population by the country's national income.

Components of National Income 

To compute the national income, we can use the following methods :

1. Value Added Method

In this method, we will come across two formulas, they are :

$$\begin{gathered} GNP=GrossValueadded+NetIncomefromabroad \\ GNP=Valueoffinalgoods-ValueofIntermediategoods+NFIA \end{gathered}$$

2. Income Method

In this method, we will come across two formulas, they are :

$\begin{array}{c}\text{GNP}=\text{Wages and Salaries}+\text{Rents}+\text{Interest}+\text{Dividends}\\ +\text{Undistributed Corporate Profits}+\\ \text{Mixed Incomes}+\text{Direct Taxes + Indirect Taxes}+\text{Depreciation}\\ +\text{Net Income from abroad}\end{array}$

3. Expenditure Method

In this method, we will come across one formula, which is :

$GNP=C+I+G+(X-M).$

Here,

C is for Private Consumption Expenditure,

I will stand for Gross Domestic Private Investment

G will be for Government Expenditure on various services and goods and

$\text{(X-M)}$ will be for net foreign investment.