1) National income accounting: what and why?
National income accounting is the framework used to measure an economy’s overall production, income generation, and expenditure over a period (usually a year/quarter).
Core idea (identity):
- Production generates incomes.
- Incomes finance expenditure. So, in principle:
2) “Domestic” vs “National”: GDP vs GNP (high-yield)
2.1 GDP (Gross Domestic Product)
GDP is the market value of final goods and services produced within the domestic territory of a country in a given period.
- “Gross” = includes depreciation (capital consumption).
- “Domestic” = within borders (regardless of ownership of factors).
2.2 GNP (Gross National Product)
GNP is the market value of final goods and services produced by normal residents/nationals of a country, regardless of where production occurs.
Relationship:
where NFIA = Net Factor Income from Abroad
= (Factor income received from abroad − Factor income paid to abroad)
Typical interpretation:
- If foreign companies earn a lot inside the country (profits/interest), NFIA can be negative → GNP < GDP.
- If residents earn a lot abroad, NFIA positive → GNP > GDP.
3) “Gross” vs “Net”: depreciation matters
3.1 Depreciation / Capital Consumption Allowance (CCA)
Depreciation is the reduction in value of capital goods due to wear and tear, obsolescence, accidental damage, etc.
Net concepts subtract depreciation:
Exam trap: Gross includes depreciation; Net excludes it.
4) Market Price (MP) vs Factor Cost (FC)
This is extremely common in Indian exams (including CUET).
4.1 Factor Cost (FC)
Value of output measured by payments to factors of production:
- wages (compensation of employees),
- rent,
- interest,
- profit,
- mixed income of self-employed.
4.2 Market Price (MP)
Value of output measured by what buyers pay in the market, which includes:
- indirect taxes (GST/excise, etc.) and excludes:
- subsidies.
Define:
Then: