Some Macroeconomic Identities

Gross Domestic Product quantifies the average manufacturing of final commodities and services taking place within the domestic economy during a year. But the whole of it may not result to the citizens of the nation. For instance, an Indian citizen working in Saudi Arabia may be earning his or her income and it will be incorporated in the Saudi Arabian Gross Domestic Product.

  • However, he or she is an Indian. In order to maintain 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 the 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 which takes into consideration such additions and subtractions is called 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, wear and tear. This depletion or wear and tear is termed to be depreciation. Normally, depreciation doesn’t become a part of anybody’s earning. If we debit depreciation from Gross National Product the amount of average earning that we attain is called 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 prices. Through the expression mentioned above, we get the value of NNP estimated at the market cost prices. But market cost price incorporates indirect taxes. When indirect taxes are imposed on commodities and services, their cost prices go up. Indirect taxes accumulate to the government. We have to debit or deduct them from NNP gauged at market cost prices in order to compute that part of NNP which actually accumulates to the factors of production. Similarly, there may be subsidies permitted by the government on the cost prices of some goods. So we need to sum subsidies to the NNP gauged at market cost prices. The quantity that we attain by doing so is called Net National Product at factor cost or National Income

Hence, NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)

The above mentioned is the concept that is explained in detail about Some Macroeconomic Identities for the Class 12 students. To know more, stay tuned to BYJU’S.