Introduction to National Income

Sunday, March 03, 2013

Introduction 
The total output of goods and services produced by a country is given importance by economists and governments due to its influence on the national economy. The higher the total output, the greater the number of people employed and hence the standard of living. 

Countries use three different measures of annual output of goods and services. They are; 
  1. Gross Domestic Product (GDP) 
  2. Gross National Product (GNP) 
  3. Net National Product (NNP) 

Gross Domestic Product 
Gross Domestic Product (GDP) refers to the total output of goods and services produced by the factors of production located in a particular country. 
  • It does not take into account the ownership of resources. Some of the resources might be owned by foreigners and the rest by the domestic firms. 
  • GDP per capita is a measure of domestic output divided by total population. 
  • Real GDP refers to the value of the total domestic output adjusted to inflation. It is also known as the purchasing power of GDP. 
  • Real GDP per capita is a measure of purchasing power of GDP per head. 

Gross National Product 
It refers to the total output of goods and services produced by the factors of production owned by a particular country. 
  • It does not take into account the location of the resources. Some of the resources might be located overseas and the rest in the home economy. 
  • In order to calculate GNP we need to know the Net Property Income from Abroad (NPIA). 
  • NPIA = NPI earned abroad – NPI paid abroad 
  • Therefore, GNP = GDP + NPIA 
  • GNP per capita is a measure of national output divided by total population. 
  • Real GNP refers to the value of the total national output adjusted to inflation. It is also known as the purchasing power of GNP. 
  • Real GNP per capita is a measure of purchasing power of GNP per head. 

Net National Product 
It refers to the GNP after deducting the depreciation of capital (NNP = GNP – Depreciation). It is also referred to as National Income. 
  • Country’s stock of capital depreciates due to wear out, tear out and obsolescence. 
  • The National Income is therefore the annual output of goods and services available either for consumption or to add to the national stock of assets. 
  • The higher the national income, the higher the standard of living of its people. But it does not mean that all people are made better-off.
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