National Income: Formulas & Tricks
We have already discussed the meaning and basics of National Income. Now, as per the request from one student on social media, I am going to discuss some basic conversions related to it. Keep your pen and register ready as we are about to learn some formulas. Let’s start with National Income: Formulas & Tricks.
How To Do The Conversion of Some Basic Terms?
In this, we will learn the conversion of three main terms before learning the conversion of some national income aggregates:
Converting Factor Cost To Market Price
In National income, ‘Factor Cost’ which is the factory price of a good, gets converted into ‘Market Price’ which is derived based on market forces of demand and supply, by adding ‘ Net Indirect Tax’ into ‘Factor Cost’.
Market Price = Factor Cost + Net Indirect Tax
Net Indirect Tax = Indirect Taxes – Subsidies
Thinking why we are adding Net Indirect Tax in Factor Cost to obtain Market Price? Well, goods produced in the factory is cheaper as compared to when we buy from any other retail outlet because tax gets added when we purchase the same good from the market.
Converting Domestic To National
National Income, ‘Domestic’ means the income earned by the residents of a country within its domestic territory, it gets converted into ‘National’ which shows the total income earned by the whole population within the nation, by adding ‘ Net Factor Income From Abroad’.
National = Domestic + Net Factor Income From Abroad
Net Factor Income From Abroad = Net Factor Income Earned from abroad – Net Factor income paid to abroad
Lots of confusion? Let’s go step by step. Domestic income is always considered to be lesser as compared to the National income. We get national income by adding ‘Net Factor Income from Abroad’ which means, whatever residents are earning in their home country and if they go abroad and earns, then that foreign income is earned by our domestic residents only. Hence, it is considered to be a part of our national income.
Converting Net To Gross
In National Income, ‘Net’ means which does not include any wear and tear or depreciation value. ‘Net’ gets converted into ‘Gross’ which includes the depreciation value, by adding ‘Depreciation’.
Gross = Net + Depreciation
Depreciation is the wear and tear or loss of value of any capital good due to its usage over time. Depreciation is known by different names like ‘consumption of fixed capital, the replacement cost of fixed capital,’ current replacement cost’, ‘capital consumption’. I will add more, as I learn more about it. I have explained the conversion below in a table form for your reference:
Solving National Income Aggregates
Whatever we learned from the above conversions, we will apply the same here for the calculation involved in national income aggregates. But first, we will learn, how to pronounce national income aggregates:
- GDPmp is read as ‘Gross Domestic Product at Market Price’. It is defined as the gross market value of all the final goods and services produced by all the production units within the domestic territory of the country for one year.
- NDPmp is read as ‘Net Domestic Product at Market Price’. It refers to the net market value of all goods and services produced within the domestic territory for one year.
- GNPmp is read as ‘Gross National Product at Market Price’. It refers to the gross market value of all final goods and services produced by the normal resident for one year.
- NNPmp is read as ‘Net National Product at Market Price’. It refers to the net market value of all the goods and services produced by the normal resident of the country for one year.
- GDPfc is read as ‘Gross Domestic Product at Factor Cost’. It refers to the gross money value of all final goods and services produced within the domestic territory of a country excluding ‘Net Indirect Taxes’ during one year.
- NDPfc is read as ‘Net Domestic Product at Factor Cost’. It refers to the net money value of all final goods and services produced within the domestic territory of a country during one year. It is popularly known by Domestic Income.
- GNPfc is read as ‘Gross National Product at Factor Cost’. It refers to the gross money value of all final goods and services produced by a normal resident of a country during one year.
- NNPfc is read as ‘Net National Product at Factor Cost’. It refers to the net money value of goods and services produced by normal residents of a country during one year. It is popularly known as National Income.
Let’s understand how we can solve national income aggregates.
- If GDPmp= 1000, NIT= 100, Depreciation= 50, NFIA= 200. Calculate NNPfc
Note: NIT stands for net indirect taxes, NFIA stands for net factor income from abroad.
Solution. In this question, we have to calculate NNPfc; so whatever we calculate are to be kept on Left Hand Side (LHS) and whichever national income aggregate is given in the question are to be kept on Right Hand Side (RHS). Conversion is applied from RHS to LHS, that is, the aggregates given in the question should be converted to what we have to find. Check the below image for calculation:
So, the final answer for NNPfc is 1050. For more clarity, you can refer to the national income accounting book.
- If GNPfc= 900, NIT= 100, Depreciation= 50, NFIA= 200. Calculate NDPmp.
- If NDPfc = 2000, Depreciation = 200, Indirect Tax = 50, Subsidies = 10, NFIA = -100. Calculate GDPmp.
- If GNPfc = 3000, Depreciation= 100, Indirect Tax = 200, NFIA = -200. Calculate NDPmp.
- If GNPfc = 1000, NIT =100, NFIA = 50, Depreciation = 70. Calculate NDPmp.
- If GDPmp = 2000, NIT = 200, NFIA = 20, Depreciation = 100. Calculate NNPfc.
- If GDPmp = 1000, NIT = 200, NFIA = 20, Depreciation = 100. Calculate NNPmp.
- NNPmp = 1500, NIT= 150, NFIA = 10, Consumption of fixed capital = 100. Find GNPfc.
- GDPmp= 1000, NIT = 10, Depreciation = 50, NFIA = 200. Find NNPfc or national income.
- GNPfc = 900, NIT = 100, Depreciation = 50, NFIA = 200. Find NDPmp.
- NDPfc = 2000, Replacement cost of fixed capital = 200, IT = 50, subsidies = 10, NFIA = -100. Find GDPmp.
- GNPfc = 3000, Consumption of fixed capital = 100, IT = 200, NFIA = -200. Find NDPmp.
- GNPfc = 1000, NIT = 100, NFIA = 50, Depreciation = 70. Find NDPmp.
- You can check your solution on this link.
- Email me your solution at Contact@LearnWithAnjali.com. If you want more questions like this, then place a request on my email id.
Check out more related posts on Macroeconomics:
- Important formulas used in macroeconomics.
- Value-added method of National income
- Government Budget
- Working of Investment Multiplier
- Monetary Policy and its Tools
- The problem of Double Counting
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