National income is the money value of all the final goods and services produced by a country during a period of one year. It denotes the country’s purchasing power.
Basic Concepts in National Income:
1. GDP – Gross Domestic product:
The value of final goods and services produced within the borders of a country in a year. It includes all the value of goods and services produced by foreigners within the country, and excludes any product activity of the residents that happened outside the boundaries of the country.
GDP at market price = Market value of final goods and services produced within the borders of a country during the year
GDP at constant price= ( GDP at market price/ GDP deflator for the respective year) X 100
GDP at factor cost (at market price) = GDP at market price – Indirect Tax +Subsidies
2. NDP - Net Domestic Product:
NDP is calculated after deducting depreciation of capital goods from GDP
NDP at market price = GDP at market price – Depreciation
NDP at constant price= (NDP at market price / NDP deflator for the respective year) X 100
NDP at factor cost (at market price) = NDP at market price – Indirect Tax +Subsidies
3. GNP – Gross National Product:
It is the value of final goods and services
produced by residents of a country within a year.
GNP at market price = GDP at market price + NFPA
Net Factor Payment from Abroad= Income earned from abroad by the residents of the country – Income earned within the country by the non-residents
GNP at constant price= (GNP at market price / GNP implicit price deflator for the respective year ) X 100
GNP at factor cost (at market price) = GNP at market price – Indirect Tax +Subsidies
4. NNP - Net National Product:
NNP is net income earned by the residents of a country. This can be obtained by subtracting depreciation from GNP.
NNP at market price = GNP at market price – Depreciation
NNP at constant price= (NNP at market price/ NNP
deflator for the respective year) X 100
NNP at factor cost (at market price) = NNP at market price – Indirect Tax +Subsidies
5. PI-Personal Income:
Personal Income is the total income received by the residents from all sources. It includes wage income, rent, earning from interest, commission, profits, bonus, dividends and transfer payments.
PI = NNP at factor cost - Retained corporate profits - Corporate tax - Income of Public Sector + Transfer Payments
6. DI-Disposable Income:
Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families.
DI=PI - Personal Taxes
7. Per Capita Income: The average income of the people of a country in a particular year is called per capita income for that year.
PCI = National Income ÷ Population
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Measurement of National Income:
National Income could be measured in three different ways as follows:
· Production or Value added approach
· Income approach
· Expenditure approach
Production approach: Under this approach, national income is measured as the sum of the production of all final goods and services. The economy is divided into three sectors as primary – agriculture, forestry and fishing, mining and quarrying; secondary- manufacturing, electricity, gas and water supply and construction; tertiary –communication and services. The aggregate value of the production of all final value of goods and services sums to national income.
Income approach: This method approaches the national income from the distribution side. The incomes accruing to all the factors of production during the process of production are aggregated together. National income is calculated by adding the following: wages and salaries, social security, earnings of self employed or professional income, dividends, undistributed profits, interest rent and profits of public sector enterprises. Subsidies and transfer payments are to be deducted. All unpaid services, financial investments in the form of equity shares, sales of old property etc are to be excluded.
Expenditure approach: Under this approach, national income is obtained by adding up all expenditure made on goods and services during a year. The following types of expenditure are to be added:
1. C - final private consumption expenditure: expenditure on consumer goods and services by individuals and households
2. G - final government expenditure: expenditure on goods and services to satisfy collective wants
3. I - Gross domestic capital formation: Expenditure by productive enterprises on capital goods and inventories or stocks.
4. (X-M): Net exports income from abroad
GDP at market price =C+I+G+X-M
