National Income (GDP)

National Income:

        The concept of national income (NI) was introduced by Cambridge Economists like Robertson, Pigou, Marshall and Keynes when they presented the Cambridge Approach of QMT. Then in 1936 when Keynes presented his General Theory, the theory of National Income determination got due importance. With such beginning the national income and its allied concepts were presented from time to time by economists.

Definition of NI:

        Prof. Marshall in his book “Principles of Economics” defines NI as.“The Sum of all the physical goods produced and services provided by utilizing the natural resources of the country with the help of labor and capital. In addition to this the net income from abroad is also included. Accordingly, the NI is the summation of all the goods produced and services provided and the net income from abroad”. Apparently, marshallian definition seems to be very simple and comprehensive, but it has some practical shortcomings.

• Statistically it is difficult to estimate accurately about the produced goods and services.

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  There may be the possibility of double and multiple counting.

• A certain portion of produced goods is kept for personal consumption.

        Because of such shortcomings, Pigou defined NI as “Only those goods and services will be included in NI which are sold against money”. But Pigou’s definition will not be acceptable for those countries where there is limited use of money and many a goods are traded under barter system. Prof. J. M. Keynes has used three methods or approaches to define NI.

1. The sum of all the expenditures which are made on consumption and investment goods is known as NI. Such definition of NI, on the one side, considers total output of the economy as NI while on the other side the total expenditures are accorded as NI. Thus to define NI by this method is known as Income-Expenditure Method of NI.

2. The sum of incomes of all the factors of production engaged in production process is also known as NI. This method to define NI is known as NI at Factor Prices Method.

3. If we subtract the cost of production from the total output produced in the economy we will get NI. This method to Define NI is Known as Subtraction of Costs of Production from Aggregate output Method.

        After Keynesian thinking, post Keynesian economists defined NI in a better way. They say that NI is like three flows which flow at the same time. Such flows by names are; INCOME, OUTPUT, and EXPENDITURES. It is explained as “When goods and services are produced in the economy, the factors of production (who produce the goods and services) will get the payments. Then the factors will spend these incomes on consumption and investment goods”.

        Thus, all above mentioned three flows, i.e., income, production and expenditures are equal during a particular time period, i.e., a year. They are also expressed with the help of an identity as;

                                                    Output = Incomes = Expenditures