Relationship between national income and gdp

Difference Between GDP and National Income | Difference Between | GDP vs National Income

relationship between national income and gdp

GDP: is the market price of output (goods and services) produced domestically in a year. It can be calculated from the national income as: 1. GDP=NI-Net Factor. Discrepancies Between National Income and GDP and found a strong inverse correlation between the size of the statistical discrepancy and. Gross National Income (GNI) is the income earned by a country's citizens and companies. GDP and GNP Difference Between GNI and GDP. GNI measures all.

Business transfer payments can be thought of as an extra cost tacked onto the price of goods, over and above factor payments, that compensates for bad debts incurred by the household sector.

Net Foreign Factor Income Net foreign factor income is the difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production. Net foreign factor income actually represents a two-part adjustment between gross domestic product and national income.

However, in a classic example of turn-about is fair play, a portion of the income earned by domestic citizens is the result of production that is part of gross domestic product for OTHER nations. These are factor payments received from the foreign sector by domestic citizens. They are added to factor payments generated by domestic production to obtain national income.

relationship between national income and gdp

Government Subsidies Less Surplus of Government Enterprises Government subsidies are transfer payments from the government sector to the business sector. As transfer payments, government subsidies are NOT payments for current production.

relationship between national income and gdp

In essence they are government gifts to the business sector. These are then added to the pool of revenue that the business sector uses for factor payments and thus national income. Because the business sector does NOT receive this revenue as the result of producing goods, it is part of national income but not part of gross domestic product. In the National Income and Product Accounts, government subsidies are adjusted by the current surplus of government enterprises.

Government enterprises are productive activities that essentially operate like private sector businesses. One example is a city that sells electricity directly to consumers. This city-owned electric "company" operates like a privately owned electric company, with one primary difference--the " profit " received. Because the term "profit" is reserved for use by private businesses, any revenue received by government enterprises over cost is termed government surplus.

This surplus is generated from producing valuable output, and is part of gross domestic product. From a national income perspective, the surplus of government enterprises is important because, unlike private business profit, it is NOT officially earned by any factors of production.

Measures of national income and output

Rather than being paid out as national income to any productive factors, this surplus is returned to government treasuries. Statistical Discrepancy The last official difference between gross domestic product and national income is the statistical discrepancy. This is the official "fudge factor" that ensures gross domestic product measured from the expenditure side is equal to gross domestic product measured from the income side.

Even though the two approaches to measuring gross domestic product SHOULD yield identical results, in reality this seldom happens.

relationship between national income and gdp

The economy is extremely complex and measurements are not perfect. This statistical discrepancy is thus used to ensure perfect equality.

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The actual usefulness of a product its use-value is not measured — assuming the use-value to be any different from its market value. Three strategies have been used to obtain the market values of all the goods and services produced: The product method looks at the economy on an industry-by-industry basis.

The total output of the economy is the sum of the outputs of every industry. However, since an output of one industry may be used by another industry and become part of the output of that second industry, to avoid counting the item twice we use not the value output by each industry, but the value-added; that is, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry.

The expenditure method is based on the idea that all products are bought by somebody or some organisation. Therefore, we sum up the total amount of money people and organisations spend in buying things.

Difference Between GDP and National Income

This amount must equal the value of everything produced. Usually, expenditures by private individuals, expenditures by businesses, and expenditures by government are calculated separately and then summed to give the total expenditure. Also, a correction term must be introduced to account for imports and exports outside the boundary. The income method works by summing the incomes of all producers within the boundary.

Since what they are paid is just the market value of their product, their total income must be the total value of the product.

GDP and GNP - National Income Part-1 - Indian Economy