What Do You Mean by Income?
Income is basically the money that is earned. The Income is used to fund the day-to-day expenditures.
Investments, Salaries, Pensions, and other Social Security are the primary sources of income for the retirees. For the individuals, the income is most often received in the form of wages or by salary. The Business income can refer to a company's remaining revenues that are paid after paying all the expenses and the taxes. In this case, the income is referred to as the "earnings.” Again, this income is subject to taxation.
Difference Between National Income and Private Income
The difference table is as follows:
What is National Income?
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National income is the value of goods and services that are produced by a country in a financial year. This is the outcome of the economic activities of any country which is during a period of one year and this is valued in terms of money. The National income, national dividend, national output, and national expenditure are all synonyms.
The National Income is the total amount of income that accrues to a country from its economic activities in a particular year’s time. This includes payments that are made to all the resources either in the form of wages, interest, rent, and profit.
The progress of a country is to be determined by the growth of the national income of the nation. There are two types of National Income Definition:
1. Traditional Definition
2. Modern Definition
Traditional Definition
According to Marshall “The labor and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. The true net annual income or revenue of the country or national dividend.”
While the Modern National Income is:
GDP
GNP
Gross Domestic Product is the value of all goods which are being produced and the services that are served within a country during a year.
Gross National Product, in order to calculate GNP, we need to collect and assess the data from all the productive activities, like the agricultural produce, wood, minerals, commodities.
What is Private Income?
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Private income is the factor of total incomes and the transfer incomes that are received from all the sources by the private sector that are the private enterprise and the households that are within or outside the country.
Private Income also includes the net factor income from abroad. The Private Sector consists of all the private enterprises and households, who are the factor owners.
Private income consists not only of the factor incomes which are earned within one's own territory and abroad but also consists of all the current transfers from the country’s government and the rest of the world. This is the sum of earned incomes and the transfer incomes that are received by the private sector.
So, this concept of private income is quite broader than that of personal income as private income consists of personal income + profit tax + the undistributed profit. This is required to be kept in mind that the net factor income from abroad is also allocated to the private sector and not to the government sector.
In the Formula
Private Income = Income from domestic product accruing to private sector + Net factor income from abroad + All types of transfer incomes
= National Income – Income from domestic product accruing to Government Sector + Transfer incomes
How to Make Notes on Private and National Income?
Go through Vedantu’s Know About The Difference Between National Income and Private Income
Read the page properly and then highlight all the key areas
Re-read the portions that are highlighted
Follow the sequential order as given on the page
Write brief and to the point sentences
Use drawings or flowcharts for a better retentive memory
Go through these before you sit for the test
Does Vedantu have Anything on Income in Commerce?
Vedantu has appropriate study material on Income. It contains Know About The Difference Between National Income and Private Income.
This page has all the relevant material that’s needed by the students of Commerce. Reading from here will clarify all doubts related to these concepts. The material has been provided on Vedantu completely free of cost so that the students do not hesitate before reading the page. It needs to be revised well and also understood in the sense in which it was intended. Income and its different types is a crucial chapter in Commerce that needs to be studied by all students as questions can come from any part of the chapter.
FAQs on National Income vs. Private Income: Key Differences
1. What is the main difference between National Income and Private Income?
The primary difference lies in their scope and components. National Income represents the total factor income earned by all normal residents of a country, regardless of whether it's in the public or private sector. In contrast, Private Income is the total income, from all sources (including factor and transfer incomes), that accrues to the private sector only. It excludes the income of the public sector.
2. How is Private Income calculated from National Income?
To calculate Private Income, we adjust the National Income (specifically, Net National Product at Factor Cost, NNPFC) by subtracting the government's income and adding incomes received by the private sector that are not part of the national income. The formula is:
Private Income = National Income
(-) Income from property and entrepreneurship accruing to government
(-) Savings of non-departmental enterprises
(+) Interest on national debt
(+) Current transfers from government
(+) Net current transfers from the rest of the world.
3. Are transfer payments included in both National and Private Income?
No, they are not. Transfer payments, such as old-age pensions, scholarships, and unemployment allowances, are not included in National Income because they are not earned in exchange for productive services (they are unilateral payments). However, they are a crucial component of Private Income because they represent actual income received by households and firms, increasing their purchasing power.
4. How does Private Income differ from Personal Income for a Class 12 student?
This is a key distinction in macroeconomics. Private Income includes the income of the entire private sector, which consists of both private corporations and households. To get to Personal Income (income received by households/individuals only), we must subtract two items from Private Income:
- Corporate Tax: The tax paid by companies on their profits.
- Undistributed Profits (or Retained Earnings): The portion of a company's profit that is not distributed to shareholders as dividends and is kept for future investment.
5. Why is the concept of Private Income important if we already have National Income?
While National Income measures the productive capacity and economic performance of a country, Private Income is a better indicator of the economic health and potential purchasing power of the private sector (households and businesses). It shows the actual income available to private entities for consumption, saving, and investment, which are key drivers of economic activity. It helps policymakers understand the impact of taxes and transfers on the private economy.
6. How does income from government-owned enterprises affect the calculation of Private Income?
Income from property and entrepreneurship of government enterprises (like profits from a state-owned railway) and the savings of these non-departmental enterprises are part of the National Income. However, since this income belongs to the public sector and not the private sector, it must be subtracted from the National Income when calculating Private Income.
7. Can Private Income ever be greater than National Income? Explain the circumstances.
Yes, it is possible for Private Income to be greater than National Income. This occurs when the sum of all additions to National Income (like interest on national debt and all transfer payments from the government and the rest of the world) is larger than the sum of all deductions (income and savings of government enterprises). This scenario reflects a significant level of government wealth redistribution to the private sector.
