Aggregates related to National Income

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National income refers to the value of goods and services that are produced by a country in a year. In simpler words, national income is the result of all economic activities of a country that is measured in terms of money within a year’s term.

The term national income is largely uncertain and is sometimes used interchangeably with the national dividend, national expenditure, and national output. Therefore, national income is the net money value of all goods and services produced within the borders of a nation in a term of one year.

National income contains various payments made in all other resources, such as interest, rent, wages, and profits. The national income of a country is an indicator of its progress. High values of national income are a sign of the good overall health of an economy.

Traditional definition: National Income

The traditional definition of national income was presented by Marshall. It states that “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. This is the true net annual income or revenue of the country or national dividend.”

This definition is criticized for the following reasons −

  • As the categories of goods and services are too large in amount, it is hard to collect data about them individually. Therefore, calculating the national income depending on huge sets of data is too difficult.
  • There are chances of double-counting national income if Marshall’s procedure is adopted. For example, the goods move from producers to wholesalers to retailers and then to consumers in an economy. If counting is done on each transfer, the national income obtained will be the ballooned one.
  • Also, in some cases goods are services are produced but not sold. An example is agricultural products that are produced for self-consumption. In such cases, the contribution of production to national income may get skipped.

The traditional definition of national income has been polished by Simon Kuznets. Kuznets states that “National income is the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.”

Modern definition: National Income

In the modern version, the national income is calculated as the Gross National Product (GNP), Net national product (NNP), Gross domestic product (GDP), and Net Domestic Product (NDP).

Gross National Product (GNP)

Gross national product refers to the value of all the final goods and services produced in a term of one year or another set tenure within the borders of the nation or by the citizens of the country.

  • GNP is the added sum of expenditures on personal products, private domestic investment, expenditures made by governments, net exports, and incomes earned by residents in the country by investing overseas minus the earnings of foreigners from the economy.
  • In other words, GNP represents the total output in monetary value earned by residents of a country. So, the earnings of foreign residents made in the country are not included in GNP. Moreover, the output provided by the residents of the country out of the border is included in it. GNP also excludes intermediate goods and services to avoid double counting.
  • In simpler words, GNP shows the contribution of a country’s citizens to its economy. Therefore, it takes into account the value of all types of earnings by citizens and deducts the expenses and earnings of foreign nationals in the country. For the same reason, GNP includes the earnings made by the citizens and excludes the income from products made by foreign nationals in the country.

Net National Product (NNP)

NNP is the net monetary value obtained from the finished goods and services produced by citizens both domestically and overseas in a set period of time. NNP is equivalent to GNP but the GNP value to maintain stocks and purchase new goods must be deducted from it to get the NNP value.

  • NNP is an indication that shows the success of a nation in keeping the minimum production standards go on a yearly basis. It can be used to trace an economy’s well-being as it considers its citizens' income regardless of the boundary of the nation.
  • NNP is also a useful standard to keep track of an economy because it is created with the fact that capital must be spent to increase production standards.
  • NNP is expressed in the currency value of the nation that it is related. For example, the NNP of India will be expressed in Rupees while for the United States, it will be expressed in Dollars.
  • The NNP value can be obtained from GNP by deducting the depreciation of assets. It is useful to note here that depreciation is the loss of value of assets due to day-to-day use and aging.

Gross Domestic Product (GDP)

GDP refers to the final value of goods and services produced within the borders of a nation in a given period of time. The growth rate of GDP is a very important indicator of wellbeing of the economy of a nation as it shows the performance of the economy within a given period of time.

GDP can be connected to inflation and population in order to provide better insights and this makes GDP a favorite tool to compare the strength of economies in the world.

GDP can be calculated in three ways −

  • Output method − The output method measures the total output or the total value of goods and services produced within the borders of a country in a given period of time. GDP is computed as real GDP to avoid distortions due to price level changes.

GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies

  • Expenditure method − In this method, the expenditures in producing goods and services within the borders of a country are considered.

GDP (expenditure method) = C + I + G + (X-IM)

Where,

C − Consumption expenditure

I − Investment expenditure

G − Government spending

(X-IM) − Exports minus imports, that is, net exports.

  • Income method − This method relies on total income generated by the factors of production, labor, and capital, within the borders of a country.

GDP (Income method) = GDP at factor cost + Taxes – Subsidies

Net Domestic Product (NDP)

The NDP is a yearly measure of output that is obtained by deducting depreciation from GDP. Growth in NDP indicates the growth of an economy while reduction implies stagnation.

NDP considers the capital that has been employed in assets, such as housing, machinery, equipment, etc. The depreciation in NDP is often referred to as capital consumption allowance as it indicates the capital reduction from assets in terms of depreciation.

In other words,

NDP = GDP-Depreciation

Conclusion

The aggregates to national income vary according to the nature of calculation but all of them can be used to calculate the overall health and well-being of the economies. It is important to know the condition of national income to learn about the economic performance too.

Therefore, the aggregates related to national income are important measures that will be a central part of macroeconomics forever.

FAQs

Q1. What is the full form of GDP? What does it indicate?

Ans. GDP stands for Gross Domestic Product. It is the final value of all goods and services produced within a country’s borders.

Q2. What is the difference between GDP and GNP?

Ans. GDP considers production within the borders by anyone irrespective of whether the producer is a foreigner or not while GNP considers income by citizens even if the income is made abroad.

Q3. In which unit is the net national product (NNP) expressed?

Ans. The NNP is expressed in the currency of the related nation. For example, in India, it is expressed in Rupees.

raja
Updated on 13-Oct-2022 11:19:47

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