A student is calculating National Income starting from GDP at market…

A student is calculating National Income starting from GDP at market prices. Her steps are:

Step 1: Take GDP at market prices.
Step 2: ________
Step 3: Subtract depreciation to get NNP at market prices.
Step 4: Subtract (indirect taxes − subsidies) to get National Income.

Which of the following is the missing Step 2?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Add net factor income from abroad to get GNP at market prices

The chain from GDP_MP to national income is: add NFIA (domestic to national), subtract depreciation (gross to net), subtract net indirect taxes (market prices to factor cost). Step 3 starts from GNP, so Step 2 must reach GNP.

Option (1) Subtract net factor income from abroad to get GNP at market prices — Incorrect. GNP = GDP plus NFIA, not minus.

Option (2) Add transfer payments to get GNP at market prices — Incorrect. Transfer payments are not factor incomes; they never enter GNP.

Option (3) Add net factor income from abroad to get GNP at market prices — Correct. GDP + net factor income from abroad = GNP, which Step 3 needs.

Option (4) Subtract net indirect taxes to get GDP at factor cost — Incorrect. Net indirect taxes are subtracted in Step 4. Taking them out here too would deduct them twice, and Step 3 needs GNP, not GDP at factor cost.

NCERT (2026-27): “Gross National Product (GNP) … Hence, GNP ≡ GDP + Net factor income from abroad (Net factor income from abroad = Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy). We have already noted that a part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. Naturally, depreciation does not become part of anybody’s income. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product (NNP). Thus NNP ≡ GNP – Depreciation”

“2.3 Some Macroeconomic Identities … NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)”