Question

Explain the concept of Net National Product at Market Price and Net National Product at Factor cost. Clarify the difference between them.

Hint:

To remember the conversion: \begin{itemize} \item To go from Market Price to Factor Cost, subtract Net Indirect Taxes. \item To go from Factor Cost to Market Price, add Net Indirect Taxes. \end{itemize}

Answer 1

Step 1: Concept of Net National Product at Market Price (NNP at MP):
Net National Product at Market Price (NNP at MP) is the net market value of all final goods and services produced by the normal residents of a country during a financial year. \begin{itemize} \item 'Net' means that it is calculated after deducting the value of depreciation (also known as consumption of fixed capital) from the Gross National Product (GNP). Depreciation represents the wear and tear of capital assets during the production process. \item 'National' means it includes the net factor income from abroad (NFIA). \item 'Market Price' means the value of goods and services is taken at the price at which they are actually sold in the market. This price includes indirect taxes (like GST) and excludes government subsidies. \end{itemize} \[ NNP_{MP} = GNP_{MP} - \text{Depreciation} \]

Step 2: Concept of Net National Product at Factor Cost (NNP at FC):
Net National Product at Factor Cost (NNP at FC) is the sum total of all factor incomes (wages, rent, interest, and profit) earned by the normal residents of a country during a financial year. \begin{itemize} \item It represents the actual cost incurred on the factors of production to produce the national product. \item NNP at FC is the true measure of a country's National Income. \end{itemize} \[ NNP_{FC} = \text{National Income} \]

Step 3: Difference between NNP at MP and NNP at FC:
The fundamental difference between 'Market Price' and 'Factor Cost' is the effect of Net Indirect Taxes (NIT). \begin{itemize} \item Indirect Taxes (IT): These are taxes levied by the government on the production and sale of goods and services (e.g., GST). They increase the market price of a commodity. \item Subsidies (S): These are financial assistance given by the government to producers. They reduce the market price of a commodity. \end{itemize} Net Indirect Taxes (NIT) is the difference between Indirect Taxes and Subsidies. \[ NIT = \text{Indirect Taxes} - \text{Subsidies} \] The relationship and difference between the two aggregates can be expressed as: \[ \text{Market Price} = \text{Factor Cost} + \text{Net Indirect Taxes} \] Therefore: \[ NNP_{MP} = NNP_{FC} + NIT \] Or, to clarify the difference: \[ NNP_{MP} - NNP_{FC} = \text{Net Indirect Taxes} \]

Step 4: Final Answer:
NNP at MP is the net market value of final goods and services, including the effect of taxes and subsidies. NNP at FC (National Income) is the sum of factor incomes earned. The difference between them is Net Indirect Taxes (Indirect Taxes - Subsidies).