National Income
The total net value of all goods and services produced
within a nation over a specified period of time, representing the sum of wages,
profits, rents, interest, and pension payments to residents of the nation.
To discuss the concept of economic growth, it is essential to measure economic output and
then examine how that output has changed over a period of time.
Economic growth
It refers to the increase in the amount of goods and
services the whole economy can produce over and above what they produced in the
last year.
The total output of goods and services has an important
influence on the standard of living and on the number of people employed
There are three different measures to find the national
income.
1)
Gross Domestic Product (GDP): It describes the
total output produced by the factors of production located in a country. [some
of these factors (capital) may be owned by foreign firms]
2)
Gross National Product (GNP): It is the total
output produced by the factors of production of a country whether at home or
abroad.
This is measured as….
Gross National Product = Gross Domestic
Product + Net Property income from abroad.
Where Net property income from abroad =
Property income earned abroad – Property income paid abroad
3)
Net National Product (NNP): It is market value
of nation’s goods and services (GDP/GNP) minus depreciation (amount of GNP
required to purchase new goods to maintain existing stock)
Net National Product (NNP) = Market value
of finished goods and services – Depreciation
Net National Product (NNP) = Gross National
Product (GNP) – Depreciation.
Example
Let's assume Country XYZ's
companies, citizens and entities produce $1 trillion worth of goods and $3
trillion worth of services this year.
The assets used to produce those goods and services depreciated by $500
billion. Using the formula above, Country XYZ's NNP is:
NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion
NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion
Why
It Matters:
NNP is a measure of how much a country can consume in a given
period. Note
that NNP measures output regardless of where that production takes place (in
other words, it includes the value of goods and services that American
companies produce, supply or create abroad).
In the 1990s, net domestic product replaced NNP as "the" macroeconomic measure of output, much as "gross domestic product" replaced "gross national product." The Bureau of Economic Analysis (BEA) still releases all four measures, however.
In the 1990s, net domestic product replaced NNP as "the" macroeconomic measure of output, much as "gross domestic product" replaced "gross national product." The Bureau of Economic Analysis (BEA) still releases all four measures, however.
Calculate National Income:
National
Income is measured for over a period of one year. Following are methods to
measure national income.
1.
Output or
Production Method: This method measure the value of the outputs (goods and
services) produced. Its equation can be written as:
NATIONAL
INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES
2.
Income Method:
This method measures the total income received by the factors of production.
Equation wise the method can represent national income as:
NATIONAL
INCOME = Income from RENT + WAGES +
INTEREST + PROFIT
3. Expenditure Method: This
method gives national income by adding up all public and private expenditures
made on goods and services during a year.
Importance of National Income
1. It
provides the government with essential information
2. To
indicate changes in the standard of living
3. To
compare the standards of living in different countries
Economic growth
It refers to the increase in the
amount of goods and services the whole economy can produce over and above what
they produced in the last year.
Economic Growth means an increase
in real GDP. This increase in real GDP means there is an increase in the value
of national output / national expenditure.
This can be
represented by using production possibility curve. As economy grows, the
production possibility curve shift towards right, which shows that the economy
can afford and is possible to produce more of capital as well as consumer goods
and services.
Benefits of economic growth
1)
Higher Incomes: This enables consumers to enjoy
more goods and services.
2)
Improved standard of living: Economic growth enables developing
countries to reduce poverty levels and afford to higher living standards.
3)
Improve firms' and consumers'
confidence: (positive
outlook) which may lead to an increase in investment.
4)
Increased employment: With higher output firms tend to employ more workers creating
more employment.
5)
Lower Government borrowing. Economic growth creates higher
tax revenues and there is less need to spend money on benefits such as
unemployment benefit. This help to reduce government borrowing.
6)
Improved public services. With increased tax revenues the government
can spend more on the National Health Service, education, infrastructure
projects, such as better roads and railways.
7)
Money can be spent on protecting the environment. Countries with higher living
standards can afford the luxury of protecting the environment.
Disadvantages of economic growth
1)
Resource depletion
[exhaustion]
Excessive use of non-renewable resources such as petroleum, minerals and metals
etc., collapse the stock of our planet's natural resources.
2)
Environmental impact Increase in pollution (noise and
congestion).
3)
Inequitable
distribution opportunities for factors
will be different due to discrimination (colour, disability, racism, ethnicity,
gender, etc.)
4)
Implications of global warming there
are close correlations of economic growth with carbon dioxide emissions across
nations which cause global warming.
Steps
for economic growth
1) Promote
economic growth through innovation: Develop indigenous
technologies which suit the requirement of domestic production as well as for
export, using the available resources.
2)
Strategic immigration: It Reduce unwanted immigrants and improve the
domestic human resource by providing better education and training.
3)
Cut down costs: Production process should be made more efficient so
as to cut down unwanted costs.
4)
Accumulation of capital: Promote the habit of saving and provide the
necessary facilities for investment in the society
5)
Risk-taking and good management: Provide the necessary education and training to the people so that
they can become entrepreneur with better risk taking capacity with good
management techniques
Evaluation
of Economic Growth
It
depends on the type of economic growth. If growth is too fast and
unsustainable, it will probably cause inflation.
It
depends on the equality of distribution - does everyone benefit from growth or
is it focused on a few individuals?
Is
economic growth environmentally sustainable? or does growth come from
exploiting non-renewable resources?
Causes for unsustainability in growth
Renewable
resources are also being depleted because of over consumption. Examples include the
destruction of rain forests, the over-exploitation of fish stocks and loss of
natural habitat created through the construction of new roads, hotels, retail
malls and industrial estates.
Among the main environmental threats,
we can identify the following:
• Depletion of global resource base and
the impact of global warming
• A huge expansion of waste arising from both production and consumption
• Over-population (particularly in urban areas) putting increased pressure on scarce land
• Pollution of the environment by producers and consumers including reductions in air quality
• Species extinction
• A huge expansion of waste arising from both production and consumption
• Over-population (particularly in urban areas) putting increased pressure on scarce land
• Pollution of the environment by producers and consumers including reductions in air quality
• Species extinction