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