NATIONAL INCOME ( GDP, GNP, NDP, NNP)

National Income Accounting is one of the most basic concept of the macroeconomics. Many people face difficulty while understanding GDP, GNP, NDP, NNP, NNP(factor cost) etcetra.. beacause these are the basic variables of macroeconomics a clear understanding and distinction among them is necessary.

First of all let us contemplate what is National income accounting? What is the need the calculate these variables? Do every countries use these variables only for estimating their national income? We will also come to the concept of a slightly different and unique variable used by Bhutan.

So going one by one , let’s first explain National income accounting ( NIA) . NIA is nothing but the accounting of the national income. In commerce and finance we have studied about accounting. Accounting means “ lekha Jokha”. i.e. the ledger book which keeps the whole account of the income. Accounting is done on every level ranging from household to industry. The same thing is done for the national income too.

So various variables to assess the national income of a country are:-

(1)         Gross Domestic Product( GDP)- It is defined as the value of all final goods and services produced inside the territory of a country within a specified period of time ( say an year).

Here the key words are underlined.

The two group of words are really important and we need to understand it minutely. The first group mentions “final goods” what does it mean? It means only those goods will be counted which are the final output. The intermediate goods will not be counted. This is done to avoid double counting of the same good. Suppose that while manufacturing a car its various parts like engine, tyre etc. are considered and at the same time the final produced car is considered( which already contains all these parts like engine , tyre etc.) , it lead to repetition of the same good while calculating the value. This is why only final goods are considered not the intermediate goods. This is to be kept in mind.

The second underlined group of words is inside the territory of a country. It means only those goods  which are manufactured within the boundary of the country will be considered. Eg. Tata has acquired Jaguar. Tata is an Indian automobile manufacturing company while the production facility of Jaguar is in UK. So the Car manufactured by the Tata Jaguar at UK plant will not be considered while calculating the GDP of India. Similarly if an American company or Korean company manufacture their product ( take the case of cheap Samsung handset) , that will be considered while calculating GDP of the country, because the product manufactured is within the Indian Territory.

(2)         Gross National Product (GNP)-  

     Here the key word is National. In this case the goods and services produced by every national will be considered, whether he is living in India or outside the country. At the same time value of goods and services produced by foreigners in India will be excluded. Earlier a few countries like USA used GNP as the indicator of their national income , but now they have shifted to the GDP.

(3)         Net Domestic Product ( NDP)- 

     With time the capital goods depreciate. It means that the value of the capital goods( means of production, machinery, building etc.) reduces with time. So after deducting this reduction from the GDP , a new variable defined is called the NDP.

(4)         Net National Product ( NNP)- 

        This is obtained by deducting depreciation from the GNP.

India and most  of the countries as well as financial institutions like World Bank and IMF considers GDP as the variable for calculating the national income of the countries. The comparison  of well- being of an economy is done on the basis of the GDP only. Current the GDP of India is 1.8 trillion dollar which is 1/5^th that of China and 1/10^th that of USA. This shows that we are lagging too behind as compared to these countries in terms of economic growth. In the next blog I will come with the concept of the GDP at factor cost and market price as well as GDP at constant price and current price. I will also discuss about the concept of the GDP Deflator and what  is unique with the national income accounting of Bhutan?.