Importance of National Income
The concept of national income or national dividend as it was formerly known, occupies an important place in the sphere of production and distribution in economic theory. National income consists of the aggregate value of all goods and services produced by the community in a given period, usually a year, deducting wear and tear and depreciation of the plants and machines that were used in the production of goods and services constituting national income.
A few years back, the calculation of national income the preoccupation of a few academicians. But in recent years, particularly since 1939, the usefulness of national income figures for purpose of economic analysis and for the preparation and formulation of economic policies is being increasingly recognized. Accordingly the number of countries which prepare and publish official national income figures has been increasing rapidly.
The first and foremost importance of national income estimate is that it gives us a correct picture of the structure of the economy, as well as a correct picture of the distribution of income according to regions industrial origin, functional services and persons: If, exhaustive, detailed and consistent national income estimates are available over a long period of time. It will be easy to assess the trends in the country’s economic growth and also analyze the factors responsible for this trend. The government can be enabled to formulate intelligent economic policies, based on empirical data rather on conjecture, to accelerate or modify the trend, and to influence the dynamic aspects of the economy like capital investment, distribution of income between groups, etc.
Again national income estimate gives us an idea of the purchasing power of the people in the country. Inflationary and deflationary gaps of purchasing are revealed by income and product figures. This is of great value in working out the details and tuning of anti-inflationary and deflationary programmes.
National income figures attempt to forecast the level of business activity for months and years ahead, since it enables us to compare and analyze changes in the output, income and expenditure of the various sectors as need as the entire economy over a period of time. These figures are absolutely fundamental to the analysis of the overall economic and business situation, particularly with reference to its cyclical aspects. As is well-known, the cyclical behavior of the economy as a whole is of major importance in assessing the prospects for any given industry despite the fact that there are always peculiar circumstances which have to be taken into account. Thus, the changes in prospect for business as a whole must be considered in deciding the production, pricing purchasing and selling policies which the individual business adopts. The importance of national income with regard to long range business planning as concerns questions of investment policy and plant expansion. Thus, national income statistics are, thus not only useful to the government but are equal useful to businessman.
National income figures have been found useful for studies of the problems of the economically under-developed Countries. Besides the aggregate national figure estimates of income, various branches of industry and of capital formation are of particular importance for these areas.
Lastly, some type of comparison between nations is made possible through aggregates as well as per capita income figures. These figures are also made use of as one indices for determining the subscription quotas of countries to international organizations such as the UNO, IMF, IBRD etc.