Explain The Various Concepts of National Income

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Explain The Various Concepts of National Income

Gross domestic product (GDP):

GDP is the market value of all final goods and services produced during a year within the geographical boundaries of a nation. It does not include the income earned by resources in foreign countries but includes the income of foreigners working in the economy.

Gross national product (GNP):

the total market value of all final goods and services produced in a country during a year is called gross national product. It includes.

The agricultural production like wheat, rice, cotton, pulses, vegetables, fruits etc.

The industrial production like cloth, machines, fertilizers, cement, sugar etc.

The services of doctors, professors, engineers, labor working in govt, semi govt, and private concerns. The services of banks, railways, road transport, air-transport etc.

The goods and services are ultimately purchased to consume or reproduce. So, if we add the following expenditures it will also be the gross national product.

  • Personal consumption expenditure(C).
  • Gross private domestic investment (I).
  • Government expenditures (G).
  • Net exports (foreign sector) (X-M).

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


Net national product (NNP):

the total net market value of all final goods and services produced in a country during a year is called net national product. In the production of gross national product, we use some capital goods i.e. equipment, machinery etc. these capital goods lose their value, during use in production process. It is called depreciation. To find the net value of output, we deduct depreciation from gross value.

So: NNP = GNP – depreciation

It is also called national income at market price.

National income (NI) or national income at factor cost:

national income at factor cost is the income received by the factors of production. The sum of all the wages and salaries, rent, interest and entrepreneurial profit is called national income at factor cost. It can be calculated by deduction indirect taxes and adding subsidies to NNP thus:

NI = NNP – indirect business taxes + subsides

Indirect taxes are subtracted as they are not the income of the factors of production and subsidies are added as they become the part of the factor income.

Personal income (PI):

all the income is not actually received by the individuals. Social security contributions are deducted (benevolent fund, gratuity, zakat) before the individual receive their income. Some of the income earned by the organizations is not distributed and reserves are created out of profits. Corporate taxes are levied on profit before distribution. These things are not received by individuals; we must subtract them from national income to arrive at personal income. On the other hand, the transfer payments that individual receive form govt, are not included in the N.I and hence must be added to arrive at P.I.so:

P.I = NI – social security contribution – corporate taxes-undistributed profits + transfers

Disposable income (D.I):

when the individual receive their income, they have to pay federal,   provincial or local taxes, Rest o the money can be spent by them, which is called disposable income. DI can defined as follows

DI = P.I – direct income tax payments

Per capita income (PCI):

it is the average income of an individual and is defined as

P.C.I. = total national income/population

Real and nominal income:

nominal income is the income taken at the current prices and real income is the income taken or calculated on some base year price. In other words the income adjusted for inflation is called real income

Real income = national income / index for inflation

The real income reflects the future purchasing power of an individual or nation over the years.

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