Chapter -3 –National Income & Related Aggregates

LEARNING OBJECTIVES
3.1 INTRODUCTION
3.2 BASIC AGGREGATES OF NATIONAL INCOME
3.3 SOLVED PRACTICALS

INTRODUCTION____________________________________________________
National Income is an important concept of macroeconomics. There are various aggregates or variants of
national income. Each aggregate has a specific meaning, method of measurement and use. The various
aggregates of national income are:
1. Gross Domestic Product at Market Price (𝐺𝐷𝑃𝑀𝑃 )
2. Gross Domestic Product at Factor Cost (𝐺𝐷𝑃𝐹𝐶 )
3. Net Domestic Product at Market Price (𝑁𝐷𝑃𝑀𝑃 )
4. Net Domestic Product at Factor Cost (𝑁𝐷𝑃𝐹𝐶 or Domestic
5. Gross National Product at Market Price (𝐺𝑁𝑃𝑀𝑃 )
6. Gross National Product at Factor Cost (𝐺𝑁𝑃𝐹𝐶 )
7. Net National Product at Market Price (𝑁𝑁𝑃𝑀𝑃 or income)
8. Net National Product at Factor Cost (𝑁𝑁𝑃𝐹𝐶 or National mcome)

3.2 BASIC AGGREGATES OF NATIONAL INCOME

In an economy, various goods and services are produced by different productive units during a period of
one year. Such goods and services cannot be added together in terms of quantity (as we cannot add 5,000
tonnes of wheat + 10,000 mobile phones + 7,000 machines and so on). Therefore, these are expressed in
terms of money.

There are many aggregates in national income to measure the value of goods and services in terms of
money. Let us start with Gross Domestic Product at Market Price (𝐺𝐷𝑃𝑀𝑃 ).

Gross Domestic Product at Market Price (𝑮𝑫𝑷𝑴𝑷 ).

It refers to gross market value of all final goods and services produced within the domestic territory of a
country during a period of one year.
 'Gross' in 𝐺𝐷𝑃𝑀𝑃 signifies that no provision has been made for depredation, i.e. it includes
depreciation.
 ‘Domestic’ in 𝐺𝐷𝑃𝑀𝑃 signifies that it includes goods and services produced by all units located
within the domestic territory (irrespective of fact whether produced by residents or non-residents).
 ‘Market Price’ in 𝐺𝐷𝑃𝑀𝑃 signifies that it includes amount of indirect taxes paid and excludes
amount of subsidy received, i.e. it shows that net indirect taxes (NIT) have been included.
 ‘Product’ in 𝐺𝐷𝑃𝑀𝑃 signifies that only final goods and services have to be included.
By making adjustments in GDPMP we can derive other aggregates.

Gross Domestic Product at Factor Cost (𝐺𝐷𝑃𝐹𝐶 )

It refers to gross money value of all the final goods and services produced within the domestic territory of
a country during a period of one year.
𝐺𝐷𝑃𝐹𝐶 = 𝐺𝐷𝑃𝑀𝑃 - Net Indirect Taxes

Net Domestic Product at Market Price (𝑁𝐷𝑃𝑀𝑃 )

It refers to net market value of all the final goods and services produced within the domestic territory of a
country during a period of one year.
𝑁𝐷𝑃𝑀𝑃 = 𝐺𝐷𝑃𝑀𝑃 - Depreciation

Net Domestic Product at Factor Cost (𝑁𝐷𝑃𝐹𝐶 )

It refers to net money value of all the final goods and services produced within the domestic territory of a
country during a period of one year.
𝑁𝐷𝑃𝐹𝐶 = 𝐺𝐷𝑃𝑀𝑃 - Net Indirect Taxes - Depreciation

𝑁𝐷𝑃𝐹𝐶 is also known as Domestic Income or Domestic factor income.

Relationship Between Four Domestic Concepts

𝐺𝐷𝑃𝑀𝑃 𝐺𝐷𝑃𝐹𝐶 , 𝑁𝐷𝑃𝑀𝑃 and 𝑁𝐷𝑃𝐹𝐶 are four Domestic concepts. The term ‘Domestic’ signifies that
contribution of only those producers (whether resident or non-resident) is to be included who are within
the domestic territory of the country.

Gross National Product at Market Price (𝑮𝑵𝑷𝑴𝑷 )

It refers to gross market value of all the final goods and services
produced by the normal residents of a country during a period
of one year.
𝐺𝑁𝑃𝑀𝑃 = 𝐺𝐷𝑃𝑀𝑃 + Net factor income from abroad
It must be noted that 𝐺𝑁𝑃𝑀𝑃 can be less than 𝐺𝐷𝑃𝑀𝑃 when NFIA
is negative. However, 𝐺𝑁𝑃𝑀𝑃 will be more than 𝐺𝐷𝑃𝑀𝑃 when NFIA is positive.

Gross National Product at Factor Cost (𝑮𝑵𝑷𝑭𝑪 )

It refers to gross money value of all the final goods and services produced by the normal residents of a
country during a period of one year.
𝐺𝑁𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 - Net Indirect Taxes

Net National Product at Market Price (𝑵𝑵𝑷𝑴𝑷 )

It refers to net market value of all the final goods and services produced by the normal residents of a
country during a period of one year.
𝑁𝑁𝑃𝑀𝑃 = 𝐺𝑁𝑃𝑀𝑃 - Depreciation

Net National Product at Factor Cost (𝑵𝑵𝑷𝑭𝑪 )

It refers to net money value of all the final goods and services produced by the normal residents of a country
during a period of one year.

𝑵𝑵𝑷𝑭𝑪 = 𝑮𝑵𝑷𝑴𝑷 - Net Indirect Taxes - Depreciation

It must be noted that 𝑁𝑁𝑃𝐹𝐶 is also known as National Income.
Relationship Between Four National Concepts
𝐺𝑁𝑃𝑀𝑃 𝐺𝑁𝑃𝐹𝐶 𝑁𝑁𝑃𝑀𝑃 𝑎𝑛𝑑 𝑁𝑁𝑃𝐹𝐶 are four National concepts. The term ‘National’ signifies that
production of only normal residents of the country is to be included even if they are outside the domestic
territory of the country.

Domestic Income (𝑵𝑫𝑷𝑭𝑪 ) Vs National Income (𝑵𝑵𝑷𝑭𝑪 )

Basis Domestic Income National Income
Nature of It is a territorial concept as it It is a national concept as it
Concept includes the value of final goods includes the value of final goods
and services produced within and services produced in the
domestic territory of a country. entire world.
Category It considers all producers within It considers all producers who
of the domestic territory of the are normal residents of the
Producers country. country.
NFIA It does not include NFIA. It includes NFIA.

Gross Domestic Product at Market Price Vs National Income

Basis Gross Domestic Product at National Income (𝑵𝑵𝑷𝑭𝑪 )
Market Price (𝑮𝑫𝑷𝑴𝑷 )
 Nature of It is a territorial concept as it It is a national concept as it includes
Concept includes value of final goods and the value of final goods and services
services produced within domestic produced in the entire world.
territory of a country.
Category of It considers all the producers within It considers the producers who are
Producers the domestic territory of the normal residents of the country.
country.
Net Indirect It is at market price, i.e. it includes It is at factor cost, i.e. it excludes net
taxes net indirect taxes. indirect taxes.
Depreciation It is inclusive of depreciation. It does not include depreciation.

Steps for Calculating Practicals of Basic Aggregates of National Income

There are eight basic aggregates of National Income:
4 Domestic Concepts : 𝐺𝐷𝑃𝑀𝑃 𝐺𝐷𝑃𝐹𝐶 𝑁𝐷𝑃𝑀𝑃 𝑁𝐷𝑃𝐹𝐶
4 National Concepts : 𝐺𝑁𝑃𝑀𝑃 𝐺𝑁𝑃𝐹𝐶 𝑁𝑁𝑃𝑀𝑃 𝑁𝑁𝑃𝐹𝐶
While solving practicals of National Income, we are often required to calculate one of the basic aggregate
out of the other 7 aggregates. For better understanding of the steps, let us assume that we have to calculate
𝑁𝐷𝑃𝐹𝐶 from 𝐺𝑁𝑃𝑀𝑃 :
The various steps are:
Step 1. Formulate an equation by putting 'Aggregate to be calculated on the left hand side' and 'Aggregate
given on the right hand side'.
Considering the given example, the equation will be: 𝑁𝐷𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 ± Adjustments.
Step 2. Identify the 'Adjustments' and calculate the answer.
As we have to calculate 𝑁𝐷𝑃𝐹𝐶 from 𝐺𝑁𝑃𝑀𝑃 , there are three adjustments required:
 ‘G’ in 𝐺𝑁𝑃𝑀𝑃 signifies Gross, i.e. it includes depreciation. So, Depreciation will be subtracted from
𝐺𝑁𝑃𝑀𝑃 to arrive at 𝑁𝑁𝑃𝑀𝑃 .
 ‘N’ in 𝐺𝑁𝑃𝑀𝑃 signifies National, i.e. it includes Net Factor Income from Abroad (NFIA). So, NFIA
will be subtracted from 𝑁𝑁𝑃𝑀𝑃 to arrive at 𝑁𝐷𝑃𝑀𝑃 .
 ‘MP’ in 𝐺𝑁𝑃𝑀𝑃 signifies Market Price, i.e. it includes Net Indirect Taxes (NIT). So, NIT will be
subtracted from 𝑁𝐷𝑃𝑀𝑃 to arrive at 𝑁𝐷𝑃𝐹𝐶 .
The equation will become: 𝑁𝐷𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 - Depreciation - NFIA - NIT. After putting the respective
values of 𝐺𝑁𝑃𝑀𝑃 , Depreciation, NFIA and NIT, we can calculate 𝑁𝐷𝑃𝐹𝐶 .
Let us understand this with the help of following illustrations:

Illustration 1 Calculate NDP at FC.

Particulars ` in crores
(i) GNP at MP 8,000
(ii) Depreciation 600
(iii) Net Factor Income from Abroad 300
(iv) Net Indirect taxes 700
Solution:
In the given question, 𝑁𝐷𝑃𝐹𝐶 is to be calculated from GNPmp, It can be calculated through following steps:
Step 1. Formulate an equation by putting ‘𝑁𝐷𝑃𝐹𝐶 on the left hand side ’and ‘𝐺𝑁𝑃𝑀𝑃 on the right hand side
𝑁𝐷𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 ± Adjustments
Step 2. Identify the ‘Adjustments’ and calculate the answer.
Depreciation, Net Factor Income from Abroad (NFIA) and Net Indirect taxes (NIT) will be subtracted from
𝐺𝑁𝑃𝑀𝑃 to arrive at 𝑁𝐷𝑃𝐹𝐶 .
𝑁𝐷𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 - Depreciation - NFIA - NIT
= 8,000 - 600 - 300 - 700
𝑁𝐷𝑃𝐹𝐶 = ` 6,400 crores.

Illustration 2. Calculate GDP at MP.

Particulars ` in crores
(i) NNP at FC 2,000
(ii) Depreciation 200
(iii) Subsidies 70
(iv) Factor Income from Abroad 110
(v) Indirect Taxes 180
(vi) Factor Income to Abroad 50

Solution:
In the given question, 𝐺𝐷𝑃𝑀𝑃 is to be calculated from 𝑁𝑁𝑃𝐹𝐶 . It can be calculated through following
steps:
Step 1. Formulate an equation by putting ‘𝐺𝐷𝑃𝑀𝑃 on the left hand side’ and ‘𝑁𝑁𝑃𝐹𝐶 on the right hand
side’. 𝐺𝐷𝑃𝑀𝑃 = 𝑁𝑁𝑃𝐹𝐶 ± Adjustments
Step 2. Identify the ‘Adjustments’ and calculate the answer.
Depreciation and Net Indirect taxes (NIT) will be added while Net Factor Income from Abroad (NFIA)
will be subtracted from 𝑁𝑁𝑃𝐹𝐶 to arrive at 𝐺𝐷𝑃𝑀𝑃 .
𝐺𝐷𝑃𝑀𝑃 = 𝑁𝑁𝑃𝐹𝐶 + Depreciation - NFIA* + NIT#
= 2,000 + 200 - (110-50) + (180-70)
𝐺𝐷𝑃𝑀𝑃 = ` 2,250 crores.
Note: NFIA* = Factor Income from Abroad - Factor Income to Abroad;
NIT* = Indirect Taxes - Subsidies
For more practicals of Basic Aggregates of National Income, refer ‘Section 3.7:

3.3 Solved Practicals’___________________________________________________

Important Formulae at a Glance
Net Indirect Taxes = Market Price - Factor Cost
Depreciation = Gross Value - Net Value
Net Factor Income from Abroad = National Value - Domestic Value
𝐺𝐷𝑃𝐹𝐶 = 𝐺𝐷𝑃𝐹𝐶 - Net Indirect Taxes
𝑁𝐷𝑃𝑀𝑃 = 𝐺𝐷𝑃𝑀𝑃 - Net Indirect Taxes
Domestic Income or 𝑁𝐷𝑃𝐹𝐶 = 𝐺𝐷𝑃𝑀𝑃 – Depreciation – Net Indirect Taxes
𝐺𝑁𝑃𝑀𝑃 = 𝐺𝐷𝑃𝑀𝑃 + Net Factor Income from Abroad
𝐺𝑁𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 – Net Indirect Taxes
𝑁𝑁𝑃𝑀𝑃 = 𝐺𝑁𝑃𝑀𝑃 – Depreciation

National Income or 𝑁𝑁𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 – Depreciation – Net Indirect Taxes

Example 1. Calculate Domestic Income or NDP at FC.

Particulars ` in crores
(i) GNP at MP 6,000
 (ii) Subsidies 200
(iii) Depreciation 100
(iv) Net Factor income from abroad 400
(v) Indirect tax 300

Solution:
NDP at FC
= GNP at MP - Depreciation - Net Factor income from abroad - {Indirect tax - Subsidies}
= 6,000 – 100 – 400-{300-200} = ` 5,400 crores.
Ans. NDP at FC = ` 5,400 crores.
The Solution of Example 1 can also be presented as:
= (i) - (iii) - (iv) - {(v) - (ii)}
= 6,000 - 100 - 400 - {300 - 200} = ` 5,400 crores
Ans. NDP at FC = ` 5,400 crores
Example 2. National Income or NNP at FC
Particulars ` in crores
(i) GDP at MP 5,500
(ii) Consumption of Fixed Capital 300
(iii) Goods and Services Tax 120
(iv) Factor income from abroad 150
(v) Subsidies 70
(vi) Factor income to abroad 250
Solution:
National Income or NNP at FC
= GDP at MP - Consumption of Fixed Capital + (Factor income from abroad - Factor income to abroad) -
(Goods and Services Tax - Subsidies)
= 5,500 - 300 + (150 - 250) - (120 - 70)
= ` 5,050 crores
Ans. NNP at MP = ` 5,050 crores
Particulars ` in crores
(i) NDP at MP 25,000
(ii) Depreciation 5,000
(iii) Subsidies 30
(iv) Factor income from abroad 400
(v) Factor income to the rest of the world 600

Solution:
Note: |n given example, only subsidies are given. There can be two ways to solve this:
(i) Add subsidies (as factor cost is to be calculated from the market price); or
(ii) Write formula as: (Indirect taxes - Subsidies) and put value of indirect taxes as zero.
GNP at FC
= NDP at MP + Depreciation + (Factor income from abroad - Factor income to the rest of the world) +
Subsidies
= 25,000 + 5,000 + (400 - 600) + 30
= ` 29,830 crores

The Solution of Example 2 can also be presented as:

= NDP at MP + Depreciation + (Factor income from abroad - Factor income to the rest of the world) -
(Indirect tax - Subsidies)
= 25,000 + 5,000 + (400 - 600) - (0 = ` 29,830 crores
Ans. GNP at FC= ` 29,830 crores

Example 4. Calculation GNP at MP.

Particulars ` in crores
(i) Domestic Income or NDP at FC 3,200
(ii) Depreciation 400
(iii) Indirect Taxes 70
(iv) Net Factor income to abroad —50

Solution:
GNP at MP
= NDP at FC + Depreciation - Net Factor income to abroad + Indirect Taxes = 3,200 + 400 -50 + 70 = `
3,620 crores Ans. GNP at MP = ` 3,620 crores
Note: Net factor income to abroad means that the paid amount is more than received amount.

Example 5. Calculate Consumption of Fixed Capital.

Particulars ` in crores
(i) National Income or NNP at FC 4,000
(ii) GDP at MP 5,000
(iii) Net Indirect Tax 300
(iv) Net Factor income from abroad 200

Solution:
GDP at MP = NNP at FC + Consumption of Fixed Capital - Net Factor income from abroad + Net Indirect
Tax |
It means:
Consumption of Fixed Capital
= GDP at MP - Net Indirect Tax + Net Factor income from abroad - NNP at FC = 5,000-300 + 200-4,000
= ` 900 crores Ans. Consumption of Fixed Capital = ` 900 crores

Example 6. Calculate Net Indirect Tax.

Particulars ` in crores
(i) GNP at MP 7,000
(ii) Domestic Income or NDP at FC 6,200
(iii) Depreciation 600
(iv) Net Factor income from abroad (-) 400
Solution:
GNP at MP = NDP at FC + Depreciation + Net Factor income from abroad + Net Indirect Tax
It means:
Net Indirect Tax
= GNP at MP - Depreciation - Net Factor income from abroad - NDP at FC
= 7,000 - 600 - (-) 400 - 6,200 = ` 600 crores
Ans. Net Indirect Tax = ` 600 crores

Example 7. Calculate Subsidies.

Particulars ` in crores
(i) GNP at FC 27,710
(ii) Consumption of Fixed Capital 4,000
(iii) Indirect Taxes 120
(iv) Factor income from abroad 400
(v) NDP at MP 24,000
(vi) Factor income to abroad 600

Solution:
GNP at FC = NDP at MP + Consumption of Fixed Capital + (Factor income from abroad
-Factor income to abroad) - (Indirect Taxes - Subsidies)
It means:
Subsidies
= GNP at FC - Consumption of Fixed Capital - (Factor income from abroad - Factor income to
abroad) + Indirect Taxes - NDP at MP
= 27,710 - 4,000 - (400 - 600) + 120 - 24,000
= ` 30 crores
Ans.: Subsidies = ` 30 crores
Calculate Factor Income to abroad.
Particulars ` in crores
(i) GNP at MP 4,500
(ii) Replacement of Fixed Capital 100
(iii) Indirect Taxes 300
(iv) Subsidies 200
(v) Factor Income from abroad 700
(vi) NDP at FC 3.900

Solution:
GNP at MP = NDP at FC + Replacement of Fixed Capital + (Factor Income from abroad
- Factor Income to abroad) + (Indirect Taxes - Subsidies)
It means:
Factor Income to abroad
= NDP at FC + Replacement of Fixed Capital + Factor Income from abroad + (Indirect Taxes -
Subsidies) - GNP at MP
= 3,900 + 100 + 700 + (300 - 200) - 4,500
= ` 300 crores
Ans. Factor Income to abroad = ` 300 crores
Note: Replacement of Fixed Capital is another name for Depreciation.
Example 9. The net domestic product at market price of an economy is ` 4,500 crores.
The capital stock is worth ` 4,000 crores and it depreciates at the rate of 10% per annum. Indirect
taxes amount to ` 150 crores, subsidies amount to ` 20 crores, factor income from the rest of the
world is ` 400 crores and to rest of the world is ` 600 crores. Find out the gross national product
at factor cost.
Solution:
Gross National Product at Factor Cost (𝐺𝑁𝑃𝐹𝐶 )
= Net Domestic Product at Market Price + Depreciation - Net Indirect taxes + Net Factor income
from abroad
= 4,500 + 10% of 4,000 - (150 - 20) + (400 - 600)
= 4,500 + 400 - 130 - 200 = ` 4,570 crores
Ans. Gross National Product at Factor Cost (𝐺𝑁𝑃𝐹𝐶 ) = ` 4,570 crores

10. Calculate (a) Depreciation; (b) Subsidies; (c) NDP at FC.

Particulars ` in Crores
(i) GNP at FC 95,000
(ii) Indirect Tax 14,000
(iii) NDP at MP 1,00,422
(iv) NNP at MP 1,00,000
(v) GNP at MP 1,07,000
Solution:
(a) Depreciation
= GNP at MP - NNP at MP = 1,07,000 -1,00,000 = ` 7,000 crores
(b) Subsidies
= GNP at FC - GNP at MP + Indirect Tax = 95,000 - 1,07,000 + 14,000 = ` 2,000 crores
(c) NDP at FC
= NDP at MP - (Indirect Tax - Subsidies)
= 1,00,422 - (14,000 - 2,000) = ` 88,422 crores
Ans. (a) Depreciation = ` 7,000 crores; (b) Subsidies = ` 2,000 crores; (c) NDP at FC = ` 88,422
crores.

REVISION OF KEY POINTS

 Gross Domestic Product at Market Price (𝑮𝑫𝑷𝑴𝑷 ) refers to gross market value of all final goods
and services produced within the domestic territory of a country during a period of one year.
 Gross Domestic Product at Factor Cost (𝑮𝑫𝑷𝑭𝑪 ) refers to gross money value of all the final goods
and services produced within the domestic territory of a country during a period of one year.
 Net Domestic Product at Market Price (𝑵𝑫𝑷𝑴𝑷 ) refers to net market value of all the final goods
and services produced within the domestic territory of a country during a period of one year.
 Net Domestic Product at Factor Cost (𝑵𝑫𝑷𝑭𝑪 ) or Domestic Income refers to net money value of
all the final goods and services produced within the domestic territory of a country during a period
of one year.
 Gross National Product at Market Price (𝑮𝑵𝑷𝑴𝑷 ) refers to gross market value of all the final
goods and services produced by the normal residents of a country during a period of one year.
 Gross National Product at Factor Cost (𝑮𝑵𝑷𝑭𝑪 ) refers to gross money value of all the final goods
and services produced by the normal residents of a country during a period of one year.
 Net National Product at Market Price (𝑵𝑵𝑷𝑴𝑷 ) refers to net market value of all the final goods and
services produced by the normal residents of a country during a period of one year.
 Net National Product at Factor Cost (𝑵𝑵𝑷𝑭𝑪 ) or National Income refers to net money value of all the final
goods and services produced by the normal residents of a country during a period of one year.

Synonyms or Similar Terms of this Chapter

𝑵𝑫𝑷𝑭𝑪 Domestic Income or Domestic Product
𝑵𝑵𝑷𝑭𝑪 National Income or National Product

HOTS HIGHER ORDER THINKING SKILLS QUESTIONS

Q. 1. Mention the situations in which following equations will hold true:
(i) National Income = Domestic Income
(ii) 𝐺𝐷𝑃𝐹𝐶 >𝐺𝐷𝑃𝑀𝑃
(iii) 𝑁𝑁𝑃𝐹𝐶 < 𝑁𝐷𝑃𝐹𝐶
(iv) 𝐺𝐷𝑃𝐹𝐶 = 𝐺𝐷𝑃𝑀𝑃
(v) Domestic Income is greater than National Income. {CBSE, Sample Paper 2017}
Ans. (i) When net factor income from abroad is zero.
(ii) When subsidies are more than indirect taxes.
(iii) When factor income paid abroad is more than factor income received from abroad.
(iv) When net indirect taxes is zero.
(v) When net factor income from abroad is negative.

Q. 2. Determine the missing items in the following cases:

(i) 𝐺𝐷𝑃𝐹𝐶 =𝐺𝐷𝑃𝑀𝑃 - ?
(ii) ? = National Income - Domestic Income
(iii) 𝐺𝐷𝑃𝐹𝐶 = ? + Depreciation
(iv) 𝑁𝐷𝑃𝐹𝐶 = ? - Depreciation - Net Indirect Tax
Ans. (i) Net Indirect Taxes; (ii) Net Factor Income from Abroad; (iii)
𝑁𝐷𝑃𝐹𝐶 (iv)𝐺𝐷𝑃𝑀𝑃

TRUE AND FALSE

Are the following statements true or false? Give reasons.
1. In a closed economy, gross domestic product is always equal to gross national product.
True. It happens because net factor income from abroad is zero due to no interaction with the rest of
the world.
2. Domestic Income of a country can be more than its National Income.
True. It is Possible when factor income paid abroad is more than factor income received from abroad.
3. Domestic product includes contribution of only resident producers within the domestic territory of
the country.
False. Domestic product includes contribution of all the producers (whether resident or non-resident)
who are within the domestic territory of the country.
Note: Per CBSE guidelines, no marks will be given if reason to the answer is not explained.

GUIDELINES TO NCERT QUESTIONS

1. Suppose the GDP at market price of a country in a particular year was ` 1,100 crores. Net Factor
Income from Abroad was ` 100 crores. The value of (Indirect taxes - Subsidies) was ` 150 crores
and National Income was ` 850 crores. Calculate the aggregate value of depreciation.
Hint: 𝐺𝐷𝑃𝑀𝑃 = 𝑁𝑁𝑃𝐹𝐶 + Depreciation - NFIA + NIT 1,100 = 850 + Depreciation -100 + 150
Depreciation = ` 200 crores.
2. In a single day, Raju, the barber, collects ` 500 from haircuts; over this day, his equipment depreciates
in value by ` 50. Of the remaining ` 450, Raju pays indirect tax worth ` 30, takes home ` 200 and
retains ` 220 for improvement and buying of new equipment. He further pays ` 20 as income tax
from his income. Based on this information, complete Raju’s contribution to the following measures
of income
(a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost.
Hint: In the given question, Depreciation = ` 50; Indirect taxes = ` 30; Retained earnings = ` 220;
Personal direct tax = ` 20.
(a) Gross Domestic Product (GDP) = ` 500
(b) 𝑁𝑁𝑃𝑀𝑃 = GDP-depreciation = 500 - 50= ` 450
(c) 𝑁𝑁𝑃𝐹𝐶 = 𝑁𝑁𝑃𝑀𝑃 - Indirect Tax = 450 -30= ` 420

REVISION EXERCISE
Multiple Choice Questions (MCQs)
1. Out of the following, which aggregate represents ‘National Income’?
(a) 𝑁𝑁𝑃𝑀𝑃 (b) 𝐺𝑁𝑃𝐹𝐶
(c) 𝑁𝑁𝑃𝐹𝐶 (d) 𝐺𝑁𝑃𝑀𝑃

2. If factor income received from abroad is equal to factor income paid abroad, then which of the
following is not a valid statement?
(a) National Income = Domestic Income (b) 𝑁𝐷𝑃𝐹𝐶 + Depreciation = 𝐺𝑁𝑃𝐹𝐶
(C) 𝑁𝐷𝑃𝐹𝐶 + Depreciation = 𝐺𝑁𝑃𝑀𝑃 (d) All are valid

3. Fill in the blank: 𝐺𝑁𝑃𝐹𝐶 = 𝐺𝐷𝑃𝑀𝑃

(a) + Depreciation - Net factor income from abroad - Net Indirect taxes
(b) + Depreciation + Net factor income from abroad + Net Indirect taxes
(c) + Depreciation - Net factor income from abroad + Net Indirect taxes
(d) + Depreciation + Net factor income from abroad - Net Indirect taxes

4. If economic subsidies are added to and indirect taxes are subtracted from the national income at
market prices, then it will be equal to:
(a) Domestic Income (b) National Income
(c) Gross national product at market prices (d) Gross domestic product at factor cost

5. Which of the following is not a component of operating surplus?

(a) Interest (b) Rent
(c) Royalty (d) Compensation of Employees

6. In which type of economy, domestic income is equal to national income?

(a) Open Economy (b) Closed Economy
(c) Both (a) and (b) (d) Neither (a) nor (b)

7. Domestic factor income is another name for:

 (a) 𝑁𝐷𝑃𝐹𝐶 (b) 𝑁𝑁𝑃𝑀𝑃
(c) 𝐺𝐷𝑃𝐹𝐶 (d) 𝑁𝑁𝑃𝐹𝐶

8. Net domestic product at factor cost is less than national income when:
(a) Net factor income from abroad is positive
(b) Net factor income from abroad is negative
(c) Net factor income from abroad is zero
(d) Net exports are positive

9. National Income is equal to:

(a) Domestic product plus factor incomes earned from abroad
(b) Domestic product plus net factor incomes earned from abroad
(c) Domestic product minus factor incomes to abroad
(d) Domestic product plus export minus imports

10. If net national product is given at Market Prices, we indirect taxes and_____subsidies to
get_____National Income of the economy.
(a) Add, Subtract (b) Add, Divide
(c) Subtract, Add (d) Subtract, Divide

11. From the following information, compute 𝐺𝑁𝑃𝑀𝑃 . 𝐺𝐷𝑃𝐹𝐶 = ` 3,000; Net factor income to abroad =
` 200. Indirect Taxes = ` 420, Subsidies = ` 240.
(a) 3,380 (b) 2,980
(c) 3,020 (d) 2,620

12. GNP exceeds NNP by:

(a) Amount of total taxes (b) Government expenditure
(c) Transfer payments (d) Difference between gross and net investment

13. Which of the following flowchart correctly represents the relationship between Domestic concepts?

Answer Key
1. C 11. B
2. C 12. D
 3. C 13 C
4. B
5. D
6. D
7. B
8. A
9. A
10. B

Very Short Answer Type Questions (1 Mark each)

Q. 1. Define domestic income.
OR
Define domestic product. (CBSE, All India Comptt. 2014}
Ans. Domestic income (𝑁𝐷𝑃𝐹𝐶 ) is the net money value of all the final goods and services produced within
the domestic territory of a country during a period of one year.
Q. 2. When is the net domestic product at market price less than the net domestic product at factor cost?
Ans. When net indirect taxes are negative i.e., subsidies are more than indirect taxes.

Q. 3. Why is gross domestic product at factor cost more than the net domestic product at factor cost?
Ans. Gross domestic product at factor cost includes depreciation while net domestic product at factor cost
does not include depreciation.
Q. 4. When will GDP of an economy be equal to GNP?
Ans. GDP and GNP will be equal when the ‘net factor income from abroad’ is zero.

Q. 5. When will the domestic income exceed the national income?

Ans. When the net factor income from abroad is negative.

Q. 6. If 𝑁𝐷𝑃𝐹𝐶 is ` 1,000 crores and NFIA is (-) ` 5 crores, how much will be the national income?
Ans. National Income = 1000 + (-5) = ` 995 crores

Q. 7. If the domestic factor income is ` 200 crores and the national income is ` 190 crores, how much will
be the net factor income from abroad?
Ans. Net factor income from abroad = 190 - 200 = (-) ` 10 crores

Q.8. In which type of economy, domestic income will be equal to national income?
Ans. Closed Economy.

Q.9. Define national income. {CBSE, All India Comptt. 2013, Delhi Comptt. 2014 (I)}
OR
Define national product. {CBSE, Delhi Comptt 2014 (l,)}
Ans. National Income refers to net money value of all the final goods and services produced by the normal
residents of a country during a period of one year.

Short Answer Type Questions (3-4 Marks each)

1. Define the following terms: (i) 𝐺𝐷𝑃𝑀𝑃 ; (ii) 𝑁𝐷𝑃𝐹𝐶 ; (iii) 𝑁𝑁𝑃𝑀𝑃
2. When can domestic product be more than national product? {CBSE, All India 2009}
3. Distinguish between Gross Domestic Product at Market Price and National Income.
4. Distinguish between domestic product and national product. (CBSE, Foreign 2017 (II)}
5. Is it necessary that Domestic Income is always less than National Income.

Long Answer Type Questions (6 Marks each)

1. Distinguish between the following, giving suitable examples in support of your answer: (a) Domestic
product and national product. {CBSE, Delhi 2005}
2. Discuss the concepts of: (i) NDP at MP; (ii) GNP at FC and (iii) GDP at MP.

Unsolved Practicals
Practicals on Basic Aggregates of National Income
1. Calculate GNP at FC.
Particulars ` in crores
(i) NDP at MP 80,000
(ii) Net Factor income from abroad -200
(iii) Depreciation 4,950
(iv) Subsidies 1,770
(v) Indirect Tax 10,600
GNP at FC = ` 75,920 Crores
2. Calculate the Domestic Income.
(i) Gross national product at market price 58,350
(ii) Indirect Tax 2,590
(iii) Subsidies 1,540
(iv) Depreciation 1,625
(v) Net Factor income from abroad -240
Domestic Income = ` 55,915 Crores
3. Calculate National Income or NNP at FC.
Particulars ` in crores
(i) GDP at MP 4,800
(ii) Indirect Taxes 300
(iii) Net Factor income from abroad 80
(iv) Consumption of Fixed Capital 200
(v) Subsidies 60
National Income = ` 4,440 Crores
4. Calculate GDP at MP.
Particulars ` in crores
(i) National Income 6,700
 (ii) Consumption of Fixed Capital 180
(iii) Factor income from abroad 100
(iv) Indirect Taxes 130
(v) Subsidies 70
(vi) Factor income to abroad 150
GDP at MP = ` 6,990 Crores
5. Calculate Domestic Income.
Particulars ` in crores
(i) GNP at FC 2,700
(ii) Indirect Taxes 60
(iii) Factor income from abroad 150
(iv) Factor income to abroad 180
(v) Replacement of Fixed Capital 150
Domestic Income = ` 2,580 Crores
6. Calculate (a) Domestic Income; (b) National Income.
Particulars ` in crores
(i) GDP at MP 70,150
(ii) Indirect Taxes 5,200
(iii) Factor income from abroad 800
(iv) Consumption of Fixed Capital 3,100
(v) Factor income to abroad 300
(vi) Subsidies 4,000
(a)` 65,850 Crores; (b)` 66,350 Crores

7. Calculate Indirect Taxes from the following data:

Particulars ` in crores
(i) NDP at FC 55,915
(ii) Subsidies 1,540
(iii) Factor income from abroad 625
(iv) Consumption of Fixed Capital 1,625
(v) Factor income to abroad 865
(vi) GNP at MP 58,350
Indirect Taxes = ` 2,590 Crores
8. Calculate Factor Income to abroad:
Particulars ` in crores
(i) GNP at FC 4,280
(ii) Subsidies 80
(iii) Factor income from abroad 400
(iv) Depreciation 480
(v) Indirect Taxes 100
(vi) NDP at MP 3,700
Factor Income to abroad = ` 280 Crores
9. Calculate Depreciation:
Particulars ` in crores
 (i) NDP at MP 80,000
(ii) Indirect Taxes 10,600
(iii) GNP at FC 75,920
(iv) Factor Income to abroad 700
(v) Factor income from abroad 500
(vi) Subsidies 1,770
Depreciation = ` 4,950 Crores
10. Calculate Subsidies:
Particulars ` in crores
(i) GDP at FC 55,000
(ii) Indirect Taxes 4,400
(iii) Factor Income to abroad 600
(iv) NNP at MP 55,500
(v) Factor income from abroad 1,300
(vi) Depreciation 2,500
Subsidies = ` 2,100 Crores
11. Gross National Product at market prices of an economy is ` 65,000 crores. The capital stock of the
economy is valued at ` 1,20,000 crores, which depreciates at the rate of 10% per annum. Indirect
taxes amount to ` 6,000 crores and subsidies amount to ` 1,000 crores. Estimate National Income of
the economy.
National Income = ` 48,000 Crores

POWER BOOSTER
CATEGORISATION OF DOMESTIC INCOME
The domestic income (NDPFC) of a country is earned by both private sector and public sector.
So, it is sub-divided into two parts:
1. Income from domestic product accruing to Private Sector: It refers to that part of domestic income
which accrues only to the private sector.
2. Income from domestic product accruing to Public Sector: It refers to that part of domestic income
which accrues to the public or government sector. It further includes two components:
(i) Income from property and entrepreneurship accruing to government administrative
departments: It includes income earned by Government's departmental enterprises (like railways,
posts and telegraphs, etc.) from property (rent and interest) and entrepreneurship (profit).
(ii) Savings of non-departmental enterprises: It includes undistributed profits of non- departmental
government enterprises (like Air India, MTNL, LIC, etc.).
Income from Domestic Product accruing to Private Sector
= 𝑁𝐷𝑃𝐹𝐶 - Income from Property and Entrepreneurship accruing to Government Administrative
Departments - Savings of Non-departmental Enterprises.

PRIVATE INCOME
Private income refers to the income which accrues to private sector from all the sources within and
outside the country.
It includes both earned income (factor income) and unearned income (transfer income) received by private
sector (Private enterprises + Households). It means, it consists of two kinds of incomes:
1. Factor Income (Earned Income): There are two sources of factor income for the Private sector:
(i) Income earned within the domestic territory known as Income from domestic product accruing to
private sector.
(ii) Income earned outside the domestic territory known as Net factor income from abroad.
2. Transfer Income (Unearned Income): The transfer income is also received from two sources:
(i) Income received within the domestic territory. It includes National debt interest and current transfers
from government.
(ii) Income received from outside the domestic territory known as net current transfers from the rest of
the world.
It must be noted that Net factor income from abroad (NFIA) accrues to both Private and Government
sectors. However; due to lack of data for the Government sector, it is assumed that NFIA is attributed to
the Private Sector only.

Transfer Incomes under Private Income

(i) Interest on National Debt: Sometimes, the government borrows funds from the public (by issuing
bonds like National Saving Certificates, Saving Bonds, etc.) in order to meet its rising expenditure.
Such debts are generally used by the government for consumption purposes. Hence, interest paid on
such debts is treated as a transfer income for private enterprises.

(ii) Current transfers from Government: it includes all transfer receipts from government in the form
of scholarships, unemployment allowances, subsidies, etc. Such transfers are always positive as they
are one-sided, i.e., they flow from Government to the private sector.

(iii) Net Current transfers from rest of the world: it refers to net gifts and remittances received from
abroad. It is positive when transfers received from abroad are more than transfers paid abroad.
However, if transfers paid abroad are more than transfers received, then it is negative.
Steps for Calculating Private Income
Let us now understand the steps for calculating 'Private Income':
Private Income from Domestic Concept (say, 𝐺𝐷𝑃𝑀𝑃 ) Step 1 Calculate Domestic Income (𝑁𝐷𝑃𝐹𝐶 )
NDPFC = 𝐺𝐷𝑃𝑀𝑃 - Depreciation - Net Indirect Taxes

Step 2 Calculate Income from Domestic Product Accruing to Private Sector

Income from Domestic Product Accruing to Private Sector = 𝑁𝐷𝑃𝐹𝐶 - - Income from Property and
Entrepreneurship accruing to Government Administrative Departments - Savings of Non-departmental
Enterprises.

Step 3 Calculate Private Income

Private Income = Income from Domestic Product Accruing to Private Sector + Net Factor Income from
Abroad + National Debt Interest + Current Transfers from Government + Net Current Transfers from rest
of the world.

PRIVATE INCOME
Private Income from National Concept (say,𝐺𝑁𝑃𝑀𝑃 )
Step 1 Calculate National Income (𝑵𝑵𝑷𝑭𝑪 )
𝑁𝑁𝑃𝐹𝐶 = 𝐺𝑁𝑃𝑀𝑃 – Depreciation – Net Indirect Taxes

Step 2 Calculate Income from National Product Accruing to Private Sector

Income from National Product Accruing to Private Sector = NNPFC – Income from Property and
Entrepreneurship accruing to Government Administrative Departments – Savings of Non-
departmental Enterprises.
Step 3 Calculate Private Income
Private Income = Income from National Product Accruing to Private Sector + National Debt Interest +
Current Transfers from Government + Net Current Transfers from rest of the world.

Private Income Vs National Income

Basis Private Income National Income
Factor/Transfer It includes factor incomes as It includes factor incomes
Income well as transfer incomes. only.
Public Sector It does not include income It includes the income of
Income of public sector. public sector.

Private Income Vs Income from Domestic Product accruing to Private Sector

Basis Private Income Income from Domestic Product Accruing to
Private Sector
Factor/Transfer It includes factor incomes as It includes factor incomes only.
Income well as transfer incomes.
Concept It is a national concept as it It is a domestic concept as it excludes NFIA.
includes NFIA.

PERSONAL INCOME
Personal Income is the sum total of all the incomes that are actually received by households from all the
sources. Like private income, it also includes both factor and transfer incomes.
Personal Income does not include ‘Corporate Tax’ and ‘Retained Earnings'
Private income belongs to both private enterprises and the households. However, Personal Income refers
to that part of private income, which is received by the households only.
• Personal Income does not include 'Corporate Tax' as such taxes are paid by the private enterprises
to the Government and are not received by the households.
• Personal Income does not include 'Retained Earnings' also as they are retained by private
enterprises for their future expansion and unforeseen events.
Personal Income = Private Income - Corporate Tax - Retained Earnings.

Personal Income Vs Private Income

 Basis Personal Income Private Income
Meaning It refers to income actually received by It refers to the income which accrues to
households from all sources. private sector from all sources.
Concept It is a narrower concept as it is a part of It is a broader concept as it includes personal
private income. income.
Formula Personal Income = Private income - Private Income = Personal Income +
Corporate Tax - Retained earnings. Corporate Tax + Retained earnings.

Personal Income Vs National Income

Basis Personal Income National Income
Meaning It is the sum total of all incomes National Income refers to the sum total of
that are actually received by all the factor incomes, earned by the
households from all the normal residents of a country during a
sources. period of one year.
Nature of Income It includes both factor incomes It includes only the factor incomes.
as well as transfer incomes.
Public sector income It does not include income It includes income earned by public
earned by public sector. sector.
Nature of Income It includes both factor incomes It includes only the factor incomes.
as well as transfer incomes.
Public sector income It does not include income It includes income earned by public
earned by public sector. sector.

PERSONAL DISPOSABLE INCOME

Personal Disposable Income (PDY) refers to that part of personal income which is actually available at
the disposal of households.
It is that part of personal income which is left with the households after making payments of taxes, fees
and other miscellaneous receipts of the government.

PDY excludes ‘Personal Taxes’ and ‘Miscellaneous Receipts of Government’

Personal Income shows the total income received by households from all sources. However, PDY is that
part of personal income which the households can spend the way they like, i.e. it shows the purchasing
power of the households. Therefore, PDY excludes that part of personal income which is paid to the
government.
• PDY does not include 'Personal Taxes' as households need to pay direct taxes like income tax, house
tax, etc. to the Government
• PDY does not include 'Miscellaneous Receipts of Government' as these are small compulsory
payments made by households to the government in the form of fees, fines, etc.

Personal Disposable Income = Personal Income - Personal taxes - Miscellaneous receipts of government.

One More way to Calculate PDY

Households can use their personal disposable income by either spending on consumption of goods and
services or saving for the future. So, PDY can also be calculated as:
Personal Disposable Income = Personal Consumption Expenditure + Personal Savings
After understanding the concept of personal disposable income, let us now discuss the meaning of National
Disposable Income.

NATIONAL DISPOSABLE INCOME (NET AND GROSS)

National Disposable Income (NDY) refers to the income which is available to the whole country for
disposal. It includes both factor income and transfer income. It is also known as 'Net National Disposable
Income'.

NDY includes ‘Net Indirect Taxes’ and ‘Net Current Transfers from ROW’
NDY shows the total income available with the economy at its disposal from all sources. It means:
• NDY includes 'Net Indirect Taxes' as it is the transfer income of the government and is free to use it,
the way it likes.
• NDY also includes 'Net Current Transfers from ROW' as it is the transfer income of the government
received from abroad.
National Disposable Income = National Income + Net indirect taxes + Net current transfers from the rest
of the world

One More way to Calculate NDY

NDY is the maximum income available to a country to spend on consumption of goods or services and
savings. So, NDY can also be calculated as:
NDY = National Consumption Expenditure + National Savings
National Consumption Expenditure is the sum total of ‘Private Final Consumption Expenditure’ and
‘Government Final Consumption Expenditure.’

Gross National Disposable Income

When depreciation is added to the net National Disposable Income, we get Gross National Disposable
Income.
Gross National Disposable Income = Net National Disposable Income + Depreciation
National Disposable Income Vs National Income
Basis National Disposable Income National Income
Factor/transfer It includes factor incomes as It includes factor incomes only.
Income well as transfer incomes.
Net Indirect It is estimated at market prices, It is estimated at factor cost, i.e.
Taxes i.e. it includes net indirect taxes. it excludes net indirect taxes.

National Disposable Income Vs Personal Disposable Income

Basis National Disposable Income Personal Disposable Income
Concept It is a broader concept as it It is a narrow concept as it
includes incomes of both public includes income of households
and private sector. only.
Net Indirect It is inclusive of net indirect It excludes net indirect taxes.
Taxes taxes.
*****