Saturday, December 7, 2019

National Income (NI)

National income has been defined in a number of ways. It is defined as the total money value of all final goods and services produced in a financial year, in India’s case it is from 1 April to 31 March.

National Income is used-
👉To measure the size of economy and level of country’s economic performance.
👉To trace trend or speed of economic growth in relation to previous year(s) as well as to other countries. 
To know the structure and composition of the national income. 
To make international comparison of people’s living standards. 

Important Methods of calculating the National Income 
1. Gross Domestic Product (GDP) 
GDP is total market value of country’s output.
It is the market value of all final goods and services produced within a financial year by factors of production located within a country, irrespective of ownership. 
GDP can be estimated at both factor cost and market price. 
Factor cost is price of commodity from the producer's side. 
A commodity when goes to the market, indirect taxes are imposed on it. This is market price. 
Factor cost= Market cost + subsidies - Indirect taxes. 
Market cost = factor cost - subsidies + indirect taxes.

2. Gross National Product (GNP) 
GNP is an estimate of total value of all the final products and services produced in a given period by the means of production owns by a country’s resident. 
GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investment, minus income earned within the domestic economy by foreign residents. 
Net exports represent the difference between what a country Exports (X) minus any Imports (M) of goods and services. 

GDP vs GNP 
GDP is all the final goods produced within a domestic territory of 
irrespective of the person producing. 
GNP is final goods produced by the citizen of a country irrespective of where they are produced.

GNP= GDP + NFFI (X - M) 
Here, X = foreign income (income from abroad) 
= Foreigner’s income from India 
Net Foreign Factor Income (NFFI): The net foreign factor income (NFFT) 
is the difference between a nation’s gross national product (GNP) and gross domestic product (GDP). 
Simply it calculates the differencebetween the aggregate amount that a country’s citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country. 
In mathematical terms, NFFI = GNP - GDP. 
Net Domestic Product (NDP) — 
NDP is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from GDP. 
Depreciation — The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. 
NDP = GDP - Depreciation 
Net national product (NNP) 
NNP is the monetary value of finished goods and services produced by a country's citizens, overseas and domestically, in a given period. 
Technically NNP is treated as National Income..

NNP = GNP - Depreciation 
Following forms of National Income are very commonly used in advanced countries 
Personal Income (PI) 
It is a part of National Income which is received by households. 
Personal Income (PI) = NI - Undistributed profits - Net interest 
payments 
made by households ~ Corporate tax + Transfer payments to the 
households 
from the government and firms. 
‘Undistributed Profit’ is a part of profit not distributed among the factors 
of 
production. 
Personal Disposable Income (PDI) 
If the Personal Tax Payments (income tax, for example) and Non-tax 
Payments (such as fines) are deducted from Personal Income, the Personal 
Disposable Income (PDI) is obtained. 
PDI 
PI - Personal tax payments — Non-tax payments. 
Per Capita Income (PCI)- 
It is generally calculated by dividing the total national income (GDP) by 
total population. 
It is not the average income because it includes children and non-working 
population but it serves as an indicator of a country's living standards. 
Other important terms you should familiar with-
1. GDP Deflator- 
It is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the  base year. 
It is called as ‘Implicit Price Deflator’. 
GDP price deflator = (Nominal GDP/ Real GDP) x 100 

2. Gross Capital Formation (GCF) 
It is defined as the new investment additions to the fixed assets, plus the 
net change in inventories. 
Fixed assets include plant, machinery, equipment and buildings, while inventory includes works in process, which are partially completed goods that remain in production.