Broadly speaking, National Income is used by a government to measure the level of the country’s economic activity in a specific period. In other words, national income is the net result of all economic activities of any country in a year and is measured in terms of money. Very often, the progress of a country is attributed to the increase/decrease in its national income. Let’s have a look at its definition:
As per Marshall, “The labour 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.”
National Income uses metrics like GDP (Gross Domestic Product), GNP (Gross National Product), GNI (Gross National Income), NNP (Net National Product) etc. Let’s understand them better:
GDP is the total monetary/market value of all the finished goods and services produced within a country’s borders during a specific time period. When calculated at market price, it’s known as GDP at market prices. It functions as a comprehensive scorecard of the country’s economic health and comprises of Wages and Salaries, Rent, Interest, Undistributed Profits, Mixed Income, Direct Taxes, Dividend and Depreciation. Whether the finished goods and services are produced by national or foreigners doesn’t matter. Let’s have a look at the types of GDP measurements:
- Nominal GDP Nominal gross domestic product is GDP evaluated at current market prices.
- Real GDP allows comparison of economic output for different years after taking inflation into account.
- GDP per capita measures GDP per person.
Calculation of GDP
There are 3 ways to calculate GDP:
- Expenditure approach
- Output/Production approach
- Income approach
Also known as spending approach, here the spending by different groups are calculated. These groups play an important part in a country’s economy.
GDP = C + G + I + NX
Here C stands for private consumption expenditures. Consumers spend money to buy goods and services for eg. groceries and haircuts.
G stands for government expenditure and gross investment. This includes government expenditure or infrastructure, payroll etc.
I stands for private domestic investments or capital expenditures. Businesses spending money to run their business will come in this category.
NX stands for Net Exports which is goods and services exported less imports.
This approach is sometimes called as the reverse of the expenditure approach. It estimates the total value of economic output and deducts cost of intermediate goods that are consumed in the process. Intermediate Goods are the raw materials that a firm buys from another firm and are completely used up in the process of production.
While the expenditure approach and the production approach focus on production, the income approach focus on the other side of the coin i.e. income. This approach calculates GDP by taking into account income earned by all the factors of production in an economy (including the wages paid, rent earned, corporate profits etc.). It also takes into account adjustments for some items that don’t show up in these payments made to factors of production.
Net Domestic Product (NDP)
GNP is an estimate of the total value of all the final products and services resulted in a given period by the means of production owned by a country’s residents. The formula to calculate GNP is below:
GNP = GDP + Residents’ Investment Income from Overseas Investments – Foreign Residents’ Investment Income Earned within a Country
In other words, GNP is calculated by adding personal consumption expenditures, private domestic investment, government expenditure, net exports (the difference between what a country exports minus imports of goods & services) and any overseas income earned by that country’s residents minus income earned within the domestic economy by foreign residents.
Difference between GDP & GNP
GDP takes into account all the output produced within a country’s borders irrespective of who owns the means of production while GNP only considers output produced of a country’s nationals irrespective of whether the production took place within the country’s borders or not.
Understanding GNI (Gross National Income)
GNI is the sum of all income earned by nationals of a country regardless of the fact whether the economic activity takes place within the country or outside of it.
Understanding NNP (Net National Product)
It’s the monetary value of finished goods and services produced by the citizens of a country (irrespective of the fact whether the production happened domestically or overseas) minus depreciation. In other words NNP = GNP – Depreciation. Depreciation is defined as the decrease in the monetary value of an asset over time due to use, wear and tear or obsolescence.
Understanding Per Capita Income
Per capita income is calculated by dividing a country’s national income by its population. It’s a measure of the per person earning in a country. It’s used to assess the average per person income and standard & quality of an area’s population.
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