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April 21, 2018

The Various Concepts of National Income

April 21, 2018


National income means the total money value of all goods produced and services rendered annually in a country. There are various concepts of national income. These different concepts explained different economic activities of a country. They are illustrated below in detail.


Concepts of National Income

Gross Domestic Product (GDP)

Gross domestic product is the total market value of final goods and services that are produced within a country during a year. These goods and services may be produced by both public and private sector and the value of them is measured in terms of money. It should be noted that GDP includes only value of those final goods and services that are produced within a country. The remittances send by workers from abroad is not included in GDP.  They are included in gross domestic production of that country where they work. In addition, when GDP is calculated on the basis of current prices it is known as nominal GDP. While on the other hand, when GDP is calculated on the basis of constant prices it is called real GDP.

Gross National Product (GNP)

Gross national product is the total market value of final goods and services that are produced within a country during a year. The remittances send by national workers from abroad and the value of net factor income also included in GNP. The value of net factor income is calculated by excluding the value of imports from exports. In order to measure gross domestic product (GNP) the following expenditures are added together.

  • Goods and services produced by government.
  • Personal consumption on consumer goods. For example, purchasing durable and non-durable goods.
  • Net exports of goods and services (exports - imports).
  • Total gross domestic private investment, such as purchasing capital goods by households or firms.

Net National Product (NNP)

Net national product is the total net market value of final goods and services produces during a year. It is calculated by extracting the value of depreciation allowances of capital goods from gross national product (GNP). We use some capital goods like machinery, equipment, tools, etc. during a year for the production of goods and services. These capital goods lose their value being used which is called depreciation. The depreciation is deducted from capital goods. Therefore, NNP is also known as National Income at Market Price. NNP can be expressed as:

NNP = GNP - Depreciation

National Income At Factor Cost

National income at factor cost which is also known as National Income is the sum of incomes earned by the four factors of production, such as land, labor capital and organization. The incomes received by the factors of production in the form rent, wages, interest and profit. The rent is received by land, wage is received by labor, interest is received by capital and profit is received by organization.  National income at factor cost is calculated by extracting the value of indirect taxes and adding the value of government subsidies at NNP.  National income at factor cost can be expressed as:

NI = NNP - Indirect taxes + Subsidies

Personal Income (PI)

Personal income is the total money which is received by individuals or households of a country during a year before payment of direct tax.  Personal income is calculated by extracting the values of corporate income taxes, undistributed corporate profits and contributions for social security from national income while adding the values of government transfer payments, transfer payments from abroad, and donations made by business organizations in national income to arrive personal income. So personal income can be expressed as:

PI = NI - Corporate income taxes - Undistributed corporate profits - Contributions for social security + Government transfer payments + Transfer payments from abroad + Business transfer payments

Disposable Personal Income (DPI)

The income left after payment of direct tax from personal income is known as disposable personal income. It is that income which is actually available to individuals or households for consumption. It can be expressed as:

DPI = PI - Personal direct taxes

Generally, the whole part of DPI is not spent, some part of it is saved. Therefore, from the approach of consumption, we can say:

DPI = Consumption expenditure + savings
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