Question

Explain the following concepts and show their relationship:

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

Answer 1

1. Gross Domestic Product at Market Prices (GDP_MP): GDP at market prices is the total monetary value of all final goods and services produced within a country’s domestic boundaries during a specific year, measured using current market prices. It includes both national and foreign producers operating within the country and accounts for depreciation. Since it is measured at market prices, it also includes indirect taxes and excludes subsidies. This figure reflects the production capacity of a country within its territory, regardless of who owns the production units.
2. Gross National Product at Factor Cost (GNP_FC): GNP at factor cost represents the total income earned by the residents (or nationals) of a country from production, whether it occurs within or outside the domestic boundaries. It is calculated based on the earnings of the factors of production, such as wages, rent, interest, and profit, and does not include depreciation. It differs from GNP at market prices by excluding net indirect taxes (i.e., indirect taxes minus subsidies), thus focusing purely on the income received by the resource owners.

Relationship Between GDP_MP and GNP_FC: To move from GDP at market prices to GNP at factor cost, we make the following adjustments:

1. Add Net Factor Income from Abroad (NFIA) to account for income earned by nationals from overseas minus income earned by foreigners domestically.
2. Subtract Indirect Taxes and add Subsidies – to convert from market prices to factor cost.

Formula:

GNP_FC​ = GDP_MP​ + Net Factor Income from Abroad − Indirect Taxes + Subsidies