Aggregates related to national income - GNP

NFIA records net factor income: factor earnings received by residents from abroad minus factor payments made to non-residents. Wages, interest, rent, and profit are factor incomes when they arise from the use of labour, capital, land, or entrepreneurship. Export sales are receipts from selling goods or services, so they belong to international trade and are not themselves factor income. Therefore, option C is excluded from NFIA.

GDP counts production that takes place within India’s domestic territory, so profit generated by a foreign-owned factory operating in India is included in India’s GDP. GNP instead follows the normal-resident principle. Thus, factor income earned abroad by an Indian resident is included in India’s GNP but not in India’s GDP. This is a positive addition to NFIA when the income is received by the resident.

The relationship is GNP = GDP + NFIA. When NFIA is highly negative, factor payments made to non-residents exceed factor income received from abroad. Subtracting this negative amount from GDP can reduce GNP substantially, although GNP need not become zero. Therefore, a high GDP can coexist with a much lower GNP when the country has large net factor income outflows.

A foreign-owned factory operating inside the country contributes to domestic production, so its output and locally generated value are included in GDP. However, the profit belonging to the foreign owner represents a factor payment to a non-resident and is deducted while calculating NFIA. GNP measures the product or factor income of normal residents, so that profit is not fully part of the country’s national product.

NFIA is calculated as factor income received from abroad minus factor income paid to abroad. Residents receive 180 from abroad, whereas the foreign company receives 300 in the domestic country; this is income paid abroad. Therefore, NFIA = 180 − 300 = −120. The negative value means factor income paid to foreigners exceeds factor income received by residents.

The relationship is GNP = GDP + NFIA, where NFIA equals factor income received from abroad minus factor income paid abroad. If foreigners earn more inside the country than residents earn abroad, NFIA is negative. Adding a negative NFIA makes GNP smaller than GDP; hence GDP exceeds GNP. This distinction is based on territory versus normal residence.

NFIA records factor income flows across borders, such as wages, rent, interest, and profits received by residents from abroad or paid to foreign factors. A tourist’s purchase is a payment for final goods or services. It may influence exports and domestic output, but it is not itself a cross-border factor-income receipt or payment, so it has no direct effect on NFIA.

GDP measures production within a country’s domestic territory, regardless of who owns the factors of production. GNP instead follows normal residents. It is obtained by adding NFIA to GDP: GNP = GDP + factor income received from abroad − factor income paid abroad. Therefore, adjustment for residents’ net factor income from abroad makes the measure national rather than merely domestic.

GNP is based on the national or normal-residence concept, whereas GDP is based on domestic territory. A normal resident’s wage earned abroad is factor income received from abroad and is added to GDP. A foreigner’s wage earned domestically is factor income paid to abroad and is subtracted through NFIA. Thus, GNP = GDP + NFIA.

Interest received from abroad is a return on a factor of production, such as financial capital, and may therefore form part of factor income received from abroad. Export receipts are earnings from selling domestically produced goods or services to the rest of the world. Exports enter the expenditure or trade component of national accounting, not NFIA. Thus, the two receipts have different economic meanings and are recorded in different parts of GNP accounting.

Intermediate goods are inputs used in producing final goods. The selling price of a final good normally includes the value of the intermediate inputs already used to make it. If the intermediate good and the final good were both counted at their full selling prices, the same production would be recorded more than once. National output is therefore measured by counting final goods or by summing value added at each production stage.

GNP measures the factor income attributable to the normal residents of a country, regardless of whether they earn it inside the domestic territory or abroad. GDP includes production within the domestic territory, so it may include income paid to foreign residents working or investing there. To convert GDP into GNP, factor income received from abroad is added and factor income paid to foreign residents is subtracted. Hence option A is correct.

The relationship between gross domestic product and gross national product is determined by net factor income from abroad: GNP = GDP + NFIA. When NFIA is zero, no amount is added to or subtracted from GDP, so GNP equals GDP. Depreciation does not change this relationship; it is used when converting a gross measure into a net measure, such as converting GNP into NNP. Therefore, even high depreciation does not alter the equality of GNP and GDP.

GNP is based on the income of a country’s normal residents, whereas GDP is based on production within the country’s domestic territory. Wages earned abroad by an Indian resident are factor income received from abroad and therefore contribute positively to India’s NFIA. They are added when moving from GDP to GNP: GNP = GDP + NFIA. The location of production matters for GDP, but the residence of the income earner matters for GNP.

NFIA is calculated as factor income received from abroad minus factor income paid to foreign residents. Here, NFIA = ₹400 crore − ₹400 crore = zero. Since GNP = GDP + NFIA, adding zero leaves GDP unchanged, so GNP equals GDP. It would be incorrect to count only the amount received from abroad; the equal payment made to foreign residents must also be deducted when calculating net factor income.

NFIA records the net flow of factor incomes between domestic residents and the rest of the world. Factor incomes include items such as wages, rent, interest, and profit for the use of productive resources. Repayment of the principal amount of a loan merely reduces or settles a financial liability; it does not represent payment for current production or use of a factor. Therefore, principal repayment is excluded from NFIA, although interest payments may be treated separately as factor income.

The correct identity is GNP = GDP + NFIA, with the sign of NFIA retained. Therefore, GNP = ₹2,000 crore + (−₹75 crore) = ₹1,925 crore. A negative NFIA means that factor income paid to foreign residents is greater than factor income received from abroad. It reduces GNP relative to GDP. The student has incorrectly treated the negative amount as a positive addition, so the claim is false.

GNP follows the residence principle: it includes factor income earned by the country’s normal residents, whether the income is generated domestically or abroad. Thus, income earned abroad by an Indian resident can enter India’s GNP through net factor income from abroad, provided it is factor income. It is not automatically an import, depreciation, or an item excluded from national product. GDP and GNP differ because GDP uses territory, while GNP uses residents.

GNP measures the factor income earned by the normal residents of a country, wherever that income is generated. GDP measures production within the domestic territory, regardless of ownership. Therefore, factor income received by an Indian resident from an enterprise abroad is added through NFIA to GNP, but it is not part of India’s GDP. The relationship is GNP = GDP + NFIA.

NFIA means net factor income from abroad: factor income received from the rest of the world minus factor income paid to the rest of the world. A remittance is not automatically factor income. If it is a gift, family support, or another unilateral transfer, it does not represent payment for the services of land, labour, capital, or entrepreneurship and therefore should not be entered directly as NFIA. Wages, interest, and profits can be factor incomes when they satisfy the relevant conditions.

First convert GDP at market price into GNP at market price by adding net factor income from abroad: GNP₍MP₎ = GDP₍MP₎ + NFIA = 18,000 + 600 = 18,600. The difference between GNP and NNP at the same market-price basis is consumption of fixed capital, or depreciation. Hence NNP₍MP₎ = 18,600 − 900 = 17,700. Therefore, option B is correct.

Foreign factor income is a return paid for using a factor of production, such as wages for labour, rent for land, interest on capital, or profit for entrepreneurship. Foreign trade receipts arise from selling goods or services internationally and are recorded through the appropriate expenditure, production, or trade accounts; they are not automatically NFIA. Separating the source and nature of each receipt prevents exports from being incorrectly added as factor income.

NFIA is calculated as factor income received from abroad minus factor income paid abroad. Interest received by an Indian resident from a German bank is a return on capital owned by an Indian resident but used abroad, so it is a positive receipt in India’s NFIA. Profit earned by a foreign company in India is factor income paid abroad and reduces NFIA. Domestic wages and tourist spending do not represent factor income from abroad.

NFIA includes factor income received by residents from the rest of the world, less factor income paid to non-residents. Interest received by an Indian resident on an investment abroad is a return on capital and therefore qualifies as foreign factor income. Tourist expenditure is a payment for goods, a government loan is a financial transaction, and a family remittance is generally a transfer; none is automatically factor income included in NFIA.

A company resident in India may own or supply capital that is used in an enterprise abroad. Interest earned on that capital is a return to a factor of production, specifically capital. Since the recipient is an Indian normal resident and the income originates abroad, it is factor income received from abroad and forms part of the receipt side of NFIA. Consequently, it is added when converting GDP into GNP: GNP = GDP + NFIA.