Concept of National Income

GROSS DOMESTIC PRODUCT:

Economy is made up of production and consumption of goods and services. Production is achieved via factors of production viz. Land, Labor and Capital. Consumption is achieved via trade, distribution and final consumption of goods & services. The goods as we know can be finished goods (final goods) or unfurnished goods. The final result of production of goods and services is "product"of an entity, we may call it Gross Product. When we combine the monetary value (value of goods in terms of money) of all goods and services produced in the domestic territory of a country for a specified time such as a year, this will be called "GROSS DOMESTIC PRODUCT".

What is domestic territory?

The domestic territory includes :

1. the political boundary as well as terrestrial water
2. ships and aircrafts operated by the residents of the country
3. fishing vessels
4. oil and natural gas rigs which may be located outside the country
5. embassies and consulates of the country located abroad

Now, as an example suppose India produces only apples and the cost of apple is Rs.50 per apple and it produce 1000 apples in a year and at the unit price of Rs.100 it produces 200 units of service then the

GDP=P*G+P*S (where p= price per unit, g=goods and s=service)

GDP=1000*50+100*200=Rs.70000

Now there are different terms regarding GDP as GDP  at Current price, GDP at Factor Cost 2004-05 prices.

GDP AT CURRENT PRICE: When GDP is estimated on the market prices it is called GDP at Current Price.

GDP AT CONSTANT PRICE: When GDP is estimated on the basis of some fixed prices prevalent at a particular point of time (a base year), it is called GDP at constant prices.

Due to Indirect Taxes the GDP at market price figure is not accurate. This is because, Market value of the Goods and services is always higher than the total cost of production, because the market prices include the Indirect taxes. So to arrive at a more accurate figure we  need to minus the Indirect taxes for the GDP at market price.But in some sector Government of India provide cash help (subsidy). So the Subsidy should be added so that we can arrive to the real value of GDP that is GDP AT FACTOR COST.

GDP AT FACTOR COST= GDP AT M.P. - INDIRECT TAXES + SUBSIDIES

GROSS NATIONAL PRODUCT:

We know that GDP is the money value of all the final goods and services produced in the domestic territory of a country in a specified time period. We must understand that domestic territory of the country does not mean only political boundary but other things such as terrestrial waters, ships and aircrafts operated by the residents of the country, fishing vessels, oil and natural rigs which may be located outside the country, embassies and consulates of the country located abroad and all of them constitute the GDP. Here we need to take some examples:

• One is Mr. Prakash Chandra Pandey, who is posted in US in a  Software Company.
• Another is Mr. John who is posted in India in Tata Power in Bangalore.
• What Mr. John is produced here is a part of GDP, but out of what he produced, he sent some money to his wife and kids at New York, United States. This is called Repatriation. We imagine that he repatriated Rs. A from India to U.S.

• What Mr. Prakash Chandra Pandey produced in US was a part of GDP of United States, but out of what he produced, he sent some money to his retired parents in Allahabad. This is also called Repatriation. We imagine the he repatriated Rs. B from US to India.

This also means that figure A minus B can be positive or negative, because any of Prakash of John can repatriate more to his country. This A minus B is called Net Factor Income From Abroad or NFIA.

In GDP figure, if we add what was repatriated to India and reduce what was repatriated out of India, then we come at a new figure which is called GROSS NATIONAL PRODUCT.

GNP=GDP+NFIA

The value of NFIA may be positive or negative. It is positive when Indians living outside the country repatriated more value and negative when foreigners living inside the country repatriated more to their country.

Net Domestic Product:

Now take a example to understand this concept. Suppose Mr. Amit has a small bakery in a shop where he has some small machines such as ovens to bake the breads. What he is producing is not a correct figure because every year his oven gets lesser in value due to use wear and tear. This loss due to wear and tear of capital goods such as building machines, equipment, tools, trucks, tractors, trains, airplanes is called Depreciation.

All tangible goods are subject to depreciation. Depreciation is also known as Consumption of the Fixed Capital.

The GDP figure is fine, but it is a Gross Figure. We can not arrive at a net figure unless we deduct what we lost in the Consumption of the Fixed Capital as Depreciation.

So when we deduct depreciation from GDP, we arrive at NDP.

NDP= GDP - depreciation.

Net National Product:

Net national product is nothing only when we add NFIA In NDP then we get NNP.

NNP= NDP + NFIA

NNP= GDP - depreciation+ NFIA

Now there are different terms such as GDP_M.P., GDP_F.C., GNP_M.P., GNP_F.C, NDP_M.P, NDP_F.C, NNP_M.P, NNP_F.C. 

Now we should understand relation between them

NNP_{F.C. =}  NNP_M.P - Indirect Tax + subsidies  =  GNP_M.P - Depreciation -Indirect taxes + subsidies  =  GDP_M.P + NFIA - Depreciation - Indirect taxes + subsidies

Whenever you want to convert Gross to Net you should Minus Depreciation from Gross such as

NDP_{M.P =} GDP_M.P. -   Depreciation

Whenever you want to convert Market Price into Factor Cost Minus Indirect tax and Add Subsidies Such as.

GDP at factor cost = GDP at market price - Indirect Tax + Subsidies.

If you want to Convert Domestic Product into National Product just add Net Factor Income From Abroad (NFIA) such as

GNP = GDP + NFIA.

In this way we can convert them.