What is National Income | Concept of GDP, GNP, NDP, NNP & PCI

What is National Income?

Every person has a certain income meanwhile a nation also has some income so when we say income this is measured into some value which is Monetary value or we can say the money value of the particular thing.
Definition: National income is the total money value of all final goods and services produced in a financial year. The financial year starts from 1st April till 31st of March of every year. There are two types of goods.

1. Final Goods

2. Intermediate goods (Raw material)

What is the importance of national income and why measure or calculate National Income?

Measuring and calculating the national income of a country helps to identify whether the trend of the nation’s income is increasing or decreasing. Ideally, the National Income of the country must be on an increasing trend, and this is expected by the country.
When the national income of a country increase it means that the growth in the country also increases. With an increase in national income, the output or the production of a firm has also increased this means if firms started growing then the opportunity for employment also comes in the upper graph and that helps in the growth of the economy which affects every single one of the country.

The Calculation needed to measure national income are as follows:

1. What is GDP (Gross Domestic Product)?

GDP (Gross Domestic product)
Definition: Monitory value of final goods and services produced in an Countries territory in a financial year.
GDP stands for “Gross Domestic product” here the word domestic is important where the calculation takes place for domestic territory or domestically produced goods and products. Here clearing one thing that GDP only calculates the products and services produced inside the country and also final goods and services.

The “domestic” term is the income or Expense which is generated in the country’s territory and is only going to get considered others are not. The territory includes the political boundaries of a country, Embassies of the Country, Consulates and Military establishments located abroad ships aircraft, or shipping vessels that are owned by residents of the country all these are considered in Domestic Territory

2. What is GNP (Gross National Product)?

GNP (Gross National Product)
Definition: The total monetary value of all the final goods and services which are produced by the normal residents of a country in a financial year.

GNP answer the term of who produces the goods and services. In “Gross national products” National means the residents of the country are producers in GNP.

Normal residents refer to individuals who usually reside in the country and whose long-term economic interest in a particular country this kind of people know as normal residents.
The goods and services produced by these normal peoples either they stay in-country and earn in-country or people who stay in India but their business are in abroad that cost too is going to calculate in GNP. One more thing which needs to make clear is If someone is a foreigner who generates his/her income in India. So in this condition, his/her income is not going to be calculated in GNP.

You can analyze the difference between GDP and GNP easily

• GDP answers where these goods and services are produced and GNP answers who produced these goods and services
• In GDP calculations are considered inside the country and GNP considers calculations for abroad too because GDP carried domestic territory and GNP carried National.

3. What is NFIA (Net Factor Income Abroad)?

NFIA (Net Factor Income Abroad)
The NFIA is a calculation to find the net income from Abroad so for that if a person who Is a National Resident but his income is generated abroad and at the same time another person who is non Resident of the country but earns in the territory of the country get into Subtraction they’ll generate NFIA
Net factor income Abroad
In simple words, we can say that subtracting the value of two-person who perform similarly like being foreigners and having an income source in that country will help us to calculate NFIA.

4. What is NDP (Net Domestic Product)?

NDP (Net Domestic Product)

Net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation.
The concept of NDP is totally similar to GDP only the difference is into Gross Is replaced by Net and the method of calculating NDP is Reducing Depreciation from GDP.
GDP – Depreciation = NDP

5. What is NNP (Net National Product)?

NNP (Net National Product)

Net national product (NNP) is the total value of finished goods and services produced by a country’s citizens overseas and domestically, minus depreciation.
The concept of NNP is totally similar to GNP only the difference is into Gross Is replaced by Net .
GNP – Depreciation = NNP

6. What is PCI (Pre Capital income)?

Pre Capital income

Per Capital income is the division of Net National Product by People of the country. The purest form of income in-country
PCI =NNP/ people

Important Concept of National income and aggregates

– Gross vs Net

The values of particular goods get decrease after a certain period due to Depreciation.
Depreciation means “wear and tear” that lead to a reduction in the value of capital goods.
GDP and GNP were the term “G” stands for Gross so if we deduct Depreciation from this gross will get the Net Income. Hence Net income is the deduction of Depreciation from Gross income.
GDP – Depreciation = NDP (Net Domestic Product)
And GNP – Depreciation = NNP (Net National Product)
So to arrive at the net value we must deduct the Depreciation from the gross value.

– National vs Domestic

National = Domestic + NFIA
If we add Domestic either GDP or NDP will derive it to national.

– Factor Cost vs Market price

FC = Cost of FoP

Factor cost refers to the cost incurred on factors of production. There are 4 factors of production such as

1. Land – Land needs to pay Rent
2. Labour – Labours need wages
3. Capitals – Capital needs to pay interest
4. Entrepreneurs – They have to provide with-profits
   These are known as cost own factors of production or the remuneration to the factors of production. Also the Factor Cost in an order to estimate growth in an economy
   The market price is a Cost Factor with Net indirect taxes and subsidy is a payment to individuals or firms, usually in a form of cash or targeted tax cut.
   Market price = factor cost + Net indirect taxes
   indirect taxes – Subsidies = Net indirect taxes

– Current and Constant

The value of goods and services are valued at the same year price is called the Current Price
And The value of goods and services are valued based on year price is called Constant Price

FAQ’s

By Mohan

Reference: IMF

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