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Basic Concepts In National Income And Output


Gross Domestic Product (GDP)

GDP is the money value of final goods and services produced in the domestic territory of a country during a year. Domestic territory does not mean only geographical boundaries of the economy. It is defined to include the following: -

  1. Territory lying within the political frontiers, including territorial waters of the country.
  2. Ships and aircraft operated by the residents of the country between two or more countries.
  3. Finishing vessels, oil and natural gas rigs and floating platform operated by the residents of the country in the international waters.
  4. Embassies, consulates and military establishments of the country located abroad.
GDP At Constant Prices And At Current Prices

When the prevailing prices are used for measuring GDP, we call it GDP at current prices but when we use the prices of some base year for measuring the value of GDP we call it GDP at constant prices. Thus, when we measure the value of final goods and services of India produced within its domestic territory during the year 1997-98 at the prices prevailing in 1997–98 itself we call it GDP at current prices. But when we use 1980-81 prices as base year prices for measuring the value of final goods and services produced in 1997-98, we

call it GDP at constant prices.

GDP At Factor Cost And GDP At Market Price

When production takes place, an enterprise buys inputs in the form of raw material, etc., from other enterprises. The use of such inputs for the purpose of production is called intermediate consumption. When we subtract the value of the intermediate consumption form the value of the output of the enterprise, we get gross value added by the enterprise. When we add gross value added by all the enterprises in the economy we get total gross value added. Total gross value added is nothing but GDP at factor cost. When we subtract the value of depreciation from gross value added we get net valued added. This net value added gets distributed among the owners of factors of production as their 
incomes. Thus, we can also calculate the GDP at factor cost by adding the domestic factor incomes and consumption of fixed capital.

The GDP evaluated at the price prevailing in the market is called GDP at market price. Conceptually, GDP at factor cost and GDP at market price should be same. But since the goods are subject to indirect taxes the GDP at market price will be more than the GDP at factor cost. Similarly, the value of goods may include subsidies provided by the Government, to producers. When such subsidies are provided by the Government, it reduces the prices of the commodities in the market and hence the value of GDP Thus, we find that GDP at market price includes indirect taxes and excludes subsidies given by the Government. Therefore, in order to arrive at GDP at factor cost we need to subtract indirect taxes and add subsidies to GDP at market price.

Net Domestic Product (NDP)

When the value of depreciation (also called capital consumption allowance) is subtracted from the value of GDP we get NDP. As we know during the production process, various fixed assets get depreciated and need replacement after one year. Therefore, it is a common practice among the fins to keep aside a sum in the form of depreciation allowance. This depreciation allowance when subtracted from GDP gives us NDP.

Gross National Production (GNP)

Primary incomes accrue to factor owners not only because of their production activities rendered in the enterprises existing in the country but also because of their production activities rendered to enterprises existing outside the country. On the similar liens, 'We can say that incomes created by the enterprises in the country do not all accrue to people in the country. A part of them goes to people who are residents of other countries for the services rendered by them. In short, factor incomes flow into the country and they flow out of the country. The 
difference between factor incomes in flows and outflows gives us the net flow of income into the country. This net flow of foreign incomes will be positive if the inflow is greater than the outflow and negative if the outflow is more than inflow.

Net National Product (NNP)

When we subtract depreciation from GNP, we get NNP Adding net factor incomes from abroad to net domestic product also gives us NNP. If the net factor incomes from abroad are positive then NNP will be more than NDP but if net factor incomes from abroad are negative, NDP Will be more than NNP.

Net National Production (NNP At Factor Cost Or National Income)

NNP at factor cost is nothing but national income of the economy. NNP at factor cost or national income is the value of final goods and services turned out during an accounting year, counted without duplication. It can also be defined as factor income accruing to the normal resident of a country. It is the sum of domestic factor income and net factor income from abroad. If NNP figures are available at market price, we can convert them into factor cost by subtracting indirect taxes and adding subsidies. 


National income, which is the monetary value of the net contribution of the primary factors of production through the production enterprises in the country in that year plus the net flow of incomes from abroad should not be confused with personal income. National income is not the sum of individual or personal income; it is not the sum of the incomes of individuals in the country. Personal incomes contain transfer incomes. But national income does not include transfer payments because such payments only represent a redistribution of the goods and services, which have already been counted. Moreover, the whole of the national income does not go to individuals. A part of it is retained by the enterprises as '; retained profits' or 'undistributed profits’. Similarly, a part of it is also retain by the Government as 'Current surpluses' and by the non-profit institutions as 'investment income'. Thus, if we subtract from national income the sum total of social security contribution and corporate income taxes and undistributed corporate profits and add personal payments we get personal income.


If we subtract personal taxes from personal income we get Personal Disposable Income.

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