CONCEPTS OF NATIONAL INCOME AND THEIR INTERRELATIONSHIP
There are various basic concepts of national income which a the mic measuring the total income of a nation. These concept are:
(1) Gross domestic product
(2) Gross national product
(3) Net national product at market prices
(4) Net national product at factor cost
(5) National disposable income.
These concepts of national income are now discussed in brief.
(A) Gross Domestic Product (GDP)
It is a key concept used in the measurement of total income of a nation. Gross domestic product is the total market value of all final goods and services produced within a country in a given period of time. According to Shapiro "GDP is defined as a flow variable, measuring the quantity of final goods and services produced during a year? The essential features of GDP are
(i) GDP is the total market value.
It measures the total market value of output at current market prices.
(ii) All goods and services.
GDP measures the market value of all goods nce no output at current market prices (cloth, furniture etc.) and services (accountant, doctor etc, services) produced in the economy.
(iii) Final goods.
GDP includes the value of only final goods. The value of intermediate goods (yarn for example is excluded to avoid double counting.
(iv) Currently produced goods.
GDP includes only the value of those goods and services which are currently produced. For example, a person sells. his old house to another person. The value of the house is not included in GDP..
Gross national product, on the other hand, measures the total income earned by the permanent residents of a country in a given time period. GNP includes factor incomes earned from abroad by the residents of a country and excludes income that foreigners earn from here. In other words when net factor income from abroad is added to GDP, we obtain GNP, and thus GNP = GDI + Net factor income earned from abroad.
In the same way, in national income accounting, individuals are attributed income which they do not actually receive. For example, undistributed profits employees contribution for social security corporate income taxes etc. are elements of national income but are not received by individuals.Hence they are to be deducted from national income to estimate the personal income.Personal income thus is:
P1 = NI + transfer payments - Corporate retained earnings, income taxes, social security taxes.
(v) Domestic territory.
"It includes the value of output of goods and services produced by all enterprises whether resident or non-resident located within the domestic territory of a country.(vi) Time period.
GDP includes the value of all final goods and services produced in a given period of time which is usually a year.(vii) Flow concept.
GDP measures the flow of income produced by all producing enterprises during a year.(2) Gross National Product (GNP)
The concept of gross national product (GNP) at market prices is more comprehensive than GDP. Gross domestic product (GDP) is the total value, measurement in current price, of all final goods and services produced in the economy during a given period. It includes all factor incomes of non-residents paid to foreigners.Gross national product, on the other hand, measures the total income earned by the permanent residents of a country in a given time period. GNP includes factor incomes earned from abroad by the residents of a country and excludes income that foreigners earn from here. In other words when net factor income from abroad is added to GDP, we obtain GNP, and thus GNP = GDI + Net factor income earned from abroad.
(3) NET NATIONAL PRODUCT (NNP)
Net national Product or national income at market prices is the net market money value of all the final goods and services produced in a country during a year. It is found out by substracting the amount of depreciation of the existing capital in a year from the market value of all final goods and services. For a continuous flow of money payments, it is necessary that a certain amount of money should be set aside from gross national income for meeting the necessary expenditure of wear and dear of all capital equipment so that there should not be any deterioration in the copital and it should remain intact. If we deduct depreciation allowance from Gross national Product, we get Net National Product at current market from price. GNP at market price - depreciation = NNP at market price.(4) NATIONAL INCOME AT FACTOR COST
National income is a measure of the sum of all factor incomes earned by the residents of a country both from within the country as well as abroad. It is infact an alternative name for net national product and factor cost. National income at factor cost or Net National product' at cost is the total income earned by a nation's residents in the production of goods and services. It is inclusive of net factor income earned from abroad. The main components of national income at factor costs (i) Wages and salaries paid by the firms to the employees (ii) Interest which is the payment for the use of funds (iii) Rent and (iv) Profit(5) PERSONAL INCOME
National income is the sum of factor income. In other words, it is income which individuals receive for doing productive work in the form of wages, rent, interest and profits.Personal income, on the other hand, includes all income which is actually received by all individuals in a year.It includes income which is not directly earned but is received by individuals.For example, social security payments, welfare payments are received by households but these are not elements of national income because they are transfer payments.In the same way, in national income accounting, individuals are attributed income which they do not actually receive. For example, undistributed profits employees contribution for social security corporate income taxes etc. are elements of national income but are not received by individuals.Hence they are to be deducted from national income to estimate the personal income.Personal income thus is:
P1 = NI + transfer payments - Corporate retained earnings, income taxes, social security taxes.
