National Income

Definition: National Income refers to the money value of all the goods and services produced in a country during a financial year. In other words, the final outcome of all the economic activities of the nation during a period of one year, valued in terms of money is called as a National income.

In the above definition, the economic activities include all the human activities that produce goods and services that can be valued at market price. Such as production by farmers, production by firms in different industrial sectors, production of goods and services by government, services produced by business intermediaries Viz. Wholesalers and retailers, banks and other financial institutions, educational institutes and professionals like doctors, teachers, lawyers, etc.

Also, there are non-economic activities that include the production of goods and services but do not have any market value. Such as hobbies, services of housewives, service to self, an exchange of mutual service between neighbors, etc.

The National Income is a vital macroeconomic variable which determines the business level and economic status of the nation. The level of national income determines the aggregate demand of goods and services while its distribution defines the pattern of aggregate demand, i.e., what kinds of goods and services are produced and demanded.

The economic activities that generate a large number of goods and services in the country constitute the national income of a closed economy, where no economic transactions with the rest of the world are taken into consideration. While in the case of an open economy, the national income includes the economic transactions with the rest of the world.

While the economic activities generate the flow of goods and services, it also generates the money flows in the form of factor payments, such as wage, rent, interest, earnings of the self-employed. Thus, national income can also be estimated by adding all the factor earnings and adjusting the sum of subsidies and the indirect taxes. Thus, the income obtained is called as a National income at factor Cost, related to the money flows.