Idea of National Income – GDP, NDP, GNP, NNP, MP & FC

UPSC Economics Smart-Prep Module • GS III + Prelims

1. What is National Income?

National Income is the foundation of macroeconomics, representing the total income generated by a country’s economic activity. It measures the value of final goods and services available for consumption, savings, or investment. It is a critical tool to understand whether an economy is expanding, stagnating, or contracting.

National Income directly influences employment levels, living standards, fiscal decisions, monetary policy, tax planning, poverty reduction strategies, and overall welfare analysis. Because India uses NNP at Factor Cost as its official measure, understanding this hierarchy is essential for prelims and mains.

★ IASNOVA.COM — SMART UPSC PREP ★

2. Big Picture – Map of National Income Concepts

This top-level map shows the 3 key “axes” along which national income concepts are constructed: territory (domestic vs national), valuation (gross vs net), and price type (market price vs factor cost). Every measurement of income is simply a combination of these three approaches.

Understanding this big picture helps avoid confusion. For example, GDP and GNP differ only by NFIA, NDP and NNP differ only by depreciation adjustments, while MP and FC differ only by indirect taxes and subsidies. The map visually integrates all interconnections in one place.

graph TB
  A[Idea of National Income]:::root --> B[Domestic vs National]:::branch
  A --> C[Gross vs Net]:::branch
  A --> D[MP vs FC]:::branch

  B --> B1[GDP]:::node
  B --> B2[GNP]:::node

  C --> C1[Gross: GDP, GNP]:::node
  C --> C2[Net: NDP, NNP]:::node

  D --> D1[Market Price: includes taxes]:::node2
  D --> D2[Factor Cost: includes subsidies]:::node2

  classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef branch fill:#FEF9E7,stroke:#B7950B,color:#7D6608;
  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef node2 fill:#FDEDEC,stroke:#B03A2E,color:#7B241C;
  

★ IASNOVA.COM — SMART UPSC PREP ★

3. GDP vs GNP – Domestic vs National Output

This section clarifies a frequent UPSC confusion: the difference between the location of production (GDP) and the ownership of income (GNP).

GDP counts everything produced within Indian borders, regardless of whether the producers are Indian or foreign. Therefore, production by Hyundai, IBM, or Toyota inside India is part of India’s GDP.

GNP counts all production by Indians (residents) irrespective of whether they are working inside India or abroad. Thus, an Indian software engineer in the USA contributes to GNP, but not GDP.

A. Gross Domestic Product (GDP)

GDP measures domestic productive capacity. It is essential for understanding domestic employment, demand, production efficiency, and the cyclical conditions of the Indian economy. It is the most-used macro indicator globally.

B. Gross National Product (GNP)

GNP corrects GDP by including cross-border earnings of Indian residents. This is done through Net Factor Income from Abroad (NFIA).

If NFIA is positive (Indians earn more abroad than foreigners earn in India), GNP is greater than GDP. If NFIA is negative, GNP is smaller than GDP.

graph TB
  A[GDP]:::node --> B[NFIA]:::node2
  B --> C[If NFIA positive → GNP increases]:::note
  B --> D[If NFIA negative → GNP decreases]:::note
  A --> E[GNP]:::node3

  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef node2 fill:#FDEDEC,stroke:#B03A2E,color:#7B241C;
  classDef node3 fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef note fill:#F5F6F7,stroke:#ABB2B9,color:#424949;
  

★ IASNOVA.COM — SMART UPSC PREP ★

4. NDP & NNP – Adjusting for Depreciation

“Gross” figures include depreciation — the unavoidable loss in value of capital assets due to usage, time, and technological change. This makes GDP and GNP slightly inflated, because they overstate the amount of income actually available to the economy.

Thus economists calculate net concepts by deducting depreciation:

• NDP removes depreciation from GDP.
• NNP removes depreciation from GNP.

Net indicators are more accurate for analysing actual productive efficiency, capital formation capacity, and the sustainable income level of the population.

graph TB
  A[GDP]:::node --> B[NDP]:::node2
  A --> C[GNP]:::node
  C --> D[NNP]:::node2

  A --> X[Minus Depreciation]:::note
  X --> B
  C --> Y[Minus Depreciation]:::note
  Y --> D

  A --> Z[Add NFIA]:::note
  Z --> C

  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef node2 fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef note fill:#F8F9F9,stroke:#B3B6B7,color:#424949;
  

★ IASNOVA.COM — SMART UPSC PREP ★

5. Market Price (MP) vs Factor Cost (FC)

Valuation plays a crucial role in national income accounting. The same physical output can have different monetary values depending on whether we measure:

• Market Price (MP) → what consumers pay in the market
• Factor Cost (FC) → what producers receive as income

The difference arises due to indirect taxes (GST, excise, customs) and subsidies. Taxes push prices up; subsidies pull prices down. Therefore we adjust MP to reach FC and vice versa.

graph TB
  A[Value at Market Price - MP]:::node2
  B[Value at Factor Cost - FC]:::node

  A --> C[Minus indirect taxes]:::note
  C --> D[Plus subsidies]:::note
  D --> B

  B --> E[Plus indirect taxes]:::note
  E --> F[Minus subsidies]:::note
  F --> A

  classDef node fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef node2 fill:#FADBD8,stroke:#B03A2E,color:#7B241C;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#515A5A;
  

★ IASNOVA.COM — SMART UPSC PREP ★

6. Master Ladder – From GDP at MP → National Income

Finally, all these concepts come together in the “National Income Ladder”. This ladder shows the exact sequence of adjustments required to reach the official measure of National Income used in India, i.e., NNP at Factor Cost.

Starting at the top:

• GDP at MP is the most commonly available data.
• Convert to GDP at FC by removing taxes and adding subsidies.
• Convert to GNP at FC by adding NFIA.
• Convert to NNP at FC by removing depreciation.

This is the single most important diagram for UPSC prelims.

graph TB
  A[GDP at MP]:::node2
  B[GDP at FC]:::node
  C[GNP at FC]:::node3
  D[NNP at FC - National Income]:::target

  A --> E[Minus taxes, plus subsidies]:::note
  E --> B

  B --> F[Add NFIA]:::note
  F --> C

  C --> G[Minus depreciation]:::note
  G --> D

  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef node2 fill:#FADBD8,stroke:#B03A2E,color:#7B241C;
  classDef node3 fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef target fill:#ABEBC6,stroke:#148F77,color:#0E6251;
  classDef note fill:#F8F9F9,stroke:#ABB2B9,color:#515A5A;
  

★ IASNOVA.COM — SMART UPSC PREP ★

7. Smart Summary – One Page Table

Use this table for instant recall. It concisely summarises all core concepts, their types, valuation method, and defining formulas.

★ IASNOVA.COM — SMART UPSC PREP ★

8. Final Comparison Diagram – GDP, GNP, NDP, NNP (All Concepts)

This single diagram links all concepts along the three dimensions: domestic vs national, gross vs net, market price vs factor cost. Use it for last-minute revision before prelims.

graph TB
  A[GDP at MP]:::base --> B[GDP at FC]:::dom
  B --> C[GNP at FC]:::nat
  C --> D[NNP at FC
National Income]:::target

  A --> E[→ minus taxes, plus subsidies]:::note
  E --> B

  B --> F[→ plus NFIA]:::note
  F --> C

  C --> G[→ minus depreciation]:::note
  G --> D

  classDef base fill:#FADBD8,stroke:#C0392B,color:#641E16;
  classDef dom fill:#EBF5FB,stroke:#2471A3,color:#1B4F72;
  classDef nat fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef target fill:#ABEBC6,stroke:#148F77,color:#0E6251,font-weight:bold;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#515A5A;
  

★ IASNOVA.COM — SMART UPSC PREP ★