1. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product (NNP).
| NNP ≡ GNP – Depreciation |
2. This variable is evaluated at market prices.
3. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production.
4. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices.
5. The measure that we obtain by doing so is called Net National Product at factor cost or National Income.
| National Income (NI) i.e. NNP at factor cost = (a). NNP at market prices –(Indirect taxes – Subsidies) OR (b). NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies) |