We usually hear Indian economy is appreciating with 7.5% GDP growth rate. China bubble got burst, UK economy got collapsed, US has very high inflation rate leading to job cut off and many more. So how people determine appreciation and depreciation rate of any economy? What are the major parameters to determine growth rate of any Economy? How to calculate national income?
This is the first post which will cover your entire basic query regarding National income and few other basic understanding of economics. You will become the basic analyst who can understand the appreciation and depreciation of an economy after you finish thorough reading of this article. So let’s begin with understanding calculation of national income.
What is National Income?
Earlier in 1940s, Blue Book firstly mentioned the National income of UK. In this report, it mentioned all the economic activities that added value to the income of the nation.
The calculated value of total amount of money earned on final goods within the boundary of the nation, exempting second hand goods, is called as National Income.
We calculate national income mainly through Gross Domestic Product (GDP), Net Domestic Product (NDP), Gross National Product (GNP) and Net National Product (NNP). Let’s discuss each of the components separately in details:
Gross Domestic Product (GDP)
GDP calculation is the most fundamental quantitative technique to determine the internal strength of any economy in terms of its national income. International Monetary Fund (IMF) and World Bank both uses this technique to rank any country in growth rate list.
The aggregate value of all the final goods & services produced within the boundary of the country is named as Gross Domestic Product (GDP).
Gross Domestic Product is the total summation of the outcome of Consumption of goods or services, Investment in production or stakes, Government Expenditure and Net outcome from Export & Import.
So mathematically GDP written as-
GDP = Consumption + Investment + Government Expenditure + (Export – Import)
GDP includes income generated by foreigners within the boundary of the nation, whereas money coming from abroad does not include in the calculation of GDP.
Net Domestic Product (NDP)
The difference between Gross Domestic Product and Depreciation gives Net Domestic Product.
Mathematically, NDP written as-
NDP = GDP – Depreciation
Depreciation constitutes all the wear and tear or any other damages to the final product. It mainly occurs due to unsafe transportation, Unsafe practices at storing, and many more.
In India, Ministry of Finance announces GDP whereas Ministry of Trade and Commerce announces NDP. It is very helpful to know the areas where government needs to work to reduce the losses due to depreciation.
Gross National Product (GNP)
Gross national Product is the total summation of GDP & income coming from abroad. It does not include economic activities done by foreigners in the country.
Income coming from abroad consists of Remittance, Interests on external loans and trade balance.
External loans are of two types:
- Loans taken by one country from other country
- Loans given by one country to other country
So mathematically GNP written as-
GNP = GDP + Income coming from abroad
Or, GNP = GDP + Remittance + Interests on external loans + trade balance
Trade balance = (Balance of Export) – (Balance of Import)
Interests on External loans = (Interest on Loans given by one country to other country) – (Interest on Loans taken by one country from other country)
In case of India, Trade balance is negative since it imports most of the stuffs than export. Also Interests on external loan is highly negative due to more loans taken from international communities.
Overall, GNP for India is Negative.
Hence GNP re-written as-
GNP = GDP – Income from abroad
Net National Product (NNP)
Net National Product is the difference between Gross national product and Depreciation. Depreciation includes all the associated wear and tear to the commodities at national level.
Mathematically NNP written as-
NNP = GNP – Depreciation
NNP = GDP + Income coming from abroad – Depreciation
National income calculated by considering two major cost factors, which are listed as follows:
Factor Cost- It constitutes production cost which includes cost of raw materials, machine cost, salary and many more things at ground level.
Market Cost- It constitutes whole sale cost which includes Transportation cost, Salary, Indirect tax, Maintenance cost, costs at ground level and marginal profit.
NNP (Factor Cost) = NNP (Market Cost) + Subsidies – Indirect tax
National Income refers to NNP at Factor Cost
Per Capita Income
Net National Product at Factor cost divided by total population of the country gives Per capita income.
Per capita income = National Income/Total Population