National Income Class 12 | GDP and Welfare | Differences | Chapter 3 |

National Income Class 12 | GDP and Welfare | Differences | Class XII | Chapter 3 |

National Income

National income refers to the sum total of factor income which is earned by normal residents of a country during an accounting year.

Factor Income

Factor Income refers to the flow of income from the production sector to the household sector. It is also known as earned income. It is received in return of follows:

  1. Compensation of Employees: It is received by rendering the service of employment by household to production unit.
  2. Rent: It is received for the use of land by household from producer.
  3. Interest: It is received for the use of capital of household from the producing units.
  4. Profit: It is received for the use of entrepreneurial skills from producer to household sector.

Transfer Income

Transfer Income is the part of income which is not earned and nothing is received in return of it since it is only for social welfare.

Normal Resident

Normal resident refers to one who resides in the country for a period of six months or more and his center of economic interest lies in that country which means to carry all of the economic activities in the country like production, consumption and investment.

Domestic Income

Domestic Income is that income which is sum total of factor income which is earned or generated within the domestic territory of a country by a normal resident of a country in an accounting year. The domestic income is the same concept as domestic product.

Domestic Territory

Domestic territory is the geographical or economical territory which is administrated by the government wherein person, goods and capital can move freely.

Concepts of National income

Under this, numerical method is used to determine the private income, personal income, personal disposable income and national disposable income.

  • Gross and Net: Gross means the value of product which includes value of depreciation in it whereas Net means the value of product which excludes the value of depreciation.

The Difference between the two is called depreciation and have other names also which are as follows:

a.) Consumption of Fixed Capital                     

b.) Current Replacement Cost

c.) Capital Consumption Allowance       

d.) Consumption of Fixed Assets

e.) Replacement Cost of Fixed Assets.

Gross  = Net + Depreciation

Net = Gross – Depreciation

  • National income and Domestic Income: National income refers to the total value of money which is earned from all the goods and services by a normal resident during an accounting year whereas domestic income is the sum total of factor income which is earned by giving factor services within the domestic territory of a country.

The difference between these two is known as Net factor Income from Abroad (NFIA) which includes in national income and excludes in domestic income where NFIA is the difference between the net factor income earned from abroad by resident and net factor income earned by non-resident of our country, NFIA = Net Factor Income from Abroad – Net Factor Income to Abroad

Formulae:

Domestic Income (DY) = National Income (NY) – Net factor Income from Abroad (NFIA)

National Income (NY) = Domestic Income (DY) + Net factor Income from Abroad (NFIA)

  • Market Price and Factor Cost: Market Price refers to the price at which the product is sold in the market whereas factor cost refers to the cost which is required to make the raw material into finished goods.

The difference between these two is called Net Indirect Tax(NIT) which is included in market price and excluded in factor cost where NIT refers to the indirect tax which is left after deducting subsidies from indirect tax, NIT = Indirect tax – Subsidies.

Formulae

Market Price (MP) = Factor Cost (FC) + Net Indirect Tax(NIT)

Factor Cost (FC) = Market Price (MP) – Net Indirect Tax(NIT)

Aggregates Related to National Income
  • Gross Domestic Product at Market Price (GDPMP ): It is defined as the gross market value which is produced within the domestic territory of a country during an accounting year.

 

  • Gross Domestic Product at Factor Cost ( GDPFC): It is defined as the gross factor value which is produced within the domestic territory of a country during an accounting year.

GDPFC = GDPMP  – Net Indirect Taxes

  • Net Domestic Product at Market Price (NDPMP ): It is defined as the net market value which is produced within the domestic territory of a country during an accounting year.

NDPMP =GDPMP – Depreciation

  • Net Domestic Product at Factor Cost (NDPFC ): It is defined as the net factor value which is produced within the domestic territory of a country during an accounting year.

NDPFC = GDPMP – Depreciation – Net Indirect Tax

  • Gross Domestic Product at Factor Cost (GDPFC ): It is defined as the gross factor value which is produced by normal resident of a country during an accounting year.

GDPFC  = GNPMP  – Net Indirect Taxes

  • Gross National Product at Market Price (GNPMP): It is defined as the gross market value which is produced by normal resident of a country during an accounting year.

GNPMP = GDPMP + Net factor income from abroad

  • Net National Product at Market Price (NNPMP ): It is defined as the net national value which is produced by normal resident of a country during an accounting year.

NNPMP = GNPMP – Depreciation

  • Net National Product at Factor Cost (NNPFC ): It is defined as the net factor value which is produced by normal resident of a country during an accounting year. It is also known as national income.

NNPFC = GNPMP  – Depreciation – Net Indirect Taxes

GDP (Gross Domestic Product)

Gross Domestic Product refers to the value of total final goods and services produced within the domestic territory of a country during an accounting year. It consists two parts which are as follows:

Nominal GDP refers to the value of final goods and services produced within the domestic territory of a country during an accounting year using current year price is known as Nominal GDP. It is also known as Monetary GDP and can be called as GDP at current price.

With the rise in the level of nominal GDP, the flow of goods and services in an economy may or may not rise in that accounting year.

Nominal GDP = (Real GDP * Price Index)/ 100

Real GDP refers to the value of final goods and services produced within the domestic territory of a country during an accounting year using base year price is known as real GDP. It can be called as GDP at constant price.

With the rise in the level of real GDP, the flow of goods and services in an economy rises in that accounting year.

Real GDP = (Nominal GDP * 100) / Price Index

  • GDP Deflator (Price Index)

GDP Deflator shows the ratio between the nominal GDP (GDP at current price) and real GDP (GDP at constant price).

GDP Deflator (Price Index) = [Nominal GDP (GDP at current price) * 100] / Real GDP

GDP in the Context of Welfare

Real GDP reflects a perfect image of flow of goods and services in an economy. Keeping other things constant with the increase in availability of goods and service to people implies greater level of welfare.

Limitations of GDP

Although GDP has a positive relation with the welfare but it some limitations which are as follow:

  1. Distribution of Income: When the distribution of income turns out to be unequal, it makes rich persons richer and poor persons poorer and GDP fails to reflect the exact rise in social welfare.
  2. Composition of GDP: Increase in the production of defense goods does not directly show the increased welfare of the people and producing more luxuries for richer section of society leads to the growth of GDP in a meaningless way.
  3. Non-monetary / Non-market Exchanges: When some economic transactions take place in an informal sector or of without money remain unrecorded and do not shows the real increase.
  4. Externalities: Any good or bad outcome of any economic activity without paying price and penalty for that. It can be both positive and negative and causes loss of social welfare which GDP fails to account.

Difference between Factor Income and Transfer Income

Basis of Difference Factor Income Transfer Income
Meaning It refers to the income which is received by providing or rendering productive services. It refers to the income which is received without providing any goods or service in return.
National Income It is included while estimating national income. It is not Included while estimating national income.
Type Bilateral payment. Unilateral payment.
Receipt It is earned. It is unearned.
Examples Rent, wages, profit and interest. Gifts, subsidies, donations, scholarships etc.

FAQ

Question: What is the full form of GDP?

Answer: Gross Domestic Product.

Question 2: What is National Income?

Answer: National Income refers to the sum total of factor income which is earned by normal residents of a country during an accounting year.

You May Also Read Macroeconomics, Basic Concepts of Macroeconomics, National Income, Calculation of National Income, Barter System, Commercial Banks, Aggregate Demand, Excess Demand, Government Budget, Foreign Exchange, Balance of Payment for better understanding of what economics is and scoring higher in upcoming examination.

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