How is NNP at factor cost derived from GNP at market prices?
Answer Details
NNP at factor cost is derived from GNP at market prices by adjusting for the difference between market prices and factor costs, which is represented by indirect taxes and subsidies.
Factor costs refer to the actual cost of producing goods and services, including wages, rent, and interest, while market prices include indirect taxes such as sales tax, excise tax, and customs duty, as well as subsidies, which are payments made by the government to reduce the cost of production or consumption.
To calculate NNP at factor cost, we need to subtract the indirect taxes and add the subsidies from GNP at market prices, since these adjustments represent the difference between market prices and factor costs. We also need to subtract depreciation, which refers to the wear and tear of fixed assets over time, to arrive at NNP, which represents the net value of goods and services produced in the economy.
Therefore, the correct formula to calculate NNP at factor cost is:
NNP at factor cost = GNP at market prices - Depreciation - Indirect taxes + Subsidies