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Concepts of National Income

National income is the measurement of flow of services and goods in economic system. The national wealth is the measurement of present assets available on a given time while the National income is the measurement of the production power of economic system in a given time period. The figures of National income are based on the financial year (i.e. from 1st April to 31st March). The base of one year is taken for calculating National income which is called base year, as all the seasons come in a year. The data of estimation of India’s National income are issued by Central Statistical Organisation (CSO).
The important concepts of national income are:
  1. Gross Domestic Product (GDP)
  2. Gross National Product (GNP)
  3. Net National Product (NNP) at Market Prices
  4. Net National Product (NNP) at Factor Cost or National Income
  5. Personal Income
  6. Disposable Income
Let us explain these concepts of National Income in detail.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. Four things must be noted regarding this definition.
First, it measures the market value of annual output of goods and services currently produced. This implies that GDP is a monetary measure.
Secondly, for calculating GDP accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. So, GDP should include the value of only final goods and services and ignores the transactions involving intermediate goods.
Thirdly, GDP includes only currently produced goods and services in a year. Market transactions involving goods produced in the previous periods such as old houses, old cars, factories built earlier are not included in GDP of the current year.
Lastly, GDP refers to the value of goods and services produced within the domestic territory of a country by nationals or non-nationals.

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore,
GNP = GDP + Net factor income from abroad.
Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.
Parameter GDP GNP
Stands for Gross Domestic Product Gross National Product
Definition An estimated value of the total worth of a country’s production and services, calculated over the course on one year GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically
Layman Usage Total value of products & Services produced within the territorial boundary of a country Total value of Goods and Services produced by all nationals of a country (whether within or outside the country)
Formula for Calculation GDP = consumption + investment + (government spending) + (exports − imports) GNP = GDP + NR (Net income from assets abroad (Net Income Receipts))
Uses Business, Economic Forecasting Business, Economic Forecasting

Net National Product (NNP) at Market Price

NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore’
NNP = GNP – Depreciation
Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.

Net National Product (NNP) at Factor Cost (National Income)

NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.
Factor Cost: Factor cost is the sum total of amount paid to four main factors of production viz; land (rent), labour, capital and entrepreneurship (profit). It is exclusive of taxes or subsidies.
National Income at current prices: If goods and services are valued at current prices i.e. prices prevailing in the market in the particular year, we get the National Income at current prices.
National Income at constant prices: When National Income is calculated at constant prices i.e., prices prevailing in a particular year, called the ‘Base Year’, we get National Income at constant prices. This method offsets the impact of inflationary tendency, in price level on economic growth and reflects the real National Income. In India the base year for constant prices is presently taken as 2004-05.
Per Capita Income: This is derived by dividing the total National Income of a country by its total population. Therefore, an increase in National Income in real terms does not necessarily mean an increase in the per capita income, as it is inversely proportional to the rate of growth of population.

Personal Income

Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore,
Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.
Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,
Disposable Income = Personal income – personal taxes.
Disposable Income can either be consumed or saved. Therefore,
Disposable Income = consumption + saving.

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