(assume indirect tax is equals to zero). So, the market price in this case is Rs 50.

What is the
factor cost? Factor cost is Rs 50 + Rs 40 = Rs 90, as Rs 90 is what gets distributed among
different factors of production as profit, interest, rent and wages.
Thought4: Ina real-world economy, lakhs of goods and services are being sold. Indirect taxes are being
collected on most of these and subsidies are being given on many by the government. Therefore, the
market price includes an amount of indirect tax (which is paid to the government by the seller) and
excludes subsidy (which is paid by the government to the seller separately over and above the market
price)
To arrive at NMPrc from NMPiyp, we thus have to subtract the indirect taxes and add subsidy to the
latter,
Concept Check
Let us take a very hypothetical example. Suppose, the cost of making a product is Rs.1000. The
indirect tax levied on it by the government is 10%. Let us suppose the government grants a subsidy
of Rs.150 on the product. Now, whatis its Factor cost and Market Price (in Rs)?
(a) 1} 1000, 950
( b} 950, 1000
(c } 1100, 950
(d)'d} 850, 950
(e)ce) None of the above
Answer: (a) 1000, 950
4. .6 Personal Income
We can further subdivide the Nation: Income into smaller categories. Let us try to find the expression
for the part of NI which is received by households. We shall call this Personal Income (P!}
First, let us note that out of NI, which is earned by the firms and government enterprises, a part of
istributed among the factors of production. Thi called Undistributed Profits (UP)
MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households.
rly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be
deducted from the NI, since it does not accrue to the households.
On the other hand, the households do receive interest payments from private firms or the
government on past loans advanced by them. And households may have to pay interests to the firms
and the government as well, in case they had borrowed money from either. So, we have to deduct
the net interests paid by the households to the firms and government
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 «This is the ‘national ncome’ according to which the IMF ranks the nations of the world in terms of the
volumes ~ at Purchasing Power Parity (at PPP}.
* Itis amore exhaustive concept of national income than GDP, as it indicates the internal as well as the
external strength of the economy.
Let us de-jargonise (simplify) the concept of Gross National Product:
© The output of a Honda plant in Manesar isn’t included in India’s GNP, although it's counted in GDP,
because the revenue from the sales of Honda vehicles goes to Japan, even though the products are
made and sold in India. It is included in GDP because it adds to the health of the Indian economy by
creating jobs for Haryana residents, who use their wages to buy local goods and services.
Similarly, the cars made in a Jaguar Land Rover plant (asubsidiary of Tata Motors) in UK will be counted
in India’s GNP, but not GDP, because the profits from those cars will boost Tata Motors’ earnings and
stock prices, contributing to higher national income. It doesn't stimulate economic growth in India
because those manufacturing jobs were outsourced. It's the UK workers who will boost their country’s
economy and GDP by buying local goods and services.
Concept Check
Q. In ‘ate whether the statement is true or false.
If India’s GDP exceeds its GNP, then foreigners produce more India than Indian zens produce
the rest of the world.
Answer: True
44 Net National Product
* We have already noted that a part of the capital gets consumed during the year due to wear and
tear. This wear and tear is ci jed depreci: jon.
* If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net
National Product (NNP}.
MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

The formula for NNP is:

© NNP = GNP —Depreciation
4.5 Net National Product at Market Price (NNPp) & Net National Product at Factor Cost (NNPrc)
* It is to be noted that all the variables discussed so far are evaluated at market prices.
But market price includes indirect taxes. When indirect taxes are imposed on goods and services,
their prices go up.
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CONCEPT NOTE
 4.3. Gross National Product
© GNP and GDP are very closely related concepts, and the main differences between them comes from
the fact that there may be companies owned by foreign residents that produce goods in India, and
companies owned by Indians that produce goods for the rest of the world and revert earned income
to domestic residents in India
* For example, there are number of foreign companies that produce goods and services in India and
transfer any come eared to their foreign residents. Likewise, many Indian corporations produce
goods and services outside of Indian borders and earn profits for India’s residents.
* Where GDP looks at the value of goods and services produced within a country's borders, GNP is the
market value of goods and services produced by al dtizens of a country—both domestically and
abroad.
¢ Thus, GNP is an estimate of total value of al the final products and services turned out
period by the means of production owned by a country's citizens.
* GNP is commonly calculated by taking the sum of personal consumption expenditures, private
domestic investment, government expenditure, net exports and any income earned by residents
from overseas investments, minus income earned within the domestic economy by foreign
residents
* The formula for GNP is:
© GNP = GDP + (Factor come earned by the domestic factors of production employed in the
rest of the world —Factor come earned by the factors of production of the rest of the world
employed in the domestic economy)
Hence, GNP = GDP + Net factor income from abroad
© (Net factor income from abroad = Factor income earned by the domestic factors of
production employed in the rest of the world — Factor income earned by the factors of
CONCEPT NOTE MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

production of the rest of the world employed in the domestic economy).

KEY DEFINITION
Gross National Product (GNP): GDP + Net Factor Income from Abroad. In other words, GNP includes
the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners
within the domestic economy and excludes incomes earned by the citizens in a forei in economy.
The different uses of the concept of GNP are as follows:
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 4.3. Gross National Product
© GNP and GDP are very closely related concepts, and the main differences between them comes from
the fact that there may be companies owned by foreign residents that produce goods in India, and
companies owned by Indians that produce goods for the rest of the world and revert earned income
to domestic residents in India
* For example, there are number of foreign companies that produce goods and services in India and
transfer any come eared to their foreign residents. Likewise, many Indian corporations produce
goods and services outside of Indian borders and earn profits for India’s residents.
* Where GDP looks at the value of goods and services produced within a country's borders, GNP is the
market value of goods and services produced by al dtizens of a country—both domestically and
abroad.
¢ Thus, GNP is an estimate of total value of al the final products and services turned out
period by the means of production owned by a country's citizens.
* GNP is commonly calculated by taking the sum of personal consumption expenditures, private
domestic investment, government expenditure, net exports and any income earned by residents
from overseas investments, minus income earned within the domestic economy by foreign
residents
* The formula for GNP is:
© GNP = GDP + (Factor come earned by the domestic factors of production employed in the
rest of the world —Factor come earned by the factors of production of the rest of the world
employed in the domestic economy)
Hence, GNP = GDP + Net factor income from abroad
© (Net factor income from abroad = Factor income earned by the domestic factors of
production employed in the rest of the world — Factor income earned by the factors of
CONCEPT NOTE MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

production of the rest of the world employed in the domestic economy).

KEY DEFINITION
Gross National Product (GNP): GDP + Net Factor Income from Abroad. In other words, GNP includes
the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners
within the domestic economy and excludes incomes earned by the citizens in a forei in economy.
The different uses of the concept of GNP are as follows:
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 Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market
prices in order to calculate that part of NNP which actually accrues
to the factors of production
* Similarly, there may be subsidies granted by the government on the prices of some commodities. So,
we need to add subsidies to the NNP evaluated at market prices.
* Example: Market price of commodity X should be Rs 100 per unit; since government wants to reduce
pI of commodity X for the end user, decides to give a subsidy of Rs 20 per unit to the manufacturer
and asks the manufacturer to sell commodity X at Rs 80 per unit; so essentially, manufacturer is still
getting Rs 100 per unit for commodity X; it is this Rs 100 that gets distributed amongst various factors
of production. That is why we need to add subsidy to market price to arrive at factor cost.
* The measure that we obtain by doing so (reducing indirect taxes and adding subsidies to NNP at
market prices) is called Net National Product at factor cost or National Income.
¢ The formula for NNP at factor cost (which is also referred to as National Income):
© _NNPrc= National Income (NI) = NNPm—Indirect taxes + Subsidies
© NNP¥c= National Income (NI) = NNPwp— (Indirect taxes— Subsidies)
© NNPrc= National Income (NI) = NNPwe—Net indirect taxes
= Where, Net indirect taxes = Indirect taxes — Subsidies.
Let us de-jargonise (simplify) the concept of NNPzc:
* Thought1: Why do we calculate NMPrc? What is it that NNPyp does not tell us that NMPrctells us
¢ Thought2: NNPicis the national income. National income goes to the suppliers of factors of production
as factor payments.
* Thought3: We do not consider NMPwp as national income as the entire market price does not get
distributed among factors of production. Consider the following simplified examples to understand this
concept better.
© Case 1: Assume that bread is the only product being produced in an economy. Assume that 1
Kg of bread got produced in 2000-01. This 1 Kg was sold at Rs 100. Out of this Rs 100, baker
paid Rs 10 as indirect tax to the government and remaining Rs 90 got distributed as profit,
MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

interest, rent and wages among different factors of production. So, the national income, that
is the income earned by all factors of production, is not Rs 100, but Rs 90. Rs 100 is the market
price in this example and Rs 90 is the factor cost.
© Case 2: Assume that bread is the only product being produced in an economy. Assume that 1
Kg of bread got produced in 2000-01. To make bread affordable for people, assume that the
government asks the baker to sell this bread at Rs 50. To ensure that the baker is not out of
pocket and is able to cover all his expenses, government pays Rs 40 as subsidy to the baker
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CONCEPT NOTE

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