Dornbusch and Fischer on Capital and Income

In this paper I critically analyze the relationship that professors Dornbusch and Fischer establish among the concepts of GNP, NNP and aggregate income. In principle, aggregate income is NNP; indeed, the whole point of introducing the concept of NNP is to determine what is the income of the economy in the aggregate. The definition of NNP excludes depreciation from aggregate income. But depreciation must be made good, and it must be so out of current production. On the ground that the factors that produce the goods that make up for depreciation must be paid, Dornbusch and Fischer conclude that the value of the portion of current output that makes up for depreciation becomes income in the aggregate. Since it is indubitable that the value of the other portion of output (that which consists of the goods not required to make up for depreciation) becomes income too, then it follows that aggregate income is GNP, not NNP. Then, Dornbusch and Fischer hold contradictory views. The cause, which I attempt at diagnosing in this paper, is a miscomprehension of the nature of capitalistic production.