Gross Domestic Product etc-2

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National Product and National Income

1.5 The national product measures all goods and services arising out of economic activity while national income is the sum of all incomes as a result of the economic activity. These two are synonymous. Since the production of goods and services is the result of the use of primary factors of inputs, namely, capital and labour, along with the raw materials, the process automatically generates income. This income is in the form of return to capital and labour used in production process. For example the total product originating in a firm making steel could be obtained by adding the total product and then deducting the intermediate product to obtain the value added. The value added of this firm consists of the income that accrued in the course of production, namely, wages and salaries and operating surplus. Thus the product of a firm must be income to someone whether it is their employees in the form of employment income or to the owners in the form of operating surplus. Hence, the unduplicated production is equivalent to the income which accrues to the factors of production. In other words national income of a country can also be viewed in terms of the money value of income flowing from the producing units to factors of production. National income is not simply an aggregate of all incomes. It includes only those incomes which are derived directly from the current production of goods and services called factor incomes. Other forms of income such as old age pensions, education grants, unemployment benefits, gifts etc., cannot be regarded as payments for current services to production. They are paid out of factor incomes and are called transfer incomes. Payments for which no goods or services are received in return are, therefore, termed as transfer payments. The national income, being the value of goods and services becoming available cannot include both factor incomes and transfer incomes.[Reproduced from Central Statistical Organization's publication. For details please refer previous post]