How to Derive National Income at Factor Cost from NNP at Market Price

The following article will guide you about how to derive national income at factor cost from NNP at market price.

Indirect Taxes:

The phrase at factor cost is to be contrasted with the phrase at Market prices.

Goods produced are sold at market prices which include the indirect taxes imposed by the Government.

Indirect taxes are levied on commodities, such as excise duty on beer and cloth etc. Thus the market value of the national product exceeds the income paid to the factors of production by the amount of indirect taxes.

Hence, net national income at factor cost shows the income actually received by the factors of production. Let us presume that the actual cost of producing a certain output is Rs. 100 which is given to different factors of production as wages, rents, interest and profits.

The Government imposes taxes worth Rs. 25 on this output so that it is sold in the market for Rs. 125. This is the market price of output, while income payments made to factors of production amount to Rs. 100 only. Thus, from the money value of NNP at market price or NNI we deduct the amount of indirect taxes to arrive at the net national income at factor cost.

NNP at MP – Indirect Taxes = Net National Income at Factor Cost.

Subsidies:

On the other hand, a subsidy causes the market price to be less than the factor cost. Subsidy is an aid in money. Suppose handloom cloth is subsidized at the rate of 10 paise per yard and sells at 90 paise per yard.

Thus, while the consumer pays 90 paise per yard the factors of production will receive Re. 1 per yard. The money value of cloth at factor cost would be equal to its market price plus the subsidies paid on it. Accordingly, NNI at Factor Cost = NNI at MP plus Subsidies minus Indirect Taxes.

Government Surplus:

Sometimes Governments render productive services and earn profits-these profits or surplus earned by the Government must be deducted before we can find out Net national Income at Factor Cost because these profits do not go to factors of production in the form of incomes but are deposited in the government treasury and, therefore, these must be deducted.

NNI at Factor Cost = NNI at MP plus Subsidies minus Indirect Taxes and Government earned profits.