National Income - GDP,GNP,NDP & NNP

 Reason for Measure National Income

• Calculating the output of an economy and aggregate economic activity - GDP, GNP, NNP, etc.
• It helps in
• Assessing how the economy is doing at macroeconomic level
• Compare the standards of living of people.
• Economic planning.
• Structure of the economy.

Simplify the Economy

• Consists of only two entities - Firms and Households
• Without a government, external trade or any savings

Circular Flow of Income

• Household get income
• Human labour - wage
• Capital - interest
• Entrepreneurship - profit
• Resources (land) -  rent.
• Households spend money on buy Good & Services Produced by Domestic firms.

Calculations of National Income

• Product method:
• By Using all value of all Goods & services produced per year.
• Income Method:
• This method approaches national income from the distribution side.
• The enterprises are classified into various industrial groups.
• Factor incomes are grouped under labour income, capital income and mixed income.
• Labour income - Wages and salaries, fringe benefits, employer’s contribution to social security.
• Capital income – Profit, interest, dividend and royalty
• Mixed income – Farming, sole proprietorship and other professions.
• By using Rent, Wages, Income, Profit.

GDP = Total (R+W+I+P)

• Expenditure Method:

GNP = C + I + G + (X-M)

• Where,
• C - Consumption Expenditure of Households
• I - Investments done by firms
• G - Government Expenditure
• X - Net Exports

Gross Domestic Product

• The value of the all final goods and services produced within the boundary of a country during one year.
• ‘Gross’ means ‘total’.
• ‘Domestic’ means all the economic activity done inside the boundary of the nation/country. – (Territory, Ships and aircrafts, Fishing vessels, International waters, Embassies.)
• ‘Product’ is a word to define ‘goods and services’ together. – (Producthere means final goods and services and not the intermediate goods)
• ‘Final’ means the stage of a product after which there is no known chance of value addition in it. Within the boundary both by Indians and Foreign citizens.
• It eliminates Double counting.

Types of Goods

1. Final Good (Taken for GDP Calculation)
• Not pass through any more stages of production or transformations
• Example: Tea leaf to Tea Powder (4Kg - Rs. 200), 2 kg buy by House hold @100 Rs & 2 kg buy by Tea Shop and sell 10 tea @15 Rs Each, Tea shop Earn 150 Rs. The final GDP value is 250 (Household-100, Tea Shop-150).
2. Intermediate Goods  
• These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods.
• Examples: Steel sheets for making automobiles, copper for making utensils
3. Capital Goods
• Ex: Car Company, the capital goods are Painting unit, Designing unit etc.
4. Consumer Durables
• They are also durable. That is, they are not extinguished. Long life goods.
• Good undergo wear and tear, Need repairs, Replacement of Parts.
• Example: TV Remote after sometime need to replacement of battery.

Gross Domestic Product is Not taken for

• Not traded in a market, such as household chores or projects.
• Illegal activities ("black market" trades).
• Second hand sales.

Gross National Product

• Gross National Product(GNP) is the value of all final goods and services produced by the nationals of a country during one year.
• Total money value of goods and services produced by the nationals outside the country is included in GNP.
• GNP = GDP ~ NFIA (Net Factor Income from Abroad).
• NFIA = Income earned by Indian in Abroad – Income of foreigner in India.

NDP & NNP

• NDP is an annual measure of the economic output of a nation that is adjusted to account for depreciation.
• NNP is the market value of all the finished goods and services that are produced in a year, by citizens of a nation, living domestically and internationally.
• Goods are Depreciated after some time,

NDP = GDP – Depreciation

NNP = GNP – Depreciation

• Ministry of Commerce and Industry announces the rates by which assets depreciate and a list is published.
• No way to cut the depreciation to Zero.
• NDP is not used to compare the economies of the world.
• Though, the GDP, NDP and GNP, all are ‘national income’,
• NNP is treated as National Income, Purest form of the income of a nation.
• When we divide NNP by the total population of nation we get the ‘per capita income’(PCI)of that nation i.e. ‘Income per head per year’.

NNP Calculator

NNP at market price

• Cost of goods reach the markets i.e. showrooms.
• In India, income was calculated at factor cost, and so is the case with most of the developing countries. The reasons are-lack of uniformity in taxes.
• However, in January 2015, India started calculating its national income at Market Cost to align with global standards. (Because of GST Implement).
• Income can be derived at two prices –constant and current.
• Market Cost= Factor Cost - Subsidies + Indirect Taxes
• Factor Cost= Market Cost + Subsidies - Indirect Taxes

NNP at Factor Cost

• The sum of net value added by the different producing units and the consumption of fixed capital.
• ‘Factor cost’ is the ‘input cost’ (Cost of capital i.e. interest on loans, raw materials, labour, rent, power, etc. also termed as ‘factory price’ or ‘production price’.)
• Since the net value added gets distributed as income to the owners of factors of production, we can also estimate GDP as the sum of domestic factor incomes and consumption of fixed capital.
• Factor cost is the ‘price’ of the commodity from the producer’s side.