Aggregates related to national income - NNP

The wear and tear or loss in the value of capital goods during production is called depreciation. NNP is obtained by deducting depreciation from GNP because NNP measures the value of output after allowing for the capital consumed in production. Therefore, old-machine wear is deducted, not added as investment, exports, or taxes.

Under the income method, NNP at factor cost is measured as the total net factor income generated by the normal residents of a country during an accounting year. It includes compensation of employees, operating surplus, and mixed income of the self-employed, after allowing for depreciation where relevant. Therefore, NNP_FC is also called National Income, not taxes, consumption expenditure, or foreign trade.

Net National Product is obtained from Gross National Product by deducting depreciation: NNP_MP = GNP_MP − depreciation. Hence, if GNP_MP and NNP_MP have the same value, the deduction must be zero and depreciation must also be zero. The equality says nothing by itself about NFIA, exports, or net indirect taxes.

The conversion formula is NNPFC = NNPMP − net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. Because subsidies reduce net indirect taxes, they reduce the amount subtracted from market-price NNP. Consequently, subsidies raise factor-cost NNP relative to market-price NNP, other things remaining constant.

NNP is a national, rather than domestic, aggregate. It includes the net factor income earned by normal residents, including factor income received from abroad. Income earned by foreigners within the domestic territory is excluded from national income through the net factor income from abroad adjustment. Consumption and borrowing are not factor incomes.

Net factor income from abroad is calculated as factor income received by residents from abroad minus factor income paid to foreigners. Therefore, factor income earned by foreigners in the domestic territory is an outward payment and reduces NFIA. Since NNP is a national aggregate, this payment lowers the national total relative to the domestic total.

GDP at market price measures gross domestic production. Adding NFIA changes the domestic measure into a national measure, giving GNP at market price. Deducting depreciation then changes the gross measure into a net measure. Hence NNPMP = GDPMP + NFIA − depreciation, which makes option A correct.

The conversion from factor cost to market price uses the relationship NNP_MP = NNP_FC + net indirect taxes. Substituting the given values gives NNP_MP = 720 + (−20) = 700 crore. A negative NIT means that indirect subsidies exceed indirect taxes by 20 crore, so the market-price value is lower than the factor-cost value.

GDP is a gross domestic measure, whereas NNP is a net national measure. Therefore, conversion from GDP to NNP requires two conceptual changes: add net factor income from abroad (NFIA) to change domestic into national income, and subtract consumption of fixed capital or depreciation to change gross into net. Hence, option A is correct.

GNP at market prices is already national and gross. First subtract consumption of fixed capital, or depreciation, to obtain NNP at market prices. Then subtract net indirect taxes (NIT) to move from market prices to factor cost, because factor-cost valuation excludes the net tax component. Therefore, option A gives both required adjustments.

To convert GNP at market prices into NNP at factor cost, first deduct depreciation and then deduct net indirect taxes: NNP₍FC₎ = GNP₍MP₎ − depreciation − NIT = 1,000 − 120 − 70 = ₹810 crore. The intermediate value, ₹880 crore, is NNP at market prices, not NNP at factor cost. Hence, option A is correct.

NNP measures the monetary value of net national production, but welfare is broader than income or output. NNP may not reflect unpaid household work, leisure, environmental damage, quality of goods, income inequality, or how production is distributed. Consequently, a higher NNP does not automatically mean that every person enjoys greater well-being. Option A is correct.

Final goods and services are those purchased for consumption, investment, or other final use. Intermediate goods are used as inputs in producing other goods, so counting their full value along with the final product would count the same output more than once. Valuing final goods, or alternatively adding value at each production stage, prevents double counting in NNP.

The relationship is NNP₍FC₎ = NNP₍MP₎ − net indirect taxes. If net indirect taxes are positive, factor-cost income is lower than market-price income. However, if net indirect taxes are negative because subsidies exceed indirect taxes, subtracting a negative amount increases the result, making NNP₍FC₎ greater than NNP₍MP₎. Therefore, option B is correct.

NNP means Net National Product. It measures the value of final goods and services produced by a country’s normal residents during one accounting year, after deducting depreciation from GNP. The word national refers to residents, while the word net indicates that capital wear and tear has been subtracted.

To calculate NNP at factor cost, first convert GDP at factor cost into GNP at factor cost by adding net factor income from abroad: GNP₍FC₎ = 950 + 20 = ₹970 crore. Then subtract depreciation, because net aggregates exclude the value of capital consumption: NNP₍FC₎ = 970 − 90 = ₹880 crore. Therefore, option A is correct.

Per capita NNP represents the average NNP available per person. It is calculated by dividing total NNP by the total population: Per capita NNP = NNP ÷ population. The division does not add depreciation or remove NFIA; those are separate national-income adjustments used when constructing the aggregate.

National-income calculations may require several adjustments depending on the starting aggregate and the desired measure. NFIA changes a domestic measure into a national measure, depreciation changes gross into net, and net indirect taxes help convert between market prices and factor cost. Thus option A lists the relevant adjustments.

The relationship between net national product and net domestic product is NNP = NDP + NFIA. Rearranging gives NDP = NNP − NFIA. Substituting the values, NDP = ₹900 crore − ₹50 crore = ₹850 crore. Hence, option B is correct. NFIA is subtracted because the conversion is from a national measure to a domestic measure.

Subtracting depreciation changes a gross measure into a net measure, but it does not change the valuation basis. Since the original aggregate is GNP at market price, the result is NNP at market price: NNPMP = GNPMP − depreciation. A conversion to factor cost would additionally require subtracting net indirect taxes, so option A is unambiguous.

NNP at market price is calculated as GNP at market price minus depreciation. Because it is national rather than domestic, it includes net factor income from abroad, which accounts for income earned by normal residents from the rest of the world after relevant payments. Option B describes a domestic production concept, option C uses the wrong treatment of depreciation, and option D describes an incorrect conversion to national income.

NNP is a national aggregate, so its national character is based on the principle of normal residents. It counts the net factor income generated by a country’s normal residents, whether their economic activity occurs within the domestic territory or abroad, after deducting depreciation. The geographical-boundary principle belongs to domestic aggregates such as GDP, not national aggregates such as NNP.

National income is conventionally measured as Net National Product at factor cost, or NNPFC. “National” means that the income of normal residents, including the net factor income from abroad, is considered; “net” means depreciation has been deducted; and “factor cost” means the income accruing to factors of production is measured without net indirect taxes. Therefore, option B is correct.

First convert GDP at market price into GNP at market price by adding net factor income from abroad: GNPMP = ₹900 crore + ₹40 crore = ₹940 crore. Then subtract depreciation to convert the gross measure into a net measure: NNPMP = ₹940 crore − ₹70 crore = ₹870 crore. Therefore, option B is correct. The result remains at market price because no net indirect tax adjustment is made.

Depreciation, also called capital consumption allowance, is deducted from Gross National Product to obtain Net National Product: NNP = GNP − depreciation. It measures the loss in value of fixed capital caused by normal wear, use, and obsolescence during production. Net factor income from abroad converts a domestic measure into a national one, while net indirect taxes convert between market price and factor cost; neither performs the gross-to-net adjustment.