Term Related to National Income

Term Related to National Income

Gross Domestic Product (GDP)

The Gross Domestic Product is defined as the value of all the final goods and services produced within the boundary of a country within a period of one year.

      GDP = C + I + G + NX
Where,
      C = Consumption
      I = Investment
      G = Government Expenditure
      NX = Net Export

Net Domestic Product (NDP)

❖ When the GDP is calculated after adjusting the weight of the value of depreciation, it is known as Net Domestic Product (NDP).
❖ This forms the net GDP which is the GDP minus the total value of the ‘wear and tear’ (depreciation), which took place in the assets while the production of the goods and services was taking place.
❖ Thus, the formula for calculating the Net Domestic Product is - NDP = GDP - Depreciation.

Gross National Product (GNP)

❖ When the ‘income from abroad’ is added to the GDP of a country, it becomes the Gross National Product (GNP).
❖ It also includes the trans-boundary economic activities of an economy.
❖ The formula is : GNP = GDP + income from abroad.

Net National Product (NNP)

The value of GNP calculated after deducting depreciation of plant and machinery is known as the Net National Product.
      Thus, NNP = GNP - Depreciation
      National Income (N) = NNP - Indirect taxes + subsidies

Cost and Price of National Income

❖ Within an economy, there are two different sets of costs and prices which are calculated. To calculate the national income, we need to choose on what basis the calculation of the national income should be done.
❖ The income of any economy may be calculated at the ‘factor cost’ or the ‘market cost’. Income of an economy, i.e., value of its total produced goods and services may be calculated at either the ‘factor cost’ or the ‘market cost’.
❖ ‘Factor cost’ is the input cost at which the production of something takes place. It includes the cost of capital, i.e., interest on loans, raw material, labour, rent, power, etc.
❖ The market cost is calculated after adding the indirect taxes to the factor cost of the product. It is the final cost at which the goods reach the market.

Taxes and National Income

❖ In the Indian scenario, there is no difference as to the extent of the direct taxes, and there is no requirement of any adjustment to be made whether the national income is calculated at the ‘factor cost’ or the ‘market cost’. It is so as both the ‘costs’ have to be the same.
❖ Besides, these taxes are collected at the income of source of the concerned person or group.
National Income at Factor Cost = NNP at Market Cost - Indirect Taxes

Subsidies and National Income

The various subsidies given by the government need to be adjusted when calculating national income. The subsidies are added to the national income in India.
  This is because the prices at which subsidized goods and services are made available by the government are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services); otherwise, we will have a distorted value (which will be less than its real value).
National Income at Factor Cost = NNP at Market Cost + Subsidies