The
total output of goods and services has an important influence on the standard
of living and on the number of people employed.
Gross domestic product (GDP) describes the total output produced
by the factors of production located in a country [some of these factors
(e.g. capital) may be owned by foreign firms].
Gross National Product (GNP) 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 = GDP + Net property income from abroad.
Where, net
property income from abroad =
Property
income earned abroad – Property income paid abroad.
The
value of the goods required to make good the depreciation of capital is
deducted from the GNP in order to obtain the Net national Product. Net national
Product is usually referred to as the national
Income.
National
Income (NNP) = Gross National Product ─ Depreciation.
The
National Income is measured using the prices of the goods and service in the
year in which they are produced, which is money national income. Real national income refers to the actual quantities of goods
and services produced. The standard of living depends on the quantities
of goods and services produced, that is the real national income.
The
measure of National income is very
useful and important, because
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.
There
are some problems in comparing the
standard of living using National income.
1)
National income does not tell us how it
is distributed.
2)
It also does not tell the types of
goods and services produced.
3)
Increase in production and national income also lead to an increase in social costs in the form of pollution,
congestion and noise, which would not increase the standard of living.
4)
Different countries will have different tastes, and different ways of life [Cold countries need to spend more on
heating] and so on.
5)
In some countries the national income is unequally distributed, or
6)
If greater percentage of income is
spend on defence then also higher national income will not provide
better standard of living.
7)
Sometimes the income per head may be same in two countries, but people in one
country may be working longer hours than that of the other. In such cases also
one cannot compare the standard of
living properly.
Measuring National income
Goods
and services are being produced and used up continuously. Therefore
national income is a measure of the total flow of goods and services over a
period of one year. There are different methods to measure national
Income. They are 1) the output method
2) the income method 3) the
expenditure method.
The
output method attempts to measure the value of the outputs of all the different
industries. The major problem of this method is the possibility of double counting of the value of output.
This problem is overcome by counting only the value added by each firm.
The
money value of the goods and services produced will be equal to their costs of
production plus profits. Therefore, the measure of the national output,
using income method is the value of all the factor incomes (including
profits) paid during the course of production. The Transfer
payments such as pensions and
social security benefits are not included in the national income.
The
goods and services produced must be either sold or added to stocks. It is
counted as the additions to the existing stocks as a part of total expenditure
on the national output in the expenditure method. This national
expenditure is equal to national output. Spending on imports must be
excluded and expenditure on exports must be included. Taxes
on goods and services are also to be deducted from the total spending.
All
the above three methods are measuring the same thing; that is the value of
National income.
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