National Income and its Concepts

Dr. Vijay Kumar Gupta, Assistant Professor of Economics, Women’s College, Samastipur, L.N.Mithila University, Darbhanga(Bihar)

1. Gross Domestic Product at Market Price:

It is the total market value of the final goods and service produced within the domestic territory of a country during one year.

GDP has following features: (i) GDP is inclusive of the depreciation allowance or consumption of fixed capital. (ii) Here we take the value of all final goods and services produced by normal residents as well as by non-residents within the domestic territory of a nation in an accounting year. (iii) Prevailing market price or current price of goods and services produced is taken. (iv) To avoid double counting, only final goods and services are included in GDP. (v) Only new goods and services are considered. The value of second hand goods is not included in it. (vi) Value of financial capital like shares, bonds etc. is not a part of GDP but commission on transactions of second hand goods and financial capital is added in GDP. (vii) Goods coming to the market for sale are the ones to be counted in GDP. Goods for self-consumption are also a part of GDP but services for self- consumption are not included. (viii) Imputed value of free residential accommodation, food, clothing and other monetary benefits provided to workers and rent on self-occupied houses are included in GDP. (ix) Transfer payments, capital gains and income earned through illegal means are not included in GDP. According to Dernburg “Gross Domestic Product at market price is defined as the market value of output of final goods and services produced in the domestic territory of a country during an accounting year.”

2. Gross National Product at Market Price

Gross National Product at market price is a wider concept. It is actually the sum of gross domestic product and net factor income from abroad. According to Dernburg, “The Gross National Product at market price is defined as the market value of the final goods and

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Thus Gross National Product at market price includes all the constituents of gross domestic product at market price and net factor income from abroad.

GNP at Market Price = GDP at Market Price + Net Factor Income from Abroad

Distinction between GDP at market price and GNP at market price.

(i) The concept of GNP at market price is broader than GDP at market price as it also includes net factor income from abroad. (ii) National product can take place in any part of the world where normal residents of the specific country work. But domestic product is limited to the domestic territory of a country. Domestic production can be produced by normal residents or even foreigners. (iii) Factor income earned from abroad is added to the GDP at market price and factor income earned by foreigners in that country in subtracted from it. (iv) National product will be greater or less than domestic product if net factor income from abroad is positive or negative. 3. Net National Product at Market Price:

It is equal to gross national product at market price minus the consumption of fixed capital or depreciation. It is more practical. According to Peterson, “Net National Product at market price is the market value of the net output of final goods and services produced by an economy during an accounting year and net factor income from abroad.”

Difference between net national product at market price and gross national product at market price.

Due to wear and tear of fixed capital in the process of production of goods and services, depreciation or consumption of fixed capital occurs. When the value of depreciation is deducted from GNP at market price, we get the value of Net National Product at market price.

NNP at Market Price = GNP at Market Price - Depreciation

GNP at Market Price = NNP at Market Price + Depreciation

4. Net Domestic Product at Market Price

Net domestic product at market price is the market value of all final goods and services produced within the nation’s borders during a given interval (such as a year) minus consumption of fixed capital. According to Dernburg, “Net domestic product at market price is the market value of net output of final goods and services produced in the domestic territory of a country by its normal residents and non-residents during an accounting year.”

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Net domestic product at market price is the difference between net national product at market price and net factor income from abroad. It can also be estimated by deducting depreciation from gross domestic product at market price.

Net Domestic Product at Market Price = Net National Product at Market Price – Net Factor Income from Abroad Net Domestic Product at Market Price = Gross Domestic Product at Market Price – Depreciation

5. Net Domestic Income or Net Domestic Product at Factor Cost

Production is actually the result of the efforts of all factors of production like land, labor, capital and entrepreneurship. Payment made to these factors as rent, wages, interest and profit is known as factor cost and output produced is called output at factor cost. Factor payments are income for the owners of factors and cost for the firm. Net domestic product at factor cost is also known as domestic income. According to Peterson, “The net domestic product at factor cost is the sum of net values added by all the producers in the domestic territory of the country during an accounting year.” This is also called domestic income. Net domestic product at factor cost or net domestic income includes (a) Compensation of employees; (b) Operating surplus; (c) mixed income of the self-employed.

(a) Compensation of Employees

(i) Wages in cash and kind (ii) Contribution of employers on social security on behalf of the employees

(b) Operating Surplus is the addition of rent, interest and profits.

(c) Mixed income of the self employed

Difference between net domestic product at factor cost and net domestic product at market price

Net domestic product at factor cost is the total income received by the factors of production while net domestic product at market price is the market value of total production in the economy. Indirect taxes don’t go to the factors of production; they are paid to the government. But they are included in the market price. Subsidies are not included in market price but they are the income of the factors of production.

So, net indirect taxes (indirect taxes – subsidies) are subtracted from the net domestic product at market price to estimate net domestic product at factor cost. .

Net Domestic Product at Factor Cost = Net Domestic Product at Market Price – Indirect taxes + Subsidies

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6. Gross Domestic Product at Factor Cost

Gross domestic product at factor cost or gross domestic income includes compensating of employees, operating surplus and mixed income earned by the factors of production in an accounting year and depreciation or consumption of fixed capital. According to Hansen, “The Gross Domestic Product at factor cost is the sum of net value added by all the producers in the domestic territory of the country and the consumption of fixed capital during an accounting year.”

Gross Domestic Product at Factor Cost = Net Domestic Product at Factor Cost + Depreciation

Difference between gross domestic product at factor cost and gross domestic product at market price

Net indirect taxes are subtracted from gross domestic product at market price to get gross domestic product at factor cost.

GDP at factor cost = GDP Market Price - Indirect taxes + Subsidies

7. Net National Product at Factor Cost or National Income

Net national product at factor cost is estimated by adding earnings of all factors of production (wages, rent, interest and profit) and net factor income from abroad. This is also known as National Income. According to Dernburg, “National Income is the factor income accruing to the residents of a country during a year. It is the sum of domestic factor income and net factor income from abroad.”

NNP at factor cost = NDP at factor cost + ------Net factor income from abroad.

Difference between National Product at Factor cost and at Market price.

Market price includes indirect taxes which go in government’s hands and are not a part of factor income and excludes subsidies which go to the factors of production.

So, national product at factor cost includes all the elements of national product at market price except net indirect taxes (Indirect taxes - Subsidies).

NNP at Factor Cost = NNP at Market Price - Net indirect taxes NNP at Market Price = NNP at Factor Cost + Net indirect taxes

According to Hicks, “When economic welfare is to be measured it is more appropriate to use the concept of net national product at factor cost, and when the productivity of an economy is to be measured, it is more appropriate to use the concept of net national product at market price.”

8. Gross National Product at Factor Cost or Gross National Income

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Gross National Product at factor cost includes the earnings of all factors of production, depreciation and net factor income from abroad. According to Peterson, “Gross national product at factor cost is the sum of factor cost of the gross product attributable to the factors of production supplied by the normal residents of the country during a year and net factor income from abroad.”

GNP at Factor Cost = NNP at Factor Cost + Depreciation

GNP at Factor Cost = GNP at Market Price - Net indirect taxes

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