What is the difference between GDP at market price and NNP at factor cost (national income)?
GradeHunt_TeamGradeHunt Team · · CBSE 12th
Class 12 Macroeconomics: I always get confused between the aggregates. How do I go from GDP at market price to national income?
national incomegdpnnp at factor costmacroeconomics
1 answer
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National income in CBSE Economics means NNP at factor cost (NNPfc). You get there from GDP at market price (GDPmp) in three adjustments.
1. Gross to Net: subtract depreciation (consumption of fixed capital).
NDP = GDP - Depreciation
2. Domestic to National: add net factor income from abroad (NFIA).
National = Domestic + NFIA
NFIA = factor income earned from abroad - factor income paid to abroad
3. Market price to Factor cost: subtract net indirect taxes.
Factor cost = Market price - (Indirect taxes - Subsidies)
So: NNPfc = GDPmp - Depreciation + NFIA - Net indirect taxes
Meaning of each term:
- Domestic: produced within the economic territory, by residents and non-residents.
- National: produced by normal residents, inside or outside the territory.
- Market price: includes net indirect taxes (indirect taxes minus subsidies).
- Factor cost: what the factors of production actually receive.
Quick example:
GDPmp = 1,000; depreciation = 80; NFIA = -20; indirect taxes = 120; subsidies = 20.
NNPfc = 1,000 - 80 + (-20) - (120 - 20) = 800.
Exam tip: write the formula first, then substitute the values step by step, so your method is clear even if there is a calculation slip. Watch the sign of NFIA: when it is negative, national income is lower than domestic income.
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