Question

Explain the following concepts and show their relationship:

‘Net National Product’ at market prices and ‘Gross Domestic Product’ at factor cost.

Answer 1

1. Net National Product at Market Prices (NNP_MP): Net National Product at Market Prices refers to the total market value of all final goods and services produced by the normal residents of a country in a given year after accounting for depreciation (the wear and tear of capital). It is derived by subtracting depreciation from Gross National Product at Market Prices (GNP at MP).
   NNP_MP ​= GNP_MP​ − Depreciation 
   NNP_MP provides a clearer and more realistic picture of the economy’s output because it accounts for the loss in value of capital goods. This makes it a better measure for evaluating sustainable and long-term economic growth compared to GNP.
2. Gross Domestic Product at Factor Cost (GDP_FC): GDP at Factor Cost is the total value of all final goods and services produced within the domestic territory of a country in a given year, calculated based on payments made to the factors of production (like wages, rent, and profits). It excludes indirect taxes and includes subsidies. 
   GDP_FC ​= GDP_MP ​− Indirect Taxes + Subsidies

Relationship Between NNP_MP and GDP_FC: To link NNP_MP with GDP_FC, we apply a series of adjustments:

NNP_MP ​= GDP_FC​ + Net Factor Income from Abroad (NFIA) + Indirect Taxes − Subsidies − Depreciation

This equation shows how to move from domestic gross production at cost to national net production at market prices by accounting for:

• Market valuation (taxes and subsidies),
• National scope (adding net factor income from abroad),
• And depreciation (for net value).

Thus, NNP_MP is a refined and comprehensive measure derived from GDP_FC, capturing the true economic contribution of a country’s residents.