A First Look at National Income

Having looked at how the economy is structured sector-wise, it is useful to introduce — at a purely conceptual level — how the size of a nation's total economic activity is actually measured. This is only a brief primer; the full definitions, methods of measurement (product, income and expenditure methods) and their detailed derivation are covered fully in your Class 12 Macroeconomics course, so this section deliberately does not repeat that ground.

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within the domestic territory of a country during a given period, usually a year. A simple conceptual way economists express what makes up GDP from the expenditure side is:

where $C$ is consumption expenditure by households, $I$ is investment expenditure by firms, $G$ is government expenditure, and $(X - M)$ is net exports (exports minus imports). This is only the conceptual shape of the identity at this stage — you are not expected to compute national income from data yet.

Gross National Product (GNP) extends GDP by also including net income earned by a country's residents from abroad (income earned by Indian citizens/firms working or invested overseas) while excluding income earned within India by foreign residents/firms and repatriated abroad. In symbols, conceptually, $GNP = GDP + \text{Net Factor Income from Abroad}$.

Net National Product (NNP) adjusts GNP for the wear and tear of capital used up in producing that year's output — called depreciation: $NNP = GNP - \text{Depreciation}$. NNP is considered a more accurate measure of the net addition to a nation's wealth in a year, since GNP alone does not account for the capital that had to be used up (and eventually replaced) to produce that output. …