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National Income: Meaning and Definitions of National Income, GDP, GNP, NDP

EPOS-Eco

Published on: December 15, 2020

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Concept of National Income

National income states to the total income of the nation in a particular period of time.

National income data tells the aggregate economic performance of the economy as a whole.

National income represents total receipts, total expenditure and the total value of production.

Since one person’s income is another person’s expenditure and each commodity is bought and sold at its market price, a national income accounting is based on the fundamental three fold identity:

(i) The value received equals,

(ii) The value paid equals,

(iii) The value of goods and services given in exchange.

Here,

National income = National expenditure = National product

Definitions of National Income

There are two types of definitions of national income; they are traditional definition and modern definition.

(i) Traditional definitions

According to Alfred Marshall, “National income is the labour and capital of country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.”

According to Pigou, “National income is that part of objective income of the community, including of course income derived from abroad, which can be measured in money.”

According to Fisher, “The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment.

Thus, a piano or an overcoat made for me this year’s income, but an addition to the capital.

Only, the services rendered to me during this year by these things are income.”

This definition of national income is better than Marshall and Pigou because it is near to the concept of economic welfare.

(ii) Modern Definitions

According to Simon Kuznets, “National income is the net output of the commodities and services flowing during the year from the country’s productive system in the hand of the ultimate consumers.”

According to Prof. P.A. Samuelson, “National income or product is the final figure you arrive at when you apply the measuring rode of money to its land, labour and capital resources.”

Modern economists view national income as a flow of output, income and expenditure.

When the firms produce goods, the factors of production are paid income in the form of wages, profits, interest, rent etc.

Households on consumption goods spend a part of these income receipts and other part is saved.

The producers for investment spending mobilize the savings.

Thus, there is circular flow of production, income and expenditure.

Here,

Total output = Total income = Total expenditure

Features of National Income Concept

The following are the main features of the concept of national income:

a.	In real terms, national income is the flow of goods and services produced in an economy during a specific period.
b.	In money terms, national income is the money measure of the aggregate of all goods and services becoming available to the nation in a particular period.
c.	National income is always expressed with reference to a time period.
d.	National income is a flow and not a stock.
e.	National income is intercepted in three ways:
	(i) as a flow of national output
	(ii) as a flow of national income
	(iii) as a flow of national expenditure
f.	There is a triple identity:
f.	National output = National income = National expenditure

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Various Concepts of National Income

The various concepts of national income are explained below:

(1) Gross Domestic Product (GDP)

It is a measure of the total flow of final goods and services produced within a country over a specified time period; generally, this time is one year.

GDP can be obtained by valuing the output of goods and services at market prices and the sum up of that.

It includes final consumption and investment goods.

But, it excluded intermediate products because they are already implicit (inherent) in the prices of final products.

In short GDP can be listed as:

a.	GDP is expressed in money terms; it is the money value of final total goods and services produced within the country during a period of time.
	The value of final goods and services is calculated at the current market price. Hence, it is called GDP at market price.
b.	GDP includes only those goods and services which have market value and which are brought in the market for sale.
c.	GDP does not include depreciation of capital goods and services during the course of production as well as transfer payment and capital gains are not included under GDP.

Here,

GDP = Total agriculture product + Total industrial product + Total product of tertiary sector.

By using expenditure method, it can be shown as:

GDP = C + I + G

Where:

GDP = Gross Domestic Product

C = Consumption expenditure

I = Investment expenditure

G = Government expenditure

Keep in Mind

Latest data of GDP of different countries:

https://www.worldometers.info/gdp/gdp-by-country/

https://worldpopulationreview.com/countries/countries-by-gdp

Latest data of GDP per capita of different countries:

https://www.worldometers.info/gdp/gdp-per-capita/

(2) Gross National Product (GNP)

Gross national product is the total measure of the flow of final goods and services at market value produced during the year in a nation plus net foreign incomes.

GNP is a broader concept than GDP.

The net foreign income is the difference between the factor incomes earned by our residents from foreign countries.

It is the factor income earned by the foreigners from native country.

Hence,

GNP = GDP + Net foreign income

Or, GNP = C + I + G + (X – M)

Where:

C = Consumption expenditure

I = Investment expenditure

G = Government expenditure

X = Total export earnings

M = Total imports expenses

X – M = Net income from abroad

(3) Net National Product (NNP)

In the production process, certain amount of fixed capital is used.

This is called depreciation of fixed capital or consumption of fixed capital.

Net national product is calculated by deducting the value of depreciation from the value of gross national product (GNP) in a year

Here,

NNP = GNP – Depreciation

Further,

NNP at market price = GNP at market price – Depreciation

(4) National Income (NI)

National income is called national income at factor cost because the national income is calculated on the basis of the remuneration of factors of production.

Since national income is the result of the joint effort of factors of production.

It is distributed among the factors.

The owners of land, capital and entrepreneurs receive rent, interest and profit respectively.

Therefore, national income is the sum of income received by factors of production.

In other words, national income can be expressed as:

National Income (NI)	=	Net National product + Subsidies – Indirect taxes
NI	=	NNP + S – IT

(5) Personal Income (PI)

Personal income is the sum of all incomes received by all individuals or households during a given year.

All income earned by a person does not include in personal income.

It only refers to the income received by the individuals.

Here,

Personal Income (PI) = National income – Corporate income taxes – Undistributed profits – Social security contribution + Transfer payments

(6) Disposable Income (DI)

The entire amount received by the individuals and households are not available for consumption expenditure because some part of the personal income should be paid to the government in the form of direct tax (income tax).

The income remained after paying direct taxes from personal income is called disposable income.

Here,

Disposable Income (DI) = Personal Income (PI) – Direct taxes

The total disposable income is not spent on consumption.

Some part is saved.

Thus,

Disposable Income (DI) = Consumption expenditure (C) – Saving (S)

(7) Per Capita Income (PCI)

Per capita income of a country refers to the average earning or income of individuals in a particular year.

It is obtained by dividing the national income of the country by the total population.

Here,

Per capita income = National Income ÷ Total Population

Per capital income of the people is useful to compare people’s standard of living in different countries.

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Differences between Gross Domestic Product and Gross National Product

Differences between GDP and GNP

SN	Gross Domestic Product	Gross National Product
i	GDP is a measure of the total flow of final goods and services produced within a country over a specified time period, generally one year.	Gross National Product is the money value of all final goods and services produced during the year in a nation and plus net foreign incomes.
ii	GDP includes income earned by foreigners within the country and exclude income earned by nationals outside their country.	GNP is the income earned by citizens of a country. It includes income earned by the nationals abroad but excludes factor incomes made by the foreigners in the country.
iii	GDP is a narrow concept of national income.	GNP is a wider concept of national income.
iv	GDP can be summarized as: GDP = Total agricultural products + Total industrial products + Total products of tertiary sectors.	GNP can be summarized as: GNP = GDP + Net foreign incomes

Calculation of GDP, GNP, NNP, NI, PI and PDI

(Amount in Millions)

1	Gross Domestic Product (GDP)	440
	Net factor income from abroad	+ 41
2	Gross National Product (GNP)	481
	Depreciation	(20)
3	Net National Product (NNP)	461
	Net indirect taxes (indirect taxes – subsidies)	(6)
4	National Income (NI)	455
	Corporate profit taxes, undistributed profits and valuation adjustment	(2)
	Social security contribution	(3)
	Transfer payments to persons	+ 6
	Personal interest income	+ 2
5	Personal Income (PI)	458
	Personal taxes (direct taxes)	(111)
6	Personal Disposable Income (PDI)	347