Are NNP and NNI Identical? | National Income

Get the answer of: Are NNP and NNI Identical?

National income is the net value of all goods and services (national product) produced annually in a nation.

There are two measures of national income. One is the market price measure and the other is factor cost measure. The national income at market price has to be adjusted properly to arrive at national income at factor cost.

The formula used for the purpose is the following:

national income at factor cost = national income at market prices – indirect taxes + subsidies

NNP is measured at factor cost. It is thus the income received or earned by productive factors. It differs from NNP at market prices due to the presence of net indirect taxes. So, there is need to change NNP at market prices by adding government subsidies on the production or sale of society’s output and by subtracting taxes on the production or sale of the social product.

Due to subsidies or negative taxes, factor incomes exceed the market value of goods sold. On the other hand, due to indirect taxes or taxes on expenditure, incomes received falls short of the market value of the goods sold. It is so because some of the sales proceeds accrues to the government as revenue.

So, NNP and NNI are not identical as NNP is evaluated usually at market prices but national income is at factor cost. Because of indirect taxes and subsidies, market price is not always equal to factor cost. In the case of indirect taxes, market price is greater than factor cost as they increase the price by factors receive less.

On the other hand, in the case of subsidies, market price is less than factor cost as they reduce the price while factors taxes paid plus subsidies received. It is only when there are no indirect taxes and subsidies, national income and NNP become identical because then market price is equal to factor cost.