An individual starts first with an account of his total money income and then studies how he can increase its size and how he can distribute it on various items of expenditure so as to secure the maximum benefit for himself and his family. Similarly an economist starts his studies with an account of the size of the national income cake.
The term national income is used to denote the aggregate income of a country during a specified period, usually one year. The aggregate output of a country may be expressed in different ways. Hence there are several national income concepts, such as GNP, NNP, disposable income and per capita income.
The aggregate market value of all final products produced in a country during a year is called its GNP.
A final product is one which is available for immediate consumption or investment. The market value of a product includes the indirect taxes paid to the government. Hence GNP at market price is equal to the cost of production plus indirect taxes.
So, if we subtract the indirect taxes from the GNP at market prices we get the total cost of producing the GNP. The GNP minus the replacement or depreciation is called the NNP. During the process of production the capital equipment of the country is gradually worn out. Some machines may also become obsolete.
A certain part of the GNP must be used for the replacement of worn out and obsolete capital goods. This part is not available for consumption or investment by the people. Thus GNP— Replacement=NNP.
The national income divided by the population of a country is called its per capita income or the average income per head.
The per capita income is a rough index of the standard of living in the country because it shows the average amount of income available to its citizens. It is, however, a very rough index.
In most of the countries of the world the national income is distributed very unevenly among the people. The greater part of it goes to the richer classes. So the majority of the people have considerably less than what is shown by the per capita income.
The national income or national dividend has been defined by Marshall as follows: The labour and capital of country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds.
Marshall conceives the national income in real terms. He conceives it as a flow of goods and services and not as a fund.
It is a continuous stream to which the different factors of production are perpetually making their contribution and from which they are receiving their incomes. Thus national income is a flow and not a stock.
As contrasted with national wealth which measures the stock of commodities held by the nationals of a country at a point of time, national income measures the productive power of an economy in a given period to turn out goods and services for the satisfaction of human wants.