Definition: National Income refers to the monetary value of the entire volume of goods and services produced in the economy during a period of one year.
Several measures of national income are used to estimate the nation’s total economic activities by totaling the value of all the goods and services produced in its economy over a period of time. All those human activities that generate the flow of goods and services that can be valued at market price are called as economic activities. The most common measures of national income are:
- Gross National Product (GNP): The Gross National product is one of the widely used and comprehensive measure of national productive activities in the open economy. The economy is said to be an open economy when along with the outcome generated from the goods and services produced in the country, the outcome generated from the economic transactions with the rest of the world are also taken into consideration.
Thus, GNP can be defined as a monetary value of all the goods and services produced during a financial year plus the incomes earned abroad from the nationals minus the income earned locally by the foreigners.
The gross national product is identical to the concept of gross national income (GNI), thus GNP = GNI. The only difference between the two lies in the procedural nature, i.e. GNP is estimated on the basis of product flows, while the GNI is estimated on the basis of money flows.
- Gross Domestic Product (GDP): The Gross Domestic product refers to the market value of all the goods and services produced in the domestic economy during a period of one year plus the income earned locally by the foreigners minus the incomes earned from economic transactions with the rest of the world.
The concept of GDP and GNP are alike with a significant procedural difference. In the case of GNP, the income earned from abroad is added while the income earned by the foreigners locally is deducted from the market value of domestically produced goods and services. Whereas in the case of GDP the process is reversed, here the income earned locally by foreigners are added while the income earned from abroad are deducted from the market value of domestically produced goods and services.
- Net National Product (NNP): The net national product is defined as GNP less Depreciation (GNP-Depreciation). The depreciation refers to the worn out or used up capital during the process of production. An estimated value of depreciation is deducted from the Gross National Product to arrive at the Net national product.
The NNP obtained above gives the measure of net output available for consumption by the society. NNP is considered as the real measure of the national income. Thus, NNP = NNI (Net National Income). It should be noted that NNP is calculated at market prices, including the indirect taxes, therefore, to obtain real national income the indirect taxes are deducted from NNP. Symbolically:
National Income = NNP – Indirect Taxes
The accounting definitions of these measures of national income can be summarized as:
At Market Prices:
GNP = GNI (Gross National Income)
GDP= GNP – Net Income from Abroad
NNP= GNP – Depreciation
NDP (Net Domestic Product) = NNP – Net Income from Abroad
At Factor Cost
GNP at Factor Cost = GNP at market price – Net Indirect Taxes
NNP at Factor Cost = NNP at market price – Indirect Taxes
NDP at Factor Cost = NNP at market price – Net Income from Abroad
NDP at Factor Cost = NDP at market price – Net Indirect Taxes
NDP at Factor Cost = GDP at market price – Depreciation