Various Concept of National Income
A. In Terms of Market Price:
Gross Domestic Product at Market Prices (GDPmp): It is the total monetary value of final products produced from all productive sectors within a country for a specified period of time. An aggregate representing the final result of the production activity of resident production units.
It can be defined in three ways:
- The GDP is equal to the sum of the gross added values of the various institutional sectors or of the various branches of activity plus taxes and minus the subsidies on products (which are not attributed to the sectors and branches of activity) ;
- The GDP is equal to the sum of the final domestic uses of goods and services (final effective consumption, gross fixed capital formation, variations in stocks) plus exports and minus imports ;
- The GDP is equal to the sum of uses in the operating accounts of the institutional sectors: payment of salaries, taxes on production and imports minus subsidies, gross operating margin and mixed-income.
GDPMP = Total product of primary sector + Total product of secondary sector + Total product of tertiary sector.
Or, GDPMP = (P1Q1+P2Q2+……..+PnQn)
Further, on an expenditure basis,
GDPMP = C+I+G+(X-M)
Where , C= private consumption expenditure I = gross private domestic investment G = government expenditure X-M = net exports
Net Domestic Product at Market Price (NDPmp): Net domestic product at market price is the estimate of the net monetary value of final goods and services produced within a country during a year. It differs from GDPMP.
NDPmp =Private consumption expenditure + Net private domestic investment + Government expenditure + Net exports
Or, NDPmp = GDPMP – Depreciation
Gross National Product at Market Price (GNPmp):
GNPmp at market price is defined as “the market value of all the final goods and services produced in the domestic territory of a country by normal residents during an accounting year including net factor income from abroad.
Being gross it includes depreciation; being at MP it includes net indirect taxes and being national it includes net factor income from abroad.
GNPmp = C+I+G+(X-M)+(R-P)
Or, GNPmp = GDPmp-NFIA
Net National Product at Market Price (NNPmp): NNPmp is the monetary value of all final goods and services produced from all productive sectors evaluated at market prices for a specified period of time.
NNPmp = GNPmp – Depreciation
Or, NNPmp =private consumption expenditure + net private domestic investment + government expenditure + net exports + net receipts
B. In Terms of Factors Cost:
Gross Domestic Product at factor Cost (GDPfc): Gross Domestic Product at Factor Cost is the estimate of gross domestic product in terms of earning of factors of production. The sum of the gross value added in the various economic activities is known as “GDP at factor cost”. GDP at factor cost plus indirect taxes fewer subsidies on products = “GDP at producer price”. For measuring the output of domestic products, economic activities (i.e. industries) are classified into various sectors.
GDPfc = Rent + Compensation of employees + Interest + profits + Mixed-income + Depreciation
GDPfc = GDPmp – net indirect taxes
Or, GDPfc = GDPmp – net indirect taxes + subsidies
Net Domestic Product at Factor Cost (NDPfc): Net domestic product at factor cost is the estimate of domestic product in terms of earning of factors of production within the territory of a country.
NDPfc = compensation of employees + rent + profits + interest + mixed-income
Or, NDPfc = GDPfc – Deprecation
Net domestic product at factor cost also known as domestic factor income receipts. It includes,
- Compensation of Employees: Compensation of employees is defined as all payments made by producer to their employees in the form of employer’s contribution to social security, wages, and salaries plus other payment made in cash and kind such as bonus, commission, overtime, housing, educational facilities, etc. in return for labor service.
- Operating Surplus: Operating surplus is the Net value added at FC minus Compensation of employees (traditionally called wages). In other words, the operating surplus is the sum of rent, interest, and profit.
- Mixed-Income: If the income for the production factors cannot be separated, as is the case for unincorporated units in the household sector, the total income is called mixed-income.
Gross National Product at Factor Cost (GNPfc): Gross national product at factor cost is defined as the value of all final goods and services at market price produced within the domestic territory of the country in an accounting year including net factor income from abroad minus net indirect taxes.
GNPfc = compensation of employees + rent + interest + profits + mixed-income + net factor income from abroad
Or, GNPfc = GNPmp + NFIA Or, GNPfc = GNPmp – Net indirect taxes
Net National Product ( NNPfc) or National Income (NI): NNPfc is the net output evaluated at factor prices. NNPfc is defined as the measure of the factor earnings of the residents of a country, both from an economic territory and abroad. Therefore, NNPfc is equal to the national income of the country.
NNPfc =compensation of employees + rent + interest + profits + mixed-income + Net factor income from abroad
Or, NNPfc = NNPmp – net indirect taxes Or, NNPfc = GNPfc – Depreciation Or, NNPfc= NDPfc +NFIA
Personal Income (PI): Personal income is the total income earned by households or individuals of a country from all productive sources plus transfer payments before paying direct taxes in a year. PI = NI (undistributed profits + corporate income taxes + total security contribution – transfer payments)
Personal Disposable Income (DI): Personal disposal income is the part of personal which the individuals or households of a country can spend the way they like. DI = PI –Direct taxes
Saving: Saving is the excess of disposable income over consumption expenditure. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. S=DI – C
Per Capita Income: It is the average of the people of a country for a specified period of time. Per capita income can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population. Per capita income for a nation is calculated by dividing the country’s national income by its population.
Per Capita Income = ( National Income)/(Total population)
Real GDP, Nominal GDP, GDP Deflator and Rate of inflation
Real GDP is the total monetary value of final products produced from all productive sectors in terms of constant market prices within a country for a specified period of time. Real GDP=P0Q0+P0Q1+P0Q2+………PnQn
Nominal GDP is the total monetary value of final products produced from all productive sectors at current market prices within the country for a specified period of time. Nominal GDP=P1Q1+P2Q2+…………+PnQn
| Nominal GDP | Real GDP |
| 1. It is the sum total of the economic output produced in a year valued at the current market price.
2. Current market price. 3. Nominal GDP is very easy. 4. It is less popular. 5. It’s not a real indicator of economic growth. 6. It doesn’t take inflation into account. |
1. It is the sum total of the economic output produced in a year valued at the base market price.
2. Base year’s market price. 3. Real GDP is a bit complex. 4. It is more popular. 5. It’s a real indicator of economic growth. 6. It is an inflation-adjusted GDP. |
GDP Deflator measures the relative changes in the current price level in comparison to the price level for the base year. GDP Deflator =(Nominal GDP)/(Real GDP) ×100
Rate of Inflation is the rate at which prices increase over time, causing the value of money to fall. Rate of Inflation = (GDP deflator of current year-GDP deflator of the previous year )/(GDP deflator of the previous year)×100%
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