Net National Income (NNI) is an indicator of the total economic activity in a country. It is related to the better known Gross Domestic Product (GDP), but its differences to GDP makes it a more appropriate indicator for Ireland.
While GDP measures the value of what is produced in the country, Net National Income measures how much of that value stays in the country. Net National Income differs from GDP, by Net Factor Income, which for Ireland is mostly an outflow of profits of foreign-owned multinationals here. GDP counts money that is made here but does not stay here. NNI deducts the part that leaves the country and gives a more meaningful indicator of the Irish economy.
Net National Income is ‘net’ of Consumption of Fixed Capital (CFC) or depreciation, that is, the decline in value of the Fixed Assets used in production. The difference between Net National Income and Gross National Income is just this Consumption of Fixed Capital. All CFC is included in GDP, but much of it is decline in the value of assets which are ultimately foreign-owned and have limited impact on the domestic economy. For example, multi-national companies here own very valuable patents and other Intellectual Property which decline significantly in value each year. That decline must be absorbed by the foreign owners. By looking at NNI instead of GDP, we exclude a large proportion of the Gross Value Added (GVA) of foreign corporations, but we also exclude some of the GVA of domestic producers.
NNI also differs from GDP by the subsidies the European Union (EU) pay to us, and the taxes we pay to them. The EU pay subsidies to Irish producers in activities such as farming, and customs duties are paid to the EU by Irish resident firms and households. These taxes and subsidies are quite small relative to the total.
In summary then, Net National Income (NNI) is:
As with indicators like GDP and GNI, the value of NNI in a particular year may not tell us very much in itself: we are usually more interested in its Growth Rate, which can tell us whether our economy is growing or shrinking and by how much. As we mentioned above, NNI excludes some of the value added of domestic producers – their Consumption of Fixed Capital. However, this CFC tends to be fairly steady, so it does not contribute much to the change in NNI. So when we look at the growth rate of NNI, the exclusion of domestic CFC is not a major drawback to its use as an indicator.
Net National Income, is calculated as part of National Accounts all around the world so it can be compared between countries. In Ireland we also calculate Modified GNI to give an even more precise indicator of the domestic economy. While NNI excludes depreciation on all assets, Modified GNI only excludes the depreciation on certain types of asset (IP and leased aircraft). Modified GNI also excludes the net income of redomiciled PLCs, while this income remains in NNI.
If we then think back to How GDP is Calculated by the income method: what is left after these deductions? NNI is largely made up of Compensation of Employees paid here to workers, net profits of Irish-owned enterprises and Taxes received by the government. Almost all of these are available for spending and investment by domestic sectors, which makes NNI a good indicator of the domestic economy.