National income is the sum of all payments which arise as a result of economic activity that is from the production of domestically owned goods and services.
The incomes which make up national income, includes rent, employment income, interest, and profit, are known as factor incomes because the factors of production earn them:
- Land earns rent.
- Labor earns wages.
- Capital earns interest.
- Entrepreneurship makes a profit.
National Income is also called Net National Product.
- Income and product are just two aspects of the same circular flow of income.
- The term net means ‘after deducting an amount for capital consumption or depreciation of capital assets.
Gross Domestic Product (GDP)
Most of a country’s national income is derived from economic activity. Economic activity within that country is referred to as total domestic income or domestic product. It is measured gross, i.e., before deducting an amount for capital consumption or depreciation of capital assets. So, in India, for example, gross domestic product refers to the total value of income/production from economic activity within India. Therefore, GDP is the most appropriate measure for assessing the productivity of an economy.
Gross National Product (GNP)
Some of a country’s national income arises from overseas investments, while non-resident revenue is some income generated within that country. The difference between these items is net property income from abroad.
Gross national product (GNP) is the gross domestic product (GDP) plus the net property income from abroad – or after subtracting the net property income from abroad, if it is a negative value.
For example, income earned in India by overseas companies and remitted back to their overseas country of origin would be a negative value for Indian GNP.
We can illustrate the difference between GDP and GNP with a simple example. Nissan is a Japanese car manufacturer with production plants in India. The profits from its Indian activities contribute to Japanese GNP, but because the actions occur in India, they count towards Indian GDP.
Relationship between GDP, GNP, and National Income
In the same way that individual companies show depreciation as a charge in their income statements, national economies show the depreciation cost on their capital assets.
- This depreciation deduction is known as capital consumption.
- The value of GNP less capital consumption is known as national income (or net national product).
As well as recognizing capital consumption, we acknowledge that there are new investments. Gross capital formation illustrates new investment. The difference between gross capital formation and capital consumption is a net investment.
The level of net investment in an economy is an indication of the productive potential of an economy. We expect an economy with high net investment to have higher potential productivity in the future than one with low net investment.
Therefore, the relationship between GDP, GNP, and National Income could be defined as;
- plus Net property income from abroad
- equals GNP
- minus Capital consumption
- equals Net national income or net national product
National income is GNP minus an allowance for depreciation of the nation’s capital.
Adjustments to GDP at Market Prices
It is important to note that GDP, GNP, and national income, as defined above, are expressed at market prices.
Since the prices of many goods and services are distorted by sales taxes (for example, on the purchase of alcohol and cigarettes) and some are reduced by subsidies (for instance, on many agricultural products), we often wish to view the situation without these reductions and convert GDP at market prices to gross value added at basic prices (which used to be known as GDP at factor cost).
Therefore, Gross value added (GVA) at basic prices = GDP at Market prices – Indirect taxes + Subsidies.
Bottom-line: National Income Reflects Economic Condition of an Economy
National income is a measure of economic activity in an economy. The figures have many uses. They can be used to measure economic growth and changes in a country’s standard of living, enable the government to assess the state of the economy and plan future policy, and compare the economic performance and standards of living of different countries.