Economy Basic Concepts Part 2 – Gross domestic product (GDP)

(1) MR = MC

  1. When one more unit of output is produced, MR is the gain and MC is the cost to the producer, so as long as the benefit is greater than the cost or MR is greater than MC.
  2. It is profitable to produce more. The producer is not in equilibrium when MR is less than MC because the benefit is less than the cost. By producing less the producer can add his profits.

(2) MC is greater than MR after the MR=MC output level

  1. It because if MC is greater than MR, producing beyond MC=MR output will reduce profits.3.3
  2. In the above diagram producer’s equilibrium in IMPERFECT COMPETITIVE MARKET.
  3. In this diagram point E shows MR=MC, so the producer will be in equilibrium on point E i.e. output level 4.
  4. Because point E satisfies both the conditions required for equilibrium i.e. MR=MC and MC > MR after equilibrium output.

 

National Income

  1. National income is the total value a country’s final output of all new goods and services produced in one year.
  2. It is Gross national product (GNP) less allowance for obsolete or ageing capital stock.


Gross domestic product (GDP)

Domestic territory

Political boundary (including EEZ) + Embassies, consulates & military establishment

The military establishment includes aircraft ships, fishing vessels, oil rigs etc owned by the residence of the country.

 

  1. It is the money value of all final goods and services produced in the domestic territory of the country during a financial year or accounting year.

 

Goods and services include

3.4

  1. Intermediate goods are not included to avoid double counting
  2. Consumer goods are directly satisfying the want of consumer (maybe semi-durable and durable)
  3. Capital goods assist in further production machinery equipment in the factory

Gross national product (GNP)

  1. Money value of all final goods and services produced by the normal residence of a country during a financial year.
  2. Normal residents are individual who usually resides in the country and whose long-term centre of economic interest lies in the country.
  3. He resides for more than 6 months or 182 days and he is eligible for paying income tax.

Difference between residence and non residence

3.5

Let us illustrate the relationship between their incomes

3.6

Here GDP means the gross domestic product, GNP is gross national product and NFIA is Net factor income from abroad.

The term factor includes the following inputs 

3.7


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