# National Income – Concept – Part 1

Before we start we need to understand some basic concepts of Income

Gross – Whenever we say Gross it means we are including Depreciation to the value of the product.

Net – When we exclude the Depreciation from the value of the product it is called Net.

Gross = Net + Depreciation

Net = Gross – Depreciation

Depreciation is the decrease in the value of fixed capital asset due to its use.

Depreciation is also called consumption of fixed capital or current replacement cost.

National Income (NY) –

National Income is the net money value of all the final goods and services produced by the normal residents of a country in an accounting year.

National Income includes the Net factor income from abroad.

NY = DY + NFIA

Domestic Income (DY)-

Domestic Income is the total factor incomes earned by the factors of production within the domestic territory of a country in an accounting year.

Domestic Income excludes the income from abroad.

DY = NY – NFIA

Net Factor Income From Abroad (NFIA) –

NFIA is the difference between Income earned by residents from the rest of the world and payments to non-residents within the domestic territory.

Income from abroad is inflow of income, and Income paid to abroad is outflow of income.

Factor Cost –

Factor cost is the amount paid to the factors of production for their contribution in the production process.

FC = MP – NIT

Market Price –

Market price is the price at which product or good is actually sold in the market.

The difference between the factor cost and market price is of the Net Indirect Taxes.

MP = FC + NIT

Indirect Taxes –

Indirect taxes are the taxes which are levied by the government on production and sale of goods. E.g. – Sales tax, custom duty, excise duty etc.

Subsides –

Subsides are the grants given by the government to the producers to encourage the production of certain goods, to provide goods at lower prices than the free market,  increase exports. These grants can be in cash or kind. E.g. – LPG cylinder etc

Net Indirect Taxes = Indirect Taxes – Subsides

When indirect taxes are more than subsides.

Net Subsides = Subsides – Indirect Taxes

When subsides are more than indirect taxes.

Aggregate of National Income

GDP, NDP, GNP, NNP at MP & FC

GDP = Gross Domestic Product

NDP = Net Domestic Product

GNP = Gross National Product

NNP = Net National Product

MP = Market price

FC = Factor cost

‘G’ in GDP as we discussed in the starting

G means Gross it includes Depreciation

‘D’ in GDP, D means Domestic which includes all the final goods and services produced by all the production units within the economic territory, this includes the production of both residents and non residents.

‘P’ in GDP, P means Product, only the final products or services are includes in GDP, and intermediate products or goods are included in GDP to avoid double counting problem.

Market price and factor cost we have already discussed above.

@ GDP at MP –

GDP at MP is defined as the gross market value of all the final goods and services produced within the domestic territory of a country in an accounting year by all producing units.

GDP at MP = GDP at FC + NIT

@ GDP at FC –

GDP at FC is defined as the gross factor value of the final goods and services produced within the domestic territory of a country in an accounting year by all producing units excluding Net Indirect Taxes.

GDP at FC = GDP at MP – NIT

@ NDP at MP –

NDP at MP is defined as the net market value of all the final goods and services produced within the domestic territory of a country by its normal residents and non residents in an accounting year.

NDP at MP = GDP at MP – Depreciation

@ NDP at FC –

NDP at FC is defined as the total factor income earned BT the factors of production within the domestic territory of a country in an accounting year. It is also called Domestic Income or Domestic factor income.

NDP at FC = GDP at MP – Depreciation – NIT

@ GNP at MP –

GNP at MP is defined as the total market value of all the final goods and services produced the Normal Residents of a country in an accounting year. (Normal residents includes all residents who are in the country and also those who are in abroad.)

GNP at MP = GDP at MP + NFIA

@ GNP at FC –

GNP at FC is defined as the gross factor value of all the final goods and services produced by the normal residents of a country in an accounting year.

GNP at FC = GNP at MP – NIT

Or

GNP at FC = GDP at MP + NFIA – NIT

@ NNP at MP –

NNP at MP is defined as the net market value of all the final goods and services produced by the normal residents of a country in an accounting year.

NNP at MP = GNP at MP – Depreciation

Or

NNP at MP = GDP at MP + NFIA – Depreciation

@ NNP at FC –

NNP at FC is defined as the net money value of all the final goods and services produced by the normal residents of a country in an accounting year. It is also known as National Income.

NNP at FC = GNP at MP – Depreciation – NIT

Or

NNP at FC = GDP at MP + NFIA – Depreciation – NIT

Categories: