BEST UNDERSTOOD WHEN COVERED

ALONG WITH THE VIDEOS ON

MACROECONOMIC MACROECONOMIC IDENTITIES

LOG ON TO WWW.ANUJJINDAL.IN

successrbi@anujjindal.in

IDENTITIES 9999466225

WWW.ANUJJINDAL.IN

COURSES OFFERED:
RBI GRADE B
SEBI
NABARD
 MACROECONOMIC IDENTITIES

MACROECONOMIC IDENTITIES OR TERMS

The following macroeconomic terms will be covered under this heading:

1. Gross domestic product

2. Gross national product

3. Net national product

4. Net national product @ factor cost

5. Personal income

6. Personal disposable income

7. National disposable income

8. Private Income

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

Gross Domestic Product (GDP): (EXPLAINED THOROUGHLY IN VIDEOS)

GDP refers to aggregate value of production of final goods and services taking place within
the domestic economy during a year. There are 3 important terms to remember under GDP.

a) Final goods and services- intermediate goods and services are not considered in
calculating GDP. Only goods and services consumed by final customer are to be added
together to arrive at GDP.

For example- whatever paneer (cottage cheese) is made and sold in an economy, the
usage of milk to make cottage cheese is not to be considered in calculation of GDP as
milk in this case is an intermediate good and not final good.

b) Domestic economy- domestic economy means economic activity going on within

territorial boundaries of a country. In case of India, the entire landmass (including
islands) and 12 nautical miles of water surrounding the landmass is a part of indian
territory, so this area is certainly a part of domestic economy. Further, 200 nautical
miles from coast or 188 nautical miles from territorial waters comes under Exclusive
Economic Zone (EEZ) where only Indian residents can carry out economic activity.
Therefore, this area also comes under domestic economy.

c) Economic activity carried out by Residents- The entire production of final goods and
services may not accrue to only citizens of the country. Multi National Companies,
foreign residents in India, foreign immigrants working in India (often we see Nepali
citizens working in Indian Urban Areas) et cetera also contribute towards final
production of goods and services. As per definition of GDP, economic activity of all
residents in India, whether Indian citizen or foreign citizen is to be combined together
to arrive at GDP. Therefore, GDP does not differentiate between indian citizen and
foreign citizen.

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

Gross National Product: (DIFFERENCE BETWEEN GDP & GNP EXPLAINED IN THE VIDEOS)

Gross National Product takes into consideration the third term/ point under GDP i.e.
economic activity carried out by residents.

In Gross National Product, we change residents to “citizens”. This means that any economic
contribution of foreign citizens in India is to be removed from calculation of GNP and
economic contribution of Indian citizens abroad is to be added in calculation of GNP.

Numerically, it can be defined as:

GNP = GDP + factor income by indian citizens in the rest of the world – factor income
earned by foreign citizens in India ; OR
GNP = GDP + net factor income from abroad

Net National Product:

We have already discussed the difference between Gross and Net. As a part of capital is
consumed during a year due to wear and tear, it is to be removed to arrive at “Net” value.
This wear and tear is called depreciation.

Net National Product = Gross National Product – Depreciation

Net National product @ Factor Cost:

Whenever nothing is mentioned ahead of variables like GDP, GNP et cetera, it is assumed that
calculation has been done at “Market Price”. To arrive at factor cost, it is important to
understand the difference between factor cost and market price.

Factor cost is the value/ cost of a product that accrues or belongs to the factors of production.
This means that factor cost is the value on which a company makes profit, labor

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

makes wages and other costs to be paid by a company are paid. We have already talked
about factors of production in detail.

When we add value accruing to the government or costs to be borne by the government,
we arrive at market price of a product.

Numerically,

NNP @ market price = NNP @ factor cost + Indirect taxes - subsidies

NNP @ factor cost = NNP @ market price – Indirect taxes + subsidies

In equation 1, we arrive at market value by adding taxes to a product and subtracting subsidies
from the product.

Taxes are added as they increase market price of a product

subsidies are subtracted as they reduce market price of the product

Both “indirect taxes and subsidies” accrue to the government and therefore it becomes
important to separate them from value accruing to the producer.

In equation 2, we deduct indirect taxes because they have been added to factor cost to arrive
at market price of a product. These are earnings accruing to the government.

Similarly, we add back subsidies because they result in reduction in market price of a product
and are borne by the government.

Personal Income:

Personal income is the income accruing to households and received by them. Personal
income is a sub part of national income/ Net national product @ factor cost.

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

In order to understand derivation of personal income, we need to understand the following

terms:

a) Undistributed profits- a part of profit of enterprises is not distributed among factors

of production. It is retained by enterprises for future investments et cetera. This is
called undistributed profits. Since undistributed profit does not accrue to households,
it has to be reduced from national income to arrive at personal income.

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

b) Corporate tax- corporate tax is imposed on earnings made by firms. It accrues to the
government and is paid by enterprises to arrive at net profits. Corporate tax is also
removed from national income as it does not accrue or belong to households.

c) Interest receipts and payments- households receive interest on loans provided to the
government or private firms. Similarly, households pay interest on loans taken from
firms or the government. We reduce interest payments made by households and
increase interest receipts made by households.

d) Transfer payments- households receive transfer payments from government and

firms in the form of pensions, scholarships, prizes etc. these receipts of households
are added to calculate personal income.

Numerically,

Personal Income (PI) = National Income – undistributed profits – (interest payments

made by households – interest receipts by households) – corporate tax + transfer
payments made to households

Personal Disposable Income:

PDI is that part of personal income, which is available to households for all kinds of
expenditures. After calculating personal income, we have to reduce personal tax and non- tax
(fines) payments to arrive at personal disposable income.

Numerically,
PDI = PI – personal tax payments- non tax payments

Personal Disposable Income belongs completely to households. They may decide to spend it
or save it according to their preferences.

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN

 MACROECONOMIC IDENTITIES

National Disposable Income:

National disposable income tells us ‘what is the maximum amount of goods and services the
domestic economy has at its disposal.’

Numerically,

National disposable income = net national product at market prices + other current
transfers from the rest of the world

Private Income:

Whatever accrues to the private sector in the country comes under private income. It
considers income by “citizens” and not residents.

Numerically,

Private income = factor income of private sector + interest + net factor income from
abroad + transfers from government + other net transfers from rest of the world

MACROECONOMIC IDENTITIES SUCCESSRBI@ANUJJINDAL.IN