How is NNP at factor cost derived from GNP at market prices?

Analyze the question: You want to move from GNP at market prices to NNP at factor cost.

Concept:

• NNP = GNP − Depreciation (capital consumption allowance). This gives "net" national product.
• Market prices include indirect taxes (which raise prices) and exclude subsidies (which lower prices). To get to factor cost, remove the indirect taxes and add the subsidies.

Formula: NNP at factor cost = GNP at market prices − Depreciation − Indirect taxes + Subsidies

Checking the options: The options are garbled by formatting, with some operators missing, but we can read them as follows:

• A. GNP − Depreciation + Indirect taxes + Subsidies. This is wrong because indirect taxes should be subtracted.
• B. GNP − Depreciation − Indirect taxes + Subsidies. This matches the formula. The minus signs were lost in the formatting: "GNP Depreciation -" and "Indirect taxes + Subsidies" read as GNP − Depreciation − Indirect taxes + Subsidies.
• C. GNP + Depreciation ... Indirect taxes − Subsidies. This is the reverse of what is needed.
• D. GNP + Depreciation − Indirect taxes + Subsidies. This is wrong because depreciation is added instead of subtracted.

Tip: Remember "Net means minus depreciation. Factor cost means strip out taxes and add back subsidies." Think of it this way: taxes inflate the market price, so you take them out. Subsidies deflate it, so you put them back.