Question

How is net national product at factor cost obtained from net domestic product at factor cost?

Answer 1

To derive Net National Product at Factor Cost (NNP_Fc), which is also known as National Income, from Net Domestic Product at Factor Cost (NDP_Fc), you need to account for net factor income earned from abroad (NFIA).

1. NDP_Fc (Net Domestic Product at Factor Cost): The total factor income (wages, rent, interest, and profits) earned within the domestic territory of a country during a year, after deducting depreciation.
2. NFIA (Net Factor Income From Abroad): The net earnings from the rest of the world. It is the difference between
   • Factor income received from abroad by residents, and
   • Factor income is paid to foreigners working in the domestic economy.

NFIA = Factor Income Received from Abroad − Factor Income Paid Abroad

The total factor income earned by normal residents of a country includes income from both domestic and foreign sources, and it is calculated after accounting for depreciation.