National Income and Aggregates

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Questions and Answers

Explain the difference between Gross Value and Net Value in the context of national income calculation. How does depreciation factor into this distinction?

Gross value is the value of a product before accounting for depreciation, while net value is the value after depreciation has been considered. To derive Net Value, depreciation is subtracted from Gross Value.

What is Net Factor Income from Abroad (NFIA), and how is it used to derive National Income from Domestic Income?

NFIA is the difference between factor income from abroad and factor income to abroad. To derive National Income from Domestic Income, NFIA is added to Domestic Income.

Explain the difference between Factor Cost and Market Price. How do Net Indirect Taxes (NIT) relate to this difference?

Factor cost is the actual cost of production while market price is the price the consumer pays. To move from factor cost to market price, add net indirect taxes (NIT).

Define Net Indirect Taxes (NIT) and provide a real-world example of an indirect tax.

<p>NIT is the difference between Indirect taxes and Subsidies. GST (Goods and Services Tax) is an example of an indirect tax.</p> Signup and view all the answers

In the context of National Income, what does Consumption of Fixed Capital refer to? What is another term used to refer to it?

<p>Consumption of Fixed Capital refers to depreciation. It is also known as Current Replacement Cost.</p> Signup and view all the answers

Differentiate between Domestic Income and National Income. Which one is considered a territorial concept, and which is a national concept?

<p>Domestic income is based on production within a country's domestic territory, while national income focuses on the income of the country's residents, regardless of location. Domestic income is a territorial concept, while national income is a national concept.</p> Signup and view all the answers

What are the formulas for calculating Gross Value from Net Value, and Net Value from Gross Value?

<p>To calculate Gross Value from Net Value, add depreciation. To calculate Net Value from Gross Value, subtract depreciation.</p> Signup and view all the answers

Why is it important to consider both domestic income and factor income from abroad when calculating national income?

<p>National income encompasses all income earned by a country's residents, regardless of whether it was earned domestically or abroad. Therefore, both domestic income and factor income from abroad are included to provide a complete picture.</p> Signup and view all the answers

What are the four components of national income that relate to domestic levels?

<p>The four components of national income that relate to domestic levels are:</p> <ol> <li>Gross Domestic Product at Factor Cost</li> <li>Gross Domestic Product at Market Price</li> <li>Net Domestic Product at Factor Cost</li> <li>Net Domestic Product at Market Price</li> </ol> Signup and view all the answers

What are the four national level aggregates used in the calculation of national income?

<p>The four national level aggregates are:</p> <ol> <li>NNP at FC</li> <li>NNP at MP</li> <li>GNP at FC</li> <li>GNP at MP</li> </ol> Signup and view all the answers

Which aggregate is also known as National Income and which is also known as Domestic Income?

<p>NNP at FC is also known as National Income, and NDP at FC is also known as Domestic Income.</p> Signup and view all the answers

When converting from Gross Domestic Product at Market Price (GDP at MP) to Net Domestic Product at Market Price (NDP at MP), what adjustment needs to be made and why?

<p>To go from GDP at MP to NDP at MP, you need to subtract depreciation, because you are going from Gross to Net value.</p> Signup and view all the answers

What adjustment is made, and why, when converting from Net Domestic Product at Factor Cost to National Income?

<p>To convert from Net Domestic Product at Factor Cost to National Income, add Net Factor Income from Abroad (NFIA). Because you are going from Domestic to National level, you must account for income earned or lost abroad.</p> Signup and view all the answers

If Indirect Taxes increase, how does this affect both the Market Price and the Net Indirect Taxes (NIT)?

<p>If Indirect Taxes increase, this increases both the Market Price and the Net Indirect Taxes. The market price increases because consumers pay the increased tax burden. The NIT increases because it is calculated as Indirect Taxes minus Subsidies.</p> Signup and view all the answers

How do subsidies influence the calculation of Net Indirect Taxes (NIT)? Explain.

<p>Subsidies reduce the Net Indirect Taxes, since NIT is calculated as Indirect Taxes minus Subsidies.</p> Signup and view all the answers

Explain the difference between Gross Domestic Product at Factor Cost (GDP at FC) and Gross Domestic Product at Market Price (GDP at MP). What accounting adjustment explains the difference?

<p>GDP at FC measures the value of production at the cost of factors of production, while GDP at MP measures the market value, including indirect taxes. The difference is explained by Net Indirect Taxes (NIT), with GDP at MP = GDP at FC + NIT.</p> Signup and view all the answers

Is NFIA included in Domestic Income, National Income, or both? Explain why.

<p>NFIA is included in National Income, but not in Domestic Income. Domestic Income only accounts for production within the geographic borders. National Income accounts for the production of all citizens.</p> Signup and view all the answers

Explain the difference between GNP at MP and GDP at MP. Be specific.

<p><em>GNP at MP</em> is the gross market value of all final goods/services produced by a country's residents, while <em>GDP at MP</em> refers to the gross market value of final goods and services produced within the domestic territory in a year.</p> Signup and view all the answers

Describe the steps one would take to convert Net Domestic Product at Factor Cost (NDP at FC) into Gross National Product at Market Price (GNP at MP)?

<ol> <li>Add depreciation to NDP at FC to get GDP at FC.</li> <li>Add NFIA to GDP at FC to get GNP at FC.</li> <li>Add NIT to GNP at FC to get GNP at MP.</li> </ol> Signup and view all the answers

Explain the statement: "Domestic calculations include producers within the domestic territory. National calculations consider all producers who are normal residents."

<p>Domestic calculations focus on the geographic location of production regardless of who owns the production, while national calculations focus on who owns the production regardless of where it occurs geographically. For example, the production of a US owned factory in Canada would be included in Canadian GDP and US GNP.</p> Signup and view all the answers

Flashcards

Gross Value

The value of a product before accounting for depreciation.

Net Value

The value of a product after depreciation is considered.

Depreciation

The decrease in the value of an asset over time.

Factor Income from Abroad

Income earned from outside a country's domestic territory.

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Net Factor Income from Abroad (NFIA)

Factor Income from Abroad minus Factor Income to Abroad.

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Factor Cost

Cost of producing a product.

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Market Price

The cost of a product with taxes levied, influencing its price.

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Net Indirect Taxes (NIT)

Indirect Taxes minus Subsidies

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GDP at MP

Gross Domestic Product at Market Price - Total market value of final goods and services in a country.

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GDP at FC

Money value of all final goods and services produced within the domestic territory.

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NDP at MP

The net market value of all final goods and services produced within the domestic territory.

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NDP at FC

The net money value of all final goods and services produced within the domestic territory.

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GNP at MP

The gross market value of all final goods/services produced by a country's residents.

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Domestic Income

Focuses on income within a country's borders.

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National Income

Focuses on the income of a country's residents.

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Domestic Calculations

Includes producers within the domestic territory.

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National Calculations

Considers all producers who are normal residents.

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NNP at FC

Term for National Income.

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Market Price Formula

Factor Cost plus Net Indirect taxes.

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National Income Composition

Income earned within a country's borders plus income from its residents abroad.

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Study Notes

  • National income calculation involves various individuals producing different items in the economy.
  • When calculating national income, production is key, whether of goods or services.
  • Produced products can be shown at values before or after depreciation.
    • Before depreciation, the value is known as Gross Value.
    • After depreciation, it's called Net Value.
  • Gross Value is the value before accounting for depreciation.
  • Net Value is the value of the item after depreciation is considered.
  • When converting from Gross to Net Value, subtract depreciation.
  • To get Gross Value from Net Value, add depreciation.
  • Depreciation is also known as Consumption of Fixed Capital or Current Replacement Cost.
  • Products made within the country's domestic territory are considered domestic value.
  • Factor Income from Abroad means income earned outside domestic territory.
  • National Income calculation includes both domestic income and factor income from abroad.
  • National income is calculated by the formula Domestic Income + Factor Income from Abroad.
  • Net Factor Income from Abroad (NFIA) is Factor Income from Abroad minus Factor Income to Abroad.
  • The formula to derive National Income from Domestic Income is: Domestic Income + NFIA.
  • Product value can be shown at gross value or net value in National Income calculations.
  • Products can be calculated at the domestic or national level.
  • The cost of making a product is referred to as Factor Cost.
  • When a tax is levied on a product and passed on to the customer, it influences the Market Price.
  • To move from Factor Cost to Market Price, add Net Indirect Taxes (NIT).
  • Indirect taxes shift the burden to the customer, e.g., GST.
  • The formula for NIT is Indirect Taxes minus Subsidies.

Eight Components

  • There are eight components of national income.
  • Four components relate to domestic levels, and four to national levels.
    • Gross Domestic Product at Factor Cost
    • Gross Domestic Product at Market Price
    • Net Domestic Product at Factor Cost
    • Net Domestic Product at Market Price
  • Four national level aggregates are:
    • NNP at FC
    • NNP at MP
    • GNP at FC
    • GNP at MP
  • NNP at FC is referred to as National Income.
  • NDP at FC is referred to as Domestic Income.

Aggregate Calculations

  • First, put the Aggregate amount you are looking for on the left side.
  • Second, put the Aggregate that you have on the right side.
  • If you are going from Gross to Net Value, then subtract depreciation.
  • If you are going from Domestic to Net Value, add NFIA.
  • To go from Factor Cost to Market Price, add taxes.

Key Concepts:

  • GDP at MP refers to the gross market value of final goods and services produced within the domestic territory in a year.
  • GDP at FC refers to the gross money value of all final goods and services produced within the domestic territory.
  • NDP at MP refers to the net market value of all final goods and services produced within the domestic territory.
  • NDP at FC is another name for Domestic Income.
  • GNP at MP is the gross market value of all final goods/services produced by a country's residents.
  • Domestic income is a territorial concept, valuing income within domestic territory.
  • National income is a national concept, focusing on residents, not territory.
  • Domestic calculations include producers within the domestic territory.
  • National calculations consider all producers who are normal residents.
  • NFIA is not included in domestic income but is included in national income.

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