Some Macroeconomic Identities

Gross domestic product quantifies the average manufacturing of final commodities and services taking place within the domestic economy during a year. However, the whole of it may not result in the citizens of the nation. For instance, an Indian citizen working in Australia may be earning his or her income but it will be incorporated in the Australian gross domestic product.

However, he or she is an Indian. In order to maintain an equilibrium, we must debit the incomes of the foreigners who are working within the domestic economy or the payments to the aspects of manufacturing owned by foreigners. For instance, the profits earned by the Korean possessed Hyundai car factory will have to be debited from the gross domestic product of India.

The macroeconomic variable that takes into consideration such additions and subtractions is known as gross national product (GNP)

GNP = GDP + (Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy)

Hence, GNP = GDP + Net factor income from abroad

We have already made a note that a part of the capital gets utilised during the year due to depletion or wear and tear. Such depletion or wear and tear is known as depreciation. Normally, depreciation does not become a part of anybody’s earnings.

If we debit depreciation from gross national product, the amount of average earnings that we attain is known as net national product (NNP).

Thus, NNP = GNP – Depreciation

It is important to be noted that all these variables are estimated and gauged at the market cost. Through the mentioned expression, we get the value of NNP estimated at the market cost. However, the market cost incorporates indirect taxes. When indirect taxes are imposed on commodities and services, their prices go up. The indirect taxes accumulate to the government.

We have to debit or deduct them from NNP gauged at market cost in order to compute that part of NNP that actually accumulates to the factors of production.

Hence,

NNP at factor cost or National income (NI) = NNP at market prices – (Indirect taxes – Subsidies)

= NNP at market prices – Net indirect taxes

Where,

Net indirect taxes = Indirect taxes – Subsidies

This article was all about macroeconomic identities for the students of class 12. To know more about such interesting concepts, stay tuned to BYJU’S.

1 Comment

  1. Nice information 🙂

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