NNP at factor cost is equal to
National Income
Net National Product at factor cost is National Income — option 4. The two are two names for the same aggregate.
The chain of aggregates. Two adjustments carry one from the broadest measure to national income — subtracting depreciation, and subtracting net indirect taxes :
| Step | Relation |
|---|---|
| Start | GNP at market price |
| Subtract depreciation (consumption of fixed capital) | = NNP at market price |
| Subtract net indirect taxes (indirect taxes − subsidies) | = NNP at factor cost = NATIONAL INCOME |
The same two steps in the other order give the same result :
\(\text{NNP}_{FC}=\text{GNP}_{FC}-\text{Depreciation}=\text{GNP}_{MP}-\text{Depreciation}-\text{Net indirect taxes}\)
Why option 1 is the trap. It subtracts net indirect tax from GNP at factor cost. But GNP at factor cost has already had the net indirect taxes removed — that is what “at factor cost” means. Subtracting them a second time would deduct the same amount twice. What must be subtracted from GNP at factor cost is depreciation, not tax.
What the two adjustments mean. Market price includes indirect taxes that the buyer pays but no producer receives, and excludes subsidies that producers do receive; removing net indirect taxes gives what actually reached the factors of production — wages, rent, interest and profit. Gross includes the capital consumed in producing the output; removing depreciation gives the net addition to the nation’s wealth.
Two more definitions in the same family. Personal income is national income minus corporate taxes, undistributed profits and social-security contributions, plus transfer payments; disposable personal income — option 3 — is personal income minus direct taxes, that is, what a household can actually spend or save.
The Indian arrangement : national income estimates are prepared by the National Statistical Office, at a base year of 2011-12; the first estimate was made by Dadabhai Naoroji and the first scientific one by the National Income Committee under P. C. Mahalanobis in 1949.
Hence, the answer is National Income.
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