National income – definition
The commonest indicator of a country’s national income is its Gross Domestic Product (GDP). There are three theoretical ways that GDP can be estimated:
- GDP(O) which measures the sum of all output of goods and services produced – referred to as the ‘output approach‘.
- GDP(I) which measures the total income generated by companies, employees and the self-employed from the production of goods and services – referred to as the ‘income approach‘.
- GDP(E) which measures the total expenditures on all finished goods and services produced within the economy – referred to as the ‘expenditure approach‘.
All these measures are ‘gross’ (rather than net) because they do not remove expenditure relating to the replacement of capital – called capital consumption.
‘Domestic’ means it measures the total value of final goods and services produced within a country’s borders in a year, whereas ‘National’ – as in Gross National Product – is the value of final goods and services produced in a year by domestically owned factors of production. Hence this measure includes ‘income’ earned by factor owners from assets held abroad, less income going abroad to overseas owners of assets in the country.
The estimates are ‘gross’ because the value of the capital assets which depreciate – the ‘capital consumption’ – during the productive process has not been subtracted.
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