The total amount of income accruing to a country from its economic activities in a period of one year is known as the country’s national income. The 1993 System of National Accounts replaced the term GNP with GNI, or Gross National Income. Both metrics measure the same thing, domestic productivity plus net income by a country’s citizens from foreign sources. When the value of taxes on products is added to the gross value added, the sum of gross value added for all resident units gives the value of gross domestic product . Thus, Gross Domestic Product of any nation represents the sum total of gross value added in all the sectors of that economy during the said year after adjusting for taxes and subsidies. When gross investment is included in domestic product, the term GDP is used.
Is total cost of all factors of production used in producing goods or services. National income at constant prices is affected by only one factor, i.e. change in physical output. It can rise only when there is an increase in the level of physical output because here prices are kept constant or fixed. Production factors such as machines, equipment, tools, factory buildings, tractors etc depreciate over a period of time during the process of production.
GDP vs NDP
It is unlike the intermediate goods and services which acts as component for final goods and services. In this article we will discuss the concepts related to National income aggregates. As NDP is calculated by subtracting depreciation from GDP, NNP can be calculated by subtracting depreciation from GNP.
NDP also takes into account transactions made outside of an economy, which makes it a more reliable measure of economic activity. NDP and GDP are indicators of a country’s economic activity level and growth rate. GDP measures the total market or monetary value of all finished goods and services produced inside a country’s geographic borders during a specific period. As we see, the national income is the total amount of the income accruing to a country from the economic activities in a year’s time.
In contrast, NDP is used to measure economic performance relative to GDP and is often used to compare the economic performance of different countries. GDP has the limitation of not taking into account the cost of production or any changes in prices. This means that GDP does not accurately reflect the economic activity of a particular country. Additionally, GDP does not take into account any transactions made outside of an economy, which can be beneficial in assessing the true economic performance of a country.
Instead of expanding the sprawl of the city, older buildings might be torn down and replaced by new construction intended to fill the same use as the predecessor building. Such an example would qualify as depreciation and replacement. By contrast, if a new housing community is developed, the construction of residences would be contributory to NDP. The main difference between GDP and NDP is that the GDP can be used in economic comparison with other countries, while NDP can never be used in such comparative studies.
What is the Difference Between GDP and NDP
Hence, aspiring candidates are advised to read through the following sections for insightful details on GNP, GDP, NNP, NDP, and more. Each of these – GDP, NDP, GNP, NNP – is an attempt to measure the ‘size’ of an economy. ‘Domestic’ figures (e.g. GDP) add up all the incomes earned within the nation’s border. ‘National’ figures (e.g. GNP) add up all the incomes earned by a nation’s citizens. Saudi Arabia is another instance of a country where GNP is higher than GDP. The Kingdom is a major oil exporter with enterprises and businesses spread around the globe.
GNP was formerly the default measure for a country’s economic production but it fell out of favor by the 1990s. The United States has used GDP as its key economic metric since 1991; it replaced GNP to measure economic activity because GDP was the most common measure used internationally. Because it is subject to pressures from inflation, GDP can be broken up into two categories—real GDP and nominal GDP. A country’s real GDP is the economic output after inflation is factored in, while nominal GDP does not take inflation into account. Nominal GDP is usually higher than real GDP because inflation is almost always positive.
What is the importance of national income and why measure or calculate National Income?
Net Domestic Product measures the net book value of all the final goods and services produced within a country geographically during a given period. Personal consumption expenditures is a measure of consumer spending and includes all goods and services bought by U.S. households. Gross National Income , an alternative to GDP as a way to measure and track a nation’s wealth, is the total amount of money earned by a nation’s people and businesses. An increase in NDP would indicate growing economic health, while a decrease would indicate economic stagnation. Ask Any Difference is made to provide differences and comparisons of terms, products and services. The income approach to calculate GDP is entirely different from the one that we saw above.
This means that NDP is a more accurate reflection of how much new wealth has been created in a country. For this reason, it may be more useful for policy makers and investors than GDP. Gross national product is another metric used to measure a country’s economic output. An increase in depreciation alone can push up the GDP level, but it does not indicate improvements in that country’s social and economic well-being. Gross investment is used to calculate GDP, while net investment (gross investment – depreciation) is used to calculate the net domestic product. NDP can be calculated by subtracting the depreciation of the capital stock of a country from its GDP.
Gross value added is defined as the value of output less the value of intermediate consumption. It is used to measure the output or contribution of a particular sector. When such GVAs from all sectors (∑ GVA) are added together and adding taxes and reducing subsidies , we can get the GDP . GVA thus shows the production contribution of a particular sector.
One potential flaw in the measurement of GDP is that it does not take into account the cost of production, which is important for assessing the economic performance of a country. NDP, on the other hand, takes into account the cost of production, making it a more reliable measure of economic performance. GDP has the disadvantage of being an incomplete measure of an economy’s performance.
GDP and NDP are important economic indicators that can be used to track changes in a country’s economy over time. Though we listen to the term GDP always, NDP plays a vital role in establishing the need for growth too. The key differences between the two crucial concepts are many and underlying within each other. National income is the total money value of all final goods and services produced in a financial year.
It is well known that GDP completely focuses on the total value of the goods and services produced within the country. This is irrespective of whether the value-added is from residents or NRIs. An increase in NDP signifies a growing economy, while a decrease denotes economic stagnation.
The NNP can be extrapolated from the GNP by subtracting the depreciation of any assets, also known as the capital consumption allowance. The relationship between a nation’s GNP and NNP is similar to the relationship between its gross domestic product and net domestic product . An example of net national product is a country’s profit from exporting rice to other countries. Gross domestic product, also known as GDP, represents the aggregate production value of a country’s goods and services combined in a given time window. Net national product, or NNP, represents a mathematical result of a country’s production after accounting for depreciation of inventory. GDP is sometimes used to measure the wealth of a country, while NDP is often used to measure the percentage of GDP that is generated through economic activity.
However, It may be the case that resident of India work and earn in some other foreign countries. Similarly, Conversely, some production taking place within a country may be attributed to temporary and seasonal foreign labour. When depreciation is subtracted from gross investment, then a net investment of $2 million is left.
Machinery that is put to regular use may need parts replaced regularly until the entire piece of equipment is no longer usable. While that may take many years, barring unexpected damage or defects, there is a cycle of equipment failure and replacement. Part of the machinery in a factory’s production line may need to be replaced while another set of similar machines continues to function within the same factory. The acquisition of the replacement machinery would be factored into the depreciation aspect of the NPI.
- National income at constant prices is affected by only one factor, i.e. change in physical output.
- By analyzing the CCA, economists can confirm the economic trends, but CCA itself is a lagging indicator.
- GDP per capitais a metric that breaks down a country’s GDP per person and is calculated by dividing the GDP of a country by its population.
- NDP is never used in comparative analysis with that of any other country.
It reduces the value of capital that is why it is separated from GDP to get NDP. Nominal GDP is generally used to compare different quarters in the same year because inflation will usually not be a significant factor. GDP measures the value of goods and services produced within a country’s borders, by citizens and non-citizens alike. GDP can help predict the economic state in the coming years, while NDP helps in predicting the number of goods to be used for future production to happen. A country might use both approaches to arrive at informed decisions to keep the economy stable.
difference between gdp and ndp Income can be referred to as the value of goods and/ or services produced by a country during a given financial year. It also includes the payments made to all the resources in the form of interest, profits, rent, wages, etc. For example, a U.S.-based Canadian NFL player who sends their income home to Canada, or a German investor who transfers their dividend income to Germany, will both be excluded from the U.S. The United States abandoned the use of GNP in 1991, adopting GDP as its measure to compare itself with other economies.
When depreciation is taken into account and deducted from gross investments (i.e. net investment is used in national accounts, instead of gross investment), then the term NDP is used. GDP and NDP consider the economic activity of a country geographically, regardless of whether the products and services are produced by a domestic company or a foreign company. As long as they are produced within the country’s borders, they are counted into that country’s GDP.
It may be the case that after certain time these capital goods needs replacement. Comparing the GDP and NDP of a country, an expanding gap between the GDP and NDP indicates an increase in obsolescence and value deterioration of that country’s capital stock. Though GDP is frequently cited when assessing the economic health of a country, NDP puts into perspective the pace at which capital assets degrade and …