GNI and NNI - GNI D = NNI In our example 1700 170 = 1530...

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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 :
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Unformatted text preview: 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....
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