of National Income:
There are various concepts of
national income. These are explained below one by one:
(1) Gross National Product (GNP).
(2) Net National Product (NNP)/National
(3) Gross Domestic Product (GDP).
(4) National Income at Factor Cost.
(5) Personal Income.
(6) Disposable Personal Income.
(1) Gross National
Gross National Product at Market Price:
Explanation of GNP:
The concept of gross national product (GNP) is comprehensive. It enables us
to measure and analyze as to how much is the aggregate economic production of
a country in a given period. The gross national product of a country (GNP) is
"The total money value of all final goods and services produced by
the residents of a country in one year period".
In the words of W.C.
"Gross national Product may be defined as the current market value
of all final goods and services produced by the economy during an income
period regardless of where the output is produced".
remember the following aspects about GNP.
(i) GNP is a flow concept: GNP represents a flow. It is a quantity produced per unit of time. It is the value of final goods and services I
produced in a country during a given time period.
(ii) GNP measures final output:
While calculating GNP, the market value of only final goods and services produced in a year are added up. Final
goods are those goods which are purchased for final use in I the market.
(iii) GNP is output produced by the citizens of a country:
Gross national product is the final output of goods and services produced by
the citizens and businesses of a country during a given time period which is
usually a year. For example, the economic activity carried out by the USA
citizens and businesses outside the country is counted in GNP. While the income
of the residents who are not USA citizens is
subtracted from GNP.
Components of Expenditures in GNP:
For measuring GNP at market price,
economists use Expenditure Approach. According to this approach:
There are four
categories of expenditures which are added together to measure gross national
product (GNP) at market price, (i) Consumption, (ii) Investment (iii) Government
expenditure and (iv) Net exports.
These four types of
expenditures are now explained in brief:
(i) Consumption Expenditure (C): It includes all personal expenditure
incurred by the citizens of a country on durable and non-durable goods in a
period of one year.
(ii) Investment (I): It is the total expenditure incurred by firms or
households on capital goods.
(iii) Govt. expenditures (G): It includes all types of expenditure incurred by
Federal, Provincial, Local Councils on the purchases of goods and services such
as national defense, law and order, street lighting etc.
(iv) Net Exports (X - M): Net exports of goods and services are value of
exports minus the value of imports.
Formula For Gross
GNP = C + I + G + (X - M)
C = consumption, I = investment, G = Govt. expenditure and X - M = Net
(2) Net National
Product (NNP)/National Income:
Explanation of NNP:
"Net national Product or national income at market prices is the net market
money value of all the final goods and services produced in a country during a
year. It is found out by subtracting the amount of depreciation of the existing
capital in a year from the market value of all final goods and services".
continuous flow of money payments, it is necessary that a certain amount of
money should be set aside from the gross national income for meeting the
necessary expenditure of wear and tear of all capital equipment so that there
should not be any deterioration in the capital and it should remain intact. If
we deduct depreciation allowance from gross national product, we get Net
National Product at current market price.
Formula For Net
National Product/National Income:
NNP at Market Price = GNP at Market Price - Depreciation
Depreciation Allowance and Maintaining Capital Intact. Here a question can be
asked as to what we actually mean by depreciation allowance and maintaining
capital intact; (the words which we have used in explaining NNP).
It is known to every one of us that
when production is going on, the value of capital equipments does not remain the
same. A decrease in value because of wear and tear through, use, rusting,
accident or through actions of elements, gradually take place in the building
and other equipments of business. A certain sum of money based on the value of
the capital equipment and its longevity is set aside every year from the gross
annual income so that when machinery is worn out, a new capital equipment can be
set up from the sum thus accumulated. This fund which is set aside for covering
the wear and tear, deterioration and obsolescence of the machinery is named as
Depreciation Allowance. We can make this concept more
clear by taking a simple example.
Example of NNP:
Suppose, a person buys a machinery for
manufacturing cloth for $10000 only. He expects that this machinery will last
ten years and after that period, it will be partially or completely worn out. He
sets aside $1000 every year from the gross national income as a depreciation
reserve of the capital equipment.
After the expiry of ten years, he
accumulates $10000 and with that money he replaces the old capital equipment
which has lived its useful life and maintains capital intact. The sum of
money, i.e., $1000 which he annually deducts from the gross annual income, is
known as depreciation allowance.
It is often pointed out by economists that the calculation of depreciation
allowance every year is a difficult task.
For example, a person expects
the longevity of the capital equipment, say for ten years. There is a
possibility that machinery may last longer or it may go out of use earlier. So
they say what needed is an approximate decision regarding the' depreciation
allowance. This decision should be based on high degree of judgment and guessing
about the future.
Maintaining Capital Intact. By maintaining capital
intact we do not mean that capital equipments should remain the same. It should
neither increase nor decrease. This can only by possible in a static society. In
a progressive society, the total capital equipment of a country must increase
every year, otherwise the national income will be affected adversely.
Economics, by the phrase 'maintaining capital intact' is meant to make good the
physical deterioration which has taken place in the capital equipment while
creating income during a given period. This can only be made by
setting aside a certain amount of money every year from the annual gross income so that when the income creating equipment becomes obsolete, a new
capital equipment may be created out. If the depreciation allowance is not set
aside every year, the flow of income would not remain intact. It will decline
gradually and the whole country will become poor.
NNP = GNP - Depreciation
(3) Gross Domestic
Explanation of GDP:
It is a key concept in the national
income. "Gross domestic product (GDP) is the total market value at current
prices of all final goods and services produced within a year by the factors of
production located within a country".
The labor and capital of a country
working on its natural resources produce a certain aggregate of
commodities, material and non-material every year. In addition to this, there
may be foreign firms producing goods in the various sectors of the economy like
mining, electricity, manufacturing etc.
If we add up the money value of all
the final goods produced both by domestic and foreign owned factors annually in
the country and valued at market prices, it wilt be called gross domestic
product (GDP). Gross Domestic Product thus is the value of aggregate or total
production of goods and services in a country in one year. This constitutes the
Gross National Product, of a country. If we make a detailed list of all such
commodities produced annually or measure the total goods produced during a year
by weight or by volume, it will not give us any clear and concise impression about our total national output. So what generally done is that
the money value of all final goods and service produced during a year at current
market prices is added up. This total current market value of all final
goods and services produced in an economy in one year period is called gross
domestic product (GDP). In the words of Campbell:
"Gross Domestic Product is
defined as the total value of all final goods and services produced in a country
in one year".
According to Shapiro:
"GDP is defined as a flow variable, measuring the quantity of final
good and services produced" during a year".
Problems in Measuring GDP:
The main problems or pitfalls which are to be avoided in the measurement of
GDP are as under:
(i) Stress on final output. While calculating the gross domestic product (GDP), the value of only those
goods are added which have reached their final stage of production
and are available for consumption. The primary or intermediate goods are not
counted in GDP. For example, table made of wood is the final product. The wood
used in making the table is a primary good. While calculating GDP, if we include
the value of wood as a separate item and the value of table separate, it will be
a case of double counting and this leads to inflated rise in GDP.
(ii) Value added method. Another way to avoid pitfall of double or multiple counting
is to calculate only the added value of a particular
commodity at its every stage of production. The result in both the cases will be
Suppose, the price of book which you are reading is
includes the cost of paper, printing and binding charges, etc., While estimating
the gross domestic product, there are two ways open to you. Either you include
the final price of the book at one time in gross domestic product or you
add up the added value at every stage in the process of the production of
the book. But you are not to count the value of a thing more than once.
following example, the reader can easily understand as to how the danger
of double or multiple counting can be avoided.
Stage of Production
Form of the Product
Price at Each Stage ($)
Value Added at Each Process ($)
The price of wood after transporting to the city
Printing of book
Binding and title, etc.
From the above example, it is clear that if we add up the value of the
product at every stage of production, the total value of the book comes to $23.63, while in fact it is priced al
So we come to the conclusion that
while adding the value of the book to the gross national product, we should
either include the final price of the book which is $10 or we should add up the
added value at each stage in the process of production. But we are not to count
the value of a particular commodity more than once. If we do so, the gross
product will be overestimated. The computation of GDP by this method is not
(iii) Non-Productive transactions are excluded from GDP. In order to measure the
economic well being of a society in a year, the non-productive transactions are
excluded from the Gross Domestic Product. There are two major types of
non-productive transactions, namely: (a) Purely financial transactions and (b)
Second hand sales. Under purely financial transaction (i) all public transfer
payments which do not add to the current flow of goods such as social security
payments, relief payments and (ii) all private financial transactions such as
receipt of money by a student from his father which make no contribution in
current production are all excluded from GDP. Similarly, the second hand sales
are excluded from GDP as they do not contribute to current production in a year.
(iv) Other transactions. There are a few other transactions which are not
included in GDP. For example, persons working in their own houses without any
payment through the market. For example, a house wife takes care of house and
children. Since she is not paid, therefore, the value added by her is not
included in GDP.
Exclusion of output production
abroad. GDP is the value of output
produced by factors of production located within a country. It excludes the
output produced abroad by domestically owned factors of production.
Distinction Between GDP and GNP:
Here it seems necessary to make a distinction between gross domestic product
(GDP) and gross national product (GNP). Gross domestic product is the total
market value of all final goods and services produced by factors of production
within a nation's border during a period
of one years. In other words GDP is a flow of production produced within the
country by domestically located resources in a year.
Gross national product (GNP) on the other hand, is the measure of all final
goods and services produced by the citizens within their own country as well as
outside the country during a period of one year. In other words, GNP expresses
the money value of flow of goods and services produced within the country and
the net income received from abroad during a period of one year. Thus when we
move from GDP to GNP, we add factor income receipts from foreigners and subtract
factor income payments to foreigners.
Formula For GDP:
GDP = GNP - Net Foreign Income From Abroad
(4) National Income
at Factor Cost:
National income can be estimated in
terms of either output or total income. When national income is measured by
adding together all income payments made to the factors of production in a year,
it is called national income at factor cost. National income thus is the sum
total of all income payments made to the factors of production. In the words of
"National income (Nl) or national income at factor cost
aggregate earning of the four factors of production (land, labor, capital and
organization) which arise from the current production of goods and services by
the nations' economy".
National Income at Factor Cost:
The main components of national
income at factor cost are as follows:
The factor incomes are generally
divided into four categories:
(i) Compensation to employees (ii)
Interest (iii) rents and (iv) profits.
(i) Compensation to employees: It is the largest component of national
income. It consists of wages and salaries paid by the firms to the workers for
their labor services.
(ii) Interest: Interest is the payment for the use of funds in a year.
The payment is made by private businesses to households who have lent money to
(iii) Rent: Rent is all income earned by individuals for the use of
their real assets such as building, farms etc.
(iv) Profit: Profit is the amount which is left after compensation to
employees, rent, interest have been paid out. The sum of compensation to
.employees, interest, rent and profit is supposed to equal national income at
(5) Personal Income:
National income is the sum of factor income. In other words, it is the income
which individuals receive for doing productive work in the form of wages, rent,
interest and profits. Personal income, on the other hand, includes all income
which is actually received by all individuals in a year. It includes income
which is not directly earned but is received by individuals.
For example, social security
payments, welfare payments are received by households but these are not elements
of national income because they are transfer payments.
In the same way, in national income
accounting, individuals are attributed income which they do not actually
receive. For example, undistributed profits, employees contribution for social
security corporate income taxes etc. are elements of national income but are not
received by individuals. Hence they are to be deducted from national income to
estimate the personal income.
Formula For Personal
PI = Nl + Transfer Payments - Corporate retained earnings, income taxes,
social security taxes
Disposable personal income is the
amount which is actually at the disposal of households to spend as they like. It
is the amount which is left with the households after paying personal taxes such
as income tax, property tax, national insurance contributions etc.
Disposable Personal Income:
Disposable personal income = Personal Income - Personal Taxes
DPI = PI - Personal Taxes
The concept of disposable personal income is very important for studying the
consumption and saving behavior of the individuals. It is the amount which
households can spend and save.
Disposable Income = Consumption +
DI = C + S