Which of the following is the correct formula for calculating National Income (NI) from Net National Income (NNP)? 

The correct answer is NI = NNP - indirect taxes + subsidies.

Key Points

• National Income (NI) is a crucial economic metric that reflects the total value of all goods and services produced by a country within a specific period, typically one year.
• Net National Product (NNP) is a component of national income accounting that measures the value of all finished goods and services produced by a country’s citizens and businesses, minus depreciation.
• To calculate NI from NNP, the formula used is: NI = NNP - indirect taxes + subsidies.
• Indirect taxes are taxes collected by an intermediary (such as a retailer) from the person who bears the ultimate economic burden of the tax (such as the consumer). Examples include value-added tax (VAT) and sales tax.
• Subsidies are financial assistance provided by the government to businesses or individuals to encourage certain activities or reduce the cost of certain goods and services.

 Additional Information

• NI = NNP + indirect taxes - subsidies – depreciation
  • This formula is incorrect because it includes depreciation which is already accounted for when calculating NNP from Gross National Product (GNP).
  • Depreciation is the reduction in the value of an asset over time, especially due to wear and tear.
• NI = NNP - indirect taxes + subsidies – depreciation
  • This formula is incorrect as well because it unnecessarily subtracts depreciation again, which is redundant.
• NI = NNP + indirect taxes – subsidies
  • This formula is incorrect because it adds indirect taxes which should be subtracted to reflect the actual national income.