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Define National Income. Analyze the importance and limitations of National Income
Define National Income. Analyze the importance and limitations of National Income
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National income is the total income earned in a nation. Gross domestic product (GDP) measures the value of all final goods produced within a nation's borders. Gross national product (GNP), the other common measure, counts all income accruing to factors of production owned by a nation's citizens. The value of all final output equals the sum of all factor payments.
I) National income statistics helps to conduct a useful analysis considering the structure of the economy by the government.
It helps to understand which sectors of the economy are contributing greatly towards the development and the contribution of each towards the national income.
Thus, it roughly gives the idea of the structure of the economy and helps in planning and framing economic policies.
II) factor cost is the cost that is used up to make good or service.
However, market price is the final price in the market that include the taxes.
Thus, the difference between national income at market price and factor cost is the net indirect tax I.e. taxes less subsidies.
Limitations
Double counting: Sometimes, the same component is counted twice if it has been used in the production process. This may lead to inaccurate calculation of GDP.
Ignores nonmonetary transactions: Certain transactions such as the services of a housewife, a teacher teaching his own son, etc. are completely ignored while estimating national income. Due to this, the important component is ignored.
Ignores goods produced for self-consumption: National income only includes those transactions which are related to the market. Therefore, goods that are produced for self-consumption such as food grains for a farmer's family are not used in calculating national income.
Choice of method: Since there are various methods to calculate national income, it is important to use the correct one while estimating it. The components which are given must be studied carefully and then only the appropriate method should be used.