National Income: Meaning and Basic Concepts

So far in Business Economics you have studied how a single firm decides its output, cost, revenue and price. This chapter zooms out from the individual firm to the economy as a whole — the macroeconomic view — because no business operates in a vacuum. Whether households can afford a firm's product, how cheaply it can borrow, and how heavily it is taxed all depend on the overall condition of the economy. National income is the single most important yardstick of that overall condition.

National income is the total money value of all final goods and services produced by an economy during a year. Because the same total can be looked at from slightly different angles, economists use a family of related aggregates, and a Business Economics student must know exactly what each one measures.

Gross Domestic Product (GDP) is the market value of all final goods and services produced within the domestic territory of a country during a year, no matter whether the factors of production used are owned by residents or non-residents. GDP is a territorial concept — it is about where output is produced, not who owns it.

Gross National Product (GNP) shifts the focus from territory to residents. It measures output/income earned by a country's normal residents, wherever in the world they earn it:

where NFIA = factor income received by residents from abroad minus factor income paid to non-residents out of the domestic economy. For India, NFIA has generally been a small negative figure, so GNP has usually been marginally below GDP.

Net National Product (NNP) removes depreciation — the wear and tear (consumption of fixed capital) that machinery, buildings and equipment suffer during a year's production:

Net Domestic Product (NDP) is the domestic counterpart — GDP minus depreciation.

Each of these can be measured at Market Price (MP) — the price the final buyer actually pays, including indirect taxes and net of subsidies — or at Factor Cost (FC) — the price actually received by the producers for the use of the factors of production:

National Income (NI) in the strict, technical sense is NNP at Factor Cost — output/income attributable to a country's residents, after removing both depreciation and the tax-subsidy wedge. This is the figure that best reflects the income genuinely available to the people of the country.