RAS Pre 2021, held on 27 October 2021. Question text as printed in RPSC's booklet; answer as per RPSC's final answer key.

The Net National Product at Market Price (N.N.P. MP) is –

Q: What is the answer to RAS Pre 2021 Q74?

(3). Correct — option (3), Gross National Product at Market Price – Depreciation. NCERT's Class XII textbook Introductory Macroeconomics builds the aggregates in its chapter National Income Accounting. First, GNP ≡ GDP + Net factor income from abroad. Next, a part of the capital stock wears out during the year. The textbook calls this wear and tear depreciation and notes that it does not become part of anybody's income. Deducting it from GNP gives Net National Product: NNP ≡ GNP – Depreciation. The textbook adds that these variables are evaluated at market prices, so the result is NNP at market prices. Its summary table writes it as NNPMP = GNPMP − Depreciation. The only step from gross to net is removing depreciation, which is Gross National Product at Market Price – Depreciation. The idea to remember: gross to net removes depreciation; domestic to national adds net factor income from abroad; market prices to factor cost removes net indirect taxes.

(1)Gross National Product at Market Price – Net Income from abroad
(2)Gross National Product at Market Price – Transfer Payments
(3)Gross National Product at Market Price – Depreciation
(4)Gross National Product at Market Price – Subsidies

Answer

(3)

Why

Correct — option (3), Gross National Product at Market Price – Depreciation.

NCERT's Class XII textbook Introductory Macroeconomics builds the aggregates in its chapter National Income Accounting. First, GNP ≡ GDP + Net factor income from abroad.

Next, a part of the capital stock wears out during the year. The textbook calls this wear and tear depreciation and notes that it does not become part of anybody's income. Deducting it from GNP gives Net National Product: NNP ≡ GNP – Depreciation.

The textbook adds that these variables are evaluated at market prices, so the result is NNP at market prices. Its summary table writes it as NNPMP = GNPMP − Depreciation.

The only step from gross to net is removing depreciation, which is Gross National Product at Market Price – Depreciation.

The idea to remember: gross to net removes depreciation; domestic to national adds net factor income from abroad; market prices to factor cost removes net indirect taxes.

Why the others are wrong

(1)
Gross National Product at Market Price – Net Income from abroad — Since GNP ≡ GDP + Net factor income from abroad, taking that income away again leads back to Gross Domestic Product at market prices.
That changes national to domestic, but the figure stays gross: depreciation is still inside it. NNP needs depreciation removed, not factor income from abroad.
(2)
Gross National Product at Market Price – Transfer Payments — Transfer payments, such as pensions, scholarships and prizes in NCERT's examples, are not a cost of production, so they are not the gap between gross and net product.
In the NCERT chain they enter much later, where they are added to reach Personal Income: PI ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
(4)
Gross National Product at Market Price – Subsidies — Subsidies belong to the move from market prices to factor cost, and there they are added back, not subtracted. NCERT writes NNP at factor cost ≡ NNP at market prices – (Indirect taxes – Subsidies).
Subtracting subsidies from GNP at market prices removes neither depreciation nor net indirect taxes, so it does not give NNP.

Concept

National income aggregates are built by switching three labels. Domestic or national: add net factor income from abroad to go from domestic to national. Gross or net: subtract depreciation to go from gross to net. Market prices or factor cost: subtract indirect taxes and add subsidies.

Depreciation is the value of capital used up in a year. NCERT notes it is also known as consumption of fixed capital.

The NCERT chain runs GDP → GNP → NNP at market prices → NNP at factor cost, which is National Income → Personal Income → Personal Disposable Income.

RPSC's 2021 syllabus lists “National Income, Growth and Development” under Basic Concepts of Economics, in the Economic Concepts and Indian Economy head.

The same logic appears in state accounts. Rajasthan's Economic Review 2020-21 says “The Consumption of Fixed Capital (CFC) is subtracted from the gross value figures to derive at Net State Domestic Product.”

It describes CFC as the replacement value of the part of the capital stock used up in production during the year.

Key facts

NCERT: GNP ≡ GDP + Net factor income from abroad.
NCERT: NNP ≡ GNP – Depreciation; evaluated at market prices this is NNP at market prices.
NCERT: NNP at factor cost ≡ National Income ≡ NNP at market prices – (Indirect taxes – Subsidies).
NCERT: depreciation is also known as consumption of fixed capital.
Rajasthan's Economic Review 2020-21 derives Net State Domestic Product by subtracting Consumption of Fixed Capital from gross figures.

From GDP to National Income (NCERT chain)

GDP at market prices→Start

+ Net factor income from abroad→= GNP at market prices

– Depreciation→= NNP at market prices

– (Indirect taxes – Subsidies)→= NNP at factor cost = National Income

Source: NCERT, Introductory Macroeconomics (Class XII), chapter 2, National Income Accounting.

Study next

GDP, GNP, NDP and NNP at market prices and factor costNet factor income from abroadPersonal Income and Personal Disposable IncomeGross State Domestic Product and Net State Domestic ProductNominal and real GDP

Common traps

Confusing the national adjustment with the net adjustment: removing net factor income from abroad gives GDP, not NNP.
Treating subsidies as something subtracted: in the step from market prices to factor cost they are added back.
Placing transfer payments in the production aggregates: they enter only at Personal Income.

A question can give one aggregate and ask what must be added or subtracted to reach another, such as GNP to NNP.

A question can also give figures for GDP, net factor income from abroad, depreciation and net indirect taxes, and ask for National Income.

Related PYQs

RPSC_2024_PRE_GS_Q392024Open & attempt →

In which of the following year annual growth rate of Gross National Income and Net National Income on both current prices and constant prices were Negative in India ?

(1) 2018-19
(2) 2019-20
(3) 2020-21
(4) 2021-22

Answer(3)

Also works with gross and net national aggregates. That question asks in which year the annual growth rates of Gross National Income and Net National Income, at both current and constant prices, were negative in India (RPSC's key: 2020-21); this one asks how the net figure is derived from the gross one.

Practice

practice — not a real PYQ
National Income (NNP at factor cost) is equal to
- (a)NNP at market prices – Depreciation
- (b)NNP at market prices – (Indirect taxes – Subsidies)
- (c)GNP at market prices + Subsidies
- (d)GDP at market prices + Net factor income from abroad
Answer(2) — NCERT defines NNP at factor cost as NNP at market prices minus net indirect taxes. Option (1) removes depreciation twice, option (3) keeps depreciation and indirect taxes in, and option (4) gives GNP at market prices.
practice — not a real PYQ
GDP at market prices is ₹500 crore, net factor income from abroad is –₹20 crore and depreciation is ₹50 crore. NNP at market prices is
- (a)₹430 crore
- (b)₹470 crore
- (c)₹450 crore
- (d)₹480 crore
Answer(1) — GNP = 500 + (–20) = 480. NNP = 480 – 50 = 430. Option (2) adds the 20 instead of subtracting it, option (3) ignores factor income from abroad, and option (4) is GNP, before depreciation.