Income level is the most commonly used tool to determine the well being and happiness of nations and their citizens. This remains true even today, Even if we know that’ income is not an exhaustive idea to know about the well being of the society.
Basically, when the idea of ‘human development’ came into being in the early 1990s, the concept of the human development index’ ultimately was heavily dependent on the level of income of an individual in a country.
Education and life expectancy can only be enhanced once the required amount of investment’ (expenditure on them) could be mobilised. Thus, somehow, income came to be established as the focal point of development / human dvelopment.
As income of a single person can be measured, it can be measured for a nation and the whole world, although the method of calculation (accounting) may be a little bit complex in the latter’s case.
The four ways to calculate the income’ of an economy, although different from each other in some ways, are the concepts of GDP, NDP, GNP and NNP. All are a form of the national income, but are different from one another. They all present a different story their own specific way.
(1). GDP :
Gross Domestic Product (GDP) is the value of the all final goods and services produced within the boundary of a nation during one year period. For India, this calendar year is from 1st April to 31st March.
It is also calculated by adding national private consumption, gross investment, government spending and trade balance (exports – minus imports).
The use of the exports – minus – imports factor removes expenditures on imports not produced in the nation, and adds expenditures of goods and service produced which are exported, but not sold within the country.
It will be better to understand the terms used in the concept, gross’, which means same thing in Economics and Commerce as ‘total means in Mathematics; domestic’ means all economic activities done whithin the boundary of a nation / country.
The different uses of the concept of GDP are as given below :
(i) Per annum percentage change in it is the growth rate of an economy. For example, if a country has a GDP of Rs. 107 which is 7 rupees higher than the last year, it has a growth rate of 7 per cent. When we use the term’ a growing economy, it means that the economy is adding up its income, i.e., in quantitative terms.
(ii) It is a quantitative concept and its volume / size indicates the internal strength of the economy. But it does not say anything about the qualitative aspects of the goods and services produced.
(iii) It is used by the IMF / WB in the comaparative analyses of its member nations.
NDP Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of depreciation’.
This is, basically, net form of the GDP, i.e., GDP minus the total value of the wear and tear’ (depreciation) that happened in the assets while the goods and services were being produced. Every asset (except human beings) go for depreciation in the process of their uses, which means they wear and tear’.
The governments of the economies decide and announce the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is published, which is used by different sections of the economy to determine the real levels of depreciations in different assets.
Thus, NDP = GDP – Depreciation.
This way, NDP of an economy has to be always lower than its GDP for the same year, since there is no way to cut the depreciation to zero.
The different uses of the concept of NDP are as given below :
(a) For domestic use only : to understand the historical situation of the loss due to depreciation to the economy. Also used to understand and analyse the sectoral situation of depreciation in industry and trade in comparative periods.
(b) To show the achievements of the economy in the area of research and development, which have tried cutting the levels of depreciation in a historical time period.
However, NDP is not used in comparative economics, i.e., to compare the economies of the world. Why this is so ? This is due to different rates of depreciation which is set by the different economies of the world.
Basically, depreciation and its rates are also used by modern governments as a tool of economic policymaking, which is the third way how depreciation is used in economics.
(3). GNP :
Gross National Product(GNP) is the GDP of a country added with its’ income from abroad’. Here, the trans – boundary economic activities of an economy is also taken into account. The items which are counted in the segment’ Income from Abroad’ are :
(i) Private Remittances : the net outcome of the money which inflows and outflows on account of the’ private transfers’ by Indian nationals working outside of India (to India) and the foreign nationals working in India(to their home countries).
(ii) Interest on External Loans : the net outcome on the front of the interest payments, i.e., balance of inflow (on the money lend out by the economy) and outflow (on the money borrowed by the economy) of external interests.
(iii) External Grants : the net outcome of the external grants i.e., the balance of such grants which flow to and from India. Today, India offers more such grants than it receives. India receives grants(grants or loan – grant mix) from few countries as well as UN bodies (like the UNDP) and offers several developmental and humanitarian grants to foreign nations.
Ultimately, the balance of all the three components of the ‘Income from Abroad’ segment may turn out to be positive or negative. In India’s case it has always been negative (due to heavy foreign loans). It means, the’ Income from Abroad’ is subtracted from India’s GDP to outflows on account of trade deficits and interest payments on calculate its GNP.
The normal formula is GNP = GDP + Income from Abroad.
But it becomes GNP = GDP +(- Income from Abroad), i.e., GDP – Income from Abroad, in the case of India. This means that India’s GNP is always lower than its GDP.
The different uses of the concept GNP are as given below:
(i) This is the ‘national income’ according to which the IMF ranks the nations of the world in terms of the volumes at purchasing power parity(PPP).
(ii) It is the more exhaustive concept of national income than the GDP as it indicates towards the quantitative’as well as the qualitative aspects of the economy, i.e., the internal as well as the’ external strength of the economy.
(iii) It enables us to learn several facts about the production behaviour and pattern of an economy, such as, how much the outside world is dependent on its product and how much it depends on the world for the same (numerically shown by the size and ner flow of its’ balance of trade’);
Net National Product (NNP) of an economy is the GNP after deducting the loss due to depreciation’.
The formula to derive it may be written like : NNP = GNP – Depreciation or, NNP = GDP + Income from Abroad Depreciation.
The different uses of the concept of NNP are as given below :
(i) This is the’ National Income'(NI) of an economy. Though, the GDP, NDP and GNP, all are’ national income they are not written with capitalised’ N’ and I’.
(ii) This is the purest form of the income of a nation.
(iii) When we divide NNP by the total population of a nation we get the’ per capita income’ (PCI) of that nation, i.e.,’ income head per year’. A very basic point should be noted here that this is the point where the rates of dipreciation followed by different nations make a difference. Higher the rates of depreciation lower the PCI of the nation.
The ‘Base Year’ together with the Methodology for calculating the National Accounts were revised by the Central Statistics Office (CSO) in January 2015.
GDP = National Private Consumption + Gross Investment + Government Spending and Trade Balance [Exports – (minus) Imports]
NDP = GDP – Depreciation
GNP = GDP + Income from Abroad
NNP = GDP + Income from Abroad Depreciation