From the following, which aggregate is called "National Income"?

Question

Accepted Answer

The correct option is 2:

The term "National Income" is universally defined in economics as the Net National Product at Factor Cost ($	ext{NNP}_{	ext{FC}}$). This aggregate represents the total money value of all factor incomes (rent, wages, interest, and profit) earned by the normal residents of a country during an accounting year. The key is in the three components: 'Net' signifies that the value of depreciation (consumption of fixed capital) has been deducted from the gross value, which is crucial for measuring the actual income available without running down the capital stock. 'National' means it includes Net Factor Income from Abroad (NFIA), which accounts for the income earned by our residents overseas and subtracts the income earned by non-residents domestically, capturing the income of the nation's citizens. Finally, 'Factor Cost' indicates that the value is calculated at the cost of the factors of production, excluding the effect of Net Indirect Taxes, providing the truest measure of income paid to the factors.

The incorrect option is 1:
Net Domestic Product at Market Price ($\text{NDP}*{\text{MP}}$) is not considered National Income. The primary flaw lies in the "Domestic" nature of this aggregate, which means it measures the income generated *within the domestic territory* of the country, regardless of who earns it. To be 'National,' the Net Factor Income from Abroad (NFIA) must be added, but $\text{NDP}*{\text{MP}}$ excludes this. Furthermore, $\text{NDP}*{\text{MP}}$ is valued at 'Market Price,' meaning it includes the effect of Net Indirect Taxes. National Income is correctly measured at 'Factor Cost' to reflect the actual payments to factors of production. Therefore, $\text{NDP}*{\text{MP}}$ is an incomplete and incorrectly valued measure of national income.

The incorrect option is 3:
Gross Domestic Product at Market Price ($\text{GDP}*{\text{MP}}$) is the standard measure of a country's total output, but it is incorrect for National Income due to multiple reasons. It is incorrect because it is 'Gross,' meaning the value of Depreciation is included, while National Income must be a 'Net' concept to reflect the sustainable income. It is also incorrect because it is 'Domestic,' meaning it excludes the income earned by residents from the rest of the world (NFIA). Lastly, it is valued at 'Market Price,' which includes Net Indirect Taxes, instead of the required 'Factor Cost.' Thus, $\text{GDP}*{\text{MP}}$ is a measure of total domestic final output, not the factor income of residents.

The incorrect option is 4:
Gross National Product at Factor Cost ($\text{GNP}*{\text{FC}}$) is the closest option, as it correctly incorporates the 'National' and 'Factor Cost' components. This aggregate is often referred to as 'Gross National Income' or 'GNI'. However, its 'Gross' nature is the reason it is not the standard definition of National Income. The inclusion of depreciation means that $\text{GNP}*{\text{FC}}$ represents the total factor income earned *before* accounting for the wear and tear of the capital stock used in production. To derive the true 'National Income' or 'Net National Income,' the consumption of fixed capital (depreciation) must be subtracted.