National Income Accounting: Definitions Explained

Here is an easy explanation of crucial definitions related to National Income Accounting, viz. Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), Net National Product (NNP).

Image: National Incomes Concepts Explained

Before dwelling on various definitions related to National Income Accounting, let’s try to understand what economics is??

In a laymen terms, economics is a discipline that studies how to bridge the gap b/w the resources that a society has and the demand of that society. As the wants are interminable (unlimited), economics studies how to manage the limited resources in the most efficient way. Simple!!!!

Economics is studied under two sub-heads – Microeconomics and Macroeconomics. We will talk about these two sections some other day and let’s move on to discuss a very important concept of Macroeconomics, viz. National Income Accounting. In this article, I’ll be specifically dealing with the definitions related to National Income Accounting, i.e. Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), and Net National Product (NNP) in a comprehensive way.

So what is Gross Domestic Product?

In a laymen terms, GDP is the total market value of country’s output. Let’s break it to get a better grasp of the definition:

GDP is the total market value of all final goods and services:

  • produced within a financial year
  • by factors of production (land, labour, capital, and entrepreneurship)
  • located within a country
  • irrespective of ownership.

In the above definition, a phrase “final goods and services” has been used. So what is final goods (goods here means goods and services both) and how is it different from intermediate goods? Let’s briefly look into that:

Final goods/services are produced for absolute final use. They don’t pass through any further stage of production or transformation. Unlike them, intermediate goods are produced by one firm for use by other firm to produce some other product. Example: Buttons, clothes, threads produced are used by the apparel making company and hence they (buttons, clothes, threads) are intermediate goods and not final goods. Simple!!!

I hope that you have understood the concept of GDP and the difference b/w final goods and intermediate goods. Now let’s discuss what is Gross National Product (GNP)?

GNP is the total market value of all final goods and services:

  • produced within a financial year
  • by factors of production (land, labour, capital, and entrepreneurship)
  • owned by a country’s citizens (if a foreigner is earning in geographical boundary of India then his income won’t be included in India’s GNP)
  • irrespective of where the output is being produced.

Have you noticed the difference b/w GDP and GNP?

While GDP takes into account all the final goods produced within a domestic territory irrespective of the person producing, GNP takes into account only those final goods that are produced by the nationals irrespective of where they are produced in the world.

Image: Difference b/w GDP and GNP

I hope the definitions of GDP and GNP are clear. Now, let’s discuss Net Domestic Product (NDP) and Net National Product (NNP).

The Net Domestic Product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from the Gross Domestic Product (GDP).

NDP=GDP-Depreciation

Similarly, Net National Product (NNP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from the Gross National Product (GNP).

NNP=GNP-Depreciation

You might be thinking what is this depreciation? So let’s have a look into that as well.

Depreciation is the regular wear and tear of capital that takes place while producing new goods and services in an economy. It is to be noted that it doesn’t takes place into account unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities or such extraneous circumstances.

Note: Depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.

 

I hope I have covered the concepts extensively. Feel free to comment, ask questions and suggest improvement; we welcome all!!!

 

References:

National Income Course on Unacademy by Ayush Sanghi

NCERT

 

This post has been contributed by Shrishti Agarwal, 1st year student in Delhi College of Arts and Commerce (DCAC), pursuing B.A. Economics (hons.)

 

 

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