Question

Explain the concepts of Domestic Product, National Product and Personal Income.

Hint:

Remember the key difference: \begin{itemize} \item Domestic \(\to\) Location-based (within the country's borders). \item National \(\to\) Resident-based (by the country's citizens/firms). \item Personal \(\to\) Receipt-based (what households actually get). \end{itemize}

Answer 1

These three concepts are key aggregates in national income accounting, each measuring a different aspect of a country's economic activity.
1. Domestic Product
Domestic Product refers to the total monetary value of all final goods and services produced within the domestic (geographical) territory of a country during a given period, usually a year. \begin{itemize} \item Key Feature: The defining characteristic is the location of production. It includes the output produced by all production units located within the country's borders, irrespective of whether they are owned by residents or non-residents. \item Example: The value of cars produced by a Hyundai (a South Korean company) factory in India is included in India's Domestic Product. However, the income earned by an Indian citizen working in the USA is not part of India's Domestic Product. \item Common Measure: The most widely used measure is Gross Domestic Product (GDP). \end{itemize} 2. National Product
National Product refers to the total monetary value of all final goods and services produced by the normal residents of a country during a given period, irrespective of where this production takes place (i.e., whether within the domestic territory or abroad). \begin{itemize} \item Key Feature: The defining characteristic is the nationality or residence of the producer. It focuses on the contribution of a country's own factors of production (its citizens and firms). \item Relationship with Domestic Product: National Product is derived from Domestic Product by adding the Net Factor Income from Abroad (NFIA). \[ \text{National Product} = \text{Domestic Product} + \text{NFIA} \] NFIA is the difference between the factor income (wages, rent, profit) earned by the country's residents from the rest of the world and the factor income paid to non-residents working within the country. \item Example: The income earned by an Indian citizen working in the USA is part of India's National Product. The profits of the Hyundai factory in India that are sent back to South Korea are subtracted from India's Domestic Product to calculate its National Product. \item Common Measure: The most widely used measure is Gross National Product (GNP). \end{itemize} 3. Personal Income (PI)
Personal Income is the sum of all incomes actually received by individuals and households from all sources during a year. It is different from National Income, which represents the income earned by factors of production. Personal income is the income available to households before they pay personal direct taxes like income tax. \begin{itemize} \item Key Feature: It focuses on the income that reaches the hands of individuals. Not all income earned is received (e.g., corporate taxes and retained earnings), and some income is received without being currently earned (transfer payments). \item Derivation from National Income: To calculate Personal Income, we start with National Income (NNP at Factor Cost) and make the following adjustments: \begin{itemize} \item Subtract incomes that are earned but not received by households: \begin{itemize} \item Undistributed Corporate Profits (savings of corporations) \item Corporate Taxes \item Social Security Contributions made by employees and employers \end{itemize} \item Add incomes that are received but not currently earned (known as Transfer Payments): \begin{itemize} \item Old-age pensions, unemployment benefits, scholarships \item Interest on public debt \end{itemize} \end{itemize} \end{itemize}