National Income and Related Aggregates
The exam tests definitions, the inter-relations among aggregates, the three measurement methods and the precautions that decide whether a mark is gained.
Core rules
- GDPmp is the market value of final goods and services produced within domestic territory in a year. GNPmp = GDPmp + net factor income from abroad.
- NNPmp = GNPmp – depreciation. NNPfc, called national income, = NNPmp – net indirect taxes, where net indirect taxes = indirect taxes – subsidies.
- Domestic income is NDPfc. Private income, personal income and disposable income are built up after adding transfers and deducting corporate tax and retained earnings.
- Three methods: value added (sum of gross value added at basic prices), income (compensation of employees + rent + interest + profit + mixed income), and expenditure (C + I + G + net exports). All should agree.
- Real GDP uses base-year prices; nominal GDP uses current prices; GDP deflator = nominal ÷ real × 100.
- Precautions: exclude intermediate goods, second-hand sales, financial assets, transfer payments and non-market services; include own-account production and imputed rent.
Worked example
GDPmp = 5,000, depreciation = 400, NFIA = –100, net indirect taxes = 300. GNPmp = 5,000 + (–100) = 4,900. NNPmp = 4,900 – 400 = 4,500. NNPfc = 4,500 – 300 = 4,200. National income is therefore 4,200, not the 5,000 headline figure.
Traps
Adding NFIA in the wrong direction. Subtracting subsidies instead of adding them when converting market price to factor cost. Counting intermediate expenditure twice. Treating GDPmp as national income, which is NNPfc. Forgetting depreciation when moving from gross to net.