Basic Concepts of National Income - GNP, GDP, GNI, NNP, NNI, PCI

National Income

Some countries are rich, some are poor and yet some others are in-between. How do we measure the performance of an economy? Performance of an economy is related to the level of production (of goods and services) or total economic activity. Measures of national income and output are used in economics to estimate the total value of production in an economy. The standard measures of income and output are Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI). In India, the Central Statistical Organisation has been estimating the national income.

You measure your academic performance in relation to other students by the percentage of the marks scored by you. Similarly a country's economic performance has been measured by indicators of national income such as GDP or GNP. Further, measuring national income is essential for various purposes that include projection about the future course of the economy, assisting government as the basis to design (or redesign) suitable development policies, helping firms in forecasting future demand for their products and facilitating international comparison.

National income per person or per capita income is often used as an indicator of people's standard of living or welfare. However, many development economists have criticized that GNP as a measure of welfare has many limitations. They argued that human well-being does not depend on national income alone. As measures of GNP exclude poverty, literacy, public health, gender equity, and many human issues of well-being, they developed other measures of welfare such as the Human Development Index (HDI).

Some rich countries in terms of national income are poor in human development. Similarly, poor countries in terms national income have performed well in human development. In the case of India, though the GDP is growing faster, its performance in terms of HDI is far below than that of many countries.

Basic Concepts

Gross National Product

Gross National Product (GNP) is the total value of output (goods and services) produced and income received in a year by domestic residents of a country. It includes profits earned from capital invested abroad.

Gros s Domestic Product

Gross Domestic Product (GDP) is the total value of output (goods and services) produced by the factors of production located within the country's boundary in a year. The factors of production may be owned by any one - citizens or foreigners.

     GNP - Net income earned from abroad = GDP

Thus, GDP measures income from where it is earned rather than who owns the factors of production.

Net National Product

Net National Product (NNP) is arrived at by making some adjustment, with regard to depreciation, in GNP. As noted above, GNP is the total value of output produced and income received in a year by domestic residents of a country. Over this one year period, the available plant and machinery (capital) will wear and tear and get condemned. Such decline in the capital assets due to wear and tear is measured as 'capital depreciation'. NNP is arrived at by deducting value of such depreciation from GNP.

That is GNP - Depreciation = NNP

Net Domestic Product

Net domestic product (NDP) is also arrived from GDP by making adjustment with regard to depreciation in the same way described above.

(NDP is calculated by deducting depreciation from GDP).

GDP - Depreciation = NDP

Per Capita Income

Per capita income (or) output per person is an indicator to show the living standards of people in a country. If real PCI increases, it is considered to be an improvement in the overall living standard of people. PCI is arrived at by dividing the GDP by the size of population. It is also arrived by making some adjustment with GDP.

GDP=PCI / Total number of people in a country

GDP and GNP

While GDP indicates productive capacity of an economy, GNP is a crude indicator for living standard. The significance of the distinction between GNP and GDP depends on the nature of a particular economy. For instance, if a country has more non-resident inflows and produces a considerable portion of its output by multinational corporations (i.e. with the help of external factors of production), its GNP will be higher than GDP. Otherwise the distinction will be negligible.

Many countries have foreign firms. In the case of US Ford Motors in Chennai, the income from the car factory would be counted as Indian GDP and not as US GDP. But the amount of profit the company sends to US will be added to their GNP. Similarly, our GNP can be arrived by adding to our GDP the net factor income receipts from abroad for the factor inputs owned by Indians. That is, the non-resident Indians income will be added to GDP to arrive at our GNP.

NI at Current Prices and Constant Prices

The concepts of national income discussed above can be measured either at 'current price' or at 'constant price'. The measure based on current price uses the ongoing market prices to compute the value of output. It is quite possible that the current price may always be higher than real value due to many factors like taxes and inflation (or rising prices). Hence, national income arrived at 'current price' includes such influences as inflation and taxes.