Question

How is net national product at factor cost obtained from net national product at market prices?

Answer 1

To convert net national product at market prices (NNP_mp) into net national product at factor cost (NNP_fc), which is also called national income, you must adjust for the impact of indirect taxes and subsidies.

1. NNP_mp (net national product at market prices) includes indirect taxes (like GST and excise duty) and excludes subsidies.
2. But factor cost reflects the actual income received by factors of production (labor, capital, etc.).
3. So we
   • Subtract indirect taxes (not part of factor earnings).
   • Add subsidies (which increase producer income).

Net national product at factor cost (also called national income) is the actual income earned by the normal residents of a country for their contribution to production, after adjusting for taxes and subsidies.