- GDP = consumption + investment + government expenditure + exports imports, according to the expenditures method.
- The output method is also referred to as the “net product” or “value added” method.
Key Terms
- Total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) Imports (M)) is the expenditure approach. GDP = C + I + G + I + I + I + I + I + I + I + I (X-M).
- GDP is estimated using the income approach by adding up the factor incomes and the factors of production in the community.
- GDP is estimated using the output approach, which involves summing the value of items sold and correcting (subtracting) for the cost of intermediary goods used to make the commodities sold.
What is the formula for calculating national income from GDP?
GDP is thus defined as GDP = Consumption + Investment + Government Spending + Net Exports, or GDP = C + I + G + NX, where consumption (C) refers to private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures, and net exports (NX) refers to net exports.
What is the formula for calculating national income using GDP and GNP?
GNP and GDP both reflect an economy’s national output and income. The primary distinction is that GNP (Gross National Product) includes net foreign income receipts.
- GDP (Gross Domestic Product) is a measure of a country’s production (national income + national output + national expenditure).
- GDP + net property income from abroad = GNP (Gross National Product). Dividends, interest, and profit are all included in this net income from abroad.
- The value of all goods and services produced by nationals whether in the country or not is included in GNI (Gross National Income).
Example of how GNP is different to GDP
If a Japanese multinational manufactures automobiles in the United Kingdom, this manufacturing will be counted as part of the country’s GDP. However, if a Japanese company returns 50 million in profits back to its stockholders in Japan, this profit outflow is deducted from GNP. The profit that is going back to Japan does not assist UK citizens.
If a UK corporation makes a profit from foreign insurance companies and distributes that profit to UK citizens, the net income from overseas assets is added to UK GDP.
It’s worth noting that if a Japanese company invests in the UK, it will still result in higher GNP because certain domestic workers will be paid more. GNP, on the other hand, will not grow at the same rate as GDP.
- GNP and GDP will be extremely similar if a country’s inflows and outflows of revenue from assets are identical.
- GNP, on the other hand, will be lower than GDP if a country has many multinationals that repatriate profits from local output.
Ireland, for example, has seen tremendous international investment. As a result, the profits of these international corporations result in a net outflow of income for Ireland. As a result, Ireland’s GNP is smaller than its GDP.
GNI
GNI (Gross National Income) is calculated in the same way as GNP. GNI is defined by the World Bank as
“The sum of all resident producers’ value added plus any product taxes (minus subsidies) not included in the valuation of output, plus net receipts of primary income (compensation of employees and property income) from outside” (Source: World Bank)
What are the three methods for calculating GDP?
The value added approach, the income approach (how much is earned as revenue on resources utilized to make items), and the expenditures approach can all be used to calculate GDP (how much is spent on stuff).
What is the formula for GDP?
Gross domestic product (GDP) equals private consumption + gross private investment + government investment + government spending + (exports Minus imports).
GDP is usually computed using international standards by the country’s official statistical agency. GDP is calculated in the United States by the Bureau of Economic Analysis, which is part of the Commerce Department. The System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, and the Organization for Economic Cooperation and Development (OECD), is the international standard for estimating GDP.
What is the purpose of calculating national income?
The National Income is determined by a country’s economic activities. The authorities can analyze a country’s economic growth and adopt appropriate actions for future development and economic policy by calculating national income.
With an example, how is national income calculated?
For the year ended December 31, 2018, the following data is available. Based on the information provided, calculate the nation’s annual national income.
Exports Imports + Foreign Production by National Residents Domestic Production by Non-National Residents = National Income = Consumption + Government Expenditures + Investments + Exports Imports + Foreign Production by National Residents Domestic Production by Non-National Residents
- $5 trillion + $7 trillion + $12 trillion + $4 trillion $2 trillion + $0.5 trillion $1.5 trillion = National Income
As a result, the nation’s national income for the year was $25 trillion.
In economics class 12, what is national income?
This is a numerically focused chapter that explains how to compute national income using several approaches (Income, expenditure and value added method, their steps and precautions). Calculate private income, personal disposable income, national disposable income (net and gross) and their differences numerically.
1. The gross value of a product includes depreciation. The term “net” refers to the worth of a product after depreciation has been taken into account.
2. Depreciation is the distinction between these two concepts.
3. Depreciation is the predicted reduction in the value of fixed capital assets as a result of their widespread use.
4. It is the end outcome of the manufacturing process.
1. Net money worth of all final products and services generated by normal people of a country throughout an accounting year is referred to as national income.
2. Domestic income is the entire factor income earned by a factor of production within a country’s domestic territory for a certain accounting year.
3. Net Factor Income from Abroad (NFIA), which is included in National Income (NY) but excluded from Domestic Income, is the difference between these two incomes (DY).
4. NFIA is the difference between regular residents’ income from the rest of the world and equivalent payments paid to non-residents within the domestic area. NFIA = Payments to Residents from the Rest of the World (ROW) Income produced by Residents from the Rest of the World (ROW)
Case I: If income is paid to a foreign country, the NFIA must reverse the sign. Put a value of 0 for income from outside the country.
If income from outside the country is supplied, then NFIA = income from outside the country. To calculate this, subtract the money paid to foreign countries from the total income.
NFIA = Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Case III: If both foreign income and foreign income are reported, NFIA is the difference between the two.
NFIA = Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Income Net Foreign Case IV: Given a net factor income from abroad, reverse the sign of NFIA.
The net factor income paid to abroad (NFPA) is equal to the difference between the income paid to and the income received from abroad.
I Foreign Net Factor Income (NFPA = 100). In this case, the NFPA is positive, indicating that money from overseas exceeds income from within the country, indicating that
1. Factor Cost (FC): This is the amount paid to production factors in exchange for their participation to the manufacturing process.
2. Market Price (MP): This is the price at which a product is sold on the open market. The distinction between these two is that MP includes Net Indirect Taxes (NIT), whereas FC does not. The difference between indirect taxes and subsidies is referred to as NIT.
Where, Indirect taxes are levied by the government on the production and sale of a commodity. Indirect taxes include sales tax, excise duty, customs duty, and others, while subsidies are monetary grants made by the government to businesses to encourage the production of specific commodities, boost exports, or sell goods at prices lower than the free market price. LPG cylinders are heavily subsidized in India.
Case I: A subsidy is granted, and afterwards NIT is reversed in sign. Put Indirect tax = 0 in this case.
Case IV: If a sales tax and an excise duty are both charged, the result is indirect taxation.
Subsidies = (1000 + 1000) 500 = 1500 NIT = Indirect Tax(sales tax + excise duty)-subsidies
Case V: If a net subsidy is granted, we must invert the sign to turn it to a net indirect tax.
(a) Net Subsidy is equal to 100. In this case, net subsidy is positive, implying that indirect tax is lower than subsidy.
(b) Subsidy Net = (-) 100. In this case, the net subsidy is negative, indicating that indirect tax exceeds subsidy, resulting in,
Case VI: If both Net subsidy and indirect tax are provided, we must disregard the indirect tax and inverse the sign of Net subsidy.
Net indirect tax = 20 Taxes levied indirectly = (-) Illustration of 100 Numerics on a Basic Concept
1. Gross Domestic Product at Market Prices (GDPMP): GDPMP is defined as the gross market value of all final goods and services generated by all production units inside a country’s domestic territory during an accounting year.
(a) The term ‘gross’ in GDPMP denotes that depreciation is taken into account, i.e. no provision for depreciation has been made.
(b) The term ‘domestic’ in GDPMP refers to all final goods and services generated by all production units inside the economic region (irrespective of the fact whether produced by residents or non-residents).
(c) In GDPMP, ‘Market Price’ denotes the inclusion of indirect taxes when subsidies are excluded, i.e., it denotes the inclusion of Net Indirect Taxes (NIT).
(d) In GDPMP, the term ‘product’ denotes that only final products and services must be included, with intermediate commodities being excluded to avoid duplicate counting.
2. Gross Domestic Product at Factor Cost (GDPFC): GDPFC is defined as the gross factor value of all final products and services generated by all production units within a country’s domestic territory during an accounting year, excluding Net Indirect Tax.
3. Market-Priced Net Domestic Product (NDPMP ).
The net market value of all final products and services produced within a country’s domestic territory by normal inhabitants and non-residents throughout an accounting year is known as the NDPMP.
4. Factor Cost Net Domestic Product (NDPFC ).
The total factor income earned by a factor of production within a country’s domestic territory throughout an accounting year is referred to as NDPFC.
GDPMP Depreciation Net Indirect Taxes = NDPFC Domestic Income or Domestic Factor Income is another name for NDPFC.
5. Gross Domestic Product (GDP) at Market Prices (GNPMP).
The market value of all final goods and services generated by normal residents of a country during an accounting year is referred to as GNPMP.
GDPMP + Net factor income from abroad = GNPMP It’s worth noting that when NFIA is negative, GNPMP can be lower than GDPMP. When NFIA is positive, however, GNPMP will be higher than GDPMP.
6. Gross National Product at Factor Cost (GDPFC) or Gross National Income (GNI) refers to the gross factor value of all final products and services produced by ordinary citizens of a country within a fiscal year.
7. Market-Priced Net National Product (NNPMP ).
The net market value of all final products and services generated by normal residents of a country throughout an accounting year is referred to as NNPMP.
8. Factor Cost Net National Product (NNPFC ).
The net money value of all final products and services generated by normal people of a country throughout an accounting year is referred to as NNPFC.
GNPMP Depreciation Net Indirect Taxes = NNPFC It’s worth noting that NNPFC is sometimes referred to as National Income.
GDP Measures Social Welfare: Real, Nominal Aggregates, Activities Excluded From GDP
1. Constant-Price National Income:
(a) National income at constant price is defined as national income calculated using the base year price index.
(b) It’s also known as Real National Income because it fluctuates with the flow of goods and services while the price remains constant.
2. Gross Domestic Product (GDP) at Current Prices:
(a) National income at current prices is defined as national income calculated using the current year price index.
(b) It is also known as Monetary National Income since it varies with the flow of products and services as well as the price of the commodity.
3. GNP at current MP or Nominal GNP: GNP at current MP or Nominal GNP refers to the value of final goods and services included in GNP at current MP, i.e., prices in effect during the year for which GNP is being assessed.
4. GNP at constant MP or Real GNP: GNP at constant MP or Real GNP refers to the valuation of final products and services included in GNP at constant prices, i.e. prices from the base year.
5. GNP Deflator: The GNP Deflator calculates the average price level of all final products and services produced inside an economy’s domestic area, including NFIA. The nominal GNP to real GNP ratio multiplied by 100 is the GNP deflator.
6. Green GNP: Green GNP refers to GDP that has been adjusted for the loss of value as a result of,
(b) Natural resource depletion as a result of overall output activity in the
7. GDPMP is not applicable to the following activities: The following are the activities:
- Potential savers and investors buy and sell financial assets such as stocks and bonds on financial markets.
- There is only a transfer of ownership right when someone buys a share. It is a claim to asset ownership.
- Financial instrument trading does not entail the production of finished commodities and services. As a result, they are excluded from the GDP.
- Payments for which no goods or services are exchanged are known as transfer payments.
Government Transfer Payments are not included in GNP since there is no creation of final goods and services in response to transfer payments.
- Private transfer payments include items such as pocket money provided by parents to their children and seniors gifting money to the young.
This is simply a money transfer from one person to another. As a result, it is not included in GNP.
I Gross national product (GNP) is the total value of all final products and services generated in a given year.
(ii) As a result, items created in the previous period are excluded from the GNP. Mr A, for example, sells his old bike to Mr B for Rs. 30,000 on April 25, 2011, after purchasing it for Rs. 45,000 on March 1, 2010. This transaction should not be included because it was already included in the 2010 GNP, and included it again would result in double counting.
I A large number of final commodities and services are not obtained through traditional market transactions. Instead of buying vegetables from the supermarket, vegetables can be grown in the garden, and an electrical fault can be rectified by the homeowner rather than calling an electrician.
(ii) These are examples of non-marketed commodities and services consumed through organized marketplaces, as GNP only includes transactions that take place through market activity.
(d) Illegal Activities: Gambling, black-marketing, and other illegal activities should be omitted because they are entirely outside the scope of NY and there is a statistical challenge with estimating them.
(e) Leisure Time Activities: Activities such as painting, growing flowers in the kitchen garden, and other leisure activities are not included because their goal is not to earn money but to pass free time in one’s hobby or entertainment; additionally, there is a statistical problem measuring satisfaction derived from painting or other leisure activities.
8. Limitations of using GDP as a measure of a country’s welfare: There are numerous limitations to using GDP as a measure of a country’s welfare.
(a) Many commodities and services that contribute to economic well-being are not counted as part of GDP or non-monetary exchanges:
I Many commodities and services are left out of national income calculation due to practical estimating challenges, such as services provided by housewives and other family members, personal account production, and so on.
(ii) These have been abandoned due to a lack of data and value issues.
(iv) As a result, relying solely on GDP would be an underestimation of economic welfare.
I Externalities are benefits or harms to others that occur as a result of someone’s actions with no money received for the benefit and no payment made for the harm done.
(ii) Activities that help others are termed positive externalities, and they raise welfare; activities that damage others are called negative externalities, and they lower wellbeing.
The construction of a flyover or a highway, for example, reduces the cost of transportation and the time it takes for users who have not contributed anything to the project’s cost. Construction spending is included in GDP, but not the positive externalities it generates. Gross domestic product (GDP) and positive externalities both boost welfare. As a result, using GDP alone as a measure of welfare understates welfare. It signifies that welfare is substantially higher than GDP suggests.
(iv) In the same way, GDP does not account for negative externalities. Factory plants, for example, produce things while also polluting the water and air. The Yamuna River, which is now a drain, is a living example. People are harmed by pollution. For injuring people, the factories are not compelled to pay anything. Producing commodities raises wellbeing, while polluting the environment lowers it. As a result, using GDP alone as a measure of welfare overstates welfare. In this scenario, welfare is far lower than GDP suggests.
I Not everyone earns the same amount of money. Some people make more money than others. In other words, income is distributed unequally.
(ii) At the same time, it is true that not everyone benefits equally from increases in ‘per capita real income.’ The term ‘per capita’ refers to an average. Some people’s income may rise at a slower rate than the national average, while others’ may rise at a faster rate. It may even fall in the hands of some.
(iii) It implies that income distribution inequality may increase or decrease.
(iv) If it rises, it means that the rich get richer and the poor get poorer.
(v) A rupee of income has greater use for the poor than for the wealthy. Assume that the poor’s income falls by one rupee while the rich’s rises by one rupee. In this instance, the reduction in the poor’s welfare will outweigh the gain in the rich’s wellbeing.
(vi) As a result, rising per capita real income disparity may result in a decrease in welfare (in the macro sense).
I GDP contains a variety of things such as food, housing, clothing, police and military services, and so on.
(ii) Some of these things, such as food, clothing, and housing, contribute more to people’s well-being. Other items, such as police and military services, may make a smaller contribution and have no direct impact on people’s living standards.
(iii) As a result, the amount of economic welfare depends more on the sorts of commodities and services provided than on the quantity produced.
(iv) This implies that if GDP rises, wellbeing may not rise in the same amount.
(ii) Milk may provide customers with both immediate and long-term satisfaction. Liquor, on the other hand, may bring some immediate enjoyment, but its negative consequences on health may result in a drop in welfare.
(iii) GDP solely accounts for the monetary worth of products, not their contribution to overall welfare.
(iv) As a result, economic well-being is determined not only by the quantity of goods and services consumed, but also by the type of commodities and services consumed.
Methods Of National Income And How To Calculate National Income Using The Income Method And Its Numericals, Steps, And Warnings:
(1) (a) “Income is generated through production.” If we wish to calculate national income using the income technique, we must first add various economic factor incomes.
(b) Adding all of these factor incomes yields a figure that is close to the
1. Employees’ Compensation (COE)/Emoluments: The sum paid to employees.
employees receive from their employers, whether in cash or in kind, or through any other means
(v) Commissions, gratuities, tips, cost of living (i.e., our country’s dearness allowance), honorarium, vacation, sick leave allowance, and so on.
(vi) Pensions at the time of retirement (Deferred Wage): Pensions at the time of retirement are based on factor services provided by the recipient prior to retirement. Deferred salary is another name for it.
Employee expenses that are reimbursed by the business enterprise should be omitted from Compensation Of Employees (COE) because they are part of the business enterprise’s intermediate consumption.
Wages and Salaries in Kind (b) Wages and Salaries in Kind (c) Wages and Salaries in Kind (d) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and Salaries in Kind (e) Wages and It contains the following items:
(iii) The provision of vehicles or other durables for the employees’ own use.
(iv) Goods and services created as by-products of the employer’s own manufacturing process, such as free travel for railway or airline employees or free coal for miners.
(vii) The value of the interest saved by companies when they offer employees low-interest or even no-interest loans for the purchase of homes, furnishings, or other goods and services.
It is important to note that it excludes any facilities that are required for work and in which employees have no discretion.
Uniforms or other unique attire, for example, that is solely worn for work. Uniforms for police officers, drivers, and hospital nurses are just a few examples. Because such payments involve intermediary consumption by businesses, this is the case.
(c) Employer Contributions to Social Security Plans: Employers contribute to social security plans such as life insurance, disability insurance, and pension plans. Employees of educational institutions and public sector businesses, for example, are covered by a Contributory Provident Fund Scheme. Employer contributions to such plans are considered part of employee pay.
Employers’ contributions to social security schemes should be included, but workers’ contributions to social security schemes should not be included, because COE is defined as what the employer pays to the employee, and anything incurred by the employee himself should not be included.
2. Operating Surplus: According to the CSO (Central Statistical Organization), operating surplus is defined as “worth of gross output minus intermediate consumption, employee remuneration, mixed income, depreciation, and NIT.”
GVOMP Intermediate Consumption COE Mixed Income Depreciation NIT = Operating Surplus
To put it another way, it’s the total of rental and entrepreneurial income. The following are the two components of operating surplus:
(a) Property revenue: This is the money generated through rent, interest, and royalties.
I Rent: Rent is the revenue generated by the ownership of land and buildings. Imputed rent is also included. In an economy, it is expected that a person who lives in his own home pays rent to himself. Imputed rent is the term for this concept.
(iii) Interest: Interest is the money earned from lending money to producing units. Imputed interest on cash contributed by the entrepreneur is also included. However, interest income only covers interest on loans used for productive purposes.
- Interest on the national debt, or interest paid by the government on the national debt, should be excluded because it is considered that such interest is paid on loans acquired for personal use.
- Interest paid by one company to another is already factored into the profit of the company that pays it.
(a) Profits from self-employment: It is the entrepreneur’s profit after all other production costs have been paid. It falls into one of three categories:
I Dividend (Distributed Profit): This is the portion of total profit that is distributed to shareholders.
Profits earned by one firm to another should not be included under this heading because they are already included in the profit of the firm that pays them.
(ii) Undistributed Profit (Private Sector Savings or Retained Earnings):
It is the portion of overall profit that is maintained as a reserve for future risks rather than being distributed to shareholders.
(iii) Corporation Tax (Profit Tax): This is the portion of a company’s total profit that is paid to the government as tax.
The idea of operating surplus is relevant to all generating firms, whether they are private or government-owned. Government enterprises are also expected to make a respectable profit on their investments.
However, operating surplus does not exist in the general government sector since goods and services are produced for the country’s social welfare rather than for profit, which is why rent, interest, and profit are all zero in the general government sector.
3. Mixed Income: Mixed income refers to the earnings of self-employed persons (such as farmers, doctors, barbers, and others) and unincorporated businesses (such as small retailers and repair shops). They don’t keep accurate records. They rarely hire factor services from the market, preferring instead to use their own resources such as land, labor, and finances. As a result, it’s difficult to distinguish between rent, labor, interest, and profit as a source of income.
Employee compensation (COE) + Operating surplus (OS) + Mixed Income NDPFC (MY)
If we wish to calculate national income using the income technique, we must first add various economic factor incomes.
When all of these factor incomes are added together, we get a computation that is close to the National Income, i.e. Net Domestic Product at FC (NDPFC).
1. Profits earned by one company to another should not be included because they are part of intermediate consumption.
2. If profit after tax and corporation tax are given, we can calculate profit by putting them together. After-tax profit = 1000
3. If both profit before tax and corporation tax are given, the corporate tax should be ignored.
Step 1: Identify businesses that use primary factors (Land, Labour, Capital, enterprise).
(a) Employee remuneration: Employee compensation refers to the amount received from their employer, whether in cash, in kind, or through any other social security program.
(a) Operating Surplus: This is the total of property and entrepreneurship income.
Mixed income refers to the earnings of self-employed persons (such as farmers, doctors, barbers, and others) and unincorporated businesses (such as small retailers and repair shops).
Step 4: To calculate domestic income, add all factor incomes and payments within domestic territory, i.e., NDPFC.
NDPFC = Employee Compensation + Operating Surplus + Mixed Income Step 5: To get NY, add NFIA to NDPFC (i.e., NNPFC).
(a) Avoid transfers: National income solely comprises factor payments, which are payments made to the owners of factors for services supplied to the production units. A transfer, not a producing activity, is any payment for which no service is provided. The most common instances include gifts, donations, and so on. Transfers must not be included in national income because they are not a production activity.
(b) Avoid capital gain: Capital gain is the profit made on the selling of used goods and financial assets. For instance, income from the sale of old automobiles, old houses, bonds, debentures, and so on. These aren’t production-related transactions. As a result, any money derived by the owners of such items is not factor income.
(c) Include income from self-consumed output: A house owner does not pay rent when he lives in his home. He, on the other hand, pays his own rent. Rent must be counted as a factor payment since it is a payment for services supplied, even if they are rendered to the owner.
(d) Include free services offered by the producing unit’s owners: Although the owners work in their own unit, they do not receive a pay. Financing is provided by the owners, however there is no interest charged. Owners produce their own work in their own facilities and do not collect rent. Despite the fact that they do not charge, the services are provided. The estimated value must be factored into national income.
How To Calculate National Income Using The Expenditure Method, Steps, And Precautions:
(a) “Production generates revenue, and revenue generates expenditure.” This method requires us to add various final expenditures from an economy in order to determine National Income.
(b) Adding all of those final expenditures yields a calculation that is close to the National Income, i.e. GDPMP.
1. Government Final Consumption Expenditure (GFCE): The amount spent by the government on current goods and services such as public health, defense, law and order, education, and so on. These goods and services earn no revenue because they are produced by a government that is not motivated by profit.
These goods and services are evaluated at their cost to the government because they are not sold to the general public and were created for the people’ social welfare. So, GFCE = Government’s intermediate consumption + Government’s compensation of employees (in cash and in
In India, how is GDP calculated?
- The GDP of India is estimated using two methods: one based on economic activity (at factor cost) and the other based on expenditure (at market prices).
- The performance of eight distinct industries is evaluated using the factor cost technique.
- The expenditure-based method shows how different aspects of the economy, such as trade, investments, and personal consumption, are performing.