Measuring National Income
Definition
Gross Domestic Product (GDP): the total value of all final goods and services produced within a country's borders over a period, usually one year.
Gross National Income (GNI): the total income earned by a country's residents, wherever in the world it is earned; GNI = GDP + net primary income from abroad.
Net National Income (NNI): GNI after deducting depreciation (capital consumption); NNI = GNI − depreciation.
Gross Domestic Product
- GDP measures output produced inside a country's borders, whoever owns the factors of production.
- It is a domestic measure, defined by the location of production, not the nationality of the earner: a Japanese-owned car plant in the UK counts in UK GDP.
Gross National Income
Reference formula
GNI=GDP+net primary income from abroad \text{GNI} = \text{GDP} + \text{net primary income from abroad} GNI=GDP+net primary income from abroad- GNI measures the income earned by a country's residents, wherever in the world it is earned.
- Start from GDP and add net primary income from abroad, which is income residents earn abroad − income foreigners earn at home.
- If residents earn more abroad than foreigners earn at home, the flow is positive, so GNI is larger than GDP.
- In Ireland, large profits of foreign-owned multinationals count in GDP but flow back abroad, so the outflow is big and GNI is well below GDP.
Key Idea
- GDP is about where output is produced (location).
- GNI is about who receives the income (residence).
Net National Income
Reference formula
NNI=GNI−depreciation \text{NNI} = \text{GNI} - \text{depreciation} NNI=GNI−depreciation- NNI is GNI after allowing for the wearing out of capital.
- Subtract depreciation, the value of capital used up in producing the year's output.
- NNI therefore shows the income available after maintaining the existing capital stock.
Example
- GDP is £800 billion, and residents earn £30 billion more abroad than foreigners earn at home.
- GNI is £830 billion, and depreciation (capital consumption) is £50 billion.
- So NNI is £780 billion: the income the country can enjoy once worn-out capital has been replaced.
Exam technique
- Move in order: GDP, then + net income from abroad gives GNI, then − depreciation gives NNI.
- Remember gross means before depreciation and net means after it.
Common Mistake
- Do not assume GNI is always larger than GDP: net income from abroad can be negative.
- Do not confuse the domestic (GDP) and national (GNI) concepts, which differ by cross-border income flows.
Self review
- Define GDP.
- How do you convert GDP into GNI?
- How do you convert GNI into NNI?
- What is the difference between a domestic and a national measure?
