National Income: Definition, Measurement, and Significance for the Economy Explained

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National income is a term that is often used to measure the economic growth and development of a country. It refers to the total value of all final products and services generated within the borders of a country during a specific period, usually a year. The rise or fall of a country’s national income can provide important insights into the country’s economic well-being and development. In this article, we will discuss the various measurements of national income and their significance in the economy.

National income explanation, image of a tree with a bulb and text.

Gross Domestic Product (GDP)

GDP is the most commonly used measure of national income. It is the total value of all finished products and services produced inside a nation’s borders during a specific time period, typically one year. The formula to calculate GDP is P x Q, where P is the final products and services’ price and Q is the total amount of final goods and services produced in the nation. This includes both domestic residents and foreigners who live inside that geographic area. GDP is used to measure the output of goods and services produced within a country’s borders, regardless of who owns the factors of production.

Ram and Shyam live in a small village and both work as farmers. They produce crops such as rice, wheat, and vegetables which they sell in the local market. The total value of all the goods and services produced by Ram and Shyam within the village borders during a specific time period, such as one year, is the Gross Domestic Product (GDP) of the village.

conversation between ram and shyam on national income

Gross National Product (GNP)

GNP is similar to GDP, but it takes into account the income of all citizens of a nation, whether resident or non-resident. GNP measures the entire output or production of all finished products and services generated by a nation’s citizens over the course of a specific time period, typically one year. However, the income of foreign nationals who live inside the boundaries of the nation is excluded from GNP.

Ram’s uncle lives in a foreign country and owns a textile factory. He employs Ram and Shyam’s family members to work in his factory. The income generated by the factory is included in the Gross National Product (GNP) of the country where the factory is located, as it is produced by citizens of that country.

Net National Product (NNP)

NNP is calculated by subtracting depreciation from GNP. Depreciation refers to the deterioration of manufactured items, and this deduction is made because a portion of current production is used to replace depreciated components of previously produced goods. NNP is used to measure the net output of goods and services produced by a country, after taking into account the depreciation of capital.

Ram and Shyam’s family have a tractor that they use to plow their fields. The tractor was purchased five years ago and has started to wear out due to use. The reduction in value of the tractor over time, known as depreciation, is subtracted from the Gross National Product (GNP) to obtain the Net National Product (NNP).

NNP at Factor Cost (NNPFC)

NNPFC considers the costs incurred during the production of goods and services for calculating national income. The payment made to the production factors, such as land, labour, capital, and entrepreneur, is included in this cost. Indirect tax is subtracted from NNPa to cover this, and then subsidies granted to manufacture goods and services are added.

To calculate the NNP at factor cost (NNPFC), we need to consider the cost of production, which includes the payment made to the production factors like land, labor, capital, and entrepreneur. Let’s assume that Ram and Shyam take out a loan to buy new farming equipment, and they pay interest on the loan. This interest payment is considered a production cost and is subtracted from the NNP to obtain the NNPFC.

Personal Income (PI)

Personal income refers to the total annual income obtained by the whole population of a nation. It is important to note that individuals in a nation do not have access to the entire national revenue. The country’s citizens do not have access to all of the national revenue. Portion of the money paid to them is excluded from national income. So, portions of the national revenue that are not available to the country’s citizens are subtracted from the national income in order to determine personal income. The money that was given to them in cash but was not counted towards national income was added to it.

Ram and Shyam both receive a salary for working in their uncle’s textile factory, and their parents receive income from selling their crops. The total amount of income received by Ram and Shyam’s family is the Personal Income (PI) of the village.

Disposable Personal Income (DPI)

Disposable personal income is the money that is accessible to people and may be used as they see fit. However, a person cannot spend all of their personal money. They are required to pay direct taxes, such as income tax. In order to get the Disposable Personal Income, these must be subtracted.

ram and shyam talking about personal and disposable incomes

After paying direct taxes such as income tax, Ram and Shyam’s family has some money left over. This money, which they can use to buy things like clothes, food, and toys, is the Disposable Personal Income (DPI). The DPI is always less than the PI, as some portion of the PI is used to pay taxes.

National income is an important measure of a country’s economic growth and development. There are various methods to measure national income, such as GDP, GNP, NNP, NNPFC, PI, and DPI, each with its own specific purpose and significance in the economy. These measurements are crucial in helping governments and policymakers make informed decisions about economic policies, investments, and development strategies.

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