National product at factor cost is equal to

National product at factor cost, also known as National Income, is derived by adjusting the market price of the national product to reflect the actual costs of production factors. According to economic principles, market prices include indirect taxes and exclude subsidies, which creates a discrepancy between what consumers pay and what producers receive [2]. To calculate the factor cost, one must subtract net indirect taxes (indirect taxes minus subsidies) from the market price [3]. This formula simplifies to: National product at market prices - indirect taxes + subsidies [4]. While Option 1 describes the transition from domestic to national product, it does not account for the factor cost adjustment [5]. Option 3 defines Net Domestic Product, and Option 4 incorrectly adds indirect taxes, which would further inflate the market price rather than reducing it to factor cost [4].

Sources

1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > NNP ≡ GNP – Depreciation > p. 25
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > National Disposable Income and Private Income > p. 27
3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > National Disposable Income and Private Income > p. 28
4. [4] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Eight (08) Measures or Aggregates of National Income: 1. GDP extsubscript{MP} = Gross Domestic Product at Market Price. 2. GDP_ extsubscript{FC} = Gross Domestic Product at Factor Cost = GDP_ extsubscript{MP} – Indirect taxes + Subsidies 3. NDP extsubscript{MP} = Net Domestic Product at Market Price = GDP_ extsubscript{MP} – Depreciation 4. NDP_ extsubscript{FC} = Net Domestic Product at Factor Cost = NDP_ extsubscript{MP} – Indirect taxes + Subsidies 5. GNP extsubscript{MP} = Gross National Product at Market Price = GDP_ extsubscript{MP} + NFIA 6 > p. 9
5. [5] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Factor Cost = Market Price - Net Indirect Taxes > p. 6