NATIONAL INCOME & RELATED AGGREGATES

(UNIT 1-CHAPTER-3)
THERE ARE 3 MAJOR RULES TO STUDY THE CONCEPT OF NATIONAL INCOME-
1. Gross, net & depreciation
Gross- it is the addition to the stock of capital before making allowance for
depreciation.
Net- it is tha actual addition made to the capital stock of economy in a
given period .
Depreciation- It refers to the fall in the value of fixed assets due to normal
wear & tear, passage of time or change of technology.

Gross value= Net value + depreciation

Net value= Gross value – depreciation
Depreciation= Gross value- Net value

2. Net indirect tax, factor cost & Market price

Net indirect tax refers to the difference between indirect taxes & liabilities.

Net Indirect Tax= Indirect tax – subsidies

Indirect tax- It refers to those taxes which are imposed by the government
on production & sale of goods & services. Eg- GST
Subsidies- subsidies are the ‘economic assistance’ given by the government
to the firms & households with a motive of general welfare. Eg- LPG
cylinders given to consumers at subsidized rates.

Factor cost- It refers to the amount paid to the factors of production for
their contribution in the production process.
Market price- It refers to the price at which product is actually sold in the
market.

Market price= Factor cost + NIT

MP= FC + (IT - Subsidies)
MP= FC + IT – Subsidies
 Factor cost= Market price – NIT
FC= MP – (IT - subsidies)
FC= MP – IT + Subsidies

The consept of NIT is very important to differentiate between factor cost &
market price. MP includes NIT, whereas, FC excludes it.

3. Net factor income from abroad, Domestic income, National income

Net factor income from abroad= Factor income from abroad – Factor
income to abroad
it refers to the difference between factor income received from the rest of
the world & factor income paid to the world.
Factor income from abroad (FIFA)- it is the income earned by the normal
residents of a country from the rest of the world (ROW) in the form of
wages, rent, interest, dividends & retained earnings.
Factor income to abroad (FITA)- It is the income paid to the normal
residents of other countries for their factor services within the economic
territory.

NFIA is significant to differentiate between “Domestic Income” & “National

Income”.
National Income= Domestic Income + FIFA-FITA
NI= DI + NFIA

Domestic income= National Income – FIFA-FITA

DI = NI – NFIA

On the basis of these three rules, there are 8 aggregates of national

income-
GDPmp GNPmp
GDPfc GNPfc
NDPmp NNPmp
NDPfc NNPfc

In this way we have-

Gross & Net
Domestic & National
MP & FC

CONVERSIONS ARE AS FOLLOWS-

1. GDPmp to NDPmp
G N
Both are Domestic concepts
Both are at Market price
To convert gross to net, we use depreciation
Gross – Depreciation = Net
GDPmp- Depreciation =NDPmp
2. GDPmp to GNPmp
Both are gross concepts
Domestic National
Both are at market price
To convert domestic to national, we use NFIA
Domestic + NFIA = National
GDPmp +NFIA = GNPmp
3. GDPmp to GDPfc
Both are gross & domestic concepts
MP FC
MP – NIT= FC
MP – (IT - Subsidies)= FC
MP – IT + Subsidies= FC
GDPmp-NIT= GDPfc