Which of the following is incorrect?

Question

Accepted Answer

Option 2 is identified as the incorrect statement, and here's why:

1. **Explanation for Option 2:**
   - The statement given is: $GNP_{FC} = GNP_{MP} + \text{Net indirect taxes}$.
   - This is incorrect because the relationship between GNP at factor cost ($GNP_{FC}$) and GNP at market prices ($GNP_{MP}$) involves subtracting net indirect taxes, not adding them. The correct formula is:
     $$
     GNP_{FC} = GNP_{MP} - \text{Net indirect taxes}
     $$
   - Net indirect taxes are the difference between indirect taxes and subsidies. To convert from market prices to factor cost, we need to remove the effect of these taxes, hence the subtraction.

2. **Explanation for why the other options are correct:**

- **Option 1: $GDP_{MP} = NDP_{MP} + \text{Depreciation}$**
     - This statement is correct. Gross Domestic Product at market prices ($GDP_{MP}$) includes depreciation, which is the wear and tear on capital goods. Net Domestic Product at market prices ($NDP_{MP}$) is calculated by subtracting depreciation from $GDP_{MP}$. Therefore, adding depreciation back to $NDP_{MP}$ gives $GDP_{MP}$.

- **Option 3: $NNP_{MP} = NDP_{MP} + \text{Net factor income from abroad}$**
     - This statement is correct. Net National Product at market prices ($NNP_{MP}$) is derived from Net Domestic Product at market prices ($NDP_{MP}$) by adding net factor income from abroad. This income includes wages, rents, interests, and profits received from abroad minus similar payments made to foreign entities.

- **Option 4: $NDP_{FC} = GDP_{FC} - \text{Depreciation}$**
     - This statement is correct. Net Domestic Product at factor cost ($NDP_{FC}$) is calculated by subtracting depreciation from Gross Domestic Product at factor cost ($GDP_{FC}$). Depreciation accounts for the reduction in value of capital goods over time, and removing it from $GDP_{FC}$ gives $NDP_{FC}$.

In summary, Option 2 is incorrect because it misrepresents the relationship between GNP at factor cost and GNP at market prices by incorrectly suggesting that net indirect taxes should be added rather than subtracted. The other options correctly represent the economic relationships they describe.