National income is, broadly speaking, the money value of all final outcomes of all economic activities of the people of a country.
The term ‘national income’ is however used in a variety of senses depending on (i) what is included in and excluded from the national income concept, and (ii) what method is used for estimating national income.
Macroeconomic analyses use different concepts and measures of national income-mainly Gross National Product (GNP) and Gross Domestic Product (GDP). Therefore, we discuss here briefly the various concepts of national income and the related macro variables used in macroeconomics.
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Gross National Product (GNP): The gross national product (GNP) is defined as the sum of market value of all final goods and services produced in a country during a specific period of time, generally oriel year. The ‘market value’ of the final ‘national product’ is the money value of all final goods and services.
The market value of the national output is obtained at both constant and current prices. Accordingly, GNP is known as ‘GNP at constant prices’ and ‘GNP at current prices’, respectively.’
Measuring GNP as ‘the market value of all final goods and services’ is beset with the problems of (i) determining what is ‘final’ and what is not, to avoid the problem of double counting, (ii) evaluation of non- marketed goods and services, e.g., farm products produced and consumed by farmers themselves and rental value of owner- occupied houses, etc., (iii) accounting for incomes from illegal activities and professions, e.g., smuggling, production and sale of prohibited goods like narcotics and arms, etc., (iv) unsold stocks and inventories, and (v) distortion of prices due to indirect taxes. National income estimating agency (e.g., CSO in India) finds ways and means to account for these problems.
Alternatively, the GNP can also be defined and measured as the sum of all factor payments (wages, interest, rent, profits and depreciation). It is then called ‘GNP at factor cost.’
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Gross Domestic Product (GDP): The Gross Domestic Product (GDP) is another measure of national income -which often figures in macroeconomic analysis and policy formulations. The concept of GDP is similar to that of GNP with a significant difference, of course.
The concept of GNP includes the income of the resident nationals which they receive abroad, and excludes the incomes generated locally hut accruing to the non-nationals. In case of GDP, however, it is just the other way round.
The GDP includes the incomes locally earned by the non- nationals and excludes the incomes received by the resident nationals from abroad. A comparative definition of GNP and GDP is given below.
GNP= Market value of domestically produced goods and services plus incomes earned by the residents of a country in foreign countries minus incomes earned by the foreigners in the country.
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GDP = Market value of goods and services produced by the residents in the country plus incomes earned in the country by foreigners minus incomes received by residents of a country from abroad.
Net National Product (NNP):
“Net National Product (NNP) is another concept of national income often used -~in macroeconomic analyses. The concept of NNP is closely related to the concept of GNP. The concept of GNP includes the output of both final consumer and capital goods.
However, a part of capital goods is used up or consumed in the process of production of these goods. This is called depreciation or capital consumption. While GNP is gross of depreciation, NNP is net of depreciation. NNP is obtained by subtracting depreciation from GNP. That is:
NNP = GNP – Depreciation
The NNP is the measure of national income which is available for consumption and net investment to the society. The NNP is, in fact, the actual measure of national income. The NNP divided by the population of the country gives the per capita income.
Personal Incomes (PI):
Personal income (PI) can be defined as the sum of all kinds of incomes received by the individuals from all sources of incomes. Personal income includes wages and salaries, fees and commission, bonus, fringe benefits, dividends, interest earnings and earnings from self-employment.
It includes also transfer incomes like pensions, family allowances, unemployment allowances, sickness allowances, old age benefits and social security benefits.
Personal Income and NNP:
It is important to note here that the sum of personal incomes is not exactly the same as NNP. The reason is that NNP excludes certain items included in personal incomes and it includes some other items not included in personal incomes.
NNP does not include many items of personal income, for example, transfer payments like social security benefits, pensions, old age allowances, and such other benefits. And, it includes undistributed profits of private companies, surpluses of public undertakings, and rentals of the public properties. However, NNP can be measured by making some additions to PI.
NNP = PI + UDP + SPU + RPP
(Where UDP = undistributed company profits; SPU= surplus of public undertakings; RPP = rentals of public properties.)