National IncomeEdit Article
While per capita gross domestic product is the indicator most commonly used to compare income levels, there are two other measures are generally preferred by analysts: per capita Gross National Income (GNI) and Net National Income (NNI). Whereas GDP refers to the income generated by production activities on the economic territory of the country, GNI measures the income earned by the residents of a country, whether generated on the domestic territory or abroad, NNI is GNI net of depreciation.
GNI is defined as GDP plus net receipts from abroad of wages and salaries and of property income plus net taxes and subsidies receivable from abroad. NNI is equal to GNI net of depreciation.
Wages and salaries from abroad are those that are earned by residents who essentially live and consume inside the economic territory but work abroad (this happens in border areas on a regular basis) or for those who live and work abroad for only short periods (seasonal workers) and whose centre of economic interest remains in their home country. Guest-workers and other migrant workers who live abroad for twelve months or more are considered to be resident in the country where they are working. Such people may send part of their earnings to relatives at home, but these remittances are treated as transfers between resident and non-resident households and are recorded in national disposable income but not national income.
Property income from/to abroad includes interest, dividends and all or part of the retained earnings of foreign enterprises owned fully or in part by residents (and vice versa).
In most countries, net receipts of property income account for most of the difference between GDP and GNI. However, it is important to note that retained earnings of foreign enterprises owned by residents do not actually return to the residents concerned. Nevertheless, the retained earnings are recorded as a receipt of property income. A counter entry of the same amount is treated as a financial transaction (a reinvestment of earnings abroad, in shares and other equities) and not as a payment of property income.
Countries with large stocks of outward foreign direct investment may be shown as having large receipts of property income from abroad and therefore high GNI even though much of the property income may never actually be returned to the country but instead added to foreign direct investment. For most OECD countries, GNI per capita does not differ significantly from GDP per capita
The Importance of National Income
Measuring national income is crucial for various purposes:
- The measurement of the size of the economy and level of country’s economic performance;
- To trace the trend or the speed of the economic growth in relation to previous year(s) also in other countries;
- To know the composition and structure of the national income in terms of various sectors and the periodical variations in them.
- To make projections about the future development trend of the economy.
- To help government formulate suitable development plans and policies to increase growth rates.
- To fix various development targets for different sectors of the economy on the basis of the earlier performance.
- To help businesses to forecast future demand for their products.
- To make international comparison of people’s living standards.
The Limits of Measuring National Income
There are practical difficulties in the measurement both of international flows of wages and salaries and property income and of depreciation. It is for that reason that GDP per capita is the most widely used indicator of income or welfare, even though it is theoretically inferior, in that context, to either GNI or NNI.
OECD (2012), “Aggregate National Accounts: Disposable income and net lending/borrowing”, OECD National Accounts
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