Basic Concepts of Macroeconomics: Gross vs Net, Domestic vs National, Nominal vs Real, Factor Cost vs Market Price

1. Gross vs Net

Gross:

• Refers to the total value without deducting depreciation (wear and tear of capital goods).
• Includes the full value of goods and services produced in an economy.
• Key term: Depreciation (also called capital consumption).

Net:

• Refers to the value obtained after deducting depreciation from the gross value.
• Net value gives a more accurate picture of an economy’s productive capacity.

Formula:
$\text{Net Value} = \text{Gross Value} - \text{Depreciation}$

Example:
If Gross Domestic Product (GDP) is ₹100 lakh and depreciation is ₹10 lakh:
$\text{Net Domestic Product (NDP)} = 100 - 10 = ₹90 \text{ lakh}$

2. Domestic vs National

Domestic:

• Refers to the value of goods and services produced within the geographical boundaries of a country, irrespective of who owns the resources (domestic or foreign entities).
• Example: A factory in India owned by a foreign company contributes to Domestic Product.

National:

• Refers to the value of goods and services produced by residents of a country, irrespective of their geographical location.
• Includes income earned abroad by Indian residents and excludes income earned in India by foreigners.

Formula:
$\text{National Income} = \text{Domestic Income} + \text{Net Factor Income from Abroad (NFIA)}$

Example:
If Domestic Income is ₹500 lakh and NFIA is ₹20 lakh:
$\text{National Income} = 500 + 20 = ₹520 \text{ lakh}$

3. Nominal vs Real

Nominal:

• Refers to the value of goods and services calculated at current market prices.
• Does not adjust for inflation, making it less reliable for comparisons over time.

Real:

• Refers to the value of goods and services calculated at constant prices (base year prices).
• Adjusts for inflation, giving a clearer picture of actual economic growth.

Formula:
$\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index (CPI)}} \times 100$

Example:
If Nominal GDP is ₹1000 crore and CPI is 125:
$\text{Real GDP} = \frac{1000}{125} \times 100 = ₹800 \text{ crore}$

4. Factor Cost vs Market Price

Factor Cost:

• Refers to the cost of production from the perspective of producers, excluding taxes but including subsidies.
• Represents the income earned by factors of production (land, labor, capital, and entrepreneurship).

Market Price:

• Refers to the price at which goods and services are sold in the market, including taxes and excluding subsidies.

Formula:
$\text{Market Price} = \text{Factor Cost} + \text{Indirect Taxes} - \text{Subsidies}$

Example:
If Factor Cost is ₹500 crore, indirect taxes are ₹50 crore, and subsidies are ₹10 crore:
$\text{Market Price} = 500 + 50 - 10 = ₹540 \text{ crore}$

Key Takeaways:

• Gross vs Net: Gross includes depreciation, Net excludes it.
• Domestic vs National: Domestic focuses on geography, National focuses on ownership.
• Nominal vs Real: Nominal uses current prices, Real adjusts for inflation.
• Factor Cost vs Market Price: Market price accounts for taxes and subsidies; factor cost does not.

This framework simplifies these concepts while being comprehensive enough for UPSC preparation.