Introduction to National Income

Now, we are comparing and ranking countries according to their economical activities. National
Income accounting is one of the most important concept in the field of Macro Economics. The
accounting and finding of an economys national output has more important, especially after the
Keynesian revolution in Economics, after the phenomenon of great depression of 1930s.
In this modern era counting, comparing and predicting future of an economy or a country. When we
observe an economy there can see so many economic activities like production, consumption,
saving, investment etc. Actually national income is the total money value of the entire economic
activity in an economy during a specified period of time.
To explain the complexity ofmeasurement of the value of national income, economists explained it
very systematically. For simplicity they classified all the economic activities under four sectors, like
a) individual consumers (C )
b) businesses / investments (I)
c) government sector (G)
d) foreign sector / export and import (X or X-M)
National income has been defined by many professionals with different views. But in theory all
definitions are giving same meaning. The father of modern national income accounting, Simon
Kuznets defined National income is the net output of commodities and services flowing during the
year from the country's productive system in to the hands of the ultimate consumers
Here this article help you to learn the concepts of national income

Before going to learn the main concepts of national income, understand the following items.
What is Net Factor Income From Abroad ?
Now, all the economies interact with other economy. So, there occurring the flow of income or output.
Net Factor Income From Abroad means the net amount of income received from abroad of foreign
sector over factor income paid to foreign sector.

When international trade delivering one of them receive some thing and the other give something as
a part of this mutual contact. For example, Indian labors working in Gulf counties and sending their
earnings to India. Similarly foreigners working in India. Here the occurring the flow of wealth.
Anyway we can find out the net Net Factor Income From Abroad by using the following formula.
Net Factor Income From Abroad = factor income received from abroad factor income paid to
abroad
What is Depreciation ?
Depreciation is defined as the permanent and gradual reduction in the value of assets due to wear
and tear, use or abuse or impact of time.
What is Subsidies ?
Subsidies refers to the amount given by government sector to the public or industries to minimize the
cost of production.
What is Taxes ?
Taxes refers to the amount paid to government by individuals and producers etc. Mainly two types of
taxes are there, Direct taxes and Indirect taxes.
What is Transfer Payments ?
Transfer Payments are maid by government to individuals and others. Actually it is not paying for any
ongoing economic activities. For example:- subsidies, pensions etc

Main concepts of National Income Accounting

Following are the major concepts in the national income accounting.
I) National income at current prices and
constant prices
II) National income at factor cost and market prices
III) Gross National Product (GNP)

IV) GNP Deflator

V) Net National Product (NNP)
VI) Gross Domestic Product (GDP)
VII) Gross Domestic Product (GDP) and Gross National Product (GNP)
VIII) Net Domestic Product (NDP)
IX) Gross National Product (GNP) Deflator
X) Green GNP
XI) Per Capita Income
XII) Private Income
XIII) Personal Income
XIV) Personal Disposable Income
I - National income at current prices and constant prices (nominal and real prices)

National income is the money value of an economys activities. So, national income can be measure
at current year prices or constant year prices.
National income at current or nominal year prices refers to measure the value of an economys
activities on the basis of the price which is ongoing time. In other words counting of the value of
goods and services at a price which is the price when the goods and services are produced.
National income at constant or base year prices refers to measuring of national income on the basis
of a base year price ( base year is a previous year, normally base year is fixed by Economists, those
year there is no any kind of economical or political or social problems like natural calamities, war
etc). compared to measuring national income at current year prices, base year is better. Because the
constant priced national income can be used to compare between years. Moreover it can be used to
analyze the changes in price level in an economy.
II - National income at factor cost and market prices
The value of an economies output can be measured at market prices and factor costs also.

In an economy, we can see the presence of taxes and subsidies. It will impact the price of an output
in two ways. Taxes increases the prices of commodities and subsidies minimizes the prices of
commodities.
When we measure national income at market prices taxes and subsidies influence the price as said
above. We can measure national income at market prices by multiplying the quantity of output with
the market prices of that output. The Net Factor Income From Abroad also included in national
income when measure at market prices.
Another way of measuring national income is on the basis of factor costs. We can derive national
income at factor cost by adding the cost occurred during the production time on different factors of
production like land, labor, capital etc. So, the following formula can be used to find national income
at factor costs.
National income at factor cost = national income at market prices net indirect taxes + subsidies
III - Gross National Product (GNP)
Gross National Product (GNP) is the market value of all final goods and services produced by a
country during a one year period. The GNP includes the value of output produced in abroad. Further
the value of depreciation is also included in GNP. We can derive GNP by using the following formula
GNP = GDP + Net Factor Income From Abroad
Nominal GNP = It is the final value of goods and services of a country measured at current year
prices
Real GNP = It is the value GNP measured at base year prices. So, it is measured at a fixed prices.
Potential GNP = It is the value of GNP, when the country produced its output with using all available
resources. Which means fuller utilization of resources.
Actual GNP = It is the value of GNP actually produced. In almost all the economies we can not see
potential GNP. Because there is a possibility for the under utilization of resources, since many
problems existed in every economy like unemployment, low capacity of labor power etc.
GNP Gap = GNP Gap refers to the difference between Potential GNP and Actual GNP. So,
GNP Gap = Potential GNP Actual GNP
IV - GNP Deflator

GNP Deflator is a important concept in macro economics to measure the general price level in an
economy. GNP deflator is the ratio of nominal GNP and real GNP.
I.e, GNP deflator = Nominal GNP / Real GNP
V Net National Product (NNP)
NNP is the total value of all the final goods and services produced by a country during a specified
period excluding depreciation. So, we can derive NNP from GNP by deducting depreciation.
Mathematically,
NNP = GNP Depreciation

VI Gross Domestic Product (GDP)

GDP is the total money value of all final goods and services produced within the domestic territory of
a country. The contribution of foreigners to the production or output also included in GDP.
Potential GDP = It refers to the value of output of a country resulted by the optimum utilization of the
available resources.
Actual GDP = It is the value of a countrys output for a specific period of time produced actually.
GDP Gap = It is the difference between Potential GDP and Actual GDP. I.e.
GDP Gap = Potential GDP Actual GDP
VII GDP and GNP
GDP Refers to the domestic output and GNP means the output of a country produced irrespective of
domestic or foreign country. The major difference between GDP and GNP is foreign force, that is the
Net Factor Income From Abroad.

VIII Net Domestic Product (NDP)

NDP is the total money value of all the final goods and services produced within the domestic
territory of a country during a specified period excluding the amount of depreciation. So,

NDP = GDP Depreciation

IX Green GNP
Green GNP is one of the new concept in Macro Economics related to the concept of national income
accounting. Suppose we find out GNP of a country. But unfortunately it will never definitely true.
Because there is a possibility to reduce the value due to many things like environmental pollution,
natural calamities etc. Such kind of events will badly effect an economy and reduce the actual value
of the final output. So, we can derive Green GNP by reducing these kind of losses from GNP.

X Per Capita Income

Per Capita Income is the average income of people of a country in a particular period. It can be
calculated by dividing the national income of the country by total population. Mathematically,
Per Capita Income = national income / population
This concept can be used to know the average income of the people of a country and their standard
of living. But it has some limitations also, for example. Inequality existed in a country will not agree
with the Per Capita Income of that country.
XI Private Income
Private Income refers to the income earned by individuals and other private corporates from their
economic and non-economic activities irrespective of domestic territory or foreign territory. So,
transfer payments like scholarships, pensions etc. included in Private Income.
XII Personal Income
Personal Income is the income received by individuals of a country from all the sources. It can be
calculated using the following formula.
Personal Income = Private Income undistributed profits profit taxes

XIII - Personal Disposable Income

Personal Disposable Income is the amount of income of individuals which can spend for
consumption and savings. Entire Personal Income can not spent as they wish. Because of the
influence of taxes. Individuals can spend their income only after the payment of direct taxes. So,
Personal Disposable Income can be arrive by using the following formula.
Personal Disposable Income = Personal Income - Direct Taxes
Conclusion
National Income is one of the wide concept in Macro Economics. Simply national Income accounting
means the measurement of the money value of the economical activities or output of an economy for
a specific period of time. The most significance of national income accounting is, it enables
economists or the authority of the country to understand and alter the required changes in the
country. Moreover it can be used for comparison study also.