Relationships Between Aggregates
Relationships between national income aggregates — formulas, conversions, and numerical problems. Understanding how GDP, GNP, NDP, NNP relate through depreciation, NFIA, and net indirect taxes. CBSE Class 12 Macroeconomics.
Notes
Domestic Income vs National Income
| Aspect | Domestic Income (NDP_FC) | National Income (NNP_FC) |
|---|---|---|
| Nature of Concept | It is a **territorial concept** as it includes the value of final goods and services produced **within domestic territory** of a country. | It is a **national concept** as it includes the value of final goods & services produced by **normal residents** in the entire world. |
| Category of Producers | It considers all producers **within the domestic territory** of the country. | It considers all producers who are **normal residents** of the country. |
| NFIA | It **does not include** Net Factor Income from Abroad (NFIA). | It **includes** Net Factor Income from Abroad (NFIA). |
In a Closed Economy, which has no economic relations with the rest of the world (meaning NFIA is zero), there is no difference between Domestic Income and National Income.
Closed Economy Identity
$$NDP_{FC} = NNP_{FC} \quad \text{(when NFIA = 0)}$$
Think of it this way: if you only earn from your tuition classes in your own city, your “domestic income” equals your “national income.” But if your brother sends ₹10,000/month from his job in Dubai, your family's national income exceeds domestic income by ₹1,20,000/year.
GDP_MP vs National Income (NNP_FC)
| Aspect | GDP at Market Price (GDP_MP) | National Income (NNP_FC) |
|---|---|---|
| Concept | Gross, Domestic, Market Price | Net, National, Factor Cost |
| Includes Depreciation | Yes (Gross) | No (Net) |
| Territory vs Residence | Within domestic territory | By normal residents worldwide |
| Includes NIT | Yes (Market Price) | No (Factor Cost) |
| Includes NFIA | No | Yes |
GDP_MP to NNP_FC (Master Conversion)
$$NNP_{FC} = GDP_{MP} + NFIA - NIT - Depreciation$$
This is the most important formula in the chapter — it connects the starting aggregate (GDP_MP) to the target aggregate (National Income) through three adjustments. ⭐⭐
Inputs
₹1,00,000
₹2,000
₹8,000
₹5,000
All 8 Aggregates
GDP_MP (Base)₹1,00,000
GDP_FC₹92,000
NDP_MP₹95,000
NDP_FC₹87,000
GNP_MP₹1,02,000
GNP_FC₹94,000
NNP_MP₹97,000
NNP_FC (National Income)₹89,000
⭐ NNP_FC (National Income)₹89,000
The Master Conversion Map
Every aggregate connects to others through exactly one of three adjustments. Click an adjustment type to highlight its connections.
GDP_MP
GDP_FC
GNP_MP
GNP_FC
NDP_MP
NDP_FC
NNP_MP
NNP_FC
−NIT →
−NIT →↓ −Dep
+NFIA →−NIT →
+NFIA →
Domestic
GDP_MP
GDP_FC
NDP_MP
NDP_FC
National
GNP_MP
GNP_FC
NNP_MP
NNP_FC
Horizontal = ±NIT | Vertical = ±Dep | Left↔Right = ±NFIA
Red = Depreciation arrows | Purple = NIT arrows | Green = NFIA arrows
Exam tip: To convert any aggregate to any other, identify which adjustments (Depreciation, NIT, NFIA) are needed and apply them in the correct direction.
Key Takeaways
Key Takeaways
- ⭐⭐ NNP_FC is called National Income — the most important aggregate.
- ⭐⭐ NDP_FC is called Domestic Income.
- ⭐ The master conversion: NNP_FC = GDP_MP + NFIA − NIT − Depreciation.
- ⭐ In a closed economy (NFIA = 0), Domestic Income = National Income.
- ⭐ 'Domestic' = within borders; 'National' = by normal residents.
- ⭐ 'Gross' = includes depreciation; 'Net' = excludes depreciation.
- ⭐ 'Market Price' = includes NIT; 'Factor Cost' = excludes NIT.
- ⭐ GNP_MP can be less than GDP_MP if NFIA is negative.