GNP vs National Income

Gross National Product (GNP) and National Income are two of the most familiar economic terms that are frequently used by the government officials and economists. They use these terms to evaluate how effective economic policies are, and to monitor the progress of these policies.

The concept of national income was first introduced in the early 1930s due to the lack of detailed economic data that made it difficult for the government of the United States to design policies to fight against the great depression. The entry of the United States into World War II led to the growing need of the data that could be used for wartime planning and therefore in 1942, annual estimates of GNP were introduced to complement the concept of national income. The purpose of these estimates was to explain how income was generated, received and spent by various sectors of the economy. But the real question is, what are GNP and National Income and how do we calculate them?

Definition

National Income is the sum of value added by all resident producers, including any taxes related to the product that are not included in the valuation of output plus net receipt of primary income (income from property and employees’ compensation) from abroad. It can also be defined as a sum of residents’ income of an economy in a specific period. It is equal to GDP plus primary income receivable from the rest of the world, less the primary income payable by resident units to non residents. According to Professor Marshall, a renowned economist, national income is a “Sum of all the physical goods produced and services provided by utilizing the natural resources of the country with the help of labour and capital. In addition to this, net income from abroad is also included. Accordingly, national income is the summation of all the goods produced and services provided and the net income from abroad.”

On the other hand, Gross National Product or GNP is an index which calculates economic growth and measures the market value of goods and services produced for final use. It is defined as a total market value of the goods and services produced in a country during a specified period of time. GNP is a measure of the current output of the economic activities in a particular economy. It is based on an assumption that keeping all other things equal, higher GNP leads to a higher quality of living.

Measurement Criteria and Economic Growth

The primary difference between the gross national product and national income lies in the fact that how these measurements are taken, and how the economic growth is determined based on these measurements. National Income measures the total economic growth of a country and also considers the income and taxes that are earned at a domestic level as well as internationally. Whereas, Gross National Product only measures the income and taxes that are earned by the domestic citizens.

Indirect Business Taxes

National income consists of the gross private investment, the personal consumption expenditure, the net income from assets abroad, the government consumption expenditure, and the gross export of services and goods after deducting the indirect business taxes and the gross imports of goods and services. It is similar to GNP, except for the fact that while calculating the gross national product, indirect business taxes are not deducted.

Measuring Product Development and Determining Interest Payments

There are also differences in how interest payments from other countries of the world are determined and how the development of a product is measured. However, there are many countries that use the terms interchangeably in order to define the borrowing power of another country, which makes it difficult to understand the difference between these measures. Therefore, it is important to have a basic understanding of national income and GNP. National income includes the value of the products and services a country produces in one calendar year combined with dividends and interest payments from other countries in the same year. GNP, as already mentioned, represents the market value of all the services and products that are produced by the country through labour or property supplied by its citizens.

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