BBA III

BUSINESS ECONOMIS II
(306)
UNIT 2
NATIONAL INCOME AND RELATED AGGREGATES
-By
Mrs. Simran Agarwal
 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.

– National income includes factor incomes only, and

– National income includes income of only the normal residents
of a country.
 FACTOR INCOMES
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 (received by the households for rendering their
services as employees of the producing units).
– Rent (received by the households for the use of their land by the producing units).
– Interest (received by the households for the use of their capital by the producing
units)
– Profit (received by the households for the use of their entrepreneurial skills by the
producing units).
 TRANSFER INCOME

Transfer incomes are those incomes which are received by a person

as help, donation or charity, etc. Transfer income is 'unearned
income'.
Since, transfer incomes are not earned as rewards for rendering
factor services, these are not included in the estimation of national
income.
 NORMAL RESIDENTS
A normal resident is said to be one
– 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.
NORMAL RESDIENTS AND NON-RESIDENTS OF INDIA-
SOME EXAMPLES
DOMESTIC AND NATIONAL CONCEPT OF INCOME
Both domestic income and national income include the four basic
elements of factor income, viz., (i) compensation of employees, (ii) rent,
(iii) interest, and (iv) profit. But there is a difference:

– 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).
CONVERSION OF DOMESTIC INCOME INTO NATIONAL
INCOME
Domestic income becomes national income provided:
– We exclude from domestic income that part of factor
income which belongs to non-residents within our
domestic territory, and
– We add to domestic income that part of factor income
which our residents earn from rest of the world ( or
from the domestic territories of other countries).
GROSS AND NET CONCEPTS OF DOMESTIC PRODUCT

GDP (Gross Domestic Product) - Depreciation = NOP

Or
NOP (Net Domestic Product) + Depreciation = GDP
Likewise:

GNP (Gross National Product) - Depreciation = NNP

Or
NNP (Net National Product) + Depreciation = GNP
DOMESTIC PRODUCT AT MARKET PRICE AND AT 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.

Once, the government sector is introduced, taxes and subsidies start playing their role,
and domestic product at market price and domestic product at factor cost become
different aggregates. This is how it happens:
• 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.
• To restore the parity between domestic product at market price and domestic product at
factor cost:
(i) we deduct the value of indirect taxes from domestic product at market price, and
(ii) we add the value of subsidies to domestic product at market price.
 AGGREGATES RELATED TO NATIONAL INCOME
• 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.
• Net Domestic Product at Market Price [NDPMPl
– 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.
– Relating (1) and (2), we can write that:
• GDP MP = NDPMP + Depreciation
• and NDPMP = GDPMP – Depreciation
• Gross National Product at Market Price [GNPMPl
– Gross national product at market price is the sum total of gross domestic product at
market price and net factor income from abroad.
– GNPMP = GDPMP + Net factor income from abroad
• Net National Product at Market Price [NNPMP]
– Net national product at market price is the sum total of net domestic product at market
price and net factor income from abroad.
– NNPMP = NDPMP + Net factor income from abroad
• Gross Domestic Product at Factor Cost [GDPFC]
– 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.
– GDP FC = Compensation of employees + Rent + Interest + Profit + Depreciation
• Net Domestic Product at Factor Cost [NDPFCJ 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.
– NDPFC = Compensation of employees + Rent + Interest + Profit
Relating (5) and (6), we can write that:
– GDPFC = NDPFC + Depreciation
– and NDPFC = GDPFC - Depreciation
• Gross National Product at Factor Cost [GNPFC]
– Gross national product at factor cost is the sum total of gross domestic
product at factor cost and net factor income from abroad.
– GNPFC = GDPFC + Net factor income from abroad
• Net National Product at Factor Cost [NNPFC]
– Net national product at factor cost is the sum total of net domestic product
at factor cost and net factor income from abroad.
– NNPFC = NDPFC + Net factor income from abroad
We know that,
– NDPFC = Compensation of employees + Rent + Interest + Profit

Accordingly,
– NNPFC = Compensation of employees + Rent + Interest + Profit + Net factor
income from abroad
AGGREGATES RELATED TO NATIONAL INCOME-
A FLOW CHART
 NOMINAL AND REAL GDP
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.
THANK YOU!!