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National Income Accounting: GDP, GNP, NNP, PI and PDI | UPSC Economy Notes

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National Income Accounting: GDP, GNP, NNP, PI and PDI

Gross Domestic Product

  • Gross Domestic Product, or GDP, refers to the total value of final goods and services produced within the domestic territory of a country during a given year.
  • The key point in GDP is domestic territory.It includes production taking place within the country, whether it is done by Indian residents or foreign nationals.
  • For example, if a foreign company produces cars in India, the value of that production will be included in India’s GDP because the production takes place within India’s domestic territory.

Gross National Product

  • Why Do We Need GNP? 
    • GDP tells us the value of final goods and services produced within the domestic territory of a country.
    • But all income generated within India may not belong to Indian residents. Similarly, Indian residents may earn income outside India.
    • Therefore, if we want to know the income earned by Indian residents, we need GNP.
  • Gross National Product, or GNP, measures the total income or output earned by the residents of a country, whether they are working within the country or abroad.
  • The key point in GNP is residency, not domestic territory.
  • GNP focuses on income earned by Indian residents. Therefore, income earned by Indian residents abroad is included, while income earned by foreigners in India is excluded.

GNP Calculation

    • To calculate GNP, we add income earned by Indian residents from abroad and subtract income earned by foreigners from India.
    • GNP = GDP + Factor Income Earned by Domestic Residents from Abroad – Factor Income Earned by Foreigners in the Domestic Economy
    • This is also written as:
  • GNP = GDP + Net Factor Income from Abroad

Net Factor Income from Abroad

  • Net Factor Income from Abroad, or NFIA, is the difference between factor income received from abroad and factor income paid to abroad.
  • NFIA = Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy

Meaning of Factor Income

  • Factor income refers to the income earned by the factors of production for their contribution to production.
  • It includes:
    • Wages received by labour
    • Rent received from land
    • Interest received from capital
    • Profit earned by entrepreneurship
  • Factor income does not include transfer payments.

Example:

  • Suppose India’s GDP is ₹1000 crore.This includes all production taking place within India.
  • But now consider two situations:
    • An Indian engineer working in Dubai earns ₹100 crore as wages.This income is not included in India’s GDP because it is earned outside India. But it belongs to an Indian resident, so it should be included in India’s national income.
    • A foreign-owned company operating in India earns ₹60 crore as profit and sends it back to its parent country.This income is included in India’s GDP because production took place inside India. But it does not belong to Indian residents, so it should be subtracted while calculating GNP.
  • Calculation
    • GNP = GDP + Income earned by Indian residents abroad – Income earned by foreigners in India
    • GNP = ₹1000 crore + ₹100 crore – ₹60 crore
    • GNP = ₹1040 crore
  • Understanding
    • India’s GDP is ₹1000 crore, because that is the value of production within India.
    • But India’s GNP is ₹1040 crore, because Indian residents earned more income abroad than foreigners earned in India.
    • So, we need GNP because it tells us the income earned by the residents of a country, whether they earn it inside the country or outside the country.

Transfer Payments

  • Transfer payments are payments received without contributing to current production.
  • Examples include: Pensions,Scholarships, Unemployment allowance, Gifts, Donations, Remittances etc.
  • Transfer payments are not included in GDP or GNP because they are not earned by producing goods and services.
  • For example, remittances received from abroad are not included in GNP as factor income because they are transfer payments, not payment for current production.

Gross National Product and Depreciation

  • Capital goods such as machines, buildings and equipment lose value over time due to wear and tear. This loss in value is called depreciation.
  • If depreciation is deducted from GNP, we get Net National Product.
  • Net National Product
    • Net National Product is the value of national output after deducting depreciation from GNP.
    • NNP = GNP – Depreciation
    • NNP gives a better idea of the net income of the economy because it removes the value of capital goods used up during production.
    • Through the expression given above, we get the value of NNP evaluated at market prices.

Net National Product (NNP) at Market Price and Net National Product (NNP) at Factor Cost

  • NNP can be measured at market price or factor cost.
  • NNP at Market Price
    • NNP at market price is calculated using the prices actually paid by buyers in the market.
    • Market price includes indirect taxes and is affected by subsidies.For example, if a good is taxed, its market price increases. If a good is subsidised, its market price decreases.
  • NNP at Factor Cost 
    • To calculate it, we deduct net indirect taxes from NNP at market price.
    • NNP at factor cost = NNP at market prices –(Indirect taxes – Subsidies)
              =  NNP at market prices – Net indirect taxes
              (Net indirect taxes ≡ Indirect taxes – Subsidies)

GDP

GNP

Total value of final goods and services produced within a country’s borders, regardless of who owns the production.

Total value of final goods and services produced by a country’s residents

Foreign Companies Operating in India (Affecting GDP but Not GNP)

  • Suppose a U.S. company manufactures phones in India.
  • The revenue from these Phones contributes to India’s GDP (since they are produced in India).
  • They are not counted in India’s GNP.

Indian Companies Operating Abroad (Affecting GNP but Not GDP)

  • Tata Motors (an Indian company) makes cars in the UK and earns profits there.
  • This income is not included in India’s GDP (because it is produced outside India).
  • However, since Tata is an Indian company, its earnings are included in India’s GNP

Basic National Income Aggregates

  • Gross Domestic Product at Market Prices = C + I + G + X – M 
  • Gross Domestic Product at Factor Cost = GDP at factor cost is gross domestic product at market prices, less net product taxes.
    •  Gross Domestic Product at Market Prices – Net Indirect Taxes (NIT)
  • Net Domestic Product at Market Prices =  GDP at Market Prices – Depreciation
  • Net Domestic Product  at Factor Cost =  Net Domestic Product at Market Prices – Net ProductTaxes – Net ProductionTaxes 
  • Gross National Product (GNP) = Gross Domestic Product (GDP) + NFIA  
  • Gross National Product (GNP) – Depreciation = Net National Product (NNP) 
    • Gross National Product (GNP) is called Gross National Income.
    • Net National Product (NNP) is called Net National Income/National Income.

Personal Income (PI)

  • Personal Income refers to the income actually received by households from all sources during a year.
  • Undistributed Profits: Undistributed profit is that part of profit which is retained by firms and not distributed among households.Since this income does not directly accrue to households, it is deducted from NNP (FC).
  • Corporate Tax:Corporate tax is the tax paid by companies on their earnings. Since this amount goes to the government and not to households, it is also deducted from NNP (FC).
  • Net Interest Payments by Households:Households may receive interest from firms or the government on loans or deposits.At the same time, households may also pay interest to firms or the government if they have borrowed money.If the interest paid by households is more than the interest received by them, the net interest payment is deducted while calculating Personal Income.
  • Transfer Payments to Households:Households also receive some payments from the government and firms without directly contributing to current production.
    • Examples include:Pensions, Scholarships, Social security benefits etc.
    • These are called transfer payments.
    • Since households receive these payments, they are added while calculating Personal Income.

Hence, Personal Income = NNP (FC) – Undistributed Profits – Corporate Tax – Net Interest Payments Made by Households + Transfer Payments to Households

Personal Disposable Income (PDI)

  • Personal Income is the income received by households, but households cannot use the entire amount freely. They have to pay certain compulsory payments such as personal income tax and non-tax payments like fines, fees or penalties.
  • Therefore, when personal tax payments and non-tax payments are deducted from Personal Income, we get Personal Disposable Income.
  • Hence, Personal Disposable Income is the income actually available with households for their own use.Households can use this income in two ways:
    • Consumption
    •  Saving
  • Personal Disposable Income = Personal Income – Personal Tax Payments – Non-Tax Payments

National Income Accounting provides a systematic framework for measuring the economic activity of a country. Concepts such as GDP, GNP, NDP, NNP, National Income, Personal Income and Personal Disposable Income help us understand production, income generation, depreciation, household income and the overall performance of an economy.

FAQs

What is National Income Accounting?

National Income Accounting is the method used to measure the total income, output and expenditure of an economy during a given period.

What is GDP?

GDP refers to the total value of final goods and services produced within the domestic territory of a country during a given year.

What is GNP?

GNP refers to the total income or output earned by the residents of a country, whether within the country or abroad.

What is the main difference between GDP and GNP?

GDP is based on domestic territory, while GNP is based on residency. GDP measures production within the country, whereas GNP measures income earned by residents.

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