Macroeconomic Identities

Factor Cost, Basic Prices and Market Prices:

• Net Production Taxes: Creation duties and appropriations that are paid or gotten comparable to the creation and are free of the volume of creation, for example, land incomes, stamps, and enlistment expenses.

Net Production Taxes = Production Taxes – Production Subsidies.

• Net Product Taxes: Product taxes and subsidies are paid or received per unit or product, e.g., excise tax, service tax, export and import duties etc. 

Net Product Taxes = Product Taxes – Product Subsidies.

• Factor cost: Factor cost includes only the payment to factors of production; it does not include any tax or subsidy.  
• Basic prices: In addition to the factor cost, include the net production taxes but not net product taxes. 
• Market prices: Net Product taxes are added to the basic prices. (Market prices include both the Indirect Taxes.

Some other Macroeconomic Identities

Gross Domestic Product:

• Gross Domestic Product measures the actions of the total creation of definite labour and products occurring inside the homegrown economy during a fiscal year. 

• Any citizen of India working abroad and earning wages will be included in the GDP of that particular country but not in the GDP of India. 
• However, citizens of India even work abroad and contribute to the Indian Economy from their earnings outside the Domestic Territory of India. 

Gross National Product (GNP): 

• Gross national product estimates the financial worth of the multitude of completed labour and products created by the country’s elements of creation regardless of their area. 

GNP ≡ GDP + Net factor income from abroad

• 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 is also called the Net Factor Income from Abroad (NFIA).

Net National Product (NNP):

• Net National Product is the net value of national output after subtracting depreciation.
• Depreciation is a certain amount of capital, which is consumed due to wear and tear. It does not form part of anyone’s income and hence should be deducted to get a more accurate measure.

NNP = GNP – Depreciation 

Personal Income: 

It is that part of the National Income, which is received by the households. The following amounts are to be adjusted for in the NI to obtain personal income: 

• Undistributed Profits (UP): The part of the profit earned by the firms and government enterprises, which is not distributed in factors of production. 
• Corporate Tax: This is imposed on the earnings made by the firms and does not accrue to the households. 
• Net interest payments made by households: The interest paid by the households to the firms or the government for any past loan/borrowing of any kind taken by them, adjusted by any interest payment that the households may receive from the firms or the government. 
• Transfer payments to the households from the government and firms: Transfer payments that the households receive from the government and firms (for example pensions, scholarships, prizes etc.)

Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

Personal Disposable Income: 

• It refers to personal income minus taxes at a personal level. 
• Measures the net income that remains after households.
• The Personal Tax Payments (income tax etc.) and Non-tax Payments (such as fines etc.) are deducted from PI, and then we obtain what is known as the Personal Disposable Income. 

Personal Disposable Income = PI – Personal tax payments – non-tax payments

National Disposable Income: 

• It is to give an estimate about the total amount of goods and services that the domestic economy has at its disposal.

National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world. 

Other current transfers from the rest of the world, include amounts received on account of gifts, aids, etc. 

Private Income:

Private Income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + transfers from rest of the world.

Conclusion

In economics, we come across different macroeconomic terms such as international trade, exports, imports, and goods and services without hardly understanding what they all represent. However, in order to be fluent in economics, one needs to understand the importance of studying macroeconomic variables and their identities. In addition to GDP, there are other key principles for measuring economic growth that will help the economy run smoothly. These include the gross national product as well as the net national product.