The national income thus computed, which is the sum total of the earnings of the various factors of production from their participation in production, is identical with the value of net national product at factor cost or net national expenditure at factor cost. From this equation, it can be readily seen that the contribution of the balance of payments to the domestic flow of income equals the difference between exports and imports, including both invisible and visible items. And, since interest and profits on foreign investment are, in fact, payments for the services of foreign-owned capital, they may be treated as invisible exports for the receiving country and as invisible imports for the paying country along with other “invisible” items.
#Four factors of production and their payments plus#
The national income, as earned by the domestic factors of production in their participation in the productive process, may therefore be said to equal the sum of domestic private consumption plus domestic private net investment plus domestic government expenditures on goods and services minus indirect taxation plus subsidies minus imports plus exports. On the other hand, foreign residents’ and government expenditures on goods and services produced at home contribute to the creation of incomes of domestic factors of production, and hence should be added to the domestic income-creating expenditures. A part of each category of expenditure may also be spent on goods and services supplied by foreign countries and thus fail to generate income at home. On the other hand, government subsidies, which enable goods and services to be purchased at less than factor cost, should be added to total expenditure for they too form part of the incomes of factors of production. Part of each of these, however, is a payment for indirect taxation which does not create income for factors of production at home, and therefore has to be deducted from the total.
Income-creating expenditures can be classified under three major headings: domestic private consumption, domestic private net investment, and domestic government expenditures on goods and services. The best approach is to study the generation of income by various types of expenditure.
Looked at from the point of view of national income accounting, the problem is fairly simple.
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