GDP and GNI

Gross Domestic product (GDP) and Gross National Income (GNI) are commonly use for assessing an economy’s level of achievements and economic progress. Except for some technical adjustments, the two terms, viz., GDP and GNI are generally used synonymously to denote a country’s national product or national income. Thus, in the ensuing analysis of national income measurement, we shall be using GDP as a measurement of national's annual production and income.

GDP, as defined earlier, is the market value of all the final goods and services produced in one year. Market value, in turn, as calculated by multiplying quantity of each good by its price. Thus, if in an economy, Q denotes the total quantity of final goods produced and P is the per unit price then value of product is P X Q. And if the economy produces only this one good Q, then GDP is equal to P X Q, i.e., the market value of the good produced.

Now, if we look this from the point of view of a person who has purchased this good is PQ. in other words, the expenditure of the buyer on the goods shows the value of the good. On the other side, if we look from the point of view of the seller, he receives an amount equal to PQ by sale of sale of good. Thus PQ is his income.

Now, if we extend this logic to the entire economy, then GDP, which is equal to the market value of all the final goods produced and market value is equal to PQ of each good, which is turn, is the expenditure on each good, then GDP can be viewed as the total expenditure on goods by all the spending units in the economy. And if we view it from producers’ point of view, GDP is the value of the final goods (PXQ) which they receive from selling those goods. The receipts of the business enterprises are distributed as reward among factors of production for their services rendered in the production process and this constitutes factor incomes (rent , wages, interest, profits), and the sum total of this factor incomes is called national income.

Thus, corresponding to the two halves of the circular flow, we can measure national or GDP in two ways:

• As value of production as denoted by the expenditure on goods produced as show circular flow of income. This is called Expenditure Method or Spending Based GDP.
• As income generated by the production process called Income Method or Income Based GDP as shown in the circular flow of income since, both these methods have the same base, viz., the value the final goods and services as looked at from buyers’ and seller’ point of view and since the money value of good purchased by the buyer must be the same as money value of the good sold by the seller (his receipts), the value of GDP calculated by these two methods must be conceptually identical, though some differences may crop in due to some errors of measurement.