National Income

National income is the process of counting the value of flow between sectors and then summing them to find the total value of economic activity in an economy.

Income as an indicator of progress was tried by many before the idea of the Gross Domestic Product (GDP). GDP is the most commonly used measure of economic activity, and its idea was put forward by the US economist Simon Kuznets in 1934.

The method tries to calculate a country’s income at domestic and National levels, in gross forms consist four concepts:

  1. GDP
  2. NDP
  3. GNP
  4. NNP
National income , GDP, GNP, NNP

National income

GDP (Gross Domestic Product):

GDP is the most commonly used measure of economic activity. The definition of GDP is given by many national and international economic organizations. The definition of GDP according to the Organization of Economic Co-operation and Development (OECD) is “ An aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products do not include in the value of their outputs)”.

According to an IMF publication, “GDP measures the monetary value of final goods and services- that are bought by final user –produced in a country in a given time period.

As we discussed GDP is the value of all final goods and services produced within the boundary of a nation during a one-year period. For India, the time period is from 1st April to 31t March.

Calculation of GDP:

GDP is calculated by adding national private consumption, gross investment, government expenditure, and trade balance (Export minus Import).

GDP = C + I + G + NX

Where:

C = Consumption

I = Investment

G = Government Expenditure

NX = Net Export

  • The use of the export minus import factor removes expenditure on imports not produced in the nation and adds expenditure on goods and services produced which are exported but not sold within the country.

Various uses of the concept of GDP:

  • The percentage change per annum in GDP is the ‘growth rate’ of an economy. When we use the term “a growing” economy, it means that the economy is adding up its income, i.e. quantitative in terms.
  • GDP is a quantitative term and its size indicates the ‘internal’ strength of the economy.
  • It does not say anything about the qualitative aspects of goods and services produced.
  • The GDPs of the member nations are ranked by IMF at purchasing power parity (PPP).

NDP (Net Domestic Product):

NDP (Net Domestic Product0 is the GDP calculated after adjusting the weight of the value of ‘depreciation’.  NDP is basically the net form of the GDP, which means GDP minus the total value of the ‘wear and tear, (depreciation) that happened in the assets while goods and services were being produced.

The formula of NDP:

NDP = GDP – Depreciation

NDP of an economy has to be always lower than GDP for the same year since there is no way to cut the depreciation to zero.

  • NDP is not used in comparative economics, i.e. to compare the economics of the world due to the different rates of depreciation that are set by different economies of the world.

GNP (Gross National Product):

Gross National Product (GNP) is the GDP of a country added to its ‘income from abroad. so, the transboundary economic activities of the economy are also taken into account.

The item that comes under the segment ‘income from abroad’ are:

  1. Private Remittances: This is the net outcome of the money which inflows and outflows on account of the ‘private transfers’ by Indian nationals working outside India and the foreign nationals working in India (to their home countries).
  2. Interest on external loans:
  3. External grants

The balance of all three components of the ‘income from abroad’ segment may turn out to be positive or negative. In the case of India, it is always negative because of heavy outflows on account of the trade deficits and interest payments of foreign loans.

The formula of GNP:

GNP = GDP + (- Income from abroad)

i.e., GDP – Income from abroad, in the case of India

  • The GNP is always lower than GDP in India.
Different uses of the concept of GNP:
  • GNP indicates quantitative as well as qualitative aspects of the economy, i.e., the internal as well as the external strength of the economy.
  • GNP allows us to learn several facts about the production behavior and pattern of an economy.

NNP (Net National Product)

The NNP (Net National Product) of an economy is the GNP after deducting the loss due to ‘depreciation’.

The formula of NNP:

NNP = GNP – Depreciation

or,

NNP = GDP + Income from abroad – Depreciation

Different uses of the concept of NNP:

  • This is the ‘NI’ (National Income) of an economy.
  • Though the GDP, NDP, and GNP, all are ‘national income’ but they are not written with capitalized ‘N’ and ‘I’.
  • This is the purest form of income for a nation.
  • After dividing NNP by the total population of a nation we get the “Per Capita Income” (PCI) of the nation, i.e., ‘income per head per year.

Higher rates of depreciation lower the PCI of the nation. Economies are free to fix any rate of depreciation for different assets, the rate fixed by them make difference when the NI of the nation is compared by international financial institutions like the IMF, WB, ADB, etc.

Cost and Price of National Income:

The issues related to cost and price also needed to decide during the calculation of National Income. Basically, there are two sets of costs and prices; and an economy needs to choose which of two costs and two prices it will calculate its national income.

  1. Cost:

Cost: the income of an economy that means the value of its total produced goods and services may be calculated at either the factor cost or the market cost.

Factor cost: it is the ‘input cost’ the producer has to incur in the process of producing something. This is also termed as ‘factory price’ or production cost. Factor cost is nothing but the ‘price’ of the commodity from the producer’s side.

Market cost: It is derived after adding the indirect taxes to the factor cost of the product, it means the cost at which goods reach the market.

In the context of India: Officially India used to calculate its National income at factor cost.

Since January 2015, the CSO has switched over to calculating it at market price. The market price is calculated by adding the product taxes to the factor cost. This way India switched over the popular international practice.

  1. Price:

Price: Income can be derived at two prices one is constant and the other is current. The difference in both prices is only that of the impact of inflation.

Inflation is considered to stand still at a year of the past in the case of constant price, while in the current price, present-day inflation is added, Current price is basically, the maximum retail price (MRP) which is seen printed on the goods sold in the market.

Revised Method

The CSO (The Central Statistics Office), released the newly revised data of National Accounts, in January 2015, with two changes:

  • The base year was revised from 2004-05 to 2011-12. It was recommended by the National Statistical Commission (NSC), which had advised to revise the base year of all economic indices every five years.
  • This time the methodology of calculating the National Accounts has also been revised in line with the requirements of the System of National Accounts (SNA) -2008, an internationally accepted standard.

The major changes in the revision are as follows:

  • The headline growth rate will now be measured by GDP at constant market price, which will henceforth be referred to as ‘GDP’.
  • Sector-wise estimates of Gross Value Added (VA) will now be given at basic prices instead of factor cost.

Note: GVA measures the difference in value between the final good and the cost of ingredients used in production, wide the scope of capturing more economic activity than the earlier ‘factory cost’ approach.

Relationship between GVA and GDP:

GVA at basic prices = CE + OS/MI + CFC + Production taxes fewer production subsidies.

GVA at factor cost = GVA at basic prices – production taxes + Production subsidies

GDP = GVA at basic prices + Product taxes – product subsidies.

{Where, CE = compensation of employees; OS = operating surplus; MI = mixed-income; CFC = consumption of fixed capital}.

  • Comprehensive coverage of the corporate sector both in manufacturing and services by incorporation of annual accounts of companies as filed with the Ministry of Corporate Affairs (MCA) under their e-governance initiative, MCA21.
  • Comprehensive coverage of the functional sector by the inclusion of information from the accounts of stock brokers, stock exchanges, asset management companies, mutual funds, and pension funds, and the regulatory bodies including the Securities and Exchange Board of India (SEBI), PFRDA, Insurance Regulatory, and Development Authority (IRDA).
  • Improved coverage of activities of local bodies and autonomous institutions, covering around 60% of grants provided to these institutions.

 

You can also read:

Santiago Consensus

Beijing Consensus

Agricultural systems in the world: A brief introduction of agricultural systems

Economics: A Brief Introduction of Economic Systems and Sectors in Economy

Washington Consensus

 

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