National Income – Concept, Types and Measurement (Managerial Economics)

Posted on Jun 5 2020 - 4:46pm by Preeti

National Income

Concept, Types and Measurement

Income refers to the flow of wages, interest payments, dividends and other things of values accruing during a period of time (usually a year). The aggregated of all incomes is national income. National income as the aggregate for money value of the annual flow of final goods and services in the national economy during a given period. National income is the most comprehensive measure of the level of the aggregate economic activity in an economy. It is the total income of a nation as against the income of an individual but the term national income is not as simple and self-explanatory as the concept of individual income may be. For instance, not all the income received by individuals during a given period can be included in the national income, similarly not all the income that is generated in the process of production in an economy during a given period is received by the individuals in the economy.

According to Paul A. Samuelson

National income or product is the final figure you arrive at when you apply the measuring rod of money to the diverse apples, oranges, battleships and machines that any society produces with its land, labour and capital resources.

Measures of National Income

1. Gross National Product (GNP)

Of the various measures of national income used in national income analysis, GNP is the most important and widely used measure of national income. It is the most comprehensive measure of the nation’s productive activities. The GNP is defined as the value of all final goods and services produced during a specific period usually one year, plus incomes earned abroad by the nationals minus incomes earned locally by the foreigners. The GNP so defined is identical to the concept of gross national income (GNI). Thus, GNP = GNI. The difference between the two is only of procedural nature. While GNP is estimate on the basis of product-flows, the GNI is estimated on the basis of money income flows, (i.e. wages, profits, rent, interest, etc. )

2. Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) is defined as the market values of all final goods and services produced in the domestic economy during a period of one year, plus income earned locally by the foreigners minus incomes earned abroad by the nationals. The concept of GDP is similar to that GNP with a significant nationals. The concept of GDP is similar to that of GNP with a significant procedural difference. In case of GNP the incomes earned by the national in foreign countries are added and incomes earned

locally by the foreigners are deducted form the market values of domestically produced goods and services. In case of GDP, the process is reverse- incomes earned locally by foreigners are added and incomes earned abroad by the nationals are deducted from the total value of domestically produced goods and services.

3. Net National Product (NNP)

NNP is defined (GNP) less depreciation, i.e. NNP= GNP- Depreciation.

Depreciation is that part of total productive assets which is used to replace the capital worn out in the process of creating GNP. Briefly speaking, in the process of producing goods and services (including capital goods), a part of total stock of capital is used up. ‘Depreciation’ is the term used to denote the worn out or used up capital. An estimated values of depreciation is deducted from the GNP to arrive at NNP.

The NNP, as defined above, gives the measure of net output available for consumption by the society (including consumers, producers and the government). NNP is the real measure of the national income.

NNP =  NNI (net national income)

In other words, NN is the same as the national income at factor cost. It should be noted that NNP is measured at market prices including direct taxes. Indirect taxes are, however, not a point of actual cost of production. Therefore, to obtain real national income, indirect taxes are deducted from the NN. Thus, NNP-indirect taxes = National Income.

4. Gross Domestic Product (GDP)

It is based on domestic income only. Income received from abroad is not considered here. The GDP can be expressed in terms of

i. GDP at market price = (GNP at market prices) – (R-P)

(or)

GDP at market prices = C+I + G + (X-M)

ii. GDP at factor prices = NDP + Depreciation (D)

(or)

GDP at factor = C+I+G +(X-m) – (IT + S)

5. Net Domestic Product (NDP)

It is the excess of GDP over the above Depreciation.

i. NDP at market prices = GDP market price – Depreciation (D)

(or)

NDD at market prices = C + I + G + (X-m) – D

ii. NDP at Factor cost = GDP – Depreciation

(or)

 = C+I+G+ (X-m) – IT + S-D

Where C = Aggregate consumption

R = Payments made to abroad

M = Money

I = Aggregate investment

G = Govt. expenditure

IT = Indirect Tax

S= Subsidy

Accounting Relations

(a)   Relations at market price

GNP = GNI (Gross National Income)

GDP = GNP less Net Income from Abroad NNP = GNP less Depreciation NDP (Net Domestic Product)

= NNP less net income from abroad

(b)   Relations at factor cost

GNP = GNP (at market price) less net indirect taxes NNP = NNP (at market price) less net indirect taxes

 NDP = NNP less net income from abroad NDP = NDP (at market price) less net indirect taxes

NDP = GDP less Depreciation

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