National Income and GDP Concepts

What is National Income?

National Income is the total value of all final goods and services produced by the normal residents of a country in a financial year. In simple terms, it’s the total income earned by a country’s citizens, no matter where they are in the world.

It’s a broad measure used to understand the economic health of a nation. GDP is the most common way to begin calculating it.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within the domestic territory of a country during a specific period (usually a year).

Let’s break down the key terms:

  • Gross: This means the value is calculated without deducting depreciation. (Depreciation is the wear and tear of capital goods like machinery).
  • Domestic: This means it only includes goods and services produced within the geographical boundaries of the country, regardless of who produces them (an Indian citizen or a foreign company in India).
  • Product: This refers to the final goods and services, not intermediate ones. For example, we count the value of a finished car, not the value of the tires sold to the car manufacturer.

Simple Analogy: GDP is like the total revenue generated within the four walls of a single factory (the country), no matter who owns the machines.

Other Important National Income Concepts

Understanding how we move from GDP to other measures is crucial.

1. Gross National Product (GNP)

GNP is the total value of all final goods and services produced by the nationals or citizens of a country in a year, regardless of where they are located.

  • Key Difference from GDP: GDP is about the location (within India), while GNP is about the nationality (by Indians).
  • Formula: GNP = GDP + Net Factor Income from Abroad (NFIA)
  • Net Factor Income from Abroad (NFIA): This is the (Income earned by Indians in foreign countries) – (Income earned by foreigners in India).

2. Net Domestic Product (NDP)

NDP is the purest form of a country’s domestic output. It is calculated by subtracting depreciation from GDP.

  • “Net” always means after deducting depreciation.
  • Formula: NDP = GDP - Depreciation

3. Net National Product (NNP)

NNP is the purest form of a country’s national income. It is calculated by subtracting depreciation from GNP.

  • Formula: NNP = GNP - Depreciation

Market Price vs. Factor Cost

  • Market Price (MP): This is the actual price you pay for a product in the market. It includes indirect taxes (like GST) and excludes subsidies.
  • Factor Cost (FC): This is the actual cost of production (cost of factors like land, labor, capital). It excludes indirect taxes and includes subsidies.

Key Relationship:

  • NNP at Factor Cost (NNPfc) is what we call the National Income of a country.
  • Formula: National Income (NNPfc) = NNP at Market Price - Indirect Taxes + Subsidies

Summary Flowchart for Revision

Here is how all the concepts are related:

Start with GDP (at Market Price):

  1. GDPmp
    • + Net Factor Income from Abroad (NFIA) ➡️ GNPmp
    • - Depreciation ➡️ NDPmp
  2. From GNPmp:
    • - Depreciation ➡️ NNPmp
  3. From NNPmp:
    • - Indirect Taxes + Subsidies ➡️ NNPfc (National Income)