National Income and Methods of Measuring It

source: economic times

Definition of National Income, which can change with the method of measuring,

National income is the total value of a country's final output of all new goods and services produced in one year.

GDP

Gross Domestic Product (GDP)  is the value of all final goods and services produced within the boundary of a nation during one year period.

For India, this calendar year is from 1st April to 31st March.

It is also calculated by adding national private consumption, gross investment, government spending, and trade balance (exports-minus-imports). The use of the exports-minus-imports factor removes expenditures on imports not produced in the nation and adds expenditures of goods and services produced which are exported but not sold within the country.

Uses of GDP

  1. Per annum percentage change in it is the ‘growth rate’ of an economy.
  2. It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy. But it does not say anything about the ‘qualitative’ aspects of the goods and services produced.
  3. It is used by the   IMF/WB in the comparative analyses of its member nations.

NDP

Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of ‘depreciation’. GDP minus the total value of the ‘wear and tear’ (depreciation) that happened in the assets while the goods and services were being produced.

The governments of the economies decide and announce the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is published, which is used by different sections of the economy to determine the real levels of depreciation in different assets.

If the value of the domestic currency falls following the market mechanism in comparison to a foreign currency, it is a situation of ‘depreciation’ in the domestic currency, calculated in terms of loss in value of the domestic currency.

NDP = GDP - Depreciation

Uses of NDP

  1. For domestic use only: to understand the historical situation of the loss due to depreciation to the economy. Also used to understand and analyze the sectoral situation of depreciation in industry and trade in comparative periods.
  2. To show the achievements of the economy in the area of research and development, which have tried cutting the levels of depreciation in a historical time period.
  3. depreciation and its rates are also used by modern governments as a tool of economic policymaking.

NDP is not used in comparative economics, i.e., to compare the economies of the world. This is due to different rates of depreciation which is set by the different economies of the world.

GNP

Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’.

The items which are counted in the segment ‘Income from Abroad’ are:

  1. Private Remittances: the net outcome of the money which inflows and outflows on account of the ‘private transfers’ by Indian nationals working outside of India (to India) and the foreign nationals working in India (to their home countries)
Today, India is the highest recipient of private remittances in the world—as per the World Bank projected at $ 72 billion in 2015 (in 2013 it was $ 70 billion, the year’s highest). China falls second ($ 64 billion) in 2015.
  1. Interest on External Loans: balance of inflow (on the money lent out by the economy) and outflow (on the money borrowed by the economy) of external interests. In India’s case, it has always been negative as the economy has been a ‘net borrower’ from the world economies.
  2. External Grants: the net outcome of the external grants i.e., the balance of such grants which flow to and from India. Today, India offers more such grants than it receives.

In the wake of globalization, grant outflows from India have increased as its economic diplomacy aims at playing a bigger role at the international level.

GNP = GDP + income from abroad

Uses of GNP

  1. This is the ‘national income’ according to which the IMF ranks the nations of the world in terms of the volumes—at purchasing power parity (PPP). India is ranked as the 3rd largest economy of the world (after China and the USA), while as per the nominal/ prevailing exchange rate of the rupee, India is the 7th largest economy (IMF, April 2016).
  2. It is the more exhaustive concept of national income than the GDP as it indicates towards the ‘quantitative’ as well as the ‘qualitative’ aspects of the economy, i.e., the ‘internal’ as well as the ‘external’ strength of the economy.
  3. It enables us to learn several facts about the production behavior and pattern of an economy, such as, how much the outside world is dependent on its product and how much it depends on the world.

NNP

The Net National Product (NNP) of an economy is the GNP after deducting the loss due to ‘depreciation’.

The formula to derive it may be written like:

NNP = GNP - Depreciation
NNP = GDP + Income from abroad - Depreciation

Uses of GNP

  1. This is the ‘National Income’ (NI) of an economy. Though, the GDP, NDP and GNP, all are ‘national income’ they are not written with capitalized ‘N’ and ‘I’.
  2. When we divide NNP by the total population of a nation we get the ‘per capita income’ (PCI) of that nation,

Cost and Price of National Income

Cost

Income of an economy, i.e., the value of its total produced goods and services may be calculated at either the ‘factor cost’ or the ‘market cost’.

Factor cost is the ‘input cost’ the producer has to incur in the process of producing something (such as cost of capital, i.e., interest on loans, raw materials, labor, rent, power, etc.). This is also termed as ‘factory price’ or ‘production cost/price’.

market cost is derived after adding the indirect taxes to the factor cost of the product, it means the cost at which the goods reach the market, i.e., showrooms (these are the cenvat/central excise and the CST which are paid by the producers to the central government in India).

India officially used to calculate its national income at factor cost (though the data at market cost was also released Since January 2015, the CSO has switched over to calculating it at market price (i.e., market cost).

Once the GST has been implemented it will be easier for India to calculate its national income at market price.

Price

Income can be derived at two prices, constant and current. The difference in the constant and current prices is only that of the impact of inflation.

Inflation is considered a standstill at a year of the past (this year of the past is also known as the ‘base year’) in the case of the constant price, while in the current price, present-day inflation is added. The current price is, basically, the maximum retail price (MRP) which we see printed on the goods selling in the market.

As per the new guidelines the base year in India has been revised from 2004–05 to 2011–12 (January 2015)

India calculates its national income at constant prices—so is the situation among other developing economies, while the developed nations calculate it at the current prices.

Basically, inflation has been a challenging aspect of policymaking in India because of its level (i.e., range in which it dwindles) and stability (how stable it has been)

  • Nominal income: The wage someone gets in hand per day or per month.
  • Real income: this is nominal income minus the present-day rate of inflation-adjusted in percentage form.
  • Disposable income: the net part of wage one is free to use which is derived after deducting the direct taxes from the real/nominal income, depending upon the need of data.

Taxes and National Income

While accounting/calculating national income the taxes, direct and indirect, collected by the government, needs to be considered.

  • Direct Taxes: individual income tax, corporate income tax, i.e., the corporate tax, dividend tax, interest tax, etc.)

There is no need for adjustment whether the national income is accounted for at factor cost or market cost. This is so because at both the ‘costs’ they have to be the same.

  • Indirect Taxes: cenvat, customs, central sales tax, sales tax/vat, state excise, etc.

If the national income is calculated at factor cost then the corpus of the total indirect taxes needs to be deducted from it. This is because, indirect taxes have been added twice: once at the point of the people/group who pay these taxes from their disposable income while purchasing things from the market, and again at the point of the governments (as their income receipts)

Collection/source of indirect taxes are the ‘disposable income’ (which individuals and companies have with them after paying their direct taxes—from which they do any purchasing and finally, the indirect taxes reach the government)

National Income at Factor Cost = NNP at Market price - Indirect taxes

Subsidies and National Income

Subsidies that are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in the case of India.

National Income at Factor Cost = NNP at Market price - Subsidies

If the national income is derived at the market cost and governments forward no subsidies there is no need for adjustments for the subsidies but after all, there is not a single economy in the world today which does not forward subsidies in one or the other form.

National Income at Factor Cost = NNP at Market price - Indirect taxes + Subsidies
Parikshit Patil

Parikshit Patil

Currently working as Software Engineer at Siemens Industry Software Pvt. Ltd. Completed graduation from Walchand college of engineering, Sangli in Computer Science & Engineering.
Kavathe-Ekand, MH India