National Income – GDP, NNP, GNP, Real GDP vs Nominal GDP and Depreciation

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National Income
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In the last post, we learned basic concepts of economy, In this post, you will learn about the measures of national income – GDP, GNP, NNP, Real vs Nominal GDP, and the Concept of Depreciation. So let’s go. 

What is an Output of an Economy?

In every economy, goods are produced and services are rendered.

Raw materials are converted into finished goods. For example- Iron is used to make cars. Tomatoes are used to make Ketchup, Cement is used to build homes.

Similarly, services are rendered. For example, banking services, insurance, hospitality, tourism, and entertainment.

So the output of an economy implies, the monetary value of all the goods and services produced in an economy in a given time period.

If you produced wheat on your farm. You eat some and sell the rest. Then all the wheat produced is considered under the concept of output.

What is National Income?

  • Nation = country
  • Income = monetary value

The national income of the country is the total value of all final goods and services produced in the country in a particular period of time usually one year. The growth of national income helps to know the progress of the country.

There is a catch. There are two types of goods – final goods and intermediate goods.

National Income - GDP, NNP, GNP, Real GDP vs Nominal GDP and Depreciation 1

Final Goods

When goods are meant for final consumption they are called final goods. Final goods cannot be used to further use. Final goods are not used in the production or manufacturing of other goods. For example- A car is the final good.

Final goods are also called consumer goods. All goods and services which are used for ultimate satisfaction and not used in further production are called consumer goods.

What Are Intermediate Goods?

Steel and plastic are used in the production of cars. These are intermediate goods. These goods are used in the production of a final good.

Under the concept of output, only final goods are included in order to avoid double counting. If we include intermediate goods, it means counting the same thing twice.

So only final goods are taken into consideration while counting national income.

What is Gross Domestic Product GDP?

In Gross Domestic Product – Domestic means within the boundaries of a country irrespective of the nationality of the country. The producer can be either an Indian (ex. Tata, Birla) or a foreigner (Samsung, Xiaomi).

It shows how many goods and services are produced within the boundaries of the country by both citizens and foreigners.

It focuses on where the output is produced rather than who produced it- it is a geographical concept.

In other words, GDP measures all domestic production, disregarding the nationality of producing entity.

What is Gross National Production GNP

Here the catchword is National. It refers to all the citizens of the country. Gross National Product is the total value of the total output for the production of final goods and services produced by the nationals of a country during a given period, generally one year.

What is Included –

  1. The income of all the residents of a country is included
  2. The income of non-resident citizens of a country i.e. Indians earning abroad is included

What is not included-

  1. The income earned by foreign nationals living in India is excluded.

In short, the GNP contains the income earned by Indian nationals (both in Indian territory and abroad) only.

Let us understand the concept of Net Factor Income from Abroad.

What is Net Factor Income from Abroad

NFIA can be positive or negative. If the income of Indian nationals abroad is more than the income of foreign nationals in India it is positive.

NFIA = Income of Indians Abroad – Income of Foreigners in India

What is Net National Production NNP

Net National Product is arrived after deducting depreciation from Gross National Product.

‘Depreciation means wear and tear of goods produced. Every good that is manufactured undergoes wear and tear.

This deduction is done because a part of the current production goes to replace the depreciated parts of the products already produced.

This part does not add value to the current year’s total produced.

NNP = GNP – depreciation.

The government decides and provides the depreciation rates in percentage for all assets in official data.

NNP AT FACTOR COST

The NNP at factor cost calculates national income only on the basis of the cost incurred to produce the goods and services.

This cost is the payment made to the factors (land, labor, capital, and entrepreneur) of production.

  • For this, the indirect tax is deducted from NNP at market price.
  • Then subsidies given to produce goods and services are added.
  • NNP at factor cost is equal to NNP at market price minus indirect taxes plus subsidies.

Notes: Factor cost is also the income for the factors of production

Factor cost + Indirect Taxes – Subsidies = Market Price

See market price can be increased by increasing taxes but this does not mean that the productivity of the economy has increased. Therefore the output of an economy is calculated at factor cost.

Real GDP vs Nominal GDP

In reality, prices tend to increase over time. Therefore factor cost also increases. That is the cost of land, labor, capital, and entrepreneurship tends to increase.

So if we are to compare the output of the economy over time we need to adjust it for inflation. Hence the concept of real and nominal GDP comes into play.

NOMINAL GDPREAL GDP
Not adjusted for inflation. Adjusted for inflation
Higher valueUsually lower value
Raw numbersAdjusted

Nominal GDP is not adjusted for inflation. Whereas Real GDP is adjusted for inflation

Why GDP is Widely Used?

  1. The United States abandoned the use of GNP in 1991
  2. India also switched to GDP measures to compare growth with other global economies

Though GNP can be useful when the aim is to analyze the effect of foreign entities and workers on the indigenous economy.

GDP vs GNP

GDP calculates productivity within a particular geographic boundary whereas the GNP calculates the output of countries’ citizens irrespective of where they are based.

Economic Growth

Generally, economists define economic growth in terms of an increase in a country’s output of goods and services. Economic growth implies an expansion in economic activities in quantitative terms. And this is expressed in two ways:

    1. Increase in Gross Domestic Product (GDP)
    2. Rise in per capita income or output

Recently India surpassed UKs economy to become the fifth largest economy but –

  1. The per capita GDP of India is less than $2,500
  2. The per capita GDP of the UK is $47,000

That is 20 times more.

 

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