Question

The following is a list of national income figures for a given year (amount in billions of dollars): $$\begin{array}{lr} \text { Gross national product (GNP) } & \$ 1,692 \\ \text { Transfer payments } & 232 \\ \text { Indirect business taxes } & 163 \\ \text { Personal taxes } & 193 \\ \text { Capital consumption allowance } & 180 \\ \text { Undistributed corporate profits } & 18 \\ \text { Social security contributions } & 123 \\ \text { Corporate income taxes } & 65 \end{array}$$ a) Compute the Net national product (NNP) b) Determine National income (NI) c) Determine Personal income (PI) d) Compute Disposable income

Short answer

a) NNP: \( \$1512 \text{ billion} \) b) NI: \( \$1581 \text{ billion} \) c) PI: \( \$1730 \text{ billion} \) d) Disposable income: \( \$1537 \text{ billion} \)

Step-by-step solution

Compute the Net national product (NNP)

To compute the NNP, we simply subtract the Capital consumption allowance (Depreciation) from the GNP. Use the formula: NNP = GNP - Capital consumption allowance NNP = \$1692 - \$180 NNP = \$1512 billion

Determine National income (NI)

To find the NI, we use the formula: NI = NNP - Indirect business taxes + Transfer payments NI = \$1512 - \$163 + \$232 NI = \$1581 billion

Determine Personal income (PI)

To find the PI, we use the formula: PI = NI - Corporate income taxes - Undistributed corporate profits + Transfer payments PI = \$1581 - \$65 - \$18 + \$232 PI = \$1730 billion

Compute Disposable income

To compute the Disposable income, we subtract the Personal taxes from the PI. Use the formula: Disposable income = PI - Personal taxes Disposable income = \$1730 - \$193 Disposable income = \$1537 billion To sum up, we have calculated: a) Net national product (NNP) = \$1512 billion b) National income (NI) = \$1581 billion c) Personal income (PI) = \$1730 billion d) Disposable income = \$1537 billion

Key concepts

Gross National Product

Gross National Product (GNP) represents the total monetary value of all goods and services produced by the residents of a country within a specific time period, typically a year. It includes the value of production by a country's citizens both domestically and abroad, but excludes the value of any products created by foreign residents within the country's borders.

For example, if a U.S. company operates in Germany, the profits from its German operations are part of the U.S. GNP. Conversely, if a German company operates in the U.S., the profits from its U.S. operations would not be included in the U.S. GNP; instead, they would be part of Germany's GNP.

Critically, GNP is a crucial indicator of a country's economic performance and is often used to compare the economic prosperity of different countries. However, it is not without flaws—it doesn't take into account the income distribution among residents of the country or the non-market exchanges that do not involve money.

Net National Product

Net National Product (NNP) is derived from Gross National Product (GNP) by accounting for depreciation. Depreciation, also known as the capital consumption allowance, represents the loss of value of capital goods over time due to wear and tear, obsolescence, or other factors.

To calculate NNP, the formula used is:
NNP = GNP - Capital consumption allowance

This adjustment to GNP gives a more accurate measure of a nation's income because it reflects the amount available for consumption and savings after replacing worn-out assets. Essentially, NNP can be thought of as the 'true' income of an economy, as it indicates the country’s ability to consume in the future without diminishing its capital stock.

Personal Income

Personal Income (PI) encompasses the total amount of income collected by the individuals in an economy within a certain period. This includes wages, salaries, investment returns, government benefits such as social security and welfare, and other sources but excludes corporate income taxes and undistributed corporate profits since these do not directly increase individuals’ purchasing power.

The formula to calculate PI is:
PI = NI - Corporate income taxes - Undistributed corporate profits + Transfer payments

Personal Income is an important measure because it gives an indication of the total income available to individuals for spending, saving, or investing. It is a more direct indicator of individual economic well-being than GNP or NNP as it reflects the income that is actually at the disposal of consumers.

Disposable Income

Disposable Income represents the amount of money that households have available for spending and saving after personal taxes have been accounted for. It’s the net income available to an individual or a household for consumption purposes and is a key indicator of a population's financial health.

The formula to calculate Disposable Income is:
Disposable income = PI - Personal taxes

As the money left after taxes, Disposable Income determines a person's or family’s ability to buy goods and services. It's crucial for economic analysts because it directly affects consumer spending, which drives a significant portion of the economy. Higher disposable income usually leads to an increase in consumer demand for goods and services, thereby stimulating economic growth.