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But in practice there is some disparity between these two aggregates arising out of various causes. There may be some members in society who live on doles and hence earn income without performing any productive functions. On the other hand some part of the goods produced may not be marketed but utilized for self-consumption. Again there may be serious errors in computation or others which may cause some difference in these two values.
iii) GNI and NNI: The distinction between Gross and Net values of the national income has both theoretical and practical significance. The adjustment factor is Depreciation charges (D) against the utilization of the services of the stock of capital goods while producing current output. Such capital goods are of longer duration and have to be replaced a few years after their utility is over. Such an allowance for wear and tear of the fixed capital equipment is also known as capital replacement (Cr) cost. The two values (D and Cr) are somewhat different in their computation and purpose. Though it is difficult to accurately predict the future replacement cost of the present capital assets, the usual procedure is to set aside a certain percentage (say 8 to 10 percent) of the national income in the form of depreciation charges. This adjustment is done as follows :
GNI - D = NNI
In our example,
1700 - 170 = 1530 where D = 170 (10% of 1700)
The reverse operation will be:
NNI + D = GNI, or 1530 + 170 = 1700
The significance of the depreciation allowance can be explained with the help of a simple example. If a farmer produces 200 quintals of grain every year then the entire produce cannot be marketed or used for his family consumption. He will keep aside say 10 quintals, to be used as seeds for the next harvest. In this case seeds worth 10 quintals is the depreciation allowance in the absence of which no output can be produced in the next harvest.
Only after making the adjustment of depreciation charges what remains in the form of NNI is available for current consumption purposes. Hence it should be understood that the term 'national income' in this analysis refers to it in its net form.
iv) NNI(MP) - NNI(FC): Another important distinction is between NNI in its market price value and NNI in its factor cost value. When national income value is computed in terms of market prices, the presence of two elements may not allow for the estimation of the true factor expenditure or cost of production of these goods. These two elements contained in the market price are indirect taxes (IT) such as sales tax, excise duty etc. and subsidy (S) or assistance in cash and kind provided by the government to private producers. The estimate of NNI will exceed the true cost of production to the extent of the IT value. On the other hand the presence of subsidies unduly reduces the correct value than what it would otherwise have been in the form of cost of production. Therefore the value of indirect tax is to be deducted and that of subsidies is to be added to the estimated value of NNI at market prices in order to arrive at the factor cost value of the NNI. With these adjustments we have:
NNI(MP) - IT + S = NNI(FC) , or
1530 - 460 + 120 = 1190 where IT = 460 and S = 120
In its reverse form:
NNI(FC)+ IT - S = NNI(MP)
1190 + 460 - 120 = 1530
In macroeconomics national income value (NI) is stated in its factor cost version. Therefore unless otherwise stated we will refer to this value as NI (that is National Income at factor cost).
v) NI, PI, DI: After the explanation of the process of arriving at the value of NI, two further operations need consideration: these make it possible to arrive at disposable income (DI) and personal income value (PI). These are other important national aggregates in the system of income accounting.
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