Many factors are used while determining the growth of a country. While studying these different aspects, t is easy to get confused as to what these terms exactly mean. But the fundamental factors differentiate these aspects as separate entities and it is important to learn each entity correctly to properly understand the growth of the country.
GDP vs National Income
The main difference between GDP and National Income is that GDP is an estimate of the total value of all the goods and services produced and provided within and by the country. On the other hand, National Income estimates the total amount of money earned by the businesses and the individuals of the nation.
Gross National Product (GDP) is the total value of all the goods produced within the country and services provided by the country. Thus GDP is the complete economic output of the country. Thus GDP includes the total market value of all the goods and services produced within the country in a set period.
National Income is the total value generated by all the individuals and businesses, irrespective of where the goods and services were sold. It calculates the total income and also considers money received from foreign investments while determining the Gross National Income (GNI). Thus the National Income is focused on the overall economic health of the country.
Comparison Table Between GDP and National Income
| Parameters of Comparison | GDP | National Income |
| Definition | GDP estimates the total value of all the goods and services produced within the country | National Income calculates the total values earned by the businesses and individuals of a country |
| Objective | GDP measures the overall economic output of the country | National Income estimates the economic health of the country |
| Calculations | GDP is the sum total of the national consumer spending, total government spending, net exports, and the amount of business capital | National Income is calculated by adding the difference of money flowing from foreign countries and money flowing to foreign countries, to the GDP |
| Exceptions | The goods and services produced outside the country are not included | The goods and services produced by foreign nationals living in the country are not included |
| Measurement Domain | GDP is a domestic production measurement | National Income is an international production comparison measurement |
What is GDP?
GDP stands for Gross Domestic Production. It is an estimate of the total value of all the goods and services produced within the country. Thus it is used to determine the domestic income of a country. GDP is based on the ownership of a means of production. Thus it only considers the businesses based inside the country.
GDP is calculated by considering the overall summation of the total national consumer spending, total government spending, the amount of business capital, and net exports. As only companies based entirely within the physical borders of a country are considered for determining the GDP, it is a powerful tool for measuring the overall economic output of a country.
There are two methods used for calculating the GDP, the Expenditure method and the Income Method. The expenditure method is the most common method used by economic and financial institutions. The Income method calculates GDP by considering the various incomes generated. GDP using this method is calculated by taking the summation of the National Income, the statistical discrepancy, and the capital consumption allowance. The GDP, along with other economic factors like the Gross National Product and the Gross National Income are used together to determine the National Income.
What is National Income?
National income is the factor that calculates the total income value generated from all the goods and services produced by the country. It calculates the total income earned by the businesses and individuals of the country in a given period. As it is a direct calculation of income, it is a factor used to determine the economic health of the country.
National Income is calculated after estimating the GDP of the country. For calculating National Income, the difference of the money flowing from foreign countries and the money flowing to foreign countries is added to the GDP. Generally, the factors such as GDP, GNP, and GNI are used together to determine the National Income. Thus National Income is a Macroeconomic factor as compared to GDP, which is a microeconomic factor.
While calculating the National Income, the goods and services produced by foreign individuals living in the country are not included. Thus National Income estimates the total contribution of the people and businesses of the country in increasing the national production. Along with the production, National income also considers the capital coming from foreign sources, such as foreign investments and other international capital gains. For the calculations, the period for income generation is generally taken as one year.
Main Differences Between GDP and National Income
- GDP estimates the total value of all the goods and services produced within the country. National Income calculates the total income generated by businesses and individuals of a country.
- GDP measures the overall economic output of the country. National Income estimates the economic health of the country.
- GDP is the sum of national consumer spending, total government spending, business capital and net exports. National Income is the sum of GDP and the difference of money flowing from foreign countries and the money flowing to foreign countries.
- In GDP calculations, the goods and services imported into the country are not included. In National Income, the goods and services produced by foreign nationals living in the country are not included.
- GDP is a domestic production measurement. National income is an international production comparison measurement.
Conclusion
The economic growth and health of a country are measured by considering many macro as well as microeconomic factors.
GDP is a measure estimating the total value of all the goods and services produced within the physical boundaries of a country.
It calculates the overall market value of all the goods and services produced, irrespective of where they are sold.
National Income is calculated after the GDP and the GNP are estimated. It is a factor that determines the total income earned by the individuals and businesses of a country.
Both the factors are used to determine the economic health and the status of a country, which are important for determining the development of the country.
References
- https://www.degruyter.com/document/doi/10.1515/9781400873630/html
- https://www.sciencedirect.com/science/article/pii/S0304407605000163
- https://www.nber.org/system/files/chapters/c2258/c2258.pdf
- https://www.jstor.org/stable/2296597