CHAPTER 4 National Income and Related

Aggregates
Some Basic Concepts related to National Income
National Income and Related Aggregates
Basic Diference between National Income and Related Aggregates

1. Some Basic Concepts related to National Income

Far proper understanding of the concept of national income and its accounting
nacedure, it is essential that the students should have some basic knowledge regarding
sameconcepts which are used in national income accounting. This section providesa brief
analvsis of these cocepts. The students are required to cautiously go through these
concepts as these are pre-Tequisite of the study of national income accounting.
( Domestic Territory of a Country
In the ordinary language,
concept of domestic territory What is Domestic Teritory?
means political or
geographical boundary of the country. But Domestic
concept teritory
of a
wider thancoutry
is a
n national income accounting the term domestic territory is political
used in different sense. Definition of domestic
a boundaries of a country. it inciudes
incudes the following: territory
besides political boundaries, the
1) terrtorial waters of a country as well
Political or geographical boundary (including territorial as its aeroplanes and ships
waters) of the country. operated by residents of the
(2)
Ships and aircrafts operated by the residents of the concemed country across different
parts of the worid and its
COuntry between two or more than two countries. For embassies.
instance, Indian ships ferrying between Japan and
orea or passenger aircrafts flying between England and Canada are very much part
of Indian
domestic territory.
gboats, oil and natural gas freighter or floating patforms in international
r waters operated by the residents of that country or the territory ot the
y w h e r e the residents have the authority to explore oil. For instance, operating
n boats Indian fishermen in the international water course ot lndian
Oceang
is
by
very much part of Indian domestic territory.
4) Embassy a r y inst.all.aliOn, scienutic
stati a ountry abroad, its trade commissioner, For iistC n c l a n
n a t i o n and immigration offices, aid agecies, ctc.Amenan bmbassy in
Embassy
ndia is
in AmeriCa 18 a part of domestic territory of lndia but
a part of domestic erritory of Tndi.
 Introductory Mactoers
52

(i) Normal Residents of a Country the normal

residents ofac
a Countr

National income is the sum total ofincome ofonly Residents.

the concept of Normal

therefore understand
must
institution
wno
oralarny resides in aCo
and whose centre of economic
A normal resident is said to
be a interest
person lies in that countty. A person must resd
or at com
Tesid
resident ofthar.
normal
b e c o m e the
than one year to
one year or more
Country for in this
context:
should be noted
The following points individuals as
well as
institutions.

include both
(1) Normal residents country
is a l s o a citizen of that cou
normal resident ofa he is a citizen of th
(2) It is not necessary
that
country
even when the o
be a normal
resident ofone more than
o n e year and his cene
person may in USA for
Indian is living be d e e m e d as a nornal
resid.
le
For example, if an he would

economic interest
lies in that country, India.
citizen of
continues to be a
USA even when he not to be tale
and IMF in a country a r e
such as WHO
organisations in these organisaf sat
However, Indians working
International
(3)
normal resident
of that country.
normal resident
of India.
would be taken a s c o u n t r v : (i) fore

are not
treated
residents
as normal of the
The following persons medical treatm
(4) as recreation, holiday,
for such purposes
visitors in the country m e m b e r s of foreign
vessels, comme
conferences, sports, etc., (11) c r e w
studies, who are emplovee
seasonal workers the ofcountry, (ii) foreigners
travellers and for purpose of install
and who have c o m e to the country
non-resident enterprises will be treate
from their employers. All these people
machinery purchased less than o n e year in the
domestic territorv of
for
foreigners as generally they stay in that country.
lie
their centre of interest does not
given country and
Border workers or persons who
crossthe border between two countries dale
(5) of the country in w
regularly in order work in o n e
to country a r e the residents
they live, not of the country in which they are working

Officials,
(6) treated diplomats, and members of the armed forces of a foreign country
as the normal residents of the country to which they belong, and not o

country in which they are employed.

In short, normal residents of our country include: (i) Citizens (and institutions)o
country who normally reside in the country and whose centre of economic intert lies
the country. (ii) Citizens of other nations who continue to live in our countr s
period of one year and whose centre ofeconomic interest lies in our country. (u n
our country working in international organisation or foreign embassies loc recreatto
u
country. Contrary to it, (1)T hose foreigners who visit ourcountry for travelling.i
nor
holidays, medical treatment, studies, conferences, sports, etc., will not be treate" orces

residents of our country. (11) The officials, diplomats and members of armea l no
will n

foreign country posted in our country and international organisations located here
treated as normal residents of our country.
 Related Aggregates
ne and
53

nr*examples.
o f Norma Residents and Non-Residents:
of India
Normal Residents Non-Residents of India
in foreign embassies in India. 1.
.indians won Foreigners working in Indian embassies in
Canada and Japan.
employed in World Health
Organisation 2. Foreigners working in World Health
indians

ocated in India. located in India. Organisation

working in the office of International 3. The German Director of the office of
3 L o c a l p e o p l e

Monetary
Fund in India. Monetary Fund located in India. International|
Ambassador for India in USA 4. USA Ambassador in India
The foreign citizen living in India for a period of 5. The foreign technical
experts working in India
nre than one year (other than those for studies a period of less than one
for
year.
or medical treatment).

Domestic Versus
National Concepts
Concept ofedomestic roduct or income refers to the product produced in the domestic
reriory of a country by all producers (normal residents and non-residents). On the
cantrary, the concept of national product or income refers to the product produced in the
domestic territory ofa country and rest ofthe world by all normal residents ofthat country.
in the conceptofdomestic product orincome, is added net factor income from abroad, it
becomes national product or income. Thus,

National ProductorIncome Domestic ProductorIncome +NetFactorIncomefrom Abroad

Onthe contrary, if net factor income from abroad is deducted from the concept of national
product or income, then it becomes domestic product or income.

Domestic Product or Income = National Product or Income - Net Factor Income from Abroad

Net Factor Income from Abroad

Diterence between factor income from abroad earned
by the normal residents of a
ountry and the factor income earned by the non-residents in that country, is called Net
Factor Income from
Abroad.
Definition
dctor Income from Abroad refers to the difference between the income earned by the
dTesidents of a country for rendering factor services to rest of the world and the
P to the non-residents or foreigners for rendering tactor services in the
9mestic territory of a
Net Factor country.
Income from Abroad Factor Income received by normal residents from rest of the wold
Factor Income received by non-residents inthat country
-

Ino
nother words, conce
an example. Suppos
exampleCOncept ofnet factor income from abroad can be explained with the help of
Indvan banks upposing Indian residents earn wages by working in foreign countries.
a banks receive interest by their
on loans given abroad. Indian residents i
earn rent
54

Introductor Maco
Ownership of foreign property and earn profit by their capital
manner let us
suppose that Indian residents earn 1,000
investme.
00 crore nent abroa
rent and crore by
by way u
way
profit in return for factor services rendered abroad. Simila"ges
Working in the domestic territory of India receive R 800
800 crore
rendered by them. Thus, the difference between the tactor
and the factor income
crore in return f o
return fo
incom received
me received
non-Tes
paid to the foreigners, is net factor
from abroafrom
income fro a
Net Factor Income from Abroad =7 1,00crore-800crore= R200 Cror
rore
In this case 200 crore will be called net factor income from abroad (NFLA
hree main components of net factor income from abroad are:

() Net wages of employees from abroad.

(11) Net income from property and entrepreneurship
(11) Net retained earnings of resident companies abroad.

Components of Net Factor Income from Abroad

1. Net Compensation of Employees: It is the diference between compensation (of employees)re
made to non-resident wore
by resident workers, temporarily employed abroad and a similar payment
who are employed temporanily within the domestic temlory of a country. (Compensation of empo
refers to payments made by the employers to the employees both in cash and kind. It also inouas
contribution to employees provi
payments made by the employers on behaif of the employees (lhike
fund)]
than retained earnings of resoat
2. Net Income from Property and Entrepreneurship (other
in the form of rent, interest and p
companies of abroad): t is the difference between the income rest of the world.
received by the residents of a country and similar payments made to the
of Resident Companies Abroad: It is the difference between the rela
3. Net Retained Earnings
companies loc
earnings of resident companies located abroad and retained earnings foreign
of
within the domestic teritory of a country

Net Concepts
(iv) Gross Versus
The term 'Gross'
S used in a broad against the term 'Net'. Gross product or n
sense as
wear and t
includes net product or income and consumption offixed capital (normal
obsolescence
+ normal rate of accidental damages).
Net ProductorIncome=GrossProductortncome-Consumption ofFixed Capital
Thus, to know net productor income, consumption of fixed capital (depreclatuo
cted from gross product or incomne.
apital
t h e other hand, to know gross product or income, consumption offixed
to n e t
product or income.
added
Gross Product or Income = Net Product or income+ Consumption of Fixed Capla
 Aggregates

and
Related 55
me
N a t h n aI
l na

or Depreciation
Consumptionof
Fixed Capital
value of fixed capital depreciates due to normal wear and tear,
consu
huringproduct uction process

and obsolescence.
obsolescence.

damage
identa,
dental
Definition
in the value of fixed
of fixed capital or depreciation is the los capital dueto
nption foreseen obsolescence and accidental damage.
onsear and
ormal wear a n d tear,
fixed capital
n main
of
causes of consumption
are:

mal Wear and Tear: In every economy, during the production of goods and services
Three
Wear and Tea
Normal
factory premises sutter lot of wear and Consequently, value of
tear.
nmachines,
ools and
goes down.
goods
these capital
(i) Foreseen Obsol Some machines turn obsolete due to technical and other
Foreseen Obsolescence: in value. This tall in value is called obsolescence. By
reasons and so depreciate fixed capital due to change in productioon
m e a n s tall in the value of
obsolescence it
in demand for the goods and services produced by it. For
technique or change
diesel engines in cars has gradually rendered the use of
example, increasing u s e of
petrol engines obsolete. It is technical obsolescence. Similarly, increasing use of
clothes has rendered the u s e of nylon clothes obsolete. Use of machines
terylene
making nylon clothes has gone down and s o these have
turned obsolete.

Consequently, their value has declined considerably.

Many a time, capital goods met accidental
ii) Normal Rate of Accidental Damages:
damages, causing fall in their value. This fall in value is called normal rate of
accidental damages. Thus,

Consumption of Fixed Capital=NormalWearand Tear+Obsolescence+Accidental Damages

) Market Price Versus Factor Cost Concepts
National income/national product may be expressed in terms of market price, or factor
cost. Expressed at market price, national income/product (or domestic income/product) is
cdled national income at market price' (or domestic income at market price). Likewise,
at factor cost, national income is called national income at factor cost.
presed
The difference is as
under:
indCtprice includes the (i) impact of subsidies which tend to lower it, and (ii) impact of
ndirect taxes which tend to raise it.
tor cost is free from the impact of subsidies or indirect taxes. Accordingly, national
into national income/national
Dro atr factor
domestic income) at market price is converted
POuct cost, using the following
equation
Nome d at Market Price-Indirect Taxes+Subsidies National Income at Factor Cost
Subsidies which lower added, and indirect taxes which rase the
market price are lower the market
Market Cn price are

deducted.
 Introd Maca
56 written
as under:
also be
may
The
above onal Income at Market Price Net direct Taxes National
equation
me at Facdor CAR
Subsidies)
taxes
Indirect
=
taxes
indirect
and Transfer Income
(Net

Factor Income (or

Factor Payments)
of factors of
or Transfer Payment
uction (the hoUSeh
ne
theowners
incomes
received by
incomes are
the nding to the
Coresponding real flow Of of factor sservie
hau. factor
producers.
Factor senvices to the
rendering their
factor flow from the producers to the
rendede to the producers, tnei
to the producers,
there is a money
once of flows, there is a production
these flows productions nbe
households consequence
of these of goods ad
and wages. As
a
interest, profit
the economy. (called unilateral Da
charity orpayments,
grant fromononethesector
otherto are one-sided
the other payments
sector. These
Ihese payments paymen heThesTheser
payments do do not
notcausa
causehth oheri
hand,
Transfer
insfer of income fromone
the transferof sector producion ci
onecaoducon
These cause merely
services in the economy.
and
anythingin return.
interest, profit and wages) are included in the est
factor payments (rent,
Itis important to note that only
of national income.
Related Aggregates
2 . National Income and
of national income:
Following are the important aggregates
at Market Price [GDPM]
(i) Gross Domestic Product
Price [GNPMP]
(i) Gross National Product at Market

(iii) Net National Product at Market

Price [NNPMP
Net Domestic Product at Market
Price [NDPMP
(iv)
Cost [NDPrcl
(v) Net Domestic Product at Factor
(vi) Gross Domestic Product at Factor Cost [GDPFc]
(vii) Net National Product at Factor Cost [NNP,
(vii) Gross National Product at Factor Cost [GNPrcl
(ix) National Disposable Income: Gross and Net Concepts Sector
Private
(x) Factor Income from Net Domestic Product accruing
ng to r a

(xi) Private Income

(xii) Personal Income
(xiii) Personal Disposable Income.
 R e l a t e dA g g r e g a t e s
57
o m ea n d

description
of these
concepts.
brief
b r i e f

Product at Market Price [GDPM]

aa
18

Domestic
n n g

e market value
of the final goods and services produced within
Gross.
ductis
is the
product
inclusive of There a r e
tic during year
ritory of
a depreciation.
one
country
domestic territory of a country. In
sticwell as foreign producers within
he
domestic
as
well as the well as
banks international as multinational companies.
sidentle
s i dexample,
ent there there are many
includes the market value ofthe final goods and services produced
product
domestic
producers,

such
all
hr
eintion
-product (GDP) is the market value ofthe final goods and services produced
of a country.
ear within the domestic territory
Caxs
don
d i u a n ga year

the understanding of four important observations, as under:

requires
concept
requires
'gross' has been pre-fixed with domestic product to indicate that it
Thisc o
s

Gross:
The term
of fixed capital.
inchdes depreciation, i.e., consumption
at market price is the market value of the final
HN Domestic: Gross domestic product
oods and services produced within the domestic territory ofthe country. It does not
matter whether production is done by domestic companies or the foreign
companies. Example: production of cars by the foreign companies in India will be
treated as part of GDP of India.
a

üi Value of Final Goods and Services: Only the market value of final services goods and
istaken into account, not the intermediate goods and services. Because the value of
intermediate goods (goods used as raw material) is already included in the value of
fimal goods.
iv) Market Value: Market value is worked out by muliplying the quantity of goods and1
services by their prices. Gross domestic product shows the market value offinal goods
nd services. It market price is measured at current prices it shows nominal gross
domestic product. On the contrary if it is calculated at constant prices in the base year
" real gross domestic product. It includes subsidies but indirect taxes are
subtracted from it.
Gross National Product at Market Price [GNPMP]
imate
Gtossnational product is not a domestic concept. it is a national concept. Here, we are to
estuma national prod
oduct of all the normal residents of a country, no matter in which part
the world they
Duntry. Also, weyareare.notWe are to be no longer confined to the domestic territory of a
terTitor Thus, gr to
: account for the product of non-resident firms in our domestic
roduceddhyby nogrOss national product is the market value of the final goods and services
Deinit ion a l residents of a country during the period of an accounting year.

TOs National
Product
produced
roduct at Market Price (GNPMP) is the market value ofthe final goods and
at M
by normal residents of a country during an accounting year.
 B8

GDPur becomes (GNPMr if net factor income from abroad js aii

ntroductor
MuioraI
lded
GNPMP GDPMP +Net Factor Income from Abroad a n d N e t

Net factor income from abroad is the dillerence between factu. GDPar

profit and wages) earned by our residents from rest ofthe

he worldand world and factor
by non-residents within our country.

Net Factor Income from Abroad (NFIA) = Factor income earned by ourresidentsfr
ents from aboad
-

Factor income eamed by non-residents D e f i n i t i c

countries)Within ourcountry Net Do

produce

Understand that, net factor income from abroad may be positive or new
If net factor income from abroad is positive, gross national product would i
gross domestic produet. On the other hand, if net factor income from
m abrc N e td o r

gross national product would be less than the gross domestic produ abroad is teza income

other w

Gross National Product at Market Price net dom

Definitic
(1) 2) (3) Net Dor
Gross Domestic Net Factor Gross National
factor i
Product at Income from Productat
Market Price Abroad Market Price of a cou

(1+2)

(ii) Net National Product at Market Price [NNPMel

A Caution
Because
There is wear and tear of fixed capital during production While estimating deprecato
process. It is called depreciation or consumption of fixed capilal. such capital goods are oonsc
By deducting depreciation from gross national product at as are being used. It inciudesn
foreseen obsolescence due Indirect
market price we get net national product at market price.
i) Change in technology
an ike sale
Net National Product at Market Price = Gross National
(0) Change in demand. ApoUF
fall in it
Product at Market Price - Depreciation (wear and tear and
damages due to
natural caiama
price
ike flood, fire, etc. are not ncule Subsidi
oolesene)
Definition
goods
(vi)
Net National Product at Market Price is the market value of net output ot tnlu
erviues produced by ormal residents within the domestic territory of a coun
Gross
with net factor niIDe 1rOm alhroad during a year.
domes
(iv) Net Domestic Productat Market Price [NDPMP Definiti
"prueol
Net domestin produ at market price is the dillerence between the marketp Gross
ds and T VKEs p i ed by all the producers in the domestic teritory Lt
Wages-
ear and the consumpion of fixed capital. Gross Domestic Product
a*
consui
 Aggrogaten
Related

croeco Ome
and

N a n

Dluct at Market Price dilleT Irom earh other only in one mens, While
NetD o NDPmr does not.
depreciation,
inchudes

l ' a n
NDPMP GDPMPDepreciation
Or
ome rane GDPMr = NDPmr + Depreciation

the market value of final gords and

erves

Market I'rice is
Definition

Product at
of other Net Domestic Pro
estic countryduringa year
exclusive depreciation.
of
domestic territory ofa
Net within the
prodced
Domestic Product at Factor Cost [NDPrc]
Income or Net
( v ) NetDome
M Net Domestic at factor cost refers
domestic
to the sum total of factor
product
o r net country. In
greater
dis ha
negate
Netdomestic
vetdomesticin
income an accounting year within
the domestic terrtory of a
ed net domestic income. Thus,
me generated during at factor cost is
also called
n c o n

words, net
domestic product
other at factor cost. product
income
= net d o m e s t i c
net domestic

Definition Factor Cost (NIDPpc) is

the s u m total of
Domestic Product at
Income o r Net within the domestic territory
Net Domestic interest + profit) generated
factor incomes
(rent + wages +
a year.
of a country during Subsidies
Indirect Taxes +
NDPrc NDPMP -
Or
Taxes
NDPrc NDPMP- Net Indirect
Subsidies.
aution Indirect Taxes
= Indirect Taxes -

g depreciation on
Because, Net
ods are consioere Pay attention to this Note
Indirect taxes (taxes levied on goods and services
sed. It includes on and subsidies are opposed to each other.
Indirecttaxes and services whereas subsidies
cause
escence duet
rise in market price of the goods
e sales tax, exclse duty, etc.) the government to compensate those producers who sell their products at
cause a
echnology arnd
demand. Accitena
given by
aim t. Subsidies arecost from the market price and
of production. Indirect taxes are therefore, deducted
pnceless than the
to natural calamite

incluoe

etc. are
not
Subsidies are added to it.
Cost or Gross Domestic Income [GDPrc]
(vi) Gross Domestic Product at Factor whereas it is excluded from net
finalgoods2" factor cost includes depreciation
1 COuntry alon S domestic product at
domestic product at factor cost. Thus,
NDPrc= GDPrc-Depreciation

Definition factor incomes (rent

+
is the s u m total of
f
Ii Cost (GDPrc) along with
price
W nestic Product at Factor the domestic territory of a country,
Ket nterest + profit) generated within
yofa
countr

at MarketP t
sumption of fixed capital during a year.
60

(vii) Net National Product at Factor Cost or National

troducoy a
Income [NNE Natio

We have already known that to change "domestúc income" into

factor income from abroad is added to it. Domestic into "natio
income or.netatinal
factor cost is domestic income. To change it into net
factor income from abroad is added to it.
onal r
national
produtomestfar. pr
e
at
Foll

Gros

NDPFc + NFIA =
NNPFc cost

i sn c

It may be noted that just as Net Domestic Product at factor

cost iss cal
Income, in the same way Net National Product at factor cost is
called Nad
Definition
Net National Product at Factor Cost (NNPFc)or National
Income is the sumtas The
incomes(rent + interest + profit + wages) generated within the domesic (
country, along with net factor income from abroad during a vear.
Or (2)
NNPFCis the sum total of factor incomes earned by normal residents
year.
of acountry d.

(vii) Gross National Product at Factor Cost or Gross National Income

(GNP: Defir
If depreciation is added to net national product at factor cost we get gross
at factor cost. national pr. Inth
Thus,
Fact
NNPFc+ Depreciation = GNPrc
ofne
Obviously not i

GNPFc Depreciation = NNPrc () sa

Definition
GrossNational Product at Factor Cost (GNPc) is the sum total
of capital,incomes
normal residents ofa country, along with consumption of fixed factor during tart
a Vea
(ix) National Disposable Income
National disposable income refers to that net income at market
price available to a WE
for disposal. It is the sum total of
national income, net indirect taxes and net u Cure
transfers from the rest of the world. Defir
National Disposable Income
allso
National Income +Net Indirect Taxes+ Net Current Transfers from therestou e wort Priv=
Definition priva
Secte
National Disposable Income is the income from all sources (earned income 80VE
current transter payments from abroad) available to residents of a countr
consumption expenditure or tor saving during a year
 Welater Appregates

Concepts of National Disposable Income What is Curent Raplacement Co

Nt
dittevres in these conmepts is ho oparnditure incumed y
ham
he nation on the replocamentofwmo
b l e Inowneinhud repla enen 89ets during he year. Nis the sai
but the same depreciaton estimated fo t
a o n ot the entire
economy
Income. Thus, OConomy as a whode
Net isposable
D i s p u h i .

nn
Ner

Income = GrossNational Disposable Income-Current Replacement Cost

sesaNe
w
Net Domestic Product accruing to Private Sector
xFa:tor hcomefrom
Income

every economy:
sectors in
rw main

Sector: It
r h a t eS e c t o r : l t
includes all enterprises Owned, controlled and managed by the
pervateindividuals,

Pablie It includes government's

Sector:Iti
Sector:
administrative departments, departmental
(like railways, post
rises (like
enerprzses
and telegraph services) and non-departmental
(like.Air India and
Indian Airlines).
cterprises
the income
Factor
income
net
from ne domestic product accruing to private sector is
sector.
carned by the private

net domestic product accruing to privale sector is that part

ne wOrds
of Dernburg, "Incomefrom
accrued to the private
sector"
P ahach is
sector includes only that part
from net domestic product accruing to private
izar ncome
earned by the private sector. In fact, it does
r domestic product
at factor cost which is
income of departmental enterprises and
mcdude () property and entrepreneurial
of the government.
sng of the non-departmental enterprises
Ftar income from Net Domestic Product accruing to Private Sector
Income of Departmental
Net Domestic Product at Factor Cost-Property and Entrepreneurial
Saving of Non-departmental Enterprises
Private Income
obtained from all sources
D E is the sum total of factor income ofprivate
sector

*26 Current transfers from the government and the rest of the world.
enfion
income from
t Central Statistical Organisation "Private income is the total of factor
world aecruing to pravale secto."
uTEnl
lransfersfrom thegovernmen and rest ofthe
watr income includes both factor incomeas well transfer payments. To know
as
ate incone we add to factor income from net domestic product accrung to private

() Net factor ncome from abroad, (2) c u r r e n t transfers from the

interestincs
fient, (3) erest on national debt, (4) current transfers from the rest ofthe
62
Introd
world and deduet from it (0) property and preneurial

departmental enterprises
and (i)
by the government sector. It
non-departmenta income
savings ofnon-department
is thus the
m o
undettatiwg
include income earned
from net domestic product accruing to private sector, interest sum tonal
income from abroad, current transler payments from the a
ove atvonwal dlet.
world. Thus, ad te
Private Income = Factor Income from Net Domestc Product accruing to Privatao
Income from abroad+ Intereston National Debt +Current T te Secdor+ Ne
+Current Transfersfromrest ofthe world
i n ) Personal Income
Personal income is the total of all current income actually received
individuals of a country from all sources. It includes factor
or incan
by housethe
income as well
payments.
Definition
According to Peterson "Personal Income is the income actually received b tera
in the form of current iransfer payments and factor income."
Under personal income is included income actually received by theindivit
sources. For example, the profits earned by the companies or firms, some
distributed among the shareholders. This undistributed profit which part
ot
sal
corporate saving is retained by the firms with themselves. One part oftheproi
away by the government in the form of corporate tax. Both these parts (corporars
and corporate tax) are not received by the shareholders. Thus to estimate pe
income, these are deducted from private income.
Main difference between private income and personal income is that under
income, corporate savings and corporate taxes are included whereas the same a
included under personal incomne.
Personal Income = Private Income - Corporate Savings-CorporateTaxes

(xii) Personal Disposable Income

Personal Disposable Income is the income from all sources Personal Diss

remaining with individuals and household after deduction of all

Income HoseroxS

+ HousehnoldCors
direct taxes and compulsory payments to the government which
they are free to spend and save the way they like. It reflects the
purchasing power of the household.

Definition
In the words of Peterson, "Disposahle income is the income available to pern0i
therp
vemuining uilth them after deduction of all taxes lervied against their inconea
goveTnment."
 RenRDTRJETES

akuBated b deducting direvt tanes and mseelanevus

m e n t adminaStrarate decpartments hke tes tines ehanges
senerage

Drec Parsora axes-Mis:alaneous Faesand Fines paid dy the Households

u bow natonal income and related agTELates .te ielated to cauh

Concepts of National Income anddRelated Aggregates At a Giance

Dieet
a aKET Proe Market value of final goods and
PRO services
produced within the domestic ternitory of
a
COuntry in an accounting year

R0Ja WaKAI I E G N P . GDPMENet Factor Income from abrad

GNPMF Consumption of Fixed Capital o
DepreCiation
NNPMP Net Factor Income from Abroad

I *aAr Cost or Ne NDPM- Indirect Taxes Subsidies

DIJ
i

mesir Pro3uT
a Faco Cost GDP) NDPDepreciation
Toauc a Factor Cost GNP- GDPF Net Factor Income from Abroad
oma

T o u Z ACiOr
COSi or National GNP--Depreciat on

r a SDsaDe
income (Oten refered Net Domestic Income Net IndirectTaxes
a d r a s I s a D E Icome Net Factor Income from abroad Net Current
+

Transfers from Rest of the World

aiora sysaOE Income Net National Disposable Income+ Curent

Repiacement Cost

m e om et Domestic Produc NDPc-Property and Entrepreneurial income

of the Departmental Enterprises of the|
2 Puae Secr
Govemment Saving of non- departmental|
enterprises
Factor income form Net Domestic Product
accruing to Private Sector Net Factor
income from Abroad +Current Transfers from
Govemment+ Current Transfers from Rest of
the World interest on National Debt

Private Income Corporate Tax

- Undistributed Profits or Corporate Saving
Personal income Direct Personal Taxes
- Miscellaneous Fees and Fines paid by the|
Households
 Capital
consumption

- indin
eN S nde taxes
side Subsi es
Capita
consumption

un uoyduunsuoo
de

Net factr rcore

* CaTere t a r s i e r s

r tego
Curert vansfers
feom rest of t e worid
irnterest cn riaorna!
 and Related Aggregate
.refers to the domestIC erritory of the
omestic prod
hic region. Natioral product country or a definite
ographic
snay eler to
any region in the world where
untry live. But dormestic
preduct coonfined to domestic borders is
sof
resdents.
tale of the final gooxds and services produced within
valu.
the
total
the donestic
aly or alled domestic product
only
or
e r r i t o r yi s c a l l e c
n d e rn a t i o n a
arOduct, beside final production produced by the normal residents
territory of that country is included net factor income from
he domestic
Hithin
the income earned in the domestic territory of that country by the
abroad a n d
, hat country
of other c O u n t r i e s is deducted from it. On the ontrary, under
residents
mal
is included the of final product produced within the
whole
stic productof the country by all producers whether normal residents or
domestic territory of
non-residents.
TOs5 product may be
tional produ more or less than gross domestic product. If the
national the normal
byis than the income
by the foreigners in a country
more
e
nome
carned
countries then gross national product will
ents ofthat country earned toreign
in
eside On the if the income carned by the
contrary,
domestic product.
less than gross income by the normal residentsof that country
1s Jess than the
ireiznersin a country will be more than gross
countries thhen gross national product
Ded in foreign income from abroad is positive then
other words, if net factor
opestic product. In m o r e than gross
domestic product. On thecontrary,
if
zO5 national product will be national product will be less
abroad negative then gross
is
t factor income from
han gross domestic product.
and
Dilference between Net Domestic Product
Price
Gross Domestic Product at Market and gross
net domestic product at market price
of
a iterence between the concept
that under net
domestic product consumption of
fixed
product at market price is consumption of fixed capital
under gross domestic product
A Incduded whereas
1hded.Thus,
at Market
Price-Consumption ofFixed Capital
rescProducd
00tat Mark Price= Gross Domestic Product
at Market
Or
Market Price+Consumption
of FixedCapital
Productat
Produdt at Market Price=Net Domestic
Market Price
and
at
Dferenc
NHetNationalbetwee
Net Domestic Product
Product at Market Price product
national
net
price and
enKsprne net C
domestic product at
market
goods
and services
are as under: total value offinal in the
donest
n o n - r e s i d e n t s ,
includes
or
at market price
by product
residents
Åwed byd
allproducers, MliCers,
whether
normal
 66 troductoryytMacreS Rtg
one accounung year while in s et
domestic territory of a country in
al market
price is inuded the
value of linal goods and services vatioial
li
ervices produc.
normal residents within the domestic
territory as well as abroad tel
() Net national product at narket price inchudes, besicle net dome.
domestie
lactor ncome from abroad also. Thus, proun
Net National ProductatMarketPrice= Net Domestic Product at Market Price+NNet FactorIncsme
Or
Net Domestic Product at Market Price= Net National Productat Market Price-Net Factor lrn nAtr
(iv) Difference between Net National Product at Market Price and
Gross National Product at Market Price
Main difference between gross national product and net national product is that
national product includesconsumption of fixed capital whereas net national br duct d
not incude consumption offixed capital. Thus, by adding consumption of fixed cari
net national product we arrive at gross national product. In other words, apita
Net Net NationalProduct at Market Price=Gross National Product at MarketPrice-Depreciatcn
Or
Gross
National Product at Market Price = Net National Product at Market Price+ Depreciaton
( ) Difference between Net Domestic Product at Factor Cost and
Net Domestic Product at Market Price
Main difference between domestic
net product at factor cost and net domestic
produ
market price is that net domestic product at factor cost is the measure of the income eae
by the factors of
production whereas net domestic product at market price is the nca
ofmarket price of the product. Thus, indirect taxes are not included in net
product at factor cost because income from such taxes is not received by the
production rather it goes to the government and so is included in market price. tae sa resu
market price goes up. On the
is not reflected in market
Contrary, subsidy is received by the factors ot pro
price. As a result, market price goes down. Thus, to
domestic product al factor cost net indirect tax (indirect
domestic product at market price. tax-subsidy) 1s deu
Net Domestic Product at Factor Cost= Net Domestic Product at Market Price -
Net Indirec
Tax
Or
Net Domestic Product at Factor Cost = Net Domestic Product at Market Price- ax
Subsiay
Indirect
 Related Aggregates
R e l a 67
a n d
n c O m e
Nalional
tiirarily,
Product atMarket Price= Net Domestic Product at Factor Cost+ Net Indirect Tax
c
N eDt omestic
Or
. Product at Market Price=Net Domestic Product at Factor Cost+ Indirect Tax-Subsidy
Net
DomesticPro
Product at Factor Cost and
( i ) oderence between GrossatDomestic
Difference
Market Price
Domestic Product
Gross
rence between gross domestic product at factor cost and gross domestic product
Maindih
lies iin the fact that gross domestic product at factor cost includes all those
narket price,
which
elements w h i c are contained in grosS product at market price except net
domestic
indirect tax. Hence,
es Domestic Product at Factor Cost= Gross Domestic Product at Market Price- Indirect Tax+Subsidy
Contrarily,
Gus DomesticProductat MarketPrice=GrossDomesticProductat FactorCost+Indirec Tax-Subsidy
vi) Diference between Gross Domestic Product at Factor Cost and
Net Domestic Product at Factor Cost
Main difference between gross domestic product at factor cost and net domestic product at
factor cost lies in the fact that gross domestic product at factor cost includes consumption of
fined capital whereas net domestic product excludes consumption of fixed capital. Hence,
G0s DomesticProductat Factor Price = Net Domestic Productat Factor Cost+Consumption ofFixed Capital
Contrarily,
estic Productat Factor cost Gross Domestic Product at Factor Cost-Consumption of Fixed Capital
M Difference between Gross National Product at Factor Cost and
Gross National Product at Market Price
difference
rke
market between gross
cebetween g national product at factor cost and gross national product at
price
shereatIs is that gross national product factor is exclusive of
shereas gross that at
at cost
ss national product market price is inclusive of indirect Hlence,
indirect
net
net
tax.
tax
Sross National Product at Factor Cost Gross National Product at Market Price- NetIndirect Tax
Or
Gross National Produ
FTOduct at Market Price = Gross National Product at Factor Cost+ NetIndirect
Tax
68
IntroductoryMaMacroeconom
NO
Product at Factor Cost and
between National
(bx) Difference Market Price
National Product at
tactor cost and national
between national product at
Main diflerence tax-subsidy) is not in marke
that net indirect
tax (indirect
cd inn ded in natig
price lies in the fact is incuded in net
national prod
product at
factor price while the
same
cost only those paym ments
are
market pre
While estimating national
product at factor
the form of rent, wages, interest aned
terest
and
included whie
are paid to the
factors production in
of market price, market nrie
profit. On
national product at ofthe
contrary, while estimating be equal but under certain
Both the estimates may
product is taken into
account.
Prices of the goods sold in include ind
ude indirect taxes
the market stances
the same may not be equal. taxes goes to the
income from suchn governme
like excise duty, sales tax, etc. T'he national income at factor eo do
to the factors of production.
Hence, to estimate
market price. On the other hand t
from national income at
taxesare deducted industries. This subsidy goes
to factors of produetio
often grants subsidies to the
Difference between indirect taxes and subsidy eall is
includedin the market price. factor cost, net indireet
taxes. Hence, to estimate
net national product at taxes
indirect
from net national product at market
(indirecttaxes-subsidies) are deducted
price
(1)
Net National Product at FactorCost
Indirect Tax (Indirect Tax-Subsidy
Net National Productat Market Price-Net
Factor Income and National Income The
(x) Difference between Domestic princ
income and national income are as under
Main differences between domestic factor Incon
of factor income earned in one
accounting
) Domestic factor income is the sum total
of a country; that is,
year within the domestic territory
Follov
Domestic Factor Income
within the Domestic Temioy
=Wages+Rent+ Interest+ Profit+ Mixed Income of self-employed
within the domestl
of factor income
On the other hand, national income is the sum total i)
territory and net factor income from abroad; that is
National Income=Domestic Factor Income + Net Factor Income from Abroad
ii) Domestic factor income is earned in the domestic territory of the country by all prou
normal residents as well as non-residents. On the contrary, national inco
the domestic territory
carned by the normal residents. They earn it within than meste
more or less a
country as well as rest ofthe world. National income may be is
or ie
factor income. It depends whether netfactor income from abroad positive
from
(xi) Difference between Private Income and Factor Income
Net Domestic Product accruing to Private Sector Personal
rom
(i) Private income is a national concept. It includes net
factor income n ngt0 the coref
domestic produce a
besides domestic income. But, factor income from net
 d Related Aggregates
7 8 a n d
p v a t e

r
s e C t o r ,

is only a domestic concepl. Tt e i l e s only domesti e d

from abroad.
hude net fac
factor income
net
i n c h u d e
ot ome inchudes tactor payments as well as transler paymensbut tau t
domestic product accruing to private sector e ludesonly lautn ayn na
/ t i r a t e
tromnetdo,
ton nationalcdebt is cluded in private irome, but it is ot Judeed n fu i
a from net domestic product aceruing to privatr seeton
m e o m e
f Drivate income is broader than the (oept l lutor nO oI e
domestinproduct accruing to private secto
C o n c e p t
Dierenice between National Income and Private Incoto
Nationalincome includes income both in the public ad privatc eeonud the ocenuny
other hand, private income icludes only the meOme o th
pvate stu
alincome includes only lactOr incomes. It dores not ine
lule
But the private income intrtes both the lactor menes wellany kined ,
Nati
ransters.
rs
ransfers from the government nd the rest of tdhe woulkd
as as u 1nt
interest on national debt is not included in national icome Dul
private income.
itsin lurded m
Diference between Private Inceme and Persenal Inceme
Concept of private income is broader than the
cocept of personal n
iacpal difference between
private income and
personal ineone is that wlile
Komeincludes corporate taxes and corporate saving, personal inome does not vat
v Diferences between Personal Income and National Income
Folowing points may be noted differentiating personal income rom natonal ine ome
Personalincome is a concept related to the receipts of
sa concept related to the generation of income. income,
wl1le natonal ti
L income from domestic product accruing to the
natonal income, but govemment (omstututes parl a
not of personal income.
Nauonal Income comprises of factor incomes only, while peronal
both factor
incomes as well as transfer
nome ne
Jurde,
payments.
"orporatesaving (undistributed profits) as well as corporation tax arr ntegialfpatt el
hatuonal income, but not of personal income.
S t O n national debt is a part of personal income, but nothat of national e e
iference between Personal Income and Disposable Income
9m alincome refers to income that the individualsand households ae tually rerr
the
all sourcer
Personal incom
omecan beestimated by dedueting undistributred fprefis
rpor
porations and corpporate tax from private inome. (On the Int1ary, dnposable
 N a t i o n an
l comea

70 Introductory Macroecong
income relers to the income that remains with the people NUMERICAL/
What are Transfer
alter making payment of direct axes and miscellancous
These are unilateral Paymertg lustration1.
receipts of the government administrative departments paynerts
one sector to the other
No vae
g b a s i s
ot
added by these
(xvi) Difference between Personal Disposable Income paymerts
example Old-age pon f On
the
Iten

and National Disposable Income scholarships, financial help to (i) Net

quake victims. These paymontea (ii) C o

Personal disposable income and national disposable income not included in national
income
income shows (iii) C o
aretwo diflerent concepts. Personal disposable
personal incomeonly ofindividuals and households of a country, On thecontrary,natin
(iv) Ope
disposable income shows the disposable income of the entire country National dipoabe
(v) Mix
income
isestimated byaggregating net domestic incomeat lactor cost, net indirect taxes,ne
factor income from abroad and net current transfers from the rest of the world. Onthe
other hand, personal disposable income is the difference between personal incomeand
Solution:
direct axes and miscellaneous payments to the government Net Domestic

surplus + Mix

Net Domestic Product at Factor Cost

=72,000 cro

Factor Income from Net Domestic

=R4,100 cro
Factor Income from Net Domestic Product Sector
Product accruing to Public Ans. Net Don
accruing to Private Sector
Income from property and entrepreneurship Mlustration 2.
accruing to the government
() Net factor income from abroad Calculate Net
departmental enterprises
(i) Interest on national debt

(ii) Current transfers from government Ite

world
(iv) Current transters from rest of the
Saving of non-departmental
enterprises ) Ne
ofslt bo e
i) Ne
Private Income
(ii) Ne
() Corporation tax (iv) Ne
() Undistibuted prots t le re (v) Ne
(vi) Ce
Personal
Income Solution:
Net Nationa
() Direct personal
taxes
receipts of
the government
et value ac
(i)
Miscellaneous

ttiary sectc
Personal 60,000 ca
as.145,Net00C
Disposable
Income
Na
Household consumption

Household saving