National Income Aggregates: Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP) and Net National Product ( NNP)
Domestic Product and National Product:
Domestic Product:
- Domestic product is defined as the value of all final goods and services produced by all the enterprises located within the domestic territory of a country during a year.
- These goods and services are produced domestically, both by the nationals or citizens of the country as well as foreign nationals working in this country.
- Domestic product is the domestic incomes generated by all the production units located within the domestic territory mof a country during a year.
National Product:
- National product refers to the amount of final goods and services produced by the normal residents of a country during a year, whether operating within the domestic territory of the country or outside.
- It is the national income earned by the nationals of a country.
- The national income is the sum total of factor income earned by normal residents of a country during a year.
The domestic product of a country is the value of output produced by all the enterprises located within that territory. However, a part of the domestic product may accrue to foreigners because this part of the domestic product is produced by enterprises owned by foreigners.
This gives rise to income received by foreigners from enterprises located in the domestic territory of that country.
The difference between national product and domestic product is equal to the net factor income from abroad.
So, National Product = Domestic product + Net factor Income from Abroad
The difference between the factor income received by normal residents of a country from rest of the world for rendering factor services abroad and the factor income accruing to rest of the world for the services rendered by it in this country is the net factor income from abroad.
National Product at Market Price and National Product at Factor Cost:
- The money value of final goods and services can be estimated in two ways at factor cost and at market price.
- Factor Cost: Factor cost refers to the factor payments made by firms to the owners of factors of production for rendering productive services.
- Market Price: Market price is the price at which a commodity is sold in the market.
- National Product or National Income at Market Price : National product or income at market price is the value of final goods and services produced by the normal residents of a country, at their market prices during a year.
- National Product or National Income at Factor Cost: National Income or product at factor cost is the sum total of all the factor income (wages, interest, rent, profits etc) accruing to the normal residents of a country during a year.
- Market prices of goods are inclusive of indirect taxes such as excise duty, GST etc. Therefore, these taxes makes the market prices which consumes pay for goods higher than the prices that the firms receive.
- These taxes are not part of factor earnings. These indirect taxes must be subtracted from national product at market price to get national product at factor cost.
- On the other hand, subsidies make the market prices lower than the factor cost.
- Subsidies: Subsidies are the cash grants given by the government to producers to sell goods at prices lower than the free market price.
- Net Indirect Taxes: Indirect taxes minus subsidy are known as net indirect taxes.
Net Indirect Taxes = Indirect Taxes – Subsidy
- Market value of goods and services differs from the earning of factors of production to the extent of net indirect taxes. Therefore, national product at market prices differs from national product at factor cost to the extent of net indirect taxes.
National Product at Factor cost = National product at Market price – Net Indirect Taxes
Or
National Product at Factor Cost = National Product at Market price – (Indirect Taxes – Subsidies)
Gross Product and Net Product:
Domestic product (income) and national product (income) can be measured in two ways on the basis of whether depreciation is included or not – Gross and Net Income.
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Depreciation of Capital: The consumption of fixed capital causing the loss of value of fixed capital assets during the process of production due to normal wear and tear is called depreciation.
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Thus, a depreciation allowance is made to meet the consumption of fixed capital. If we deduct depreciation from gross product, Net product is obtained.
Net Domestic or National Product = Gross Domestic or National Product – Depreciation
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Gross Product does not make allowance of depreciation in the estimation of domestic or national product. But the net product makes allowance of depreciation.
National Income Aggregates:
On the basis of above mentioned criteria, we have eight possible national income aggregates as –
1. Gross Domestic Product at Market Price (GDPMP)
2. Gross National Product at Market Price ( GNPMP)
3. Net Domestic Product at Market Price ( NDPMP)
4. Net National Product at Market Price (NNPMP)
5. Gross Domestic Product at Factor Cost (GDPFC)
6. Gross National Product at Factor Cost (GNPFC)
7. Net Domestic Product at Factor Cost (NDPFC )
8. Net National Product at Factor Cost (NNPFC)
1. Gross Domestic Product at Market Price (GDPMP)
- Gross domestic product at market price is the market value of all final goods and services at the prevailing market prices, produced in the domestic territory of a country during a given year, without making an allowance for depreciation.
- GDPMP simply shows what is produced within the domestic territory of a country by normal residents of a country, nationals as well as non – nationals.
- Being gross it is inclusive of depreciation i.e. consumption of fixed capital in the process of production has not been excluded.
2. Gross National Product at Market Price (GNPMP) :
- Gross national product at market price is defined as the market value of all final goods and services produced by normal residents of a country during a year without making an allowance for depreciation.
- GNPMP differs from GDPMP to the extent of net factor incomes earned from abroad. To get GNPMP from GDPMP we have to add GDPMP the factor income earned from abroad by the normal residents of a country in the form of wages, dividends, interests, profits etc.
- GNPMP = GDPMP + Net factor income from abroad
- Net factor income from abroad may be positive or negative. If net factor income from abroad is positive, GNPMP would be greater than GDPMP. While if net factor income from abroad is negative, GNPMP would be less than the GDPMP.
3. Net Domestic Product at Market Price (NDPMP) :
- NDPMP is the market value of all final goods and services at the prevailing market prices, produced in the domestic territory of a country during a given year after making allowance for depreciation.
- Net domestic product at market price is the difference between gross domestic product at market price (GDPMP) and deprecation.
NDPMP = GDPMP – Depreciation
- NDPMP is the measure of net availability of final product. It is the measure of domestic income which is available for consumption and investment in the economy.
4. Net National Product at Market Price ( NNPMP):
- NNPMP shows the market value of all final goods and services produced by normal residents of a country during a year after making allowance for depreciation.
- Net National Product at market price differs from Gross National Product at market price in that the depreciation of capital is subtracted.
NNPMP = GNPMP – Depreciation
- It reflects how much is produced over and above that amount which is required to keep the nation’s stock of capital intact. It clearly gives a better indication of long – run economic growth than better GNPMP does.
5. Gross Domestic Product at Factor Cost (GDPFC):
- It is the sum total of earnings received by various factors of production in the form of wages, interest rent, profits etc. within the domestic territory of a country in a year, without making allowance for depreciation.
- GDPFC measures factor incomes generated within the domestic territory irrespective of whether generated by normal residents or non – residents.
- Being gross, it makes no provision for depreciation.
- Market value of goods and services differs from the earnings of factors of production because of net indirect taxes. Thus, if we deduct net indirect taxes from GDPMP we get GDPFC.
GDPFC = GDPMP – Net Indirect Taxes
6. Gross National Product at Factor Cost ( GNPFC) :
- GNPFC is the sum total of earnings received by Various factors of production, in the form of wages, rent, interest etc. by normal residents of a country in a year without making allowance for depreciation.
- NNPFC differs from GNPMP to the extent of net indirect taxes.
- GNPFC = GNPMP – Net Indirect Taxes
7. Net Domestic Product at Factor Cost (NDPFC):
- Net domestic Product at Factor Cost is the sum total of earnings of factors of production within the domestic territory of a country in a year after making allowance for depreciation.
- It is also known as domestic income or domestic factor income as it shows the income generated within the domestic territory of the country by all the producers within the year.
- It differs from Gross Domestic Product at factor Cost to the extent of depreciation.
NDPFC = GDPFC – Depreciation
- Net Domestic Product at Factor Cost includes:
1. Compensation of Employees :
All payments made by producers to their employees in the form of wages and salaries and other payments made in cash and kind in return for labour services.
2. Operating Surplus:
It is the sum total of property income and income from entrepreneurship. Or it is the sum total of interest, rent, profits and other similar incomes.
3. Mixed Income:
It is composite of labour income and property income. It covers total income of own account workers like doctors, street hawkers, etc. and income of unincorporated enterprises like farmers, small – scale handicraft producers. Income is in the nature of partly labour income and partly property income.
8. Net National Product at Factor Cost (NNTFC) :
- It is also known as National Income.
- National Income can be defined as factor income accruing to the normal residents of a country during a year after making allowance for depreciation.
- It is the value of all final goods and services produced by normal residents of a country whether operating within the domestic territory of a country or outside , at their factor cost.
- If we add net factor income from abroad to net domestic factor income or domestic income we get national income.
NNPFC (or National Income) = Net Domestic Factor Income + Net Factor Income from abroad
- Net factor income from abroad may be negative as well as positive.
- If net factor income from abroad is negative, national income will be less than domestic income.
- If net factor income from abroad is positive, national income will be more than domestic income.
- NNPFC or national income can also be found by deducting depreciation from gross national product at factor cost (GNPFC) .
NNPFC (or National Income) = GNPFC – Depreciation
- NNPFC is the sum total of compensation of Employees, operating surplus, mixed income and net factor income from abroad.