Which of the following is a correct statement?

Correct — A. National income is NNP at factor cost. Build it down from the widest aggregate and watch what each step removes.

GNP at MP = GDP at MP + net factor income from abroad
NNP at MP = GNP at MP − depreciation
NNP at FC = NNP at MP − net indirect taxes = national income

Two subtractions do the work. Depreciation turns gross into net, and net indirect taxes turn market price into factor cost. Only option (a) carries both, and it is national rather than domestic.

Why the others are wrong

• (b)
  National Income is GDP at MP. — GDP at MP fails on three counts at once. It is domestic rather than national, gross rather than net, and at market prices rather than factor cost.
• (c)
  National Income is GNP at FC. — GNP at FC is the closest miss. It is already at factor cost and already national, but it is still gross, so it exceeds national income by exactly the depreciation.
• (d)
  National Income is NDP at MP. — NDP at MP is net, which is half the correction, but it stays domestic and stays at market prices. It therefore omits net factor income from abroad and still carries indirect taxes.

Every national accounting aggregate is a point on a three-way grid.

Gross becomes net by subtracting depreciation, the consumption of fixed capital. Domestic becomes national by adding net factor income from abroad, the income Indians earn abroad minus what foreigners earn here.

Market price becomes factor cost by subtracting net indirect taxes, which are indirect taxes minus subsidies.

National income is the corner of that grid where all three switches are set: net, national, factor cost. Every distractor here is the same aggregate with one or two switches left in the wrong position.

Key facts

• National income is NNP at factor cost, that is GNP at market price minus depreciation minus net indirect taxes.
• Net factor income from abroad is what converts a domestic aggregate into a national one.
• Depreciation, the consumption of fixed capital, is what converts a gross aggregate into a net one.
• Net indirect taxes are indirect taxes minus subsidies, and they separate market prices from factor cost.

Common traps

• GNP at factor cost looks right because it is national and at factor cost, but it is gross and so overstates national income by the depreciation.
• Adding net factor income from abroad and subtracting net indirect taxes are separate corrections, and doing only one of them lands on a distractor.
• Net factor income from abroad can be negative for India, so national aggregates are not automatically larger than domestic ones.

No directly related past PYQ was found.