Production generates income to those who contribute efforts and resources for the production of goods and services. Total spending on the output (money value of production) by the people accrues as revenue or sale proceeds to the business enterprises out of which rent, wages, interest, etc., are paid and what remains is the profit or the reward of the entrepreneurs. Thus wages + rent + Interest
+ profits must be equal to the total sale proceeds (value of the output) because the profit, being the residual item after all other claims have been met, equates the value of output (as determined by spending )and the factor incomes. Thus, value of production is equal to value of income and therefore GDP is equal to GNI (gross national income). In a closed economy with no factor income from abroad:
GDP = GNI = Wages + Rent +Interest + Profits
There is, however, a difference between the GDP and GNI in an open economy. The estimates of output produced measured by the GDP are not the same or equal to the total income received by the factors of production in a country as measured by the GNI. This difference is caused by what is called net factor income from abroad.
Gross National Income (GNI) is the measure of income received by the national of a country while GDP is the value of output produced in a country. Income received may be more than the value of domestic output when people receive income not only from domestic activities but also from factor services provided by them outside their country. Thus, other countries nationals working abroad are the example that show total income received by a nation is more than the value of output it produces. Conversely, some of country’s output may be produced with the factor services provided by the people not belonging to this country and thus they have a claim on it. The payments of profits, royalties, etc., on foreign investment and emoluments paid to foreign employees thus make the GDP less than GNI. The difference between the factor income going out of the country and that coming into the country from rest of the world, is called Net Factor Income from Abroad. We can this reconcile the two concepts of income, viz., GDP and GNI as follows:
Gross National Income (GNI) = Gross Domestic Product (GDP) + Net Factor Income from Abroad
While, Net Factor = Compensation (wages, salaries, etc.)received, income from Abroad by our national from abroad minus what is paid out by this country to foreign nationals + Net property income (rent, dividend etc.) and entrepreneurial income (profits, etc.) received from abroad.SUBMIT ASSIGNMENT NOW!