Question

Why are Income Receipts from the Rest of the World added and Income Payments to the Rest of the World subtracted to get National Income (NI)? Explain.

Answer 1

The gross domestic product measures the final output by people and businesses located within the United States. However, there are several other national accounts that give a slightly different view of the economy.

The gross national product (GNP) measures the value of the final output created by Americans, whether they are located within the United States or outside of it. What is included in the gross domestic product (GDP) but not in GNP is the domestic production by foreign workers and companies. So the production of Mercedes-Benz cars in Alabama is counted in GDP but not GNP. On the other hand, the production of cars by GM in China is counted in the GNP but not GDP. The differences between GDP and GNP are small because the additions or subtractions of foreigners working within the United States and Americans working abroad are small relative to the size of the United States economy.

A more accurate measure of growth than the GDP is the net domestic product (NDP), which is simply the GDP minus capital depreciation, which is a measure of the amount of output used to replace aging stock of capital. Net domestic product measures how much the economy has grown. Generally, the smaller the difference between GDP and NDP, the more efficient the economy. The amount of depreciation is lowered by producing better quality that lasts longer, lessening the need for replacement.

Obsolescence also contributes to capital depreciation, since many firms abandon outdated equipment and machinery, since they can reduce their production costs by shifting to new, more efficient machinery and equipment. Because there is always some capital depreciation, the rate of NDB growth will always be less than GDP growth.

National income (NI) sums the total amount earned by Americans for their land, labor, capital, and entrepreneurial talent, whether within the United States or abroad. Hence, national income is sometimes referred to as factor income, because it equals the income received by Americans for all factors of production provided by them. NI can be derived from NDP by subtracting 2 quantities used in the domestic product but not pertinent to the national income. First, net foreign factor income must be subtracted from NDP since it is the income earned by foreigners in the United States minus the income earned by Americans abroad. This makes sense, since the earnings of foreigners should not be included in the United States national income. Indirect business taxes, including sales taxes, excise taxes, custom duties, business property taxes, and license fees are also excluded from NDP because they are not payments for factors of production. National income can also be calculated by simply summing up all employee compensation, rent, interest, proprietors' income, and corporate profits.

Like Gross National Product (GNP), gross national income (GNI) is a measure of a country's income. But GNP is calculated based on output rather than income. In practice there are slight discrepancies in measurement between the two, and GNI has come to be preferred to GNP by organizations such as the World Bank.

GNI is also similar to Gross Domestic Product (GDP) However, GNI includes net income received from abroad, while GDP only counts income received from domestic sources.

To calculate GNI, compensation paid to resident employees by foreign firms and income from overseas property owned by residents is added to GDP, while compensation paid by resident firms to overseas employees and income generated by foreign owners of domestic property are subtracted. Product and import taxes that are not already accounted for in GDP are also added to GNI, while subsidies are subtracted. Residence, rather than citizenship, is the criterion for determining nationality in GNI calculations, so long as the residents spend their income within the country.