Definitions and Measures of National Income- Abilash, Alen and Aneesh

8/8/2019 Definitions and Measures of National Income- Abilash, Alen and Aneesh

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National IncomeNational Income is the money

value of all final goods and

services produced in a country

during a period of one year.

Definition ofNational Income


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Economic activities

These include all human activities which creategoods and services that can be valued at

market price

E.g. : production by farmers, services provided

by banks

Non-economic activities

Activities which produce goods and services thatdo not have any market value

E.g. : Spiritual, social, political activities


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National Income as Money Flow

economic activities generate

flow of goods and services

money flows in the form of factorpayments- wages, interest, rent, profits etc.


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Thus

National income may also be estimated by

adding thefactor earnings and adjusting the

sum for indirect taxes and subsidies

The National Income thus obtained is known

asNATIONAL INCOMEAT FACTOR COST


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How is National Income

different from PrivateIncome?


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Personal Income - PI:

Income earned by all the individualsand institutions during a year in a

country

The entire national income does not

reach individuals and institutions

A part of it goes by way of

corporate taxes

Undistributed profits

Social security contributions


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People sometimes get incomes withoutany productive activity

They are called Transfer Payments

Example: Unemployment benefits, old age

pensions etc.

Such transfer payments are not included

in the National Income

However they are added to Personal

Income


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Personal Income PI:

PI is computed by using the following

formula

PI = National Income (Corporate taxes,

undistributed profits, social security

contributions) + Transfer Payments


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GROSS NATIONAL PRODUCTGROSS NATIONAL PRODUCT

Defined as current value of all goods and

services produced by the economy

during a given period

GNP = value of all ( final) goods and

services produced in a country in one

year + income earned by its citizensabroad - income earned byforeigners in

the country


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GNP is the market value of all goods and

services produced by the residents of a

particular country.

It includes the income of those residents

earned by corporations owned overseas and

from working abroad.

It is also one of the measure ofNational

Income

GNP = GDP + Net Factor Income from Abroad

Difference between National and

Domestic is Net factor income from

abroad


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Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDP measures the value of output producedwithin the domestic boundaries of the country

GDP includes the output of the foreign owned

firms with production plants located in thecountry

There are three ways of calculating GDP - all of

which should sum to the same amount since by

identity:

National Output = National Expenditure =

National Income


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GNP andGDP tend to be used as synonyms,GNP andGDP tend to be used as synonyms, butbut

GNP

Incomes earned by

nationals abroad are

taken into account-but

not that of foreigners

who earn locally.

GDP

Incomes earned within

the countrys boundariesis taken into account- byboth the nationals andthe foreigners.


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Net National Product (NNP)Net National Product (NNP) NNP is defined as GNP minus Depreciation.

i.e. NNP = GNP - Depreciation NNP is the most complete measure of productive activity

by a country's nationals, though it is measured at market

price

i.e. it includes, Indirect taxes and sometimes even

subsidies

This need to be adjusted to get actual values of

National Incomex Adjusted NNP will be at factor cost

Difference between Gross and Net is

Depreciation


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Net National Product (NNP) atfactor CostNet National Product (NNP) atfactor Cost

For this, first find Net Indirect taxes

Net Indirect Taxes = Indirect taxes subsidies

NNP at factor cost = NNP at market price Net

Indirect taxes

The Net National Product (NNP) atfactor cost is also

commonly known as National Income

Thus National Income i.e. Net National Product at

factor cost can be calculated from GDP using following

formula

NI = GDPMarket Price + Netfactor Income Depreciation Net

Indirect tax

Difference between Market Price and Factor

Cost is Net Indirect Taxes


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GNP GNI

GDP GNP less NET INCOME FROM ABROAD

NNP GNP less DEPRECIATIONNDP NNP less NET INCOME FROM ABOARD


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Definitions and Measures of National Income- Abilash, Alen and Aneesh

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