National income of a country can be defined as the total market value of all final goods and services produced in the economy in a year. The sum of all incomes of the people of a country is called national income. This national income is greatly related to the national product. In fact in a two-sector economy without the Government and its imposition of indirect taxes and grant of subsidies and also assuming no depreciation national income and national product are one and the same thing. The incomes which different people of the society get are obtained by them for their contribution of labour, land, capital and entrepreneurial services to the national production. Hence the income which the labourers get are wages for the productive services which labourers lend to the various firms which undertake the work of production. Similarly, the owners of land get income as rent because of their contribution of land to the productive firms; the capitalists get interest for lending their money capital to the entrepreneurs for undertaking any work of production or business. The entrepreneurs get profits for starting and organising the work of production and bearing risk and uncertainty involved in it. It is thus clear that the different individuals of a country obtain their income either as wages of their labour, or as interest on their money capital, or as rent for their land, or as profits for their enterprise. The sum of incomes obtained as wages, rent, interest and profits is the national income of the country.
Gross Domestic Product (GDP)
Gross Domestic Product is defined as the total market value of all final goods and services produced in a year in the domestic territory of a country. Two things must be noted in regard to gross national product.
First, it measures the market value of annual output. In other words, GDP is a monetary measure. There is no other way of adding up the different sorts of goods and services produced in a year except in terms of their money prices. But in order to know accurately the changes in physical output, the figure for gross national product is adjusted for price changes.
Secondly, for calculating gross domestic product accurately, all goods and services produced in any given year must be counted once, and not more than once. Most of the goods go through a series of production stages before reaching a market. As a result, parts or components of many goods are bought and sold many times. Hence to avoid counting several times the parts of goods that are sold and resold, gross national product includes the market value of only final goods and ignores transactions involving intermediate goods.
The market value of domestic product is obtained at both constant and current prices. Accordingly, GDP is known as ‘GDP at constant prices’ and ‘GDP at current prices’, respectively.
Measuring GDP as ‘the market value of all final goods and services’ is beset with a number of problems:
(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.
Gross National Product (GNP)
Another important concept of national income is gross national product (GNP). Gross national product is the money value of all final goods and services produced by normal residents as well as non-residents in the domestic territory of a country and also not includes net factor income earned from abroad. The concept of GNP includes the income of the resident nationals which they receive abroad, and excludes the incomes generated locally but accruing to the non-nationals.
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 countries minus incomes earned by the foreigners in the country
GDP = Market value of goods and services produced by the residents in the country plus incomes earned in the country by the foreigners minus incomes received by residents of a country from abroad
Net Domestic Product (NDP)
The second important concept of national income is that of net domestic product (NDP). In the production of gross domestic product of a year, we consume or use up some fixed capital, i.e., equipment, machinery, etc. The capital goods, like machinery, wear out or fall in value as a result of its consumption or use in the production process. This consumption of fixed capital or fall in the value of fixed capital due to wear and tear is called depreciation. When charges for depreciation are deducted from the gross national product we get net national product. Clearly, it means the market value of all final goods and services produced in a year after providing for depreciation. Therefore, it is also called ‘domestic product or income at market prices. Therefore,
Net Domestic Product = Gross Domestic Product at market prices minus Depreciation at Market Prices
or NDP at MP = GDP at MP minus Depreciation at Factor Cost (NDP at FC)
National Income at factor cost which is also simply called national income means the sum of all incomes earned by resource suppliers for their contribution of land, labour, capital and entrepreneurial ability which go into the year’s net production. In other words, national income (or national income at factor cost) shows how much it costs society in terms of economic resources to produce net output. It is really the national income at factor cost for which we use the term National Income. The difference between national income (or national income at factor cost) and net national product (national income at market prices) arises from the fact that indirect taxes and subsidies cause market prices of output to be different from the factor incomes resulting from it.
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 minus Depreciation or capital consumption
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.