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Difficulty: HardBasic National Income Aggregates (GDP, GNP, NNP, NDP)

The following national income figures are recorded for an economy in a given year:

- Gross Domestic Product at market prices (GDPmpGDP_{mp}): $1,420\$1,420 billion
- Factor income received by domestic residents from abroad: $95\$95 billion
- Factor income paid to foreign residents within the domestic economy: $140\$140 billion
- Capital Consumption Allowance (Depreciation): $105\$105 billion
- Indirect taxes: $115\$115 billion
- Subsidies: $30\$30 billion

What is the Net National Product at factor cost (NNPfcNNP_{fc}) of this economy in billions of dollars?

Answer: 1185 billion dollars

Answer

The Net National Product at factor cost (NNPfcNNP_{fc}) is $1,185 billion.
To derive Net National Product at factor cost (NNPfcNNP_{fc}), start with GDPmp=1,420GDP_{mp} = 1,420. Calculate Net Factor Income from Abroad (NFIANFIA) as 95−140=−4595 - 140 = -45 billion dollars, giving GNPmp=1,420+(−45)=1,375GNP_{mp} = 1,420 + (-45) = 1,375 billion dollars. Subtracting depreciation (105105 billion dollars) yields NNPmp=1,270NNP_{mp} = 1,270 billion dollars. Finally, subtracting Net Indirect Taxes (115−30=85115 - 30 = 85 billion dollars) converts market price to factor cost: 1,270−85=1,1851,270 - 85 = 1,185 billion dollars.

Step-by-Step Solution

1
Determine Net Factor Income from Abroad (NFIA)
NFIA = 95 billion−95\text{ billion} - 140\text{ billion} = -\45 billion45\text{ billion}
NFIA measures the net flow of factor earnings between domestic residents and the rest of the world.
2
Convert GDP at market prices to GNP at market prices
GNP_{mp} = 1,420 billion+(−$45 billion)=$1,375 billion1,420\text{ billion} + (-\$45\text{ billion}) = \$1,375\text{ billion}
Adding NFIA to domestic product converts gross domestic output to gross national output.
3
Deduct depreciation to obtain NNP at market prices
NNP_{mp} = 1,375 billion−$105 billion=$1,270 billion1,375\text{ billion} - \$105\text{ billion} = \$1,270\text{ billion}
Subtracting capital consumption allowance converts gross national measures to net national measures.
4
Calculate Net Indirect Taxes (NIT)
NIT = 115 billion−$30 billion=$85 billion115\text{ billion} - \$30\text{ billion} = \$85\text{ billion}
Net indirect taxes equal total indirect taxes minus subsidies provided by government.
5
Adjust NNP at market prices to factor cost
NNP_{fc} = 1,270 billion−$85 billion=$1,185 billion1,270\text{ billion} - \$85\text{ billion} = \$1,185\text{ billion}
Converting from market price evaluation to factor cost requires subtracting indirect taxes and adding back subsidies.

Key Concept

Derivation of Net National Product at Factor Cost from Gross Domestic Product at Market Prices
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Topics

Basic National Income Aggregates (GDP, GNP, NNP, NDP)

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