Concept of National Income
1. Gross National Product (G.N.P.):
Gross National Product is defined as the total market value of all final goods and services produced in a year. (Or any specified time period e.g. a quarter). We have to keep these things in mind:
1. It is the market value of everything that is produced by Nationals of a country both inside and outside the country’s territory.
2. To ascertain accurate changes in the total output gross national product is adjusted for price changes by comparing it to a base year
3. Everything in the point one means total goods and services. Final means that the value has to be counted only once and not twice. This means intermediate products are not counted. Only the products and services that are used for final consumption have to be counted. For example wheat is converted to flour. Floor is a good for final consumption, and the value of floor covers the value of the wheat as well. Flour may be further converted to biscuits and in this case biscuits cover the value of wheat and its conversion to flour as well. So various forms of most of the goods are purchased and sold several times. This is likely to subject such goods to double accounting – once in its semi-finished form, and again as the final good. In order to avoid this problem, gross national product includes only the market values of the final goods, and ignores the transactions of intermediate goods.
4. The calculation of G.N.P. also excludes non-productive transactions, which are pure financial transactions or transfer payments, such as old-age pensions or unemployment assistance, which are in the nature of grants, gifts, transactions relating to existing shares, or second-hand shares.
2. Gross Domestic Product: GDP
While GNP means all that is earned and received by the individuals in weather inside or outside of the territories of the country. GDP focuses all goods and services produced by the nationals within the country.
GNP: Income earned by nationals inside (GDP) + Income Earned by Nationals Outside –Income earned by the foreign nationals inside.
3. Net National Product: (NNP) or National Income at Market Price
Since Gross National Income covers everything which are final goods and services. In above example, the cost of biscuits is includes production, transport and marketing cost which was incurred at various stages from converting it from Wheat to Biscuits. But there is wear and tear also during all these stages. This wear and tear must be reduced from the Gross National products to know what net national product is. NNP is also called National Income at Market price:
NNP or NI (market price) = GNP-depreciation.
4. National Income (NI):
NNP is also called National Income at Market Price. National Income what we normally hear about is National Income at factor Cost.
To understand this concept we have to know first what factor cost is. We take two examples of sugar. We suppose that
1. Sugar is being sold in the market for Rs. 20 per kg. This is sugar’s market cost. When sugar came out of the factory it was charged with Re. 1 excise and Re. 1 Sales tax per kilogram. This means the factors of production of sugar (land, labor and capital) will receive Rs. 18 per kg. So in this case:
Sugar (Factor Cost) = Sugar (Market Price)-Taxes
2. Sugar is being sold in the market for Rs. 20 per kg. However Govt. Provides subsidy to sugar at Rs. 7 per Kg. So the consumer pays Rs. 13 (Market Price) and factors of production will receive Rs. 20 (factor Cost). This means
Sugar (Factor Cost) = Sugar (market price) + subsidies.
Now we come at NNP:
NNP (Factor Cost) =NNP (market price) –taxes+ subsidies.
In other words:
National Income (Factor Cost) = national Income (market price)-taxes + subsidies.
National Income at factor cost is called as National Income.
5. Per-Capita Income:
The percapita income is arrived by dividing the national income by population. Percapita income is measured either at constant prices or on current prices.
6. Personal Income:
National Income is the income of all individuals of the country, however it is not the income received by all individuals. Some part of the national income is actually not received by individual. For example corporate income taxes are a part of national income but they are not received by the individuals. So to arrive at personal income corporate taxes must be subtracted from National Income. Similarly social security contributions, undistributed corporate profits etc. are reduced from the national Income.
Then, there are some incomes received which are not currently earned (e.g., transfer payments, which include old-age pensions, unemployment relief, other relief payments, interest payment on the public debt, etc.)
So we arrive at Personal Income with following formula:
Personal Income = National Income – Social Security Contributions –Corporate Income Taxes – Undistributed Corporate Profits + Transfer Payments
7: Disposable Income DI
The Personal income is the income of an individual. He / she pays personal taxes , property taxes etc. and after that whatever left to him or her is Disposable Income.
Personal Income –Personal taxes =Disposable Income
There is another formula:
Disposable Income = Consumption + saving.
If after paying my personal direct taxes I have Rs. 100, after consumption of Rs. 80 I will have Rs. 20 as my savings.