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National Income Meaning And Measurement

 National Income Meaning and Measurement

Meaning

National income is an uncertain term which is used interchangeably with national dividend, national output and national outlay. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a nation. In other words, the total amount of income accruing to a nation from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.

Concepts of National Income

  1. G.D.P – Gross Domestic Product

It is the total value of products and services manufactured within the nation during a year. This is computed at market prices and is known as GDP at market prices.

(a) Nominal and Real GDP

When GDP is measured on the basis of current prices, it is called GDP at current prices or nominal GDP. Conversely, if the GDP is computed on the basis of fixed prices in some year, it is called GDP at constant prices or real prices.

And the Formula for computing Real GDP is as below.

Real GDP = GDP for the Current year x Base Year (Which is equal to 100)
                                                                              Current Year Index

Let us an illustration under this concept.

Illustration 1:

Presume the year 2000 – 2001 as the base year and GDP for 2010 – 2011 is $ 500,000 and the price index for this year is 500. Compute the Real GDP for the year 2010 – 2011.

Solution

       GDP for the current year = $500,000

      Base year index 2000 – 2001 is taken as 100

      Price index of the current year = 500

By substituting these values in the above formula, we obtain as under:

      500,000 x 100
                       500
     
      Real GDP for the year 2010 – 2011 = $100,000
     
(b) GDP Deflator

      This is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.

Thus the formula for computing GDP Deflator is as below.
     
      Nominal (or Current Prices) GDP         x 100
         Real (or Constant Prices) GDP

Let us see an illustration of this model.

Illustration 2

Calculate the GDP Deflator for the year 2010 – 2011, if the nominal GDP or current price is $250,000 and that of the Real or Constant price is $125,000.

Solution

Nominal GDP or Current Price = $250,000

      Real GDP or Constant Price = $125,000

Substituting the values in the above formula, we obtain as under.

= 250,000        x 100
         125,000

      = $200

Hence the GDP Deflator for the year 2010 – 2011 = $200

  1.  Gross National Product or GNP

The GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in the nation, comprising of net income from overseas. GNP includes four types of final goods and services.

    1. Consumer’s goods and services to satisfy the immediate wants of people.
    1. Gross private domestic venturing in capital commodities comprising of fixed capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods.
    1. Goods and services produced by the government and
    1. Net Exports of goods and services i.e. difference between value of exports and imports of goods and services, known as income from abroad.

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