National Income

This is the broadest category which simply means  total quantity of output of goods and services supplied by all businesses in a country. But this is measured and defined variously as follows:

GDP at factor cost and GDP at market prices

GDP at factor cost means total value of output produced in a country (geographical territory ) during one year by all the businesses whether they are domestically owned or foreign owned.

GDP at market prices refers to GDP valued at market prices. Market prices differ from factor cost in terms of indirect taxes and subsidies. When goods are produced and sold, indirect taxes like excise duty, sales tax, VAT are levied on them. Businesses also receive subsidies to produce particular products.  Indirect taxes and subsidies determine the market  prices at which the products are sold.

So, when we use market prices to value output, we get false values. In order to get true valuation, i.e. GDP at factor cost, we must deduct indirect taxes on expenditures and add subsidies.

GNP at factor cost/market prices

GNP means value of output produced by a country regardless of where in the world the services of its factors are supplied. And this can be measured at market prices or factor cost.

GNP= GDP + net factor income from abroad.

Net factor income from abroad is inflows of factor incomes into a country minus outflows of factor incomes from that country.  For example, if Indians invest their money incomes in the shares of foreign companies, there is inflow of dividends.  If there are sales  abroad of CDs and videos of Indian musicians, or of Indian developed computer games,  there is inflow of royalties. If Indians invest overseas in terms of direct investments, there is inflow of profits. If Indians lend money abroad or let out their property to foreigners, there is inflow of interest and rent.

National Income or Net National Product

This is defined as GNP at factor cost minus depreciation.

Depreciation refers to productive assets depreciating over time, i.e. loss of economic value through wear and tear or technological obsolescence.
Three ways of measuring  national product

There are three ways of measuring GDP, viz. the product method, the income method and the expenditure methods.  The total value obtained should be more or less the same whichever method is used.

In the product method, we measure the value of goods and services produced by all the businesses in the country. In the income method, we measure the total of all incomes earned by the owners of the four factors of production, viz. land, labour, capital and enterprise. In the expenditure method, we measure the  total expenditure made on the goods and services.

Problems in measuring

When we use the product method, a major problem is double counting. This is avoided by taking only the final value of goods and services or by adding value of each stage of production in the given year. Services provided by the public sector for which there are no market prices are valued  at the cost of their provisioning. Inflation poses another problem requiring us to distinguish between nominal GDP and real GDP. Inflation can increase nominal value without there being any increase in real production.There is also the problem that many goods and services do not enter GDP because they are not market transactions.

When we use the income method, we should avoid double counting by excluding transfer payments. We should exclude indirect taxes and include subsidies.

When we use the expenditure method, we should avoid double counting by excluding the Government expenditure in terms of transfer payments. For true value, we should exclude indirect taxes on expenditures and include subsidies.

The components of GDP in the expenditure method are (a) final private consumption expenditure; (b) Gross private real investment expenditures incurred by businesses and households; (c) Government expenditure in terms of consumption and gross investment; and  (d) net exports (i.e. exports minus imports) including net factor income from abroad.

Factors influencing national product

The level of national product of any country depends on (a) its natural resources (b) labour resource including human capital (c) real capital investments (d) business culture in terms of risk taking (e) access to venture capital (f) political stability (g) how much of resources are used for non-wealth creating activities like defence (h) economic policies and how they are implemented, etc.