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Unit 2: National Income

Notes
Example: We would not want to include the full price of an automobile producer to put
on the car. The components of the car that are sold to the manufacturers are "intermediate goods"
and their value is not included in GNP. Similarly, the wheat that is used to make bread is an
"intermediate good". The value of the bread only is counted as part of GNP and we do not count
the value of wheat sold to the miller and the value of flour sold to the baker.

Self Assessment

Fill in the blanks:

1. National product is also referred to as .......................
2. Gross National Income includes the total value produced within a country, together with
its income received from other countries ....................... similar payments made to other
countries.
3. The value of wood used to make a wardrobe is not included in the calculation of national
income so as to avoid the problem of .......................

2.2 National Aggregates (Important Concepts)

For the purpose of measurement and analysis, national income can be viewed as an aggregate of
various component flows. Generally these component flows represent the intersectoral
transactions which describe the broad structure of the economic system. Accordingly, there exist
several measures of aggregate incomes varying in their scope and coverage.

To begin with let us consider the most comprehensive and broad-based measure of aggregate
income widely known as Gross National Product at market prices or GNP . It shows the
MP
market value of the aggregate final product before the deduction of provisions for the
consumption of fixed capital, attributable to the factors of production supplied by the normal
residents of a country.
Two important words are "gross" and "national". Similarly the phrase "at market prices" is also
significant because it specifies the criterion of valuation. The main alternatives to these three
specifications are 'net', 'domestic' and at 'factor cost'.
Let's discuss these important concepts first.

Gross and Net Concepts

Gross emphasises that no allowance for capital consumption has been made or that depreciation
has yet to be deducted.
Net indicates that provision for capital consumption has already been made or that depreciation
has already been deducted.

!
Caution Thus, the difference between the gross aggregate and the net aggregate is
depreciation.
i.e.,
GNP at market price/factor cost = NNP at market price/factor + depreciation

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