Economics · Chapter 8
Study notes aligned to the official NEB syllabus.
National income accounting measures the total money value of the goods and services produced in an economy over a period of time. It uses several related concepts, moving from the broadest measure of output down to the income actually available to households.
The most important concept of national income is gross domestic product. GDP is the money value of all final goods and services produced within the domestic territory of a nation during a year.
It is written as:
$$GDP = P_1Q_1 + P_2Q_2 + \cdots + P_nQ_n$$
where $P_1 \ldots P_n$ are the prices of final goods and services and $Q_1 \ldots Q_n$ are their quantities.
According to the expenditure approach, GDP is expressed by:
$$GDP = C + I + G + (X - M)$$
where:
The market value of all final goods and services produced within a country in a year plus net factor income from abroad is called gross national product. It is a broader concept than GDP.
$$GNP = GDP + NFIA$$
where $NFIA$ (net factor income from abroad) is receipts minus payments:
$$NFIA = R - P$$
with $R$ = receipts (income earned by residents from abroad) and $P$ = payments (income earned within the domestic economy by overseas residents).
| Basis | GDP | GNP |
|---|---|---|
| Definition | GDP is the money value of all final goods and services produced within the country. | GNP is the money value of all final goods and services produced within the country plus net factor income from abroad. |
| NFIA | It does not include net factor income from abroad (NFIA). | It includes net factor income from abroad (NFIA). |
| Concept | It is a narrow concept. | It is a wider concept than GDP. |
| Inclusion | It includes economic activities within the country. | It includes economic activities within and outside the country. |
| Calculation | $GDP = P_1Q_1 + P_2Q_2 + \cdots + P_nQ_n$ | $GNP = GDP + NFIA$ |
Net national product is gross national product minus depreciation. Every capital good depreciates during the process of production, and NNP nets out this wear and tear.
$$NNP = GNP - \text{Depreciation}$$
National income is the total earning of all factors of production in the form of wages, rent, interest and profit, plus net factor income from abroad. It is also called national income at factor cost.
$$NI = NNP - \text{Indirect tax} + \text{Subsidy}$$
The total income received by all individuals and households of a country from all possible sources before the payment of direct taxes is called personal income. It is the actual income received by individuals and households during a year.
$$PI = NI - \text{Corporate income taxes} - \text{Undistributed corporate profit} - \text{Social security contribution} + \text{Transfer payment}$$
National income accounting measures the total money value of the goods and services produced in an economy over a period of time. It uses several related concepts, moving from the broadest measure of output down to the income actually available to households.
The most important concept of national income is gross domestic product. GDP is the money value of all final goods and services produced within the domestic territory of a nation during a year.
It is written as:
where are the prices of final goods and services and are their quantities.
According to the expenditure approach, GDP is expressed by:
where:
The market value of all final goods and services produced within a country in a year plus net factor income from abroad is called gross national product. It is a broader concept than GDP.
where (net factor income from abroad) is receipts minus payments:
with = receipts (income earned by residents from abroad) and = payments (income earned within the domestic economy by overseas residents).
| Basis | GDP | GNP |
|---|---|---|
| Definition | GDP is the money value of all final goods and services produced within the country. | GNP is the money value of all final goods and services produced within the country plus net factor income from abroad. |
| NFIA | It does not include net factor income from abroad (NFIA). | It includes net factor income from abroad (NFIA). |
| Concept | It is a narrow concept. | It is a wider concept than GDP. |
| Inclusion | It includes economic activities within the country. | It includes economic activities within and outside the country. |
| Calculation |
Net national product is gross national product minus depreciation. Every capital good depreciates during the process of production, and NNP nets out this wear and tear.
National income is the total earning of all factors of production in the form of wages, rent, interest and profit, plus net factor income from abroad. It is also called national income at factor cost.
The total income received by all individuals and households of a country from all possible sources before the payment of direct taxes is called personal income. It is the actual income received by individuals and households during a year.