1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a financial year.
Four things must be noted regarding this definition.
2. Gross National Product (GNP): Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore, GNP = GDP + Net factor income from abroad.
Net factor income from abroad = factor income received by Indian nationals from abroad – factor income paid to foreign nationals working in India.
3. Net National Product (NNP) at Market Price: NNP is the market value of all final goods and services after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore, NNP = GNP – Depreciation Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.
4. Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.
5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or households during a given year.
In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore, Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.
6. Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,
Disposable Income = Personal income – personal taxes. Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving.
MEASUREMENT OF NATIONAL INCOME
Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:
1. Output or Production method
2. Income method, and
3. Expenditure method.
1. Output or Production Method: This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year.
In order to arrive at the net value of production of a given industry, intermediate goods purchase by the producers of this industry is deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income.
The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.
2. Income Method: This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people.
This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc.
3. Expenditure Method: This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government:
GDP = C + I + G + (X – M).
DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME
There are many difficulties in measuring national income of a country accurately. The difficulties involved are both conceptual and statistical in nature. Some of these difficulties or problems are discuss below: The first problem relates to the treatment of non-monetary transactions such as the services of housewives and farm output consumed at home. On this point, the general agreement seems to be to exclude the services of housewives while including the value of farm output consumed at home in the estimates of national income.