Page 21 - DECO402_Macro Economics

Macroeconomic Theory

Notes Now we defines national Income by following terms
National income during a period of one financial year by normal residents of a country earned factor
income’s total addition. This income in form of emolument (as a rent, interest, profit and wages of
employees) we get due to usages of own factor service.
Using the concept of value added, it can be defined by following type.
During a period of a financial year by normal residents of a country as a result of factor services total
summation of value added is called national income. Keep in mind that value added and income
generated are identical.

 In Dernberg words, “National income is the factor income accuring to the residents of the country
during a year. It is the sum of domestic factor income and net factor from abroad.

Gross and Net concepts of National Income

National income have gross and net concepts. “National income” term is a pure concept. Necessarily
it is Net National Product at Factor Cost (NNP ). Rather changing (NNP ) in gross national product
FC
FC
at factor cost in its depreciation or consumption of permanent capital is added.
Hence:
Net National Product at Factor Cost + depreciation = Gross National Product at Factor Cost
NNP + Depreciation = GNP
FC FC
Or
Gross National Product at Factor Cost – depreciation = Net National Income at Factor cost
GNP – Depreciation = NNP
FC FC

National Income at Basis Price (or Factor Cost) and National Income at
Market Price.

The actual meaning of concept of national income is national income at factor cost. But if in its value
of net indirect tax (indirect tat-subsidy) is added then it will be national income at market value.
By following equation this relationship can be expressed:
Net National product at Factor cost + Net Direct Tax (Indirect Tax – subsidy) = Net National Product
at Market value.
Or
Net National Product at market value – Net Indirect Tax = Net National Product at Factor Cost.

National Income is Linked with the Level of Product Activity.

It is clear from above explanation that national income of country is linked with that country’s
production activities level. The high level of national income shows high production activities level of
country and viceversa. Production meant “value added” and meaning of value added is “Generation
of income”. In on economy total sum of derived income due to value added is generally called
national income. In developed countries the production level is high, consequently their national

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