The modern
concepts of national income widely use the following aggregates of the value of
economy’s output:
1. Gross Domestic
Product and Gross National Product
2.
Net
Domestic Product and Net National
Product
3.
National
Income
4.
Personal
Income
5. Disposable Income
We shall
now discuss each one of these concepts in detail.
1. Gross Domestic
Product and Gross National Product
Gross Domestic
Product (GDP) and Gross National Product (GNP) both measures the aggregate
current market value of goods and services produced in a year. GDP refers the
production within the boundaries of a nation i.e. produced domestically in the
territory of a country e.g. Produced in India whether by Indians or foreigners.
The GNP on the other hand measures the production by any Indian persons or
firms anywhere in India or outside the country. The GNP includes the income
earned abroad by Indian nationals. GNP is less commonly referred to than GDP
but is best described as the measure of national output. Thus, GNP can be
either higher or lower than GDP. We calculate the market value of final goods
and services. Things which do not have market value are excluded. Real GDP per
capita is the main indicator of the average person’s standard of living but,
GDP is not a great measure of economic well being. It does not take into
account the quality of the environment, leisure time and distribution of income
in the society.
GDP
Definition
“Gross Domestic Product is the total
market value of a nation’s production including service sector in a given year”.
GDP also measures total expenditure on the economy’s output of goods and
services. For the economy as a whole, income equals expenditure.
GNP
Definition
Gross
National Product (GNP) is the aggregate current market value of the economy’s
output of all final goods and services produced in an open economy in a year.
GNP is the total income earned by a country’s permanent residents.
Both GDP
and GNP attempt to measure the same thing, but generally GDP is more common
method of measuring country’s economic success than GNP.
GDP is
currently produced output during one year: GDP is the measure of currently produced
goods and services during a year. One important thing to be borne in mind while
calculating GDP is that non-productive transactions are excluded from the
calculation of GDP. Non-productive transactions are purely financial
transactions or transfer payments like old age pension, unemployment allowance
which are merely grants or gifts. Purchasing of shares of already existing
companies are also financial transactions and are excluded from the
calculations of GDP.
It is a
monetary measure of aggregate production: There are n number of heterogeneous
goods and services that are produced in an economy. These goods and services
are measured in different units. It is therefore difficult to add them without
a common measuring rod. Money is such a common measuring yard stick by which
thousand of goods and services can be added together in value terms. Thus,
monetary value of all these items for the country as whole is called Gross Domestic
Product.
Final
Goods and Services: What do we mean by
final goods?
Final
goods are those goods which are purchased for final use of consumption and are
not sold again for further processing. Thus, while calculation the value of
goods and services we do not include the value of intermediate goods, only
production of final goods and services enters in GDP figures. Market
transactions of previously produced goods such as old houses, cars would not
enter into GDP.
The
following transactions are not included in the Calculation of GDP:
Non-market
productive activities: Non-market production such as do it yourself activities, e.g.
self shave, household work cooking , cleaning and dusting of own house daily are not a part of GDP calculation
The
underground economy: GDP
do not measure illegal business activities e.g smuggling, black
marketing, gambling, sale of illegal liquor, production of banned drugs may
earn income for the persons but are not
recorded as a part of GDP estimates. Similarly, under reporting income to avoid
income tax also remain unrecorded.
Government
activities are valued at cost- (i.e. salaried earned by government servants): The reasons are
obvious. These activities are not sold in the open market and it is not clear
in many cases as how much value was added.
Real
v/s Nominal GDP and GNP
It has
already been made clear the GDP and GNP are the monetary measures of the
productive capacity of a country. The value of money is never constant it keeps
on changing with the price level in the country, During inflation when price
level is high the GDP or GNP figures are high and during deflation when price
level is low the GDP and GNP figures are low. The economists have worked out
Real figures by deflating it with price index number. The real GDP thus
represents a real rise in the productive capacity. Thus, real GDP and GNP measure
these figures at constant prices where as the GDP and GNP figures at current
prices or market prices are called the nominal figures.
Real GDP = {Nominal GDP/Price index} X100
In GNP we
add the net income earned by the individuals and corporations from anywhere in
the world.
GNP = GDP + NR (Net income inflow from assets abroad or Net
Income Receipts) - NP (Net payment outflow to foreign assets).
Difference
between GDP and GNP
GDP is the
production within the geographical boundaries of a nation by all residents
in that country (whether citizens or non-citizens). In narrow term, GDP is
based on the geographical area of production while GNP is based on the
location of ownership. GNP is the production of the citizens of a country,
irrespective of their place of living. GDP per-capita tells more about the
standard of living of people in a country as compared to the GNP.
- GDP is
calculated via three methods namely: Output Method, Income Method, and
Expenditure Method. GNP is calculated via GDP plus net income from abroad.
GDP is used as the primary measure of production in most of the countries.
- GDP shows the
strength of a country’s domestic economy while GNP shows the economic
capacity of its nationals.
- GDP focuses on
the domestic production while GNP focuses on the production of nationals
worldwide.
- Qualitative and
quantitative factors in an economy are considered more by the GDP as
compared to the GNP. These factors are often overlooked in the case of
calculating GNP.
- Just like GDP,
GNP also includes the indirect taxes and depreciation in the calculation
of income but doesn’t include the services consumed in producing the
manufactured products because the value of these services is included in
the price of finished products.
- The formula of GDP
is: GDP = C + I + G + (X-M) and the formula of GNP is: GNP = GDP
+ Income earned by Nation from Other Countries – Income Earned by
Foreigners from Domestic Market.
2.
Net Domestic Product (NDP)
The
second important concept of national income is Net Domestic Product . Capital
goods building, machine, tools equipment, tractors, transport when are in use
cause depreciation. If this depreciation or consumption of fixed capital id
subtracted from GDP we reach at the net Domestic Product or Net National
Product. Depreciation is valued as the amount of money that would be necessary
to be spent each year to maintain the capital stock in its current state. The
two types of goods are used in the production process. The first of these is
currently produced capital goods and the second is intermediate goods. The
capital goods such as business plant, machinery etc. are ultimately used up in
the production process, but every year only a portion of value of capital goods
is used up in production. This portion is deducted from GDP to arrive at NDP
figure. The net domestic product is considered to be a more accurate measure of
country’s productive capacity as it the market value of all final goods and
services. It is also called National income at market prices. There is however,
no error free method of measuring depreciation, so in practice GDP or GNP is
more in use.
In
short,
NDP=
GDP- Depreciation[1]
Net
National Product (NNP):
Net
national product may be calculated at market cost and at factor cost. The
difference originates from the indirect taxes imposed by the government and the
subsidies provided by the government. If taxes are imposed market price will be
greater than factor cost and on the other hand if subsidy id given by the
government the market price will be less than the factor cost.
In the Net Domestic product add the Net Factor
Income from Abroad to arrive at Net National Product.
In short, NNP= NDP + Net factor income Abroad
(NFIA)
Or NNP=GDP-Depreciation + NFIA
The NNP may be more or less than NDP, depending
upon the positive or negative value of the NFIA.
Net Domestic Product at Market Price:
Net Domestic Product estimated at current prices in the market, is
called Net Domestic product at Market prices.
NDPMP =NNPMP – NFIA
So, basically, NNP describes the depreciation,
compared to the GNP. Naturally, the value of NNP is always less than the GNP.
3.
National Income: National
income is the sum of all factor earnings from current production of goods and
services. Factors earnings are the incomes of factors of production or resource
suppliers. If there are no charges in the form of indirect taxes and no
transfer payments to producers the market price will be just equal to factor
cost. In such cases there will be no difference in NDP and NI. Goods produced are sold at market prices which include
the GST imposed by the Governments. GST is levied on commodities by centre and
state governments. Thus, the market value of the national product exceeds the
income paid to the factors of production by the amount of GST. Hence, net
national income at factor cost shows the income actually received by the
factors of production.
The
National Income can be derived from GDP in the following manner:
NI=
GDP-depreciation – indirect taxes (GST) + subsidies
Or
NI=
NNP- indirect taxes (GST) + subsidies or
Thus,
we can calculate the NNP at factor income i.e. NI
NNP
(factor cost) = NNP at market price- indirect taxes + subsidies
The
profit earned by the Public sector or government enterprises must also be
deducted from the NNP to arrive at NNP at factor cost. Thus, the National
Income at factor cost is the sum of all
incomes earned by factors of production or resource suppliers for their
contribution.
4. Personal Income:
Personal
income is the sum of all incomes actually received by all individuals or
households during a given year. National income is the measure of income earned
from current production of goods and services. The entire income is not distributed
among factors of production. It is useful to have a measure of income received
by owners of resource suppliers regardless of source. A part of factor income
is kept as social security contributions, undistributed profits and a part goes
to government as corporate income tax. On the other hand government grants
social security benefits e.g. old age pension, disability benefits,
unemployment allowances, relief payments during natural calamities, accidents,
etc. These are received by the persons without participating in the current
production. Such payments are known as transfer payments. The transfer payments
are added to factor earnings distributed among persons.
In
short,
PI
= NI – corporate income tax- undistributed profits – social security benefits +
transfer payments.
5. Disposable Income:
The
household receive personal income but the entire income is not available to the
persons for personal use. The households are liable to pay direct taxes from
the PI and only after paying the income tax and other such direct taxes the
remaining balance may be either consume or saved. Thus if direct taxes are
deducted from the PI the remaining income is known as Disposable income (DI)
In
short,
DI
= PI – direct taxes.
Or
DI
= C+ S
Where,
C=
consumption
S=
savings
It
is important to note that personal income may exceed national income if the
amount of transfer payments is large enough. Similarly, DI may exceed PI if the
expenditure is financed by spending past savings.
***
[1] Some economists prefer the use of the word
consumption of fixed capital (CFC) . Conceptually, CFC is the same as the
depreciation but operationally the value of CFC is higher than depreciation
because the former takes into account the current values of fixed assets where
the depreciation is at original costs.
No comments:
Post a Comment