Economicsfinance

National Income : GDP, GNP, NDP and NNP

National Income

How to measure and compare the economic development of countries? Quite a simple question, isn’t it? But the question wasn’t easy in the 1900s, as the concept of national income or GDP (Gross Domestic Product) wasn’t in practice back then. Various economists used certain ways to measure the total income of various countries, but the ways used weren’t the most efficient. The process of measuring income was simplified and structured with the advent of the concept of Gross Domestic Product (GDP).

National Income
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What’s national income?

National income is the sum total of the values of all the goods and services produced in an economy in a financial year. There are various means to calculate the national income of a country-

  • GDP – Gross Domestic Product
  • NDP – Net Domestic Product
  • GNP – Gross National Product
  • NNP – Net National Product

GDP (Gross Domestic Product)

National Income
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The Gross Domestic Product is the value of all the final goods and services produced in an economy in one year. ( The financial year in India is from 1st April to 31st March). GDP takes into account the values of final goods rather than the intermediate goods. (Final Goods – Goods that are used for direct consumption by the consumer and are not meant for further processing). The GDP of a country determines the strength of its economy and the growth in GDP is considered as an indicator for its economic growth.

The concept of GDP was introduced by Simon Kuznets in 1934, who was an American economist, working at the U.S National Bureau of Economic Research. In the 1929-32 report to the U.S Congress, Kuznets used the term GDP to calculate the total income generated in the country. The concept was initially used by the U.S Government in order to measure the economic recovery process of the U.S after the Great Depression of 1929. Its use was continued by Presidents Herbert-Clarke Hoover and Franklin D. Roosevelt. The idea was also adopted by the World Bank and the International Monetary Fund for measuring the national income.
Kuznets was honored with the Nobel Economic Prize in 1971.

GDP can be classified into –

  • Nominal GDP – The nominal Gross Domestic Product is the total value of goods and services produced in an economy, which is evaluated at current market prices.
  • Real GDP – The Real Gross Domestic Product, as opposed to the Nominal GDP, measures the value of all the goods and services produced by adjusting for inflation and deflation in the economy.

NDP (Net Domestic Product)

National Income
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Net Domestic Product is the value of GDP after reducing the value of depreciation. Simply put, the NDP is the value of GDP minus Depreciation. Depreciation is the value of the reduction in the cost of an asset in a systematic manner until its value becomes zero. Assets undergo ‘wear and tear’ during the process of their use. However, the value of depreciation is determined by the government of the country. In India, the job is done by the Ministry of Commerce and Industry, which determines the rate of depreciation for different sections of the economy and for different commodities. For example – the rate of depreciation of a residential house in India is 1% per annum.

So, we can conclude that the value of NDP is always less than the GDP. The value of depreciation in an economy can never be zero, but can surely be reduced. In fact, the value of depreciation has been reduced substantially with the advent of materials such as ball bearings and lubricants.

As opposed to GPD, the value of NDP is not used in comparing the economies because the value of depreciation is not constant, i.e. different governments set different rates of depreciation, which might be based on logic or are set strategically. In India, the rate of depreciation of heavy vehicles was 20% till 2000 but was raised to 40% afterward. There wasn’t any logic in doing so, but it was increased strategically in order to increase the sales of heavy vehicles in India.

GNP (Gross National Product)

National Income
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Gross National Product is derived by adding the value of GDP with income from abroad.

What constitutes income from abroad?

  • Private Remittances – This is the net of money that inflows in India in terms of private transfers made by Indian nationals working abroad and the money that outflows from India in terms of private transfers made by foreigners working in India to their respective countries. India has been one of the top gainers in this respect, with a large number of Indian nationals working in various countries, especially the U.S and Europe. India got the top spot in 2019 receiving remittances worth $80 billion. However, as the World Bank predicts, the remittances in India would fall by 9% due to the pandemic.
  • Interest on External Loans – It is the net of interest payments received by the economy on the money lent outside the economy, and the interest paid on the money borrowed by the economy. As opposed to remittances, India’s position has been in negative territory in this regard.
  • External Grants – It’s the net of grants that flows out of India and the grants that India receives. In this regard too, India’s in the negative territory as it gives more grants to other nations, which are meant for humanitarian and developmental purposes, than it receives. This is actually positive for Indian diplomacy as it helps to increase India’s influence in an interconnected and globalized world.

GNP is indeed a great concept as it indicates the strength of the economy and its influence around the world. High private remittances indicate the quality of human resources in India which are working abroad. In terms of external grants, India’s position as a ‘giver’ determines its great foreign policy and increasing influence in the world. But however, India, being a ‘borrower’ in terms of external loans is surely a matter of concern, as interest payments cost a large chunk of the government’s budget.

NNP (Net National Product)

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Net National Product is the value of GDP after deducting the value of depreciation and adding the value of income from abroad. In other terms, it’s the value of NDP added with income from abroad. NNP = NDP + Income from abroad OR NNP = GDP + Income from abroad – depreciation. 

The Net National Product is the actual National Income of an economy. The Per Capita Income of an economy is derived by dividing the NNP by the population of the country.

Methods of evaluating the National Income

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Cost –  The national income of an economy can be evaluated by-

  • Factor cost – Its the cost incurred by the producer during the process of producing a commodity. The cost incurred includes the cost of labor, rent, raw materials, energy, transportation, interest payments on loans, etc. In a nutshell, this is the cost at which the producer produces a commodity.
  • Market cost – The market cost is the cost derived after adding indirect taxes to the factor cost.

Price – The national income can be evaluated by –

  • Constant Prices – Constant prices are the prices that adjust for the effects of inflation.
  • Current Prices – Current prices are the actual prices of commodities that we notice in an economy without making any adjustments for inflation effects.

National Income. Is it the best way to determine economic growth?

Well, it certainly tells us about the strength of an economy, but using national income in comparative economics has certain drawbacks. Because different countries have different populations and the national income doesn’t tell us anything about the average amount earned by one person in the country.

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Hence, reports on economic and human development produced like World Development Report (WDR) by the World Bank and Human Development Report (HDR) by United Nations Development Programme use PCI (Per Capita Income) to compare the economic development in different countries. Per Capita Income is derived by dividing the national income of a country by its population.

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