National income: National income means the total value of goods and services produced

annually in a country. In other words, the total amount of income accruing to a country from
economic activities in a year's time is known as national income. It encompasses the sum of all
incomes earned by individuals and businesses, including wages, salaries, profits, rents, and other
earnings.

Different concepts of national income:

Gross Domestic Product (GDP). Gross Domestic Product (GDP) is a monetary measure
that represents the market value of all final goods and services produced within a country during a
specific period, typically a year or a quarter. It is a comprehensive measure of a nation's overall
economic activity and an indicator of its economic health. It is represented as:
GDP = C+I+G+(X-M)
Where:
 C is personal consumption expenditures
 I is gross private domestic investment
 G is government consumption expenditures and gross investment
 X is exports
 M is imports
Example: Imagine a country where:
 People spend $500 billion
 Businesses invest $200 billion
 Government spends $300 billion
 Exports are $150 billion
 Imports are $100 billion
GDP = $500 + $200 + $300 + ($150 - $100) = $1100 billion
So, the country's total output (GDP) is $1100 billion.

Types of GDP.
 Nominal GDP: Nominal GDP is the total value of all final goods and services produced
within a country's borders in a specific period, valued at current market prices. It provides a
snapshot of the economy's size at that specific point in time.
Formula:
Nominal GDP = £(Price of Goods and Services × Quantity of Goods and Services)
 Real GDP: Real GDP measures the value of all final goods and services produced within a
country in a given period, adjusted for changes in price levels (inflation or deflation). It
provides a more accurate reflection of an economy's size and how it's growing over time by
using constant prices from a base year.
Formula:
Nominal GDP
Real GDP= × j100
GDP Deflator

Difference between Nominal GDP & Real GDP:

 Nominal GDP Real GDP
Market value of all final goods and services Market value of all final goods and services
produced using current prices. produced, adjusted for inflation/deflation
using constant prices.
Current prices of the year in which output is Prices from a base year (constant prices).
produced.
Not adjusted for inflation or deflation. Adjusted for inflation or deflation,
Useful for short-term analysis and current Useful for long-term comparisons and
economic performance. understanding real growth.
Reflects both price level changes and Reflects only changes in output.
changes in output.
Represents the sum of the market values at Useful for analysis of true economic growth,
current prices. historical comparisons, and policy making.
Calculation Formula: Calculation Formula:
Nominal GDP = £(Price of Goods and Nominal GDP
Real GDP= ×100
Services × Quantity of Goods and Services) GDP Deflator

Methods of calculating GDP: GDP can be calculated using three different approaches:
A. Production Approach: The production approach, also known as the output or value-added
approach, calculates GDP by summing the value added by all industries within an economy.
This method focuses on the production side of the economy and considers the value added
at each stage of the production process.
Here is a detailed breakdown of the production approach:
Production Approach Formula:
GDP = £ (Gross Value of Output - Value of Intermediate Consumption)

Example: Consider a simple economy with three stages of production: farming, milling, and
baking.

1. Farmer
o Gross Value of Output (GVO): The farmer produces and sells wheat for $100.
o Intermediate Consumption (IC): The farmer has no intermediate consumption.
o Value Added (VA): $100-$0 = $100
2. Miller
o Gross Value of Output (GVO): The miller buys wheat for $100 and sells flour for
$150.
o Intermediate Consumption (IC): The cost of wheat purchased is $100.
o Value Added (VA): $150-$100 = $50

3. Baker:
o Gross Value of Output (GVO): The baker buys flour for $150 and sells bread for
$250.
o Intermediate Consumption (IC): The cost of flour purchased is $150.
o Value Added (VA): $250-$150= $100

Calculating GDP
 To calculate GDP using the production approach, sum the value added by each stage of
production:
GDP = £(VAFarmer+VAMiller + VABaker)
Substituting the values:
GDP = $100+$50+$100
GDP = $250

B. Income Approach: The income approach to calculating GDP focuses on the total income
earned by the factors of production (labor and capital) within an economy. It essentially
sums up all the incomes earned by individuals and businesses in the economy, including
wages, profits, rents, and interest income.
Income Approach Formula:
GDP = R+I+P+SA+W
Components of the Income Approach (Mnemonic: RIPSAW)
Where:
 R = Rents (income from property)
 I = Interests (income from investments)
 P = Profits (business profits)
 W = Wages (compensation of employees)
 SA = Statistical Adjustments (corporate income taxes, dividends paid to
shareholders, and undistributed profits).

Example Calculation
 Wages (W): Suppose the total wages paid to employees are $50 million.
 Rents (R): The total rent income received by property owners is $10 million.
 Interest (I): The total interest income earned by lenders is $5 million.
 Profits (P): The total profits earned by businesses are $20 million.
 Statistical Adjustments (SA):
i. Corporate income taxes: $3 million.
ii. Dividends paid: $2 million.
iii. Undistributed profits: $1 million.
Total Statistical Adjustments: $3 million + $2 million + $1 million = $6 million.
GDP = $50 million + $10 million + $5 milion + $20 million + $6 million = $ 891 million
 C. Expenditure Approach: The expenditure approach is one of the primary methods used to
calculate a country's Gross Domestic Product (GDP). This approach measures GDP by
summing the total spending on all final goods and services produced within a country over
a specific period, typically a year. The focus is on the demand side of the economy,
capturing all expenditures made by different sectors.
Formula:
GDP = C+I+G+(X-M)
Where:
 C is personal consumption expenditures
 I is gross private domestic investment
 G is government consumption expenditures and gross investment
 X is exports
 M is imports
Example: Imagine a country where:
 People spend $500 billion
 Businesses invest $200 billion
 Government spends $300 billion
 Exports are $150 billion
 Imports are $100 billion
GDP = $500 + $200 + $300 + ($150 - $100) = $1100 billion
So, the country's total output (GDP) is $1100 billion.

Importance of GDP: Gross Domestic Product (GDP) is a critical measure of a country’s

economic performance and health. It represents the total value of all goods and services produced
over a specific period, typically annually or quarterly. GDP is essential for several reasons:
A. Economic Indicator: GDP growth indicates a growing economy, while a decline suggests
economic trouble. Policymakers use GDP data to gauge the effectiveness of economic
policies and make necessary adjustments.
B. Policy Making: Governments and central banks rely on GDP to design fiscal and monetary
policies. For instance, during a recession, policymakers may implement stimulus measures
to boost GDP.
C. Investment Decisions: Investors use GDP to assess the economic environment. A robust
GDP growth rate can attract both domestic and foreign investments, whereas a declining
GDP can deter investors.
D. Standard of Living: GDP per capita, which divides the GDP by the population, serves as an
indicator of the average economic well-being of individuals in a country. Higher GDP per
capita typically suggests a higher standard of living.
E. International Comparisons: GDP allows for the comparison of economic performance
between different countries. It helps in understanding the relative economic strengths and
weaknesses of nations.
In summary, GDP is a comprehensive measure that influences government policy, investor
behavior, and the overall understanding of an economy’s health and growth trajectory.
Gross National Product (GNP). Gross National Product (GNP) measures the total economic
output produced by the residents of a country, regardless of whether the production takes place
within the country or abroad. GNP includes the value of all goods and services produced by a
nation's residents, as well as the income earned by its residents from overseas investments,
minus the income earned by foreign residents from domestic investments.
The formula for GNP is:
GNP = GDP + Net Income from Abroad

Example
Suppose:
 GDP of Country A is $1,000 billion.
 Income earned by residents of Country A from abroad is $100 billion.
 Income earned by foreign residents from investments in Country A is $50 billion.
 Net Income from Abroad = $100 billion - $50 billion = $50 billion
Using the GNP formula:
GNP = $1,000 billion + $50 billion = $1,050 billion
So, the GNP of Country A is $1,050 billion.

Difference calculating methods of GNP:

A. Expenditure Approach method: The Expenditure Approach method of
calculating GNP focuses on the total spending on the nation's final goods and
services during a given period. It includes the expenditures made by different
sectors of the economy, along with the net income earned from abroad.
Formula:
GNP = C + I + G + (X - M) + NR
Components:
 C: Consumption expenditure by households
 I: Investment expenditure by businesses
 G: Government expenditure on goods and services
 X: Exports of goods and services
 M: Imports of goods and services
 NR: Net income earned from abroad (difference between income earned by residents
from overseas investments and income earned by foreigners from domestic
investments)
Example
Suppose a country has the following economic data for a year:
 Consumption (C): $1,000 billion
 Investment (1): $300 billion
 Government Spending (G): $500 billion
 Exports (X): $200 billion
 Imports (M): $150 billion
 Net Income from Abroad (NR): $50 billion
Using the Expenditure Approach Formula:
GNP = $[1000+300+500+(200-150)+50] billion
= $ [1000+300+500+50+50] billion
= $1900 billion
In this example, the GNP is $1,900 billion.
 B. Income Approach method: The Income Approach method of calculating GNP
focuses on summing all the incomes earned by the factors of production within
a country, including wages, rents, interests, and profits. This approach ensures
that all economic activities generating income are considered, capturing the
total income generated by the nation's residents, both domestically and abroad.
Formula:
GNP = W + R + I + P + T + NR
Components
 W: Wages and salaries (compensation of employees)
 R: Rent (income from property)
 I: Interest (income from investments)
 P: Profits (corporate profite)
 T: Taxes on production and imports (indirect taxes minus subsidies)
 NR: Net income earned from abroad
Example Calculation:
Suppose a country has the following economic data:
 Wages and salaries (W): $500 billion
 Rent (R): $100 billion
 Interest (i): $50 billion
 Profits (P): $150 billion
 Taxes on production and imports (T): $80 billion
 Net income from abroad (NR): $20 billion
Using the formula:
GNP = $[500+100+50+150+80+20] billion
= $900 billion
Therefore, the GNP of the country would be $900 billion.

C. Production Approach method: The Production Approach, also known as the

Value-Added Approach, is one method of calculating GNP (Gross National
Product). This method focuses on the value added at each stage of production in
the economy.
Formula:
GNP = Sum of value added by all producers + Net income from abroad
Example:
Suppose an economy consists of three sectors: agriculture, manufacturing, and
services. Each sector produces goods or services with the following value added
in a given year:
 Agriculture: $8500,000
 Manufacturing: $1,200,000
 Services: $800.000
 Additionally, net income from abroad (NR) is $100,000.
To calculate GNP using the Production Approach.
GNP = Value added by all sectors + Net income from abroad
GNP = ($500,000 + $1,200,000-$800,000) + $100,000
= $2.500,000 + $100,000 GNP
= $2,600,000
So, the Gross National Product (GNP) for this hypothetical economy using the
Production Approach would be $2,600,000.
Deference between GDP and GNP.

GDP GNP

GDP stands for Gross Domestic Product. GNP stands for Gross National Product

It measures only the domestic production. It measures only the national production.

Includes production by foreign companies Excludes production by foreign companies

within the country. within the country.
Does not include income from abroad. Includes income earned by residents from
abroad.
Focuses on the location of production. Focuses on the ownership of production.

Used to assess the economic performance of Used to assess the economic performance of
a country. a country's citizens.
Calculation Formula: Calculation Formula:
GDP = Private Consumption Gross Investment GNP = GDP + Net Income from Abroad
(C)+ Government Investment (I)
+ Government Spending (G)
+ (Exports (X)-Imports (M))

Net National Product (NNP): Net National Product (NNP) is a measure of the market value of all
goods and services produced by a country's residents in a given period, minus depreciation (wear
and tear on capital goods). It is an important economic indicator that reflects the net output or
income of the nation after accounting for depreciation.
Formula:
NNP = Gross National Product (GNP) – Depreciation
Example:
Suppose a country's GNP for a particular year is $3,000,000 and the depreciation (also known as
capital consumption allowance) is $500,000.
To find the Net National Product (NNP):
NNP = GNP-Depreciation
= $3,000,000-$500,000
= $2,500,000
Therefore, the Net National Product (NNP) for that yeat would be $2,500,000.

NI at Current Prices and Constant Prices:

NI (Net National Income) at current prices and constant prices are terms used in national income
accounting to differentiate between the nominal value and the real value of income adjusted for
inflation. Here's a brief explanation of each:
 NI at Current Prices:This is the total net income of a country's residents calculated using
the prices that prevail in the same period. It reflects the nominal value of goods and
services without adjusting for inflation.
Usage: This measure is used to evaluate the nominal economic performance of a country.
However, it doesn't provide a clear picture of real income changes over time due to the
influence of price level changes (inflation or deflation).
  NI at Constant Prices: This is the total net income of a country's residents adjusted for
inflation, using the prices of a base year. It reflects the real value of goods and services,
providing a clearer picture of changes in economic performance over time.
Usage: This measure is used to compare the real economic performance of a country
across different periods by removing the effects of inflation or deflation.

Example Calculation
Given Data:
NI at current prices for the year = $500 million
Price index: base year = 100, current year = 125

Formula to Convert NI at Current Prices to NI at Constant Prices:

¿ at CurrentPrices
¿ at Constant Prices=( )×100
Price index
Calculation:
500,000,000
NI at Constant Prices = ( ) × 100
125
= 4,000,000 × 100
= 400,000,000
Summary:
 NI at Current Prices: $500 million (nominal value)
 NI at Constant Prices: $400 million (real value adjusted for inflation)

Net Domestic Product (NDP): Net Domestic Product (NDP) is an economic metric that measures
the value of all goods and services produced within a country in a specific period, adjusted for the
depreciation of capital assets. It provides a clearer picture of an economy's actual productivity and
sustainability by accounting for the wear and tear on physical assets.
Formula:
NDP = GDP- Depreciation
where:
 GDP is the Gross Domestic Product
 Depreciation (also known as Capital Consumption Allowance) represents the reduction in
the value of physical assets due to wear and tear, obsolescence, or aging.
Example
Imagine a country produces $100 worth of goods and services. During the production process,
its machinery depreciates by $10. The NDP would be = $100 GDP - $10 depreciation = $90
Per Capita Income (PCI): Per Capita Income (PCI) is a measure of the average
income earned per person in a specific area, typically a country, region, or city. It is
calculated by dividing the total income earned in that area by the total population.
Formula:
PCI = Total Income / Total Population

Example
Let's consider a country where the total income earned in a year is $10,000,000, and
the total population is 1,000,000 people.
Using the formula for Per Capita Income:
PCI = $10,000,000/1,000,000
= $10
Therefore, the Per Capita Income (PCI) for this country would be $10. This means, on
average, each person in the country earns $10 per year.

Importants of national income measurement:

National income measurement is crucial for several reasons:
 Economic Performance Assessment: It provides a clear picture of a country's economic
health, helping to gauge how well the economy is performing over time.
 Policy Making: Accurate national income data aids governments in designing and
implementing effective economic policies, addressing issues like inflation, unemployment,
and economic growth.
 Resource Allocation: It helps in the efficient allocation of resources by identifying which
sectors are performing well and which need support.
 International Comparisons: National income measurements allow for comparisons
between different countries' economic performances, aiding in global economic analysis
and decision-making.
 Living Standards: It indicates the average income and living standards of the population,
helping to assess and improve the quality of life.
 Investment Decisions: Businesses and investors use national income data to make
informed decisions about investments and expansions.
In summary, measuring national income is vital for understanding, managing, and improving a
country's economic and social well-being.