Basic National Income Concepts
Introduction to National Income
National income is a term used to measure the monetary value of the flow of the output of goods and services produced in an economy over a period of time, usually a year.
Gross National Product (GNP):
GNP is the market value of all final goods and services produced by the nationals of a country during a specified period of time usually a year. It follows from this definition that all goods and services produced by the nationals of a country (within or outside) are embodied in the GNP.
Gross Domestic Product (GDP):
Gross domestic product measures the total output in the domestic economy. It is the total monetary value of all final goods and services produced within a country during a specified period of time, usually a year. It includes all the output produced by local and foreign-owned firms domiciled in the economy.
Nominal GDP, real GDP, and potential GDP are three different measures of aggregate output. Nominal GDP is the market value of all final goods and services produced in the domestic economy in a one-year period at current prices. By this definition,
- only output exchanged in a market is included ( do-it-yourself services such as washing your own clothes are not included);
- output is valued in its final form ( output is in its final form when no further alteration is made to the good which would change its market value); and
- output is measured using current year prices.
Because nominal GDP values are inflated by prices that change overtime, aggregate output is also measured holding the prices of goods and services constant over time. This valuation of GDP at constant prices is called real GDP. The third measure of aggregate output is potential GDP (trend GDP), the maximum production that can take place in the domestic economy without putting upward pressure on the general price level.
National Income (NI):
This is the sum of all incomes earned by the factors of production in the economy during a specified period of time, usually a year. The national income measures the costs of the economic resources which have gone into the current production (of this year’s output); hence, it gives us the value of output at factor costs rather than at market prices.
Net National Product (NNP):
NNP is the net money value of final goods and services produced in an economy in a time period, usually a year. It is obtained by deducting capital consumption allowance from GNP.