Concepts
1] Gross Domestic Product
a] Gross Domestic Product [GDP (MP)]
Gross – total/aggregate
Domestic – within the political/geographical/territorial
boundaries of a nation, regardless
of who is doing the producing or who owns the productive capital that
produces it.
Product – the production of goods and services
Therefore the gross domestic product is the flow of goods
(consumer goods and investment goods) and services in the economy in a
given period of time usually a year. It is the value (volume) of goods
and services, both tangible and intangible, produced in the economy in a
given period of time usually a year.
It includes the final goods and services produced and
exchanged for money in a country during a given year ie it is calculated
at market price.
· It includes the net income from foreign trade ie [X - M]
· The term gross implies that it includes depreciation ie
[D].
· Gross Domestic Product at market price includes amount of
indirect taxes paid ie [IT] and excludes amount of subsidy ie [S]
received, that is, net indirect taxes are included.
· GDP (MP) = C + I+ G
+ (X-M)
NOTE
Calculation at market price does not give us the exact
value of productive activity in the country and therefore it is
necessary to calculate national income at factor cost ie the cost borne
by the producer which is the same as the income received by the factors
of production. For this it is necessary to consider “indirect taxes” and
“subsidies”.
The market price of goods and services is inclusive of
indirect taxes which are transferred by the producers from the consumers
to the government. Due to this the factors of production receive a
reward less than the market price. Therefore while calculating national
income the value of indirect taxes has to be deducted.
The market price of goods and services does not include the
value of subsidies, which are transferred by the producers from the
government to the consumers. Due to this the factors of production
receive a reward more than the market price. Therefore while calculating
national income the value of subsidies has to be added.
b] Gross Domestic Product [GDP (FC)]
Gross Domestic Product at factor cost is the gross money
value, (ie as per the total cost borne by the producer or the total
income received by the factors of production), of all final goods and
services produced within the domestic territory of a country, during a
period of one year.
· Gross Domestic Product at factor cost includes amount of
subsidy received and excludes amount of indirect taxes paid ie [- IT +
S]
· [GDP (FC)] = GDP (MP) –Indirect tax + Subsidy
· [GDP (FC)] = GDP (MP) –IT + S
· [GDP (FC)] = C + I+ G + (X-M) – IT +S.
2] Gross National Product
a] Gross National Product [GNP (MP)]
Gross – total/aggregate
National – produced
by the citizen of a country, regardless of where it is produced, by
their own productive capital
Product – the production of goods and services
Therefore the gross national product is the flow of goods
(consumer goods and investment goods) and services in the economy in a
given period of time usually a year. It is the value (volume) of goods
and services, both tangible and intangible, produced in the economy in a
given period of time usually a year, including net property income from
abroad ie [R – P].
It includes the final goods and services produced and
exchanged for money by the citizens of a country during a given year ie
it is calculated at market price.
· The term gross implies that it includes depreciation.
· Gross National Product at market price includes amount of
cost of production and indirect taxes paid and excludes amount of
subsidy received, that is, net indirect taxes are included.
· It includes net property income from abroad ie [R - P]
· GNP(MP) = GDP (MP) +
(R-P)
· GNP(MP) = C + I+ G
+ (X-M) + (R-P)
b] Gross National Product [GDP (FC)]
Gross National Product at factor cost is the gross money
value, (ie as per the total cost borne by the producer or the total
income received by the factors of production), of all final goods and
services producedby
the citizens of a country, regardless of where it is produced by their
own productive capital, during a
period of one year.
· Gross Domestic Product at factor cost includes amount of
subsidy received and excludes amount of indirect taxes paid ie [- IT +
S]
· [GNP (FC)] = GNP (MP) –Indirect tax + Subsidy
· [GNP (FC)] = GNP (MP) –IT + S
· [GNP (FC)] = C + I+ G + (X-M) – IT +S.
NOTE
There is a wear and tear of fixed capital assets in the
process of production. This
leads to loss in the value of the asset. Idleness of an asset, outdated
assets and loss in the value of capital may also occur in the value of
capital due to fire floods and other calamities. This is known as
depreciation and defined as “wear and tear of capital”. To arrive at net
or exact or actual value, loss in the value of capital assets has to be
deducted from the gross value.
3] Net Domestic Product
a] Net Domestic Product [NDP (MP)]
Net – actual
Domestic – within the political/geographical/territorial
boundaries of a nation, regardless
of who is doing the producing or who owns the productive capital that
produces it.
Product – the production of goods and services
Therefore the net domestic product is the net/actual market
value of flow of goods (consumer goods and investment goods) and
services in the economy in a given period of time usually a year. It is
the net value (volume) of goods and services, both tangible and
intangible, produced in the economy in a given period of time usually a
year.
It includes the final goods and services produced and
exchanged for money in a country during a given year ie it is calculated
at market price.
· NDP (MP) = GDP (MP) – Depreciation
· NDP (MP) = C + I+ G + (X-M) – D
b] Net Domestic Product [NDP (FC)]
Net Domestic Product at factor cost is the net/actual money
value, (ie as per the total cost borne by the producer or the total
income received by the factors of production), of all final goods and
services produced within the domestic territory of a country, during a
period of one year.
· NDP (FC) is also
known as domestic income or domestic factor income
· NDP (FC) = GDP (MP) – Net Indirect Taxes
· NDP (FC) = NDP (MP) – IT + S
· NDP (FC) = C + I+ G + (X-M) – D – IT + S
·
4] Net
National Product
a] Net National Product [NNP (MP)]
Net – actual
National – produced
by the citizen of a country, regardless of where it is produced, by
their own productive capital
Product – the production of goods and services
Therefore the net national product is the net/actual market
value of flow of goods (consumer goods and investment goods) and
services in the economy in a given period of time usually a year. It is
the net value (volume) of goods and services, both tangible and
intangible, produced in the economy in a given period of time usually a
year
It includes the net/actual market value final goods and
services produced and exchanged for money by the citizens of a country
during a given year ie it is calculated at market price.
· If we deduct depreciation from GNP (MP) we get NNP (MP).
· NNP (MP) = GNP (MP) – D
· NNP (MP) = C + I+ G + (X-M) + (R-P)- D
b] Net National Product [NNP (FC)]
Net National Product at factor cost is the net/actual market value of, (ie
as per the total cost borne by the producer or the total income
received by the factors of production), of all final goods and
services produced by
the citizens of a country, regardless of where it is produced by their
own productive capital, during a
period of one year
· It includes income earned by factors of production
· Net National Product at factor cost includes amount of
subsidy received and excludes amount of indirect taxes paid ie [- IT +
S]
· NNP (FC) = NNP (MP) – Indirect Taxes + Subsidies
· NNP (FC) = NNP (MP) – IT + S
· NNP (FC) = C + I+ G + (X-M) + (R-P)- D – IT + S
NOTE
Net National Product [NNP (FC)] is also known as National Income at Factor Cost [NI (FC)]; ie
National income at factor cost means the sum of all incomes
earned by resource suppliers for their contribution of land, labour,
capital and entrepreneurial ability, which go into the year’s net
production.
· NI (FC) = NNP (MP) – Indirect Taxes + Subsidies
· NI (FC) = NNP (MP) – IT + S
· NI (FC) = C + I+ G + (X-M) + (R-P)- D – IT + S
Personal Income (PI)
National income is earned through productive activity
undertaken in a given period of time ie a year.
Personal income however is the total income received by all
individuals or households from all the sources in a given period of time
ie a year.
It is necessary to make adjustments in respect of transfer
payments from the government. Such payment may take the form of
pensions, old age pensions, unemployment doles etc are received by the
people. Similarly gifts, lottery prizes, etc, are received by the
people.
Personal income may be earned or
unearned /transfer income [TP/TI]. All such payments have to be added to
national income for arriving at personal income.
The entire national income, though earned through
productive activity, is not available to the individuals or households
for use or spending etc. The entire national income may not be available
for payment among individuals and households. Certain adjustments, ie
some deductions and some additions are necessary to derive personal
income.
Therefore have to be deducted while
calculating personal income. They are -
A part of corporate profits is kept aside by business firms
for paying tax ie corporate tax [CT] to the government.
A part of corporate profits is kept aside by business firms
for further investments, before distributing it among the shareholders.
This is known as undistributed profits [UP]
A part of corporate profits is kept aside by business firms
for social security contributions towards provident fund etc [SSC]
Such income which is earned through productive activity but
not received by the people is deducted while calculating personal income
· PI = NI + TP – CT – UP – SSC.
Importance of calculating personal income
· It shows the actual income available to a person or
household
· It indicates the potential purchasing capacity of the
people
· It indicates the consumption and savings capacity of a
person. (however the exact amount mat not be indicated by personal
income; for this personal disposable income has to be calculated).
Personal Disposable Income (PDI)
The entire income of a person is not available to a person
for consumption or saving. This is because individuals have to pay a
part of their income as direct/personal taxes [PT], to the government.
For eg personal tax, wealth tax, property tax etc. Tax is “a compulsory
payment to the government”.
What is really available to the individuals/households for
expenditure can be estimated after deducting the amount of personal tax
from personal income.
· PDI = Personal Income – Personal Tax
· PDI = PI – PT
However the entire personal disposable income may not be used for
consumption as a part of it may be retained for savings. Therefore
· PDI = Consumption + Saving
· PDI = C + S
Importance of calculating personal income
· It indicates the level of consumption expenditure
· It indicates the level of private savings and investments
of a nation
· It indicates the tax burden of individuals
Per Capita Income [PCI]
Per capita income is, “the average income of a nation”. It
is calculated as
· PCI = 
Importance of calculating Per Capita Income
Per capita income indicates the standard of living in a
country.
Per capita income to compare standard of living at a point
of time and over a period of time.
It indicates the economic progress of a country.
Eg If Indias national income in 1947 was Rs 8833 crores and
population was36 crores
· PCI = = 
= Rs 245