Lilavatibai Podar High School, ISC

2024 -25
Subject : Economics Grade 12
Topic : Ch19 National Income Aggregates

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Domestic product (or domestic income) 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

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produced domestically, both by the nationals or citizens of the country as well as
foreign nationals working in this country. Thus, domestic income is the sum
total of factor incomes generated by all the production units located within
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the domestic territory of a country during a year.

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 income earned by the nationals of a country. Thus, national income is
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the sum total of factor incomes earned by normal residents of a country
during a year.Difference between National Product and Domestic Product is
equal to Net Factor Income from abroad (NFIA)
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National Product = Domestic Product + NFIA

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Conversions for your reference

Gross - Depreciation = Net
Net + Depreciation = Gross
Depreciation aka Consumption of fixed capital

Domestic + NFIA = National

National - NFIA = Domestic
NFIA is Net Factor Income from Abroad
NFIA = Factor Income received by normal residents of a country ( from abroad)
- Factor income accruing ( paid ) to rest of the world ( to abroad )

Factor Cost + NIT = Market Price

Market Price - NIT = Factor Cost
NIT is Net Indirect tax
NIT = Indirect Taxes - Subsidies

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➔ Net Domestic/ National Product = Gross Domestic/ National Product -
Depreciation

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➔ National Product = Domestic Product + Net Factor Income from
Abroad

➔ National Product at Factor Cost = National Product at Market Prices -

(Indirect taxes - Subsidies )
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Only for your reference

Gross Inclusive of depreciation
Net allowance for depreciation
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Domestic - within domestic boundaries

National - by Normal residents

MP - Market value
FC - sum total of earnings received by various factors of production / domestic
product/ sum total of domestic factor income
NATIONAL INCOME AGGREGATES

Gross Domestic Product at Market Prices (GDPMp): Gross domestic product

at market prices 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, inclusive of depreciation

Gross National Product at Market Price (GNP mp): It is defined as the market
value of all final goods and services produced by normal residents of a country

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during a year, inclusive of depreciation.
GNPmp = GDPmp + Net Factor Income Abroad

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Net Domestic Product at Market Prices (NDPmp).
NDP at market prices is the market value of all final g/s at prices prevailing in the
market produced in the domestic territory of a country during a given year after
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making allowance for depreciation.
NDPmp = GDPmp -- Depreciation

Net National Product at Market Prices (NNPmp ).

NNPmp is the market value of all final g/s produced by normal residents of a
country during a year after making allowance for depreciation.
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NNPmp = GNPmp -- Depreciation

Gross Domestic Product at Factor Cost (GDPfc).

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GDPfc is the sum total of earnings received by various factors of production in

terms of wages, interest, rent, profits etc. within the domestic territory of a
country in a year inclusive of depreciation.
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GDPfc = GDPmp - Net Indirect Taxes.

Gross National Product at Factor Cost (GNPfc ).

GNPfc is the sum total of earnings received by various factors of production in
terms of wages, rent, interest, etc. by normal residents of a country in a year
without making allowance for depreciation. It differs from GNPmp to the extent of
net indirect taxes.
GNP fc = GNP mp - Net Indirect Taxes
Net Domestic Product at Factor Cost (NDPfc) or Domestic Income
Net domestic product at factor cost is the estimate of the domestic product in
terms of earnings of factors of production within the domestic territory of a
country in a year after making allowance for depreciation.
NDPfc = GDPfc - Depreciation

NDPfc includes the following:

i) Compensation of Employees: It is defined as 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.

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ii) Operating Surplus: It is the sum total of property income and income from
entrepreneurship. i.e. it is the sum total of interest, rent, profits and other similar

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incomes.
iii) Mixed income: They are incomes composed of labour incomes and capital
incomes of those persons who provide both labour and capital services in the
production process. In other words, it is composite of labour income and property
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income in case of those producers where it is difficult to differentiate between
labour element and capital element in the services of factors of production. It
covers own account workers like doctors, street hawkers, etc. and income of
unincorporated enterprises like farmers, small-scale handicraft producers. Hence
here the income is partly labour income and partly property income.
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Therefore NDP at factor cost or Net Domestic income is the sum total of all the
above mentioned 3 categories earned by the factors of production in the
domestic territory of a country in a year.
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Net National Product at Factor cost (NNPfc) or National income.

NNP at Factor cost or National income can be defined as factor income accruing
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to the normal residents of a country during a year after making allowance for
depreciation.
It is the sum total of domestic factor income and net factor income earned from
abroad.
NNPfc or National income = Domestic Factor Income + Net Factor income
earned from abroad

Transfer Payments Incomes and payments which are not related to any
production activity in current period are known as transfer payments.
Transfer payments are payments received without any contribution to
current output

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➔ GDP mp ➔ GDP fc = GDPmp - Net Indirect Taxes.

➔ GNP mp = GDPmp + Net ➔ GNP fc = GNP mp - Net Indirect Taxes

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Factor Income Abroad
➔ NDP fc (Domestic income) =
➔ NDP mp = GDPmp - GDPfc - Depreciation
Depreciation

➔ NNP mp =GNPmp -
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NDP fc + Net factor income from abroad
Depreciation
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Transfer payments are of two types, namely 'current transfers' and 'capital
transfers'.
A current transfer is the one which is made out of the current income of the
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payers and adds to the current income of the receivers. Old-age pensions,
unemployment benefits, scholarship to poor students are the examples of current
transfers.
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A capital transfer, on the other hand, is the one which is paid out of the
capital or wealth of the payers and adds to capital or wealth of the
receivers.
Payments made by the government to some individuals to meet the damages
during flood, famines, etc. and the transfers from households and business firms
to the government in the form of inheritance tax, capital gains, etc. are such
capital transfers.

Disposable Income Income inclusive of all current transfers is called

disposable income.
Disposable income is the income received from all soufces available to the
people.
Disposable Income = Income + Net Current Transfers
Disposable income can be higher or lower than income depending upon whether
net current transfers i.e. the difference between current transfer colipts and
current transfer payments are positive or negative.

National Disposable Income ( Variant of disposable income)

National disposable income is defined as the sum total of national income
at market prices and net current transfers received from rest of the world

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It is the income received by the residents of a country from all the sources for
spending as well as for saving during the year.

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The difference between the current transfers received from rest of the world in
form of gifts, donations etc and current transfers paid to rest of the world in form
of gifts, donations, etc is known as net current transfers received from rest of
the world. 24
Current transfers from one sector to another sector within a country do not affect
national disposable income of a country.

While estimating National Disposable Income, we take national product at market

prices.
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Gross national disposable income is the sum total of gross national
product at market prices and net current transfers received from the rest of
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the world.
GNDI = GNPMP + Net Current Transfers received from Rest of the World
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Net National Disposable Income is the total available income from all
sources at the disposal of a nation which it can spend the way it wants. It is
to know what is the amount of goods and services which is at the disposal of the
domestic economy.
NNDI = NNPmp + Net Current Transfers received from Rest of the World
DISPOSABLE INCOME AGGREGATE OF PRIVATE SECTOR
There are various types of disposable income aggregates belonging to private
sector. However the main income disposable aggregates of private sector are
1) Private Income
2) Personal Income
3) Personal Disposable Income

Private Income
It is the total of factor income (including retained profits of the
corporations) from all sources and current transfers from the government

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and rest of the world accruing to the private sector.
It can be obtained from NI (NNPfc) by making various adjustments, i.e. additions

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and deductions.

Following types of incomes are deducted from NI:

(i) Income from property and entrepreneurship accruing to the government
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commercial enterprises and administrative departments.
(ii) Savings of non-departmental enterprises of the government.
Thus, private income does not include the income accruing to the government
sector because this part of NI is not available for distribution and hence does not
form part of the income of the private sector.
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Following incomes are added to the NI:
i) Interest that the government pays on national debt (borrowings from public to
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meet its consumption expenditure). It forms part of the private income.

ii) Net current transfers received from the government administrative
departments i.e. in the form of old-age pension payments, unemployment
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allowances, medical allowances, scholarships, gifts etc.

iii) Net current transfers like gifts and grants received from other countries.

Private sector gets some such transfer incomes which are part of private income
but not of NI. The concept of private income explains the division of NI between
the private sector and the government sector of the economy.
Private Income =
National Income
– Income from Property and Entrepreneurship accruing to the
Government Commercial Enterprises and Administrative Departments
– Savings of non- departmental Enterprises of the Government
+ Interest on National Debt
+ Net current transfers from Government
+ Net current transfers from abroad.

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Personal Income
It is the income actually received by persons from all sources in the form of

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factor incomes and current transfer payments during a year.
It is sum total of all current incomes received by persons or households
Personal income is useful in finding out purchasing power of people.
It is rough indicator of economic welfare of consumers
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Personal Income =
Private Income
–Undistributed Profits
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–Corporate Profits Tax
–Retained Earnings of Foreign companies
–Contribution of entreprise towards social security schemes.
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Personal Disposable Income

Personal disposable income is that part of personal income which is
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available to the individuals to be used the way they like.

Disposable income is always less than personal income, because only that part
of individual income that remains after payment of personal taxes and
miscellaneous payments to the government (fees, fines etc.) is the actual amount
available for spending by the households.
Personal Disposable Income =
Personal income
– Personal taxes
– Miscellaneous receipts of the Government Administrative Departments
paid by households

Households can use personal disposable income on consumption and saving.

Personal Disposable Income is a useful measure of potential demand for goods
and services in the economy.

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Personal Disposable Income = Consumption Expenditure of Households +
Household Savings

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Per Capita Income
PCI is the average income of the normal residents of a country in a
particular year.
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Per Capita Income = National Income
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Population
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PCI is calculated both at current prices as well as at constant prices.
An increase in Per capita real income leads to an improvement in the standard of
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living of the people as well as economic development. However, PCI is not a

perfect index of economic development and welfare.
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Real Gross Domestic Product and Nominal Gross Domestic Product

( GDP at current prices and GDP at constant prices )

GDP at current prices is the money value of all final g/s produced by all the
enterprises located within the domestic territory of a country during a
particular year expressed at market prices prevailing in that year. GDP at
current prices is known as nominal gross domestic product.
GDP at constant prices on the other hand measures the value of final g/s
produced by all the enterprises located within the domestic territory of a
country during a particular year expressed at the market prices prevailing
in a particular which becomes the base year.
GDP at constant prices is known as real GDP. Thus, GDP at constant prices
reflects real growth of an economy.

GDP at current prices is converted into GDP at constant prices by eliminating the
effect of price changes on GDP with the help of a suitable price index.
Price index is that number which measures the changes in prices between

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different years.

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GDP at Constant Prices = GDP at current prices
--------------------------------------- x 100
Price Index of Current Year
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The need for estimating GDP at constant prices arises because GDP at current
prices produces a misleading picture of economic growth when prices are rising
or falling. If the volume of the goods and services produced each year remains
constant, and prices continue to rise, then GDP at current prices increases
continuously. This increase in GDP creates a false sense of richness or
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economic growth. It does not improve the standard of living of people, hence it
does not reflect the real economic growth. Hence Real GDP is more useful in
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making comparisons of economic performance among different countries of the

world.
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Gross domestic product (NI) as an indicator of economic welfare.

Economic welfare means the total satisfaction or utility derived from the
use of goods and services that can be purchased for money.
Increase in National Income leads to an increase in economic welfare.
Economic welfare depends on the availability of goods and services which satisfy
the needs of the consumers. It is the real PCI which is generally taken as an
index of economic welfare.
There 2 aspects to be noted in this regard:
● Availability of goods and services on average is indicated by PCI rather
than total income. Higher total income,such as GDP, need not result in
increased availability of goods and services on average if the increase in
GDP is accompanied by still higher increase in population. As a result of
higher growth rate of population, per capita availability of g/s in the country
will fall, which will result in a fall in the standard of living of the people and
thereby a fall in economic welfare. Hence, PCI is a better index than total
income like GDP.

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● While taking NI as an indicator of economic welfare, NI should be taken in
real terms and not in nominal terms. An increase in money national income

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may be partly due to increase in the quantity of goods and services. Real
national income is a better index because it eliminates the impact of price
changes on national income. Thus, real PCI is taken as an index of
economic welfare. 24
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