JJas!

c Concepts of
National Incohle

Chapter Scheme
1.1 Introduction: Macroeconomics
1.2 Goods: Meaning and TYPes 1. 7 .5 Net Domestic Product at Factor Cost
1.2.1 lntermediate Goods vs. Final Goods (NDPFc)
1.2.2 Consumption Goods vs C . l Good 1.7:6 Gross Domestic Product at Factor
. . apita s
1.3 Investment: Meaning and TYPes · Cost (GDPFd
1.3.1 Gross investment vs· · Net I nvestment 1. 7. 7 Gross Nationai Product at Factor Cost
1.3.2 Depreciation (GNPFJ
1.4 Stock vs. Flow 1. 7 .8 Net National Product at Factor Cost
1.5 Economic Territory (NNPFJ or National Income (NI)
1.6 Normal Residents of a Country 1.8 Net Factor Income from Abroad (NFIA)
1.8.1 Meaning of Net Factor Income from
1. 7 National Income Aggregates Abroad
1. 7.1 Gross Domestic Product at Market 1.8.2 Constituents of NFIA
Price (GDPMP)
1.8.3 Difference Between NFIA and Net
1. 7 .2 Gross National Product at Market Exports .
Price (GNPMP)
1. 7 .3 Net National Product at Market Price 1.9 lmportant Formulae at a Glance
(NNPMP) Points to Remember
1. 7.4 Net Domestic Product at Market Price Test Your Knowledge
(NDPMP) Answers to MCQs
---"-:>"

a TI ON: MACROECONOMICS
Meaning and Subject-matter of Macroeconomics
The word 'Macro' is derived from the Greek word makros meaning large. Macroeconomics
deals with aggregative economics. Macroeconomics is defined as the study of overall
economic phenomena, such as problem of full employment, GNP, savings, investm.ent,
aggregate consumption, aggregate investment, economic growth, etc. It is also known
as Theory of Income and Employment since its major subject-matter deals wit h the
(
determination of income and employment.
I
I The study ofmacroeconomics is used to solve many problems ofan ~onomy like, monetary
iL problems, economic fluctuations, general unemployment, inflation, disequilibrium in
the balance of payment position, etc. The scope or subject-matter of macroeconomics
includes t he t opics as shown in Fig. 1. 1.

M di:
 ::.~ ;/;.,/~
Macroeconomics

l
Theory of
Income and
I
Theory of General
Price Level
I
Theory of
Economic
7 Theory
of
Employment and Inflation Growth Distribution
Fig. 1.1 Subject-matter of Macroeconomics

Importance of Macroeconomics
Macroeconomics has emerged as the most challenging branch_ of economics. In the words
of Samuelson, "... no area of economics is today more VItal and controversial than
. "
macroeconomics.
The importance of macroeconomics on theoretical and practical reasons is clear from the
following points:
1. I_t gives an overall view of the growing complexities of an economic system. It provides
powerful tools to explain the working of the complex economic systems.
2. It pro:vides the basic and logical framework for formulating appropriate macroeconomic
policies (e.g., for inflation, poverty, unemployment, etc.) to direct and regulate economy
towards desirable goals.
3. It helps in analysing the reasons for economic fluctuations and provide remedies.
Limitations of Macroeconomics
Some of the major limitations of macroeconomics are:
(t) Macroeconomics ignores structural changes in an individual unit of the aggregate. The
conclusions drawn on the basis of aggregate variables may be misleading.
(it) As Hicks puts it,"most of macro magnitudes which figure so largely in econorruc
discussions are subject to errors and ambiguities."

1.2 GOODS: MEANING AND TYPES

Goods are any physical object, natural or man-made, which can be seen, touched and
measured, and command a price in the market. Goods include both physical objects (i.e.,
tangible objects) and services (i.e., intangible).
A good which commands a price in the market is called economic good and which does
not command a price is called non-economic good .
. 1.2.1 Intermediate Goods vs. Final Goods
A product can be intermediate or final. The distinction, based on end-user or ultimate
user, is of great importance in national income accounting.
Intermediate Goods
They are those goods which are acquired for further production or for resale during the
same year.
 Examples. Wheat h .

l
heory
Of
fu . pure ased by a restaurant
rruture Purchased by a furniture sh f, , cotton purchased by thread malting mill
ready-mad
e garments, etc.
Features of · .
op or resale, cloth h
pure ased by manufacturer of
'

ribuu 011 Intermediate goods are:

(a) The value ofint~rmediate goods is not added in nati .
of double counting). onal income (to avoid the pr9blem
(b) These goods are not consumed by consumers.
Drds
han (c) They remain within the production lx,undary Production b d ; · •
Ii · . oun ary 1s an llllagmary
ne drawn around the production sector of an eronomy..Within the line firms purehase
each other's goods for further production.
the Final Goods
...
des They are those goods which are acquired for persona[ consumption and investment. These
goods reach their 'final user'. ·

me Examples. (a) Wheat, furniture, doth, bread, butter, etc., used by the consumers, (b)
Machines used by producers, (c) Government Services are also treated as final good in
National Income Accounting.
Features of final goods are·:
(a) The value of final goods is included in the calculation of national income.
(b) Final goods are consumed by con~umers (called consumption goods) or used1 as
investment by producers (called capital goods).
le
(c) They remain outside the production boundary.
C Difference between Intermediate and Final Goods
.
Table 1.1 summanses th e difference between interm~diate
. and finalGoods
Final goods.
Table 11 Difference between Intermediate and

Intermediate Goods ' ' :,Final Goe/d's - I

.
1. They are used for production ofother . 1. They are used for final consumption.
goods and services.
2. They are meant for resale, so value 2. They are not meant for resale, so no
• added to these goods.
value 1s .
gets added to these goods. .
. within the production 3. They remain outside the production
3. They remam
boundary. . · al

I boundary. . d d . ational 4. Their value is included m nation

4. Their value is not mclu e m n
income .. Milk' bought by household
I income.
5. Examp,e., .
for resale.
Milk used in a sweet s
hop 5. Example. .
for consumption.

rm
 ;J ••
.~ti j,,~ M I~ •

1·2·2 Consumption Goods vs. Capital Goods .

. (,) Consumption G oods. They are those goods which · are boughtn bY consumers as
final or_ ultimate goods to satisfy their wants clirectlY· Thesend i clud~ (,) . dunble
like car, television, radio, etc., (it) non-durable good_• a serv:tces like frui~
oil, milk, vegetable, services of doctot teacher, etc., (ii,) senu-durable goods such as
·crockery, etC., and (iv) services like bank officer, doctor, teacher, etc. 3
(ii) Capiul. Goods. They are those final goods which form the ~apital th stock of
country at the end of an accounting year and which are used up m e production
'process. ThesC include ( ) durable goods like car purchased by a firm for use in
1
business (it) stock of raw material, semi-finished and finished goods at the end of
I
1· an accounting year. Such goods satisfy human wants indirectly.

1.3 INVESTMENT: MEANING AND TYPES

Investment .means addition made to the stock of physical capital such as buildings, plants
machines, tools and equipments, etc. during a given period of time. It is also called capital
fo~atiol). lt raises the productive capacity of the economy.
1.3.1 (;ross Investment vs. Net Investment
Gross Investment. It refers to total addition made to stock of physical capital over a
period of time. It includes depreciation.
Net Investment. It is defined as net,addition made to stock of physical capital over a
period of time. It does not include' depreciation.
1.3.2 Depreciation
It means loss of value ?r fall in the value of fixed assets due to normal wear and tear in
the process of productton and expected obsqlescence. It is also called cons ti f
fixed capital. . ump on o

Significance of Depreciation. Depreciation helps to differentiate between d

For example: . gross an net.

Gross Investment - Depreciation = Net Investment

. - D epreciat10n
or Gross Investment - Net investment . .
or Net Investment + Depreciation = Gross Investment.
Thus, we come to the conclusion that:

- Depreciation

Gross Net

+ Depreciation
~A STOCK .vs.".'" " FLOW
" '::::-·l2_~-=--::::."J.-:.-::-::.f~
1
._.,.:,. ,~::~--r--
-
:~~~~~-.. :·,~;:: .::1!.=!~
2
1• .
ble 1.2 gives the difference b
.i a Table 1 2 n· etween stock and flow.
· ifference b
Stock etween Stock and Flow Variables
1. Stock means that . Flow
economic variable wJ~tity of an 1. Flow is that quantity of an economic
at a Particular . c is measured
point of time variable which is measured during a
2. Stock has no time di .· period of time.
mens1on.
2. Flow has time dimension-like per
3. Stock is a static concept. hour, per day, per month and per year.
4. Examples: 3. Flow is a dynamic concept.
(a) Wealth 4. Examples:
(b) Water•in a tank (a) Income
(c) Inventories (b) Water in a stream
(d) Capital (c) Changes in inventories
. (d) Capital formation
There 1s mutual dependenc b k · 'thdr wal
b kd e etween stoc and flow. For example, flow of WI a s
from a an epends upon the stock of saving..
1.5 ECONOMIC TERRITORY
st
The _fir thing to note is that economic territory of a country is not simply political
frontiers of t~at country. The two may have common elements,· but still they are
conceptu~y d~erent: Let us first see how it is defined. According to the United Nations,
"Econonuc territory 1s the geographical territory administered by a government within
which persons, goods and capital circulate freely."
The above definition is based on the criterion "freedom of circulation of persons, goods
and capital". Clearly, those parts of .the political frontiers of a country where the
government of that country does not enjoy the above 'freedom' are not to be included in
e~onomic territory of that country. One example is embassies. Government of India does
not enjoy the above freedom in the foreign embassies located within India. So, these are
not treated as a ·part of economic territory of India. They are treated as part of the
economic territories of their respective countries. For example, the US embassy in India is
a part of economic territory of the USA Similarly, the Indian embassy in Washington is
a part of economic territory of India.
Scope
Based on 'freedom' criterion, the scope of economic territc:>ry is defined to cover:
(t) Political frontiers including territorial waters and air space.
(it) Embassies consulates, military bases, etc. of the country located abroad, but
excluding ~hose of other countries lo~ated within the political frontiers.
(iii) Ships, aircrafts, etc. operated by the residents between two or more countries. . . .
(iv) Fishing vessels, oil and natural gas rigs, etc. operated by the residents in the
international waters or other areas over which the country enjoys the exclusive rights
or jurisdiction.
 Implication
Sa,-u.rwati l ntToductary Ma~ ·
.,o~conomi· -"'
cs--x.a

National income and related

· f aggregates
· al . are basically measures of prod uction
· act"1 1.
T'h ere are
.
two
d
categones
d
o
. al
nat:10n
d
mcome aggregates-domestic a d .
n nat1ona]
" ty.

d omestlc
• ,L • ,L
pro uct an nat:J.on pro uct. Production act ivity or allproductio
· • • • J •
.
n unzts lo
' or
witotn tr.1e economic territory ts uomesttc
. product. Gross domestic product, net domca.led .
prod uct are some examp1es. Wce will learn more about the implications after stu d . estic
concept of resident. It is concerned with 'where'. Ying the

I
1. 6 NORMAL RESIDENTS O F A COUNTRY
Note that citizen and resident are two different terms. This does not mean th t •.
. "d d "d . .. A a a citizen
' 1s not. .res1 ent, an a resth ent .1s. not af at1zen. person
. can. be a citizen
. as well as resi•d ent
ut 1t 1s not necessary· t · at a c1t:1zen
f o a country 1s necessarily the
. resident of that country ·
b
A person can b e a c1t1zen o one country . and at the same time a resident of another·
country. For example, an NR1-Non-res1dent Indian. An NRl is citizen of India b
resident of the country in which he lives. ut a
Citizenship is basically a legal concept based on the place of birth of the person or so
legal provisions allowing a person to become a citizen. On the other hand, residentshi;::
basically an economic concept based on the basic economic activities performed by a
person.
A resident is defined as follows:
A resident, whether a person or an institution, is one whose centre ofeconomic interest lies in
the economic territory ofthe country in which he lives.
The 'centre of economic interest' implies two things: (i) the resident lives or is located
within the economic territory and (ii) the resident carries out the basic economic activities
of earnings, spending and accumulation of wealth from that location. It is concerned with
'by whom'.
Implication
Production activity of the residents of an economic territory is national product. GNP,
NNP, are some examples. National product includes production activities of residents
irrespective of whether they are performed within the economic territory or outside it.
In comparison, domestic product includes production activity of the production units
located in the economic territory irrespective of whether they are carried out by the
residents or non-residents.
1.7 NATIONAL INCOME AGGREGATES
National Income. Mor National Produd is defined as the money value of allfinal goods
and services produced within the domestic territory of a country in an a•c counting year plus
th
netfactor income from a/Jroad. National income/product is the value of production by e
normal residents of a country (within or outside the domestic t erritory).
Domestic Income. Dlis the value of production within the domestic territory of a count!}'·
 BasicOonceptsofNationallncomc __ __ _ _ • ~----=
There are many different concepts of national income Each h
1
: : _:

ifi
=1.7)
..
method of measurement and use. A list of these eight co~cepts fas a_ spalec.. c me~rung,
. . o nat:Ion mcome 1s:
1. Gross Domestic Product at Market Pnce (GDPMP)
2. Gross National Product at Market Price (GNPMP)
3. Net National Product at Market Price (NNPMP)
4. Net Domestic Product a~ Market Price (NDPMP)
5. Net Domestic Product at Factor Cost (NDPFc)
6. Gross Domestic Product at Factor Cost (GDPFc)
7. Gross National Product at Factor Cost (GNPFc)
8. Net National Product at Factor Cost (NNPFc)
Notes.
1. Bas!salbf distinction between Gross and Net is Depreciation or consumption of fixed
cap1t . _
Gross =Net+ Depreciation
· · or Net= Gross - Depreciation
Exception: Gross output and net output.
Where Gros~ output= Net output+ Intermediate consumption
2. Basis of distinction between National and Domestic is Net factor income from
abroad.
National = Domestic+ Net factor income from abroad.
3. Basis of distinction between Market Price and Factor Cost is Net indirect taxes (i.e.,
Indirect taxes - Subsidies). .
Market Price= Factor cost+ Net indirect taxes
= Factor cost + (Indirect taxes - Subsidies)
or Factor Cost =Market price- Net indirect taxes
=Market price - (Indirect taxes - Subsidies)

1.7.1 Gross Domestic Product at Market Price (GDPMP)

The subscript 'gross' means that GDPMP is gross of consumption of fixed capital. 'Domestic'
means domestic teritory or resident production units. 'Product' means final products.
'Market price' means that GDP is calculated at price inclusive of indirect taxes and
exclusive of subsidies. GDPMP is a macro concept which is defined as the market value
of the final goods and services produced within the domestic territory of a country
during one year by all production units inclusive of net indirect taxes and depreciation.
The important points to remember about GDPMP are:
,f
V

· produced d · ·
1. GDPMP is a flow concept, i.e., flow of goods and sefVlces urmg a Year, I
does not include goods produced in the previous year- . t
· . I 51·tuations where pnce of bas
2. GDPMP 1s always GDPMP at current pnces. n e Year is
taken, it is called GDPMP at constant prices. . . consurn .
. cl des value of mtermediate
3. GDPMP is not value of output because it ex u d • .. nits in domestt' . Ption,
· G · val dded b all pro uong ""u c ternto
,.,., . DPMP ,s sum total of ue • Y. ional companies in India.) ry of
• al · financ1·a1 transactions
a country. (It includes value added by multmat . and 10 ·
4. GDPMP excludes transfer payments, capit gains, corn,
generated through illegal means. . where market value = pri
ds and sefVlces
5. GDPMP is the market value of fi.tnal goo ce )(
quantity. of final goods. andGVR
services.· eludes only final value of goods and services.
10
6. To avoid. double counting,
d d • MP
t rn·tory of a country and therefore, excludes NFr A

7. GDPMP ,s confine to o01est1c e "'·

GDPMP is measured by the formula: . .
GDPMP = Value of output in domestic territory- Value of intermediate consumption

or GDPMP = 2 Value added "',

Qyes. 1. Why js GDPMP called gross? . I
Solution. GDPMP is /jnal products valued at market price. This is what buyers pay. But .
this is not what production units actually receive. Out ofwhat bufers_pay, the production 1
units have to make pro~sion for deprecia_tion and_rarn;ent _of indirect tax like excise, 1·
00
sales taX etc. This explatns) why GDPMP ,s called gross. It IS called gross because
· provisw~ has been made for depreciati.on. However, if depreciation is deducted from I
GDP, it becomes Net Domestic Product (NDP).
Qyes. 2. Why is GDPMP called 'at market price'?
Solution. Out of what buyers pay; the production units have to make payments of:
indirect taxes, if any. Sometimes production units receive subsidy on production. This
is in addition to the market price which production units receive from the buyers.!
Therefore, what production units actually receive is not the 'market price' bur "market J
price_- indirect t~ + subsidies". This is what is actually available to production units . 1

for distnbutton of mcome among the owners·of factors of production. \i!J

1.7.2 Gross National Product at Market Price (GNP,,,,J

GNP,a_ is d~ed as the market value of the final goods and services produced in the
domestJ.c temtoryofacountryb
. . an accounting year in
Ynormal rest"dents dunng . cluolllg
J: ..

net factor mc9me from abroad.

GNPMP is measured by the formula: I

GNPMP = GDPMP+ Net factor income from abroad

J
, !

d
 &JtFMl&hiil"f"M E :< . } .. 2

1., 7, 3 Net National Product at Market Price (NNPMP)

NNPMP is de6?ed as the market val~~ 0 ~ the outp~t of final goods and services produced
by normal resident~ of an eco?omy ?1 its domestic t~rritory during an accounting year
exclusive of depreaation and mcluswe of net factor mcome from abroad.
NNPMP can be calculated by the following formulae:
NNPMP = GNPMP- Depreciation ... (1)
NNPMP = NDPMP + NFIA ... (2)
NNPMP =:= GDPMP+ NFIA - Depreciation ... (3)
1.7.4 Net Domestic Product at Market Price (NDPM,)
NDPMPis defined as the market value offinal goods and services produced in the domestic
territory t of a country by its normal residents and non-residents or by all during an
accounting year less of depreciation.
NDPMP can be calculated by the following form,ulae:
NDPMP = GDPMP- Depreciation ... (1)
NDPMP = NNPMP- Net factor income from abroad ... (2)
or NDPMP = L NVA ... (L .NV4 = ~ummation of Net Value added of all firms)
1.7.5 Net Domestic Product at Factor Cost (NDPFc>
NDPFCis alt~matively known as Net Domestic Income. NDPFc is defined as the total
· factor incomes earned by the factors of prpduction. In other words, NDPFc is the sum
of domestic factor incomes~
NDPFC can be calculated by the following formulae:
NDPFc = Compensation of employees + Operating surplus
+ Mixed income of the self - employed ...(1) .
or NDPFC = NDPMP..;. Indirect taxes + Subsidies ... (2)
or NDPFC = NDPMP - Net indirect taxes . ...(3)
1.7.6 Gross Domestic Product at Factor Cost (GDPFc>
GDP at factor cost is defined as the sum of net value added by all the producers in the
domestic territory of a country inclusive of depreciation during an accounting year.
GDPFC is measured by the following formulae:
GDPFc = GDPMP - Indirect taxes + Subsidies ... (1)
GDPFC = NDPFC +Depreciation ... (2)
= Compensation of employees + Operating surplus + Mixed income
+ Depreciation
= Domestic factor income + Depreciation
 _.._..,__......._ 'F . • . , . . ,~ ',Jllf#l'l,l)Qh ;.-,,r-.::
-r,+fAF!Jl 'l.,f _- ~ , l

~:1[0 .•··/ "' . .. . . . ; / , ' ,' ... , , ~ - ·.

1.7.7 Gross National Prod1:1ct at Factor Cost (GNP,c)
GNl'i is defined as the sum of gross value at factor cost by normal residents
I coun:r du.ring a year and net factor income from abroad. of a
l

,,,j GNP,FC is calculated

,
by the following formulae:
I GNPFC = NNPFc + Depreciation ... (1)
GNPFC = GNPMP- Net indirect taxes ·...(2)

1.7.8 Net National Product at Factor Cost (NNPFc> or National Income (Nn
National Income is defined as the, factor income accruing to ~e norm_al residents of
the country (rent, interest, profit and wages) during a year. It ts the sum of domesf
factor lnco~e ana ., defr1~e d as the sum of netIC
net factor·income fr~m abr_oad. NH;,Fc 1~
value added at factor cost by normal residents m the domestic t~rntory of a country and
net factor income from abroad in an accounting year.
NNPFC or NI is calculated by the following formulae:
NNPFc = NDPFC + Net factor income from abroad ... (1)
NI= Domestic factor income+ NFIA (2)
1
•••

= Compensation of employees + ,Operati~g surplus + Mixed income + NFIA

= NNPMP - Net indirect taxes -
1.8 NET FACTOR INCOME FROM ABROAD (NF/A)
The concept of Net Factor Income from. Abroad·(NFIA) is of great significance. It
distinguishes between domestic factor income and national income. ·
National Income= Domestic factor income+ ·, Net factor income from abroad
1.8.1 Meaning of Net Factor Income from Abroad
Net factor income from abroad is the difference between the income received from
abroad by the normal residents of a country for rendering -factor s~rvices and the
income paid for the factor services rendered by non-residents within the domestic
territory of a country. In other words, the normal residents of India earn income from
abroad in the for~ of wages, rent, interest, _r,rofit, etc. On the .same line, foreigners who
are normal residents of other countries· also earn income from India. The difference
between the two is called net factor income from abroad.
NF/A =Factor income from abroad by the normal resident - Factor income of non-
resident in the domestic territory
1.8.2 Constituents of NF/A
' ... ,The three main components of NFJA are:
~(7') N~t compens~tion ·o f empJqyee~. .
(/;) Net income from property and entrepreneurship (interest, re~t, profit and dividend)
and · ·
(c) Net retained earnings of resident companies abroad.
 - ,._11
!!!!!!!!!!l!!!! ::~~===~. .=-=~=-=-.:=-==_!
. 1.;~
11
(a) Net Compensation of Employees. Net compensati f
between compensation of employees received b on-~ employees is the difference
temporarily abroad or are employ,ed abroad and si~ resi ent workers that are living
workers that are temporarily staying or employed :tyments made_to no~-resident
country. _ n the domestic territory of a
Net Compensation of Emplovees from Abroad = Com .
'
a country ~orking ahroad - Compensation paid t0 h pensatton · dby r~s1"d ~nts of
r~ceive
domestic territory. · _ t e non-re 51dents working m the
Examples of factor income earned from abroad by Indian •d
(t) Profits earnediby State Bank of India located in En re~ ents are:
net factor income earned from abroad by I di . ~dan 1 come under the category of
n an res1 ents
(ii) Compensation of employees paid to Indian employees · ki · h E - •
• {i°
American and Japanese embassies located in India comeword ng t e mbasfsf:y like
income earned from abroad by Indian residents. un er t e category o _actor
(iit) Rent received by State Bank of India on the building rent d t - r · b ·
New Delhi. _ _ _ e o a 10re1gn em assy m
1 "
(iv) Interest income received by Indians on the bonds they h d fi r ·
.
countnes. .- pure ase rom 1ore1gn
(v) Compensation of employees paid to Indian_employees working in the office of the
World Bank located in India. . . _
Note. Salary paid to Indian Amb~ssador ih USA by Government of India is not included
under tJie. category of net factor IJ!Come from abroad by Indian residents. It is a part of
domestic income. - -·: - · ', .-_,
(h) N~t Income 6:o~ Property and E_ntrepreneurship. Net income from property and
~ntrepreneursh1p 1s equal to the '!ifference between ,the income received by way of
interest, rent and profit by the residents of a country and similar payments made to
the rest of the world. ·
Net In_co_me ~rom Property and ~ntreprenelirship from Abroad = Income received by
the residents m the form of rent, interest and profit fro~ the rest of world - Payments
made in the form of rent, interest and pro.fit to the rest of the world.
(c) Net Retained Earnings of Resident Companies. Net retained earnings of resident
companies is the difference between the retained·earnings (or undistributed profits) of
the resident companies located abroad and retained earnings of non-resiaent (or
foreign companies) located within the domestic t~rritory of a country.
Net Retained Earnings of Resident Companies Abroad= Retained Earnings of
Resident Companies Abroad - Retained Earnings of Foreign Companies Located in
a Country.
Example: British companies operating in the domestic !e1:itory of_ India are fo_reign
companies for India and Indian companies operating in Britain are resident companies of
India. Thus,
Net Factor Income from Abroad ·= Net compensation of employees from abroa? + Net
income from property and entrep~eneurship fr~m
abroad+ Net retained earnings of resident comparues
abroad. ·