With reference to 'Net National Product (NNP) at Factor Cost', consider the following statements: 1. It is derived by adding net indirect taxes to NNP at market prices. 2. It is also known as National Income (NI). 3. It includes the value of depreciation. Which of the statements given above is/are correct?

With reference to 'Net National Product… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 4: National Income Accounting

mcqmedium

With reference to 'Net National Product (NNP) at Factor Cost', consider the following statements:

It is derived by adding net indirect taxes to NNP at market prices.
It is also known as National Income (NI).
It includes the value of depreciation.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 17

Options

A2 only
B1 only
C1, 2 and 3
D1 and 3 only

Did you get this right?

Solution

The correct option is

2 only

Explanation

National Income Accounting involves various aggregates such as GDP, GNP, and NNP calculated at either Market Price (MP) or Factor Cost (FC). The distinction lies in the treatment of indirect taxes, subsidies, and depreciation.

Statement 1 is Incorrect: Net National Product (NNP) at Factor Cost represents the total income earned by the factors of production (land, labor, capital, and entrepreneurship) in the form of rent, wages, interest, and profit. In standard economic accounting, NNP at Factor Cost is technically defined as the National Income (NI) of a country.

Statement 2 is Correct: Market prices include indirect taxes and exclude subsidies. To arrive at Factor Cost (the actual cost of production) from Market Prices, one must remove the effect of taxes and add back subsidies. Therefore, NNP at Factor Cost is derived by subtracting Net Indirect Taxes (Indirect Taxes - Subsidies) from NNP at Market Prices, not by adding them.
Formula: NNP_FC = NNP_MP - Net Indirect Taxes.

Statement 3 is Incorrect: The distinction between "Gross" and "Net" aggregates lies in the treatment of depreciation (consumption of fixed capital). "Net" aggregates are obtained by subtracting depreciation from "Gross" aggregates. Consequently, NNP excludes the value of depreciation.

Key Takeaway: National Income is synonymous with NNP at Factor Cost. It is the purest form of income measurement available to residents after accounting for capital wear and tear (depreciation) and government fiscal intervention (indirect taxes and subsidies).

Your note

More from Chapter 4: National Income Accounting

Consider the following statements regarding 'Inventory Investment': 1. It is treated as a part of capital formation. 2. Only planned accumulation of inventory is counted as investment; unplanned accumulation is treated as a loss. 3. It is always a positive value regardless of whether stocks increase or decrease. Which of the statements given above is/are correct?

medium

With reference to 'Personal Disposable Income (PDI)', consider the following statements: 1. It includes the income that households must pay as taxes to the government. 2. It is calculated by deducting personal tax payments and non-tax payments from Personal Income. 3. It is always less than Personal Income if personal taxes are positive. Which of the statements given above is/are correct?

easy

Which of the following is NOT considered a 'Final Good'?

easy

easy

With reference to the 'GDP Deflator', consider the following statements: 1. It is the ratio of Nominal GDP to Real GDP. 2. It measures the change in the quantity of goods produced, not prices. 3. Unlike the Consumer Price Index (CPI), it does not include the prices of imported goods. Which of the statements given above is/are correct?

medium

Keep practising Chapter 4: National Income Accounting

Work through every question from this NCERT chapter.

Browse all NCERT Class 12 Economics chapters