Page 212 - DECO405_MANAGERIAL_ECONOMICS

Unit 13: Basic National Income Concepts

GNP as the Total of Factor Incomes Notes

As mentioned above, national product gives a measure of a nation's productive activity,
irrespective of the fact whether this activity takes place at home or abroad. When national
income is calculated after excluding indirect taxes like excise duty, sales tax, etc. and including
subsidies we get GNP at factor cost as this is the amount received by all the factors of production
(indirect taxes being the amount claimed by the government and subsidies becoming a part of
factor income).
GNP at factor cost = GNP at market prices – Indirect taxes + Subsidies

13.1.5 Net National Product

The NNP is an alternative and closely related measure of the national income. It differs from
GNP in only one respect. GNP is the sum of final products. It includes consumption goods plus
gross investment plus government expenditures on goods and services plus net exports. Here
gross investment (GI) is the increase in investment plus fixed assets like buildings and equipment
and thus exceeds net investment (NI) by depreciation.
GNP = NNP + Depreciation
NNP includes net private investment while GNP includes gross private domestic investment.

We know that during the process of production, assets get consumed or depreciated. So, during
a year the net contribution to output is the production of goods and services minus the depreciation
during the year. This is known as NNP at market prices because it is the net money value of final
goods and services produced at current prices during the year after depreciation.
Gross National Product 585.00

Less:
Capital consumption allowances 51.6
Equals:
Net National Product 533.4
Less:
Indirect business taxes 56.6

Other adjustments -1.6
Equals:
National Income 478.4
Equation

NNP = GNP – Depreciation
= C + I + G + (X – M) – Depreciation
g
= C + G + (X – M) + (I – Depreciation), where I = Government investment
g g
= C + G + (X – M) + I , where I = Net investment, C = Consumption expenditure,
n n
G = Government Expenditure, X = Export, M = Import
= C + G + I + (X – M)
n
Where I represents net investment which equals gross investment minus depreciation
n
(I - Depreciation).
g

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