Question

Explain the Gross National Product at Market Price.

Hint:

To navigate between different national income aggregates, remember these three key conversions: \begin{itemize} \item Gross \(\leftrightarrow\) Net: Subtract/Add Depreciation. \item Domestic \(\leftrightarrow\) National: Add/Subtract Net Factor Income from Abroad (NFIA). \item Market Price \(\leftrightarrow\) Factor Cost: Subtract/Add Net Indirect Taxes (NIT). \end{itemize}

Answer 1

Step 1: Understanding the Concept:
GNP_MP is a key aggregate used in national income accounting. To understand it, we must break down each component of its name: "Gross," "National," and "at Market Price."

Step 2: Detailed Explanation of Components:
\begin{enumerate} \item Gross: The term "Gross" indicates that the value of depreciation (also known as consumption of fixed capital) has not been subtracted from the total value. Depreciation is the wear and tear of capital goods (like machinery and buildings) during the production process. If we subtract depreciation from GNP, we get Net National Product (NNP). \[ \text{GNP} - \text{Depreciation} = \text{NNP} \] \item National: The term "National" refers to the income of all the "normal residents" of a country, regardless of where the income is generated. It is different from "Domestic," which refers to all income generated within the geographical boundaries of a country. To convert a domestic product to a national product, we add the Net Factor Income from Abroad (NFIA). NFIA is the difference between the income earned by residents from the rest of the world and the income earned by non-residents within the country. \[ \text{GNP} = \text{GDP} + \text{NFIA} \] \item at Market Price (MP): The term "Market Price" means that the goods and services are valued at the prices at which they are actually sold in the market. This price includes the effect of indirect taxes (like GST) and government subsidies. Indirect taxes increase the market price, while subsidies decrease it. To convert a value at market price to one at factor cost (the cost of production), we subtract net indirect taxes. \[ \text{GNP at Factor Cost} = \text{GNP at Market Price} - \text{Net Indirect Taxes (NIT)} \] where NIT = Indirect Taxes - Subsidies. \end{enumerate}

Step 3: Final Definition:
Combining these components, Gross National Product at Market Price (GNP_MP) is the market value of all final economic goods and services produced during a financial year by the normal residents of a country. It is calculated as GDP at Market Price plus Net Factor Income from Abroad. \[ \text{GNP}_{\text{MP}} = \text{GDP}_{\text{MP}} + \text{NFIA} \]