Various Concept of National Income

Real GDP

It is the measurement of the physical volume of an economy's goods and services using the prices of a base year. The GDP measured at constant price is called real GDP. Because real GDP is not affected by price changes, change in real GDP reflects the change in the amount being produced.
Thus it is the actual measure of the total production of an economy.

Nominal GDP

It is the measure of national income which uses the price of the current year to identify the value of production of goods and services. The nominal GDP sometimes reflect the false statement on economic growth of the country. In the country where there is high inflation, then nominal GDP gives inflated value of the national economy. The Nominal GDP shows a rise in national income even in following conditions:

• Actual production is decreasing but prices are rising.
• Actual production remains constant and prices are rising.

GDP Deflator

As discussed above, the nominal GDP covers both the quantities of goods and services and prices of them while the real GDP only covers the quantities of goods and services produced by holding constant base year’s price. In this context, the GDP deflator acts as an adjustment factor to convert real GDP into nominal GDP which calculates only the prices of goods and services. The GDP deflator is the ratio of Price Index Number (PIN) of a given year to the price index number of the base year. The price index number of the base year is 100. The given year is the year whose real GDP is to be estimated. GDP deflator is calculated as:

GDP deflator=PIN of the given year/100

Similarly, the nominal GDP of a year can be converted into real GDP by the following formula:

Real GDP=Nominal GDP/GDP deflator

Or, GDP deflator=Real GDP/Nominal GDP

Hence, GDP deflator is also the ratio of real GDP and Nominal GDP.

Potential and actual GDP

Potential GDP is the real GDP that the economy is expected to achieve when its labor and other resources are fully employed. In other words, it is the maximum sustainable output level obtained during the full employment of resources of the country. It is only the estimated GDP in the ideal case.

Actual GDP, on the other hand, is the measured output of the country in the given year. It is the actual value of GDP calculated over a period of one year while the potential GDP is only the highest estimate value of GDP that the country can achieve in an ideal situation of full employment of all resources. The GDP gap is the difference between country’s potential GDP and real GDP. Lower the value of GDP gap, the more prosperous will be the economy.

Personal Income

Personal income is the sum of incomes actually received by all the individuals or households during a given year. It does not include all the income earned by the person. It only includes the income received by individuals after deducting taxes. The personal income includes wages and salaries, fees and commissions, bonus, benefits, dividends, interest earning and earnings from self-employment. It also includes transfer incomes like pensions, family allowances, unemployment allowances, sickness allowances, old-age benefits and other social security allowances.

Hence, personal income (PI) = National income – Corporate profit taxes, undistributed profits, and valuation adjustment – Social security contribution + Transfer payments to person + Personal interest income.

Disposable income

The entire income earned by the households or individuals are not available for consumption and saving. Some part of the income should be paid to the government in the form of income tax, payment due against government loans, and fines and penalties. Hence, the income remained after paying personal taxes and other amounts to the government are called personal disposable income.
Personal disposable income can be calculated as:

Disposable income = Personal income – (personal income tax + fees + fines)

Personal saving

Personal saving is the part of personal disposable income that is not spent. The major portion of personal disposable income is spent on consumption of goods and services. There is two other expenditure. The first is interest paid to nosiness and the second is transfer to foreigners. From this, we can find the percentage of personal disposable income i.e., the personal saving rate of a country.
The saving can be further multiplies which generate more income by investing it in various productive sectors. Investment of saving can create different opportunities to a different sector of people.

Per capita income (PCI)

The per capita income of a country is the average income of all the individuals of that country. It is obtained by dividing the national income of the country by the total population of that country. Hence, per capita income can be calculated by the following formula:

Per capita income (PCI) = Current national income/ current total population

Or, PCI = Net National Product (NNP) / current total population

Per capita income of the people is useful to compare people’s standard of living in different countries. Higher per capita indicates the improved living standards. However, this does not reflect the income gap of the country. It is only the average estimate of the income of individuals.

References

Gwartney, J., Stroup , R., & Sobel, R. (2009). Economics: Private and Public Choice. southwestern Cengage learning.
Kharel, K. R., Ghimire, Y., Bhattarai, D., Jnawali, S., & Paudel, K. (2010). Business Economics. Kathmandu: Sukunda Pustak Bhawan.