National Income and Related Aggregates

National income and related aggregates
CONCEPT OF NATIONAL INCOME

National income is the sum total of factor incomes earned by normal residents of a
country during the period of an accounting year. This definition of national income
conveys two important points:
(i) national income includes factor incomes only, and
(ii) national income includes income of only the normal residents of a country.
FACTOR INCOME
Factor incomes are the payments made by the producing units (firms) to the households
(owners of the factors of production) for the use of
their factor services.
Factor incomes (or factor payments) are broadly classified as under:
Compensation of employees
Rent
Interest
Profit
Transfer incomes are those incomes which are received by a person as help, donation
or charity, etc. , whereas factor incomes are those incomes which are received by the
factors of production by rendering their factor services.
factor income is 'earned income', transfer income is 'unearned income'.
NORMAL RESIDENTS
A normal resident is said to be one (i) who ordinarily resides in the country concerned,
and (ii) whose centre of economic interest lies in that country.
A person residing in a country for a period of one year (or more) is taken as
'ordinarily residing' in that country. This person may or may not be the citizen of
that country.
A person is said to have his economic interest in a country when he carry out all
his economic activities such as production, consumption or investment in that
country.
DOMESTIC AND NATIONAL CONCEPTS OF INCOME
Domestic income is the sum total of factor incomes (compensation of employees +
rent + interest + profit) generated within the domestic territory of a country (no matter
who generates it: normal residents or non-residents).
National income is the sum total of factor incomes (compensation of employees + rent
+ interest + profit) earned by normal residents of a country (no matter where it is
generated: within the domestic territory or outside).
DOMESTIC TERRITORY OF A COUNTRY

Economic territory is the geographical territory administered by a government within
which persons, goods and capital circulate freely.
the domestic territory of a country is understood to mean political territory of a nation.
foreign embassies located in India are not a part of domestic/ economic territory
of India
Indian embassies located abroad are a part of domestic/economic territory of India
domestic income of a country includes factor incomes of both the residents and
non-residents working within the domestic territory of a country.
Net factor income from abroad is the difference between (i) factor income
earned by our residents who are temporarily residing abroad, and (ii) factor
income earned by non - residents who are temporarily residing in our country.
CONVERSION OF DOEMSTIC INCOME INTO NATIONAL INCOME
Domestic income is the sum total of factor incomes generated within the domestic
territory of a country during the period of an accounting year. It includes factor income
of both the residents as well as non-residents in the domestic territory of a country.
Domestic Income = Domestic Product
DOMESTIC PRODUCT AT MARKET PRICE AND FACTOR COST

Domestic product at market price is identical with domestic product at factor cost,
provided there is no government and there are no taxes and subsidies related to the
production of goods and services in the economy.
When market price and factor cost become different is cause:-
Taxes on goods (called indirect taxes) tend to raise the market price of the goods.
Accordingly, domestic product at market price is increased.
subsidies tend to lower the market price of the goods. Accordingly, domestic
product at market price is reduced.
AGGREGATES RELATED TO NATIONAL INCOME

(I) Gross Domestic Product at Market Price [GDP MP]
Gross domestic product at market price is the market value of final goods and
services produced within the domestic territory of a country
during the period of an accounting year, inclusive of depreciation.
(2) Net Domestic Product at Market Price [NDP MP]
Net domestic product at market price is the market value of the final goods and
services produced within the domestic territory of a country
during the period of an accounting year, exclusive of depreciation.
(3) Gross National Product at Market Price [GNP MP]
Gross national product at market price is the sum total of gross domestic product at
market price and net factor income from abroad
(4) Net National Product at Market Price [NNP MP]
Net national product at market price is the sum total of net domestic product at
market price and net factor income from abroad.
(5) Gross Domestic Product at Factor Cost [GDP FC]
Gross domestic product at factor cost is the sum total of factor cost incurred on the
production of final goods and services within the
domestic territory of a country (during an accounting year), inclusive of
depreciation.
(6) Net Domestic Product at Factor Cost [NDP FC] Or Net Domestic Income
Net domestic product at factor cost is the sum total of factor cost incurred on the
production of final goods and services with the domestic territory of a country, during
an accounting year.
(7) Gross National Product at Factor Cost [GNP FC]
Gross national product at factor cost is the sum total of gross domestic product at
factor cost and net factor income from abroad.
(8) Net National Product at Factor Cost [NNP FC]
Net national product at factor cost is the sum total of net domestic product at factor
cost and net factor income from abroad.
NOMINAL AND REAL GDP

NOMINAL GDP
It refers to GDP at current prices. It is the market value of the final goods and services
produced within the domestic territory of a country during an accounting year, as
estimated using the current year prices.
* It does not cause any increase in the flow of goods and services in the economy. It
only causes 'money illusion'-the illusion of a higher market value of the given output *
REAL GDP
Refers to GDP at constant prices. It i s the market value of the final goods and services
produced within the domestic territory of a country during an accounting year, as
estimated using the base year prices.
Base year is the year of comparison. It is the year when macro variables (like production
and general price level) are believed to be within their normal range.
When nominal GDP rises, the flow of goods and services in the economy may or
may not rise during an accounting year.
when real GDP rises, the flow of goods and services in the economy must rise
during an accounting year.
GDP at current prices (also called monetary GDP or nominal GDP) refers to market
value of the final goods and services produced within the domestic territory of a country
during an accounting year, as estimated using the current year prices. It may increase
without any increase in the quantum of output in the economy.
GDP at constant prices (also called real GDP) refers to market value of the final goods
and services produced within the domestic territory of a country during an accounting
year, as estimated using the base year prices. It increases only when there is increase in
the quantum of output in the economy.
*The index of real GDP always reflects a change in the level of output, while the index of
nominal GDP may or may not. Which is why real GDP is considered as a better
index of economic growth than the nominal GDP *
GDP AND WELFARE
Real GDP is considered as an index of welfare of the people. Welfare of the people is
measured in terms of the availability of goods and services per person. Increase in real
GDP means increase in the level of output in the economy.
LIMITATIONS:-
(1) Distribution of Income: If distribution of income turns unequal, GDP growth fails to
reflect a rise in social welfare. India is facing this situation at present. While per capita
GDP is rising, starvation deaths are hitting the headlines more often than ever before.
Reason: Distribution of income is becoming increasingly unequal.
(2) Composition of GDP: Composition of GDP may not be welfare oriented. Example:
Increase in the production of defence goods does not lead to any direct increase in
welfare of the people. [Of course, strong defence offers a peaceful environment in the
country. But, it contributes to social welfare only indirectly.]
(3) Non-monetary Exchanges: In rural economies, barter system of exchange still
prevails to some extent. Payments for farm labour are often made in kind rather than in
cash. All such transactions remain unrecorded. This causes underestimation of GDP. To
the extent GDP remains underestimated, it remains an inappropriate index of welfare.
(4) Externalities: Externalities refer to good and bad impact of an economic activity
without paying the price or penalty for that. There are both positive and negative
externalities. Positive externalities occur when, for example, Mr. X maintains a beautiful
garden and Mr. Y (neighbour of Mr. X) enjoys it. It adds to welfare of Mr. Y but he does
not pay for it. Negative externalities occur when, for example, smoke emitted by
factories causes air pollution or industrial waste is driven into rivers causing water
pollution. It causes a loss of social welfare. But, most farmers do not pay the penalty.
GDP fails to account for the impact of positive and negative externalities on social
welfare. Hence, it is an inappropriate index of welfare.

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National Income and Related Aggregates

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National income and related aggregates

CONCEPT OF NATIONAL INCOME

DOMESTIC TERRITORY OF A COUNTRY

DOMESTIC PRODUCT AT MARKET PRICE AND FACTOR COST

AGGREGATES RELATED TO NATIONAL INCOME

NOMINAL AND REAL GDP

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