Explain the relationship between Net Domestic Product (NDP) and Net National Product (NNP). Include how factor income from abroad is treated.
Answer
NDP = GDP – Depreciation; NNP = NDP + Net factor income from abroad
The correct answer is NDP = GDP – Depreciation; NNP = NDP + Net factor income from abroad — Combine the two to show that NNP adjusts NDP for international factor income, giving the final relationship NNP = GDP – Depreciation + Net factor income from abroad.
Step-by-step solution
- State the definition of NDP: NDP at factor cost equals GDP at factor cost minus depreciation (consumption of fixed capital).
- State the definition of NNP: NNP at factor cost equals NDP plus net factor income earned by residents from abroad (income earned abroad minus income earned by foreigners domestically).
- Combine the two to show that NNP adjusts NDP for international factor income, giving the final relationship NNP = GDP – Depreciation + Net factor income from abroad.
Common mistake: Confusing NDP with GDP and ignoring depreciation
Concept tested: Difference between NDP and NNP
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