What is National Income?
National income is the money value of all the final goods and services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types. Since these goods are measured in different physical units, it is not possible to add them together. Thus, we cannot state national income is so many millions of metres of cloth, so many million litres of milk, etc. Therefore, there is no way except to reduce them to a common measure. This common measure is money. The value of all goods and services produced is measured in money.
For example, if the value of a metre of cloth is 20 rupees and the total cloth produced is 100 metres, then the money value of cloth is 2000 rupees. In this way we can find out the value of other goods and services and the total value of all the goods and services produced during one year. This gives us a single measure of the final goods and services produced by the country in that year which is nothing but the value of national income or national product.
National income accounting
National income accounting refers to a set of rules and techniques that are used to measure the output of a country. It is used almost synonymously with GDP.
Gross Domestic Product
Gross domestic product is the money value of all final goods and services produced in the domestic territory of a country during an accounting year. Here, the focal point is domestic which refers to the territory. The concept of domestic territory has a special meaning in national income accounting. Domestic territory is defined to include the following:
- Territory lying within the political frontiers, including territorial waters of the country.
- Ships and aircrafts operated by the residents of the country between two or more countries.
- Fishing vessels, oil and natural gas rigs, and floating platforms operated by the residents of the country in the international waters or engaged in extraction in areas in which the country has exclusive rights of exploitation.
- Embassies, consulates and military establishments of the country located abroad.
Gross National Product
Here, the focal point is “National”, which refers to the nationality of the citizens involved in the economic activity. Gross national product (GNP) is an estimate of total value of all the final products and services produced in a given period by the means of production owned by a country's nationals. In simple words, income of all the resident and non-resident citizens of a country is included whereas the income of foreign nationals who reside within the geographical boundary is excluded.
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 investments, minus income earned within the domestic economy by foreign residents. Net exports represent the difference between what a country exports minus any imports of goods and services.
Net Domestic Product(NDP):
While calculating GDP no provision is made for depreciation allowance (also called capital consumption allowance). In such a situation gross domestic product will not reveal complete flow of goods and services through various sectors.
It is a matter of common knowledge that capital goods like machines, equipment, tools, buildings, tractors etc., get depreciated during the process of production. After some time these capital goods need replacement. A part of capital is therefore, set aside in the form of depreciation allowance. When depreciation allowance is subtracted from gross domestic product we get net domestic product.
In brief
NDP = GDP - depreciation