In economics, when we refer to income, generally we mean money income. According to Seligman, 'Income in the economic sense, is the flow of satisfactions from economic goods'. We know that all economic goods form wealth. The main source of income is wealth. For example, if you own a house, it is your wealth. If you get rent from it, it is your income. There are two points about income - time and amount.
There are two kinds of income - (1) money income and (2) Real Income. Generally people earn their incomes in the form of money.
Money income is also known as nominal income. But the standard of living of people of a country depends on their real income. Real income depends upon the purchasing power of money and that in turn depends on the price level. Real income refers to the command of a person over actual commodities and services. Just because money incomes of people increase, we cannot say they are better off. It all depends upon how many goods they can command.
Suppose, my money income is Rs. 10, and price of one kilo of rice is Rs. 10, then I can buy one kilo of rice or my income is worth of only one kilo of rice. In the next month, my money income is raised to Rs. 15, but the price of one kilo of rice is increased to Rs. 20. Now my income is worth only ¾ kilo of rice. Therefore, in spite of increase in money income, my real income has come down due to higher increase in price. Real income is price adjusted money income.
National Income : National income refers to the value of commodities and services produced by a country during a year.
Marshall defined national income as follows : 'The labour 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……… This is true net annual income or revenue of the country, or the national dividend'.
From the national income of a country, we can find out whether the country is rich or poor. And from the composition of national income, we can find out the relative importance of agriculture, industry and service sector in the economy.
We get per capita income [(i.e) income per person per year] by dividing national income by the population of the country.
Per capita income = National Income/Population
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