The sum total of value added by all production units within domestic territory of a country is called domestic product. Both residents and non-residents render factor services to these units. Therefore, the income generated in these units is shared by both the residents and non-residents as their factor income.
To get contribution of only normal residents (or their factor income earned within the domestic territory) we have to deduct the factor payments made to the non-residents. These factor payments are known as factor payments made to the rest of the world.
The residents, in addition to their factor services to the production units located in the economic territory of a country, also provide factor services to the production units outside the economic territory i.e., to the rest of the world (ROW). In return for these services they receive factor incomes from the rest of the world.
Thus, National income is the sum total of factor incomes earned by the normal residents of a country within and outside the economic territory. Therefore,
National Income = Domestic Income
+ ( Factor Income Received From ROW – Factor Payments Made To ROW )
Net Factor Income from ROW : It is the difference between factor income’s received from ROW and factor payments made to ROW.
National Income/Product = Domestic Income/Product + Net Factor Income Form Abroad
- Gross Domestic Product At Market Price + Net factor Income From Abroad
= Gross National Product At Market Price
- Net Domestic Product At Market Price + Net factor Income From Abroad
= Net National Product At Market Price
- Net Domestic Product At Factor Cost + Net factor Income From Abroad
= Net National Product At Factor cost
It is Net National Product at factor cost which is called National Income of a country.
Nominal and Real GDP
When the money value of goods and services included in GDP is estimated on the prices of current year, it is called GDP at current prices or nominal GDP. Here current prices mean the prices of the year of which GDP is estimated. For example, for estimating GDP for the year 2012-13 if we use the prices prevailing in the year 2012-13, we shall get nominal GDP.
On the other hand, when the value of goods and services included in GDP is estimated on the prices of base year, we get GDP at constant prices or real GDP. Increase in real GDP implies increase in the production of goods and services.
Therefore, the calculation of GDP at constant prices or real GDP gives us the correct picture of the economic performance of an economy.
Bibliography : NIOS – Economics