Can National Income at Market Price Be Less Than National Income at Factor Price?

National income is a measure of the total income earned by a country’s residents within a certain period of time. It can be calculated in two ways: at market price and at factor price.

National Income at Market Price

National income at market price includes all income earned by residents of a country, regardless of whether it is earned from domestic or foreign sources. This includes wages, salaries, profits, interest, and rent.

National Income at Factor Price

National income at factor price excludes net factor income from abroad. This is the income earned by residents of a country from investments in other countries, minus the income earned by residents of other countries from investments in the given country.

Can National Income at Market Price Be Less Than National Income at Factor Price?

Yes, national income at market price can be less than national income at factor price. This can happen when a country has a negative net factor income from abroad. This means that the income earned by residents of the country from investments in other countries is less than the income earned by residents of other countries from investments in the given country.

For example, if a country has a large amount of foreign debt, the interest payments on that debt will reduce its net factor income from abroad. This can lead to national income at market price being less than national income at factor price.

Implications

The difference between national income at market price and national income at factor price can have important implications for economic policy. For example, a country with a negative net factor income from abroad may need to take steps to increase its exports or reduce its imports in order to improve its balance of payments.

Note: Depreciation is not included in national income at factor price but is included in national income at market price. This is because depreciation is not a factor payment. It is an expense that businesses incur as their capital assets wear out.

Conclusion

National income is a key indicator of a country’s economic health. By understanding the difference between national income at market price and national income at factor price, policymakers can better assess the country’s economic situation and make appropriate policy decisions.

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