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Various Concepts of National Income

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VARIOUS CONCEPTS OF NATIONAL INCOME:-

NATIONAL INCOME

A. Gross Domestic Product (GDP):-

        GDP is defined as the market value of all the final goods and services produced within the domestic territory of a country in a year. It can be calculated by multiplying all the goods and services produced within the country by their respective prices and adding them.

           Symbolically, 

                   GDP = P1Q1+P2Q2+P3Q3+……….. +PnQn within the country.

            GDP includes only the final goods and services. All the intermediate goods and services are excluded from the measurement of GDP. Intermediate goods are those goods which are produced by one firm and used for further processing by another firm.

Features of GDP:-

  1. GDP is a market value of all the final goods and services produced within the country.
  2. GDP is calculated on the basis of the current market price.
  3. It includes only those goods which have market value and brought for sale.
  4. Transfer payments like pension, allowances, etc. are not included in GDP.
  5. GDP does not include capital gains.
  6. Whether the resources are domestically earned or foreign earned does not matter in GDP.

    B. Gross National Product (GNP):-

                GNP is defined as the market value of all the final goods and services produced in a year by domestically owned resources and foreign sectors.

              Symbolically,

                      GNP = GDP + NFIA

                       Where,

                        NFIA = Net Factor Income derived from Abroad.

                GNP is a broader concept than GDP because it includes Net Factor Income from Abroad.

    Features of GNP:-

    1. It is calculated on monetary terms.
    2. It includes only the final goods and services.
    3. The intermediate goods are excluded to avoid double counting.
    4. It includes income earned by the residents of a country within a country and abroad.
    5. It includes factor payments to foreigners by the country.
    6. It does not include capital gains and transfer payments.
    7. It includes only those goods which have market value and brought for sale.


    DIFFERENCE BETWEEN GDP AND GNP:-


    Basis
    GDP
    GNP
    Definition
    It is the monetary value of all the final goods and services produced within the domestic the territory of a country.
    It is the monetary value of all the final goods and services produced by the citizens within the country and abroad.
    Concept
    It is a narrow concept.
    It is a broad concept.
    Territorial and national concept
    It is a territorial concept as it is concerned with the domestic territory of a country. 
    It is a national concept as it is concerned with the normal residents of a country.
    Net factor income from abroad
    It does not include the net factor income from abroad.
    It includes net factor income from abroad.
    Calculation
    GDP equals to the value of all the final outputs produced in a domestic territory.
        GDP = P1Q1+P2Q2+…….. +PnQn
    GNP equals to GDP plus NFIA.
    GNP = GDP + NFIA


    C. Net National Product (NNP/ NDP) :-

                   NNP refers to the total market value of all the goods and services produced by the factors of production of a country or other polity during a given time period minus depreciation. Similarly, NDP corresponds to GDP minus depreciation. Depreciation describes the devaluation of fixed capital through wear and tear associated with its use in productive activity.

                     In national income accounting, NNP and NDP are given by the following formula:-

                            NNP / NDP = P1Q1+P2Q2+……… +PnQn+(X-M)+NFIA -Depreciation or CCA.

                      Where,      CCA = Capital Consumption Allowance.

                                                            OR,

                              NNP/ NDP=C+I+G+(X-M)+NFIA - D or CCA.


    D. Personal Income (PI):-

                     Personal income is distributed to different persons or households. All amounts of national income do not go to persons. Taxes are imposed on income, the provident fund is deducted, on the other hand, transferable payments like pensions, aged allowances, unemployment allowances, etc. are given by the governments. So, they must be adjusted. PI can be represented by the following formula:-

                        PI = NI – Income tax - undistributed profit – social securities + transferable payments.               


    E. Disposable income (DI):-

                        The income left after paying direct taxes from personal income is called DI. It is because all the income earned by individual and households are not available for consumption. It is expressed as:-

                          DI = PI – Direct taxes.


    F. Per-Capita income or average income (PCI) :-

    It measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population. This is used to compare the wealth of one population with those of others. PCI is often used to measure a country's standard of living. It is usually expressed in terms of a commonly used international currency such as the Euro or US dollar because they are widely known.

                     PCI = NI ÷ Total population.

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