Determination of national income

National income is the money value of all final goods and services produced in a country during a period of one year. • GNP (Gross National Product) • GDP (Gross Domestic Product) • NNP (Net National Product) • NDP (Net Domestic Product)

GNP & GDP
GNP is defined as the money value of all final goods and services produced in a country during a period of one year plus the income of nationals from abroad. GNI is sum of all the factor payments made – wages for labour, rent for land, profit for entrepreneurs and interest on capital. The difference between GDP and GNI is only procedural. The final value of both remains the same. NOTE: GNP includes production for self consumption, rent from owner occupied property and expenditure on public administration, defence etc. GDP is defined as the market value of the goods and services produced within the nation’s geographical territory, irrespective of the ownership of resources. GDP = GNP – NIA (Net income from abroad) The difference between GDP and GNP at market prices arises due to the existence of “net factor income from abroad”. GDP does not include net factor income from abroad. NNP & NDP

NNP is the same as national income at market price. NNP is defined as GNP less depreciation; i.e. NNP = GNP – Depreciation The capital goods, like machinery fall in value as a result of its consumption or use in the production process during a year. It is called depreciation.

National Income (NI) or Net National product at Factor cost: NNP-Net Indirect taxes GNP at factor cost = GNP at market price – net indirect taxes NNP at factor cost (national income) = NNP at market price – net indirect taxes METHODS OF MEASURING NATIONAL INCOME Production Method: National economy is considered as aggregate of productive units like agriculture, manufacturing, mining, services etc. It measures national income from output side. The gross product is found out by adding up all the net values of production. Its importance lies in the fact that one can see the relative importance of various sectors by showing their respective contribution to the national income Income Method: National economy is seen as combination of production factors’ owners & users. National income is obtained by summing up the total incomes obtained by the individuals in the country. It is calculated by adding up the rent on land, wages of employees, profit of entrepreneurs (including undistributed profits) and interest on capital.

Expenditure Method: Views national economy as collection of spending units. It calculates national income by totaling the expenditures made on goods and services in a year. It is equal to C + I + G + X. Consumption (C) = Amount spent by private individuals on consumption of goods and services Investment (I) = Amount spent by businesses and individuals on new enterprises, renewal and replacement etc. Government Purchases (G) = Amount spent by govt. for goods and services Net Exports (X )= Exports minus imports PROBLEMS IN MEASUREMENT OF NATIONAL INCOME
1. Non-monetized transactions such as services of housewives, farm output

consumed by farmers. This leads to distortions; for example, a paid nanny's income contributes to GDP, but an unpaid parent's time spent caring for children will not, even though they are both carrying out the same economic activity. 2. Underground Activities such as illegal betting, drug trade etc are not accounted for.
3. National Income is not a welfare measure: IT just measures the income of

the country but does not include factors such as welfare of people, their happiness, quality of life, quality of environment etc goes unaccounted. PERSONAL INCOME
Real GNP=Nominal GNP ×Deflator of Base YearDeflator of Current Year Growth Rate=Change in Real GNPOriginal GNP

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