National Income Accounting | Difference between Gross investment and Net investment

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Hi friends, in today’s article we are going to know about the concept of National Income Accounting and also know the difference between gross investment and net investment, GNP and GDP, etc. So let’s discuss in details.

Mention Three importance of National Income Accounting

The importance of national income accounting are given below-

(i) It helps in policy making and planning.

(ii) It helps in understanding and evaluating the performance of the economy.

(iii) It helps in measuring inflation and deflation changes.

What do you mean by Economic Welfare?

Economic welfare is the level of growth and standard of living of either an individual or a group of persons. Economic welfare is economic wellbeing expressed in terms of the sum of consumer and producer surplus.

What is Net National Income?

Net national income (NNI) is the difference between gross national income (GNI) and depreciation. It means –

NNI = GNI – Depreciation.

Difference between National Income at market price and National income at factor cost

National income at market price includes the value of final goods and services produce by the country.

On the other hand, national income at factor cost is measured the income earned by factors of production.

Difference between Factor Income and and transfer income

The main difference between factor income and transfer income are as follows –

Factor Income Transfer Income
(i) Factor income is the payment in exchange for rendering productive services by factors of production.  (i) On the other hand, payment received without any productive service is known as transfer income.
(ii) It includes rent, wages, interest and profit. (ii) It includes gifts, grants and subsidy.
(iii) It is two sided payment. (iii) It is one sided payment.

Difference between Gross investment and Net investment

Gross investment refers to the total expenditure on buying capital goods over a specific period of time without considering depreciation.

On the other hand, Net investment considers depreciation from gross investment, that is –

Net investment = Gross investment – Depreciation.

What is depreciation?

In economics depreciation is the gradual decrease in the value of the capital stock of a firm, nation or other entity, either through physical depreciation or changes in the demand for the services of the capital inequation.

What is inventory investment?

Inventory of the production denotes the sold stock of finished goods or raw materials changes in inventory stock during the year is called inventory investment.

Let us assume that in the beginning of 2016 a producer started his business with 80 units of unsold fridge, during 2016 he produce 200 units of fridge. But actually he could sell 120 units due to take of demand. It explained with the help of inventory investment formula.

Inventory stock = 80 + (200 -120)

= 80 + 80

= 160

Thus the inventory stock raises from 80 units to 160 units. It is definitely unexpected loss. So, this was inventory investment example.

Relationship between National Income and Economic Welfare

Pigou establishes a close relationship between national income and economic welfare because both of them are measured in terms of money.

It means that when national income raises economic welfare also raises. But in reality there may exist inverse relationship between economic welfare and national income.

• If the size of population of a country raises along with the rise in national income then economic welfare decreases.

• National income can not be a loyal index of economic welfare, if people spent their income on illegal activities such as drinking, gambling, in such a situation economic welfare decrease.

• If the difference between rich and poor becomes higher than raising GDP does not empty rise in economic welfare.

• The Nature of production also influences the economic welfare. If national income raises due to rise in the production of harmful goods, like drugs, chemical then rise in national income denote fall in the economic welfare.

• The condition of labour also determine the relation. If national income increase due to huge exploitation of labour then economic welfare decreases.

From the above discussion, it is clear that rise in the GDP does not measure economic welfare.


Is GDP a useful measure of economic welfare? Justify your answer. OR Why GDP is not a useful measure of economic welfare?


So friends, this was the concept of National Income Accounting . Hope you get the full details about it and hope you like this article.

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