Page 213 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes NNP at Factor Cost (or National Income)

Goods and services are produced with the help of factors of production. National income or
NNP at factor cost is the sum of all the income payments received by these factors of production.
NI = GNP – Depreciation – Indirect taxes + Subsidies

Since factors receive subsidies, they are added while indirect taxes are subtracted as these do not
form part of the factor income.
NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies

Did u know? What does Genuine Progress Indicator — GPI Mean?

A metric used to measure the economic growth of a country. It is often considered as a
replacement to the more well known gross domestic product (GDP) economic indicator.
The GPI indicator takes everything the GDP uses into account, but also adds other figures
that represent the cost of the negative effects related to economic activity (such as the cost
of crime, cost of ozone depletion and cost of resource depletion, among others). The GPI
nets the positive and negative results of economic growth to examine whether or not it
has benefited people overall.

13.1.6 Personal Income

National income is the total income accruing to the factors of production for their contribution
to current production. It does not represent the total income that individuals actually receive.

Two types of factors account for the difference between national income and personal income.
On the one hand a part of the total income which accrues to the factors of production is not
actually paid out to the individuals who own the factors of production. The obvious instances
are corporate taxes and undistributed or retained profits. On the other hand, the total income
that individuals actually receive generally includes some part that comes to be regarded as
payment for the factor services rendered in the current year, for example, gifts, pensions, relief
payments and other welfare payments. Such payments are known as "transfer payments" because
they do not represent the payments made for any direct contribution to current production.

Thus, personal income is calculated by subtracting from national income those types of incomes
which are earned but not received and adding those types which are received but not currently
earned. So
Personal Income = NNP at factor cost – Undistributed profits – Corporate taxes +
Transfer payments

13.1.7 Disposable Income

Disposable income is the total income that actually remains with individuals to dispose off as
they wish. It differs from personal income by the amount of direct taxes paid by individuals.
Disposable Income = Personal Income – Personal taxes
DI = PI – T

So, PI = DI + T
Usually, people divide their disposable income between consumption spending and personal
saving.

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