Page 21 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes National and Domestic Concepts

The concept of national versus domestic arises because of the fact that the economy is not closed
in the sense that it has transactions with the rest of the world in the form of exports and imports,
gifts, loans, factor income flows, etc.
National income or product is that income or product which accrues to the economic agents who
are resident of the country. Most of the national income is derived from economic activity
within the country. But some income arises due to the activities of the residents outside the
country. Similarly, some of the product or income arising in the country may be due to the
activities of the non-residents. The difference between these two flows is referred to as net factor
income from abroad.
The measure of production arising out of the activities of economic agents within the country is
termed as domestic product even if a part of that income accrues to non-residents. When
adjustments are made to this product by deducting the income of non-residents within the
country and adding the income of residents abroad, the national product is obtained.

!

Caution Hence, the difference between the national and domestic concept is the net factor
income from abroad and in a closed economy national and domestic incomes are
synonymous.
GNP at market price/factor cost = GDP at market price/factor cost + Net factor income from
abroad

NNP at market price/factor cost = NDP at market price/factor cost + Net factor income from
abroad

Net factor income from abroad = Factor income received from abroad - Factor income paid
abroad.

Market Prices and Factor Costs

The valuation of the national product at market prices indicates the total amount actually paid
by the final buyers while the valuation of national product at factor cost is a measure of the total
amount earned by the factors of production for their contribution to the final output.

GNP = GNP at factor costs + indirect taxes-Subsidies.
MP
(Note: GNP at factor costs can also be written as GNP )
FC
NNP = NNP + indirect taxes-Subsidies.
MP FC
!
Caution If it's not mentioned that whether the aggregate is at market price or factor cost
and simply the aggregate is mentioned, we consider it to be at market prices. For example,
if only GNP is written, we consider it as GNP .
MP

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