Aggregates related to national income - GNP

GNP is the monetary value of final goods and services produced during a specified period, generally one year, by the normal residents of a country, whether production occurs within the country or abroad. It excludes resale of previously produced goods because that is not current production. Loans, gifts, and foreign aid are transfer or financial transactions rather than payments for current final output.

Before applying any national-income formula, identify exactly which aggregate is given and which aggregate must be found. GDP is based on domestic territory, while GNP is obtained by adding NFIA: GNP = GDP + NFIA. The sign of NFIA must also be preserved. Confusing GDP with GNP or ignoring a negative NFIA can produce an incorrect result even when the arithmetic is simple.

GNP is a gross measure because depreciation has not yet been deducted, and it is a national measure because it follows the residence principle. It is related to GDP through NFIA: GNP = GDP + NFIA. Pensions and gifts are transfer receipts, not production, and subtracting depreciation would convert a gross measure into a net measure such as NNP.

To move from a domestic measure to a national measure, net factor income from abroad is added. Therefore, at the same market-price basis, GNPMP = GDPMP + NFIA. Depreciation is used when converting a gross measure into a net measure, while transfer payments and population are not the adjustment that changes GDP into GNP. Keeping the price basis identical is essential in this relation.

The price basis must remain unchanged when converting GDP into GNP. Since both figures are at factor cost, use GNPFC = GDPFC + NFIA. Substitution gives GNPFC = ₹10,500 crore + ₹450 crore = ₹10,950 crore. Option B is only the original GDP figure, while options A and D result from using an incorrect operation. Therefore, option C is the correct answer.

Income such as rent, interest, or profit earned by a country’s resident factors from property or productive assets located abroad is factor income from abroad. It is included in national income through NFIA, subject to the relevant accounting treatment. Foreign aid, loans, and lottery winnings are transfers or financial receipts rather than payments for the current productive services of factors, so they are not included as factor income in GNP.

A scholarship is generally a transfer payment or financial assistance. It is not paid in exchange for providing labour, land, capital or entrepreneurship in the production of goods and services during the accounting period. GNP measures the value of current final output and factor incomes generated by production; therefore, a scholarship is not directly added to GNP. It may be spent on goods and services, but that later expenditure is treated separately and does not make the scholarship itself current production.

National income is NNP at factor cost. To convert GNP at market price into NNP at factor cost, first subtract depreciation to remove the consumption of fixed capital and then subtract net indirect taxes to remove the difference between market price and factor cost. Therefore: NNP at factor cost = ₹21,000 − ₹1,600 − ₹900 = ₹18,500 crore. Hence option A is correct. ₹19,400 crore subtracts only depreciation, while ₹20,100 crore subtracts only net indirect taxes.

GNP can be identified through three ideas: gross, national and product. Gross means depreciation has not yet been deducted; national means production or factor income is associated with the country’s normal residents; and product means the value of final goods and services. In aggregate accounting, GNP = GDP + net factor income from abroad (NFIA). Loans and gifts are transfers, domestic territory alone identifies GDP, and depreciation is subtracted—not added—to obtain a net measure.

NFIA and net exports describe different cross-border flows. NFIA is factor income received from abroad minus factor income paid abroad, covering wages, rent, interest, and profit. Net exports are exports of goods and services minus imports of goods and services. Confusing them can produce an incorrect interpretation of national income, even though both involve international transactions.

The standard relationship is GNP = GDP + NFIA, where NFIA equals factor income received from abroad minus factor income paid abroad. If NFIA is negative, it must be subtracted from GDP; if it is positive, it must be added. Reversing the sign changes the numerical result and may also reverse the economic interpretation. Therefore, the answer becomes wrong.

GNP measures the value of final output generated by the factors of production that normally belong to, or are resident in, the country. These factors may earn income within the domestic territory or abroad. This resident-based approach distinguishes GNP from GDP, which is based on the location of production. Taxes collected by the government and imported goods alone do not measure national productive capacity. Therefore, resident factors are the relevant basis for GNP.

GNP is obtained from GDP by adjusting for the income received by domestic residents from factor services supplied abroad and the income paid to foreign factors working domestically. The net result is Net Factor Income from Abroad (NFIA), so the formula is GNP = GDP + NFIA. Depreciation converts a gross measure into a net measure, transfer payments are not payments for current production, and adding intermediate goods would create double counting.

Use the national-income identity GNP = GDP + NFIA. Since NFIA is positive, it must be added to GDP: ₹8,300 crore + ₹420 crore = ₹8,720 crore. Therefore, option C is correct. Option B merely repeats GDP, option A subtracts a positive NFIA incorrectly, and option D adds the amount twice. Always preserve the sign of NFIA: a positive value increases GNP, while a negative value decreases it relative to GDP.

The formula is GNP = GDP + NFIA. Substituting the given values gives GNP = ₹11,200 crore + (-₹350 crore) = ₹10,850 crore. The negative NFIA indicates that factor income paid to the rest of the world is greater than factor income received from abroad, so the adjustment reduces GNP below GDP. Option B ignores NFIA, option C adds the absolute value incorrectly, and option D is only the magnitude of the adjustment.

Final goods are purchased for consumption, investment or other final use and their market value already includes the value contributed by intermediate goods used in producing them. If the intermediate goods were also counted separately, the same output value would be included more than once, overstating GNP. Therefore, national accounting counts final goods or, equivalently, the value added at each production stage. The purpose is accurate measurement, not taxation or removal of foreign income.

The distinction between gross and net measures is depreciation, also called consumption of fixed capital. NNP is calculated by subtracting depreciation from GNP: NNP = GNP − Depreciation. Depreciation represents the loss of value or wear and tear of fixed assets used during production. NFIA is the adjustment that distinguishes GNP from GDP, not GNP from NNP. Indirect taxes and foreign aid do not determine this gross-to-net difference.

Net National Product is obtained by deducting consumption of fixed capital, commonly called depreciation, from Gross National Product. The formula is NNP = GNP − depreciation. Therefore, NNP = ₹14,000 crore − ₹1,100 crore = ₹12,900 crore. Option B is still the gross value, while option C incorrectly adds depreciation.

The relationship between these aggregates is GNP = GDP + NFIA. Rearranging gives NFIA = GNP − GDP. Substitution gives NFIA = ₹9,700 crore − ₹10,000 crore = −₹300 crore. The negative result means factor income paid abroad exceeds factor income received from abroad by ₹300 crore. Therefore, option B is correct.

Interest received by an Indian resident from an investment or activity abroad is income earned by a resident from the rest of the world. It is therefore classified as factor income from abroad and forms part of NFIA. Since GNP = GDP + NFIA, this income raises GNP relative to GDP, provided other components remain unchanged.

A non-resident company earning profit in India receives factor income within the domestic territory, but that income belongs to a non-resident. For the national, or resident, concept, it is treated as factor income paid abroad and is subtracted while calculating NFIA. Thus GNP = GDP + factor income from abroad − factor income paid abroad.

First calculate NFIA: factor income from abroad minus factor income paid abroad = ₹1,000 crore − ₹1,300 crore = −₹300 crore. Then apply GNP = GDP + NFIA. Hence, GNP = ₹18,000 crore + (−₹300 crore) = ₹17,700 crore. Since payments abroad exceed receipts, GNP is lower than GDP; therefore option A is correct.

National income is measured as NNP at factor cost (NNPFC). To convert GNP at market price into NNP at factor cost, two adjustments are required: depreciation is deducted to change gross into net, and net indirect taxes are deducted to change market price into factor cost. Thus, GNPMP − depreciation − NIT = NNPFC, which is national income. Therefore, option A is correct.

National income is NNP at factor cost. Starting with GNPMP, subtract depreciation to obtain NNPMP, and subtract NIT to convert market prices into factor cost: NNPFC = GNPMP − depreciation − NIT = ₹22,000 − ₹1,500 − ₹1,200 = ₹19,300 crore. Therefore, option A is correct. The other values result from omitting one adjustment or adding an amount incorrectly.

The old car itself is not current production, so its entire resale price is excluded from GNP. However, the dealer performs a current economic service such as arranging the sale, advertising, or transferring the vehicle. The service charge is payment for that service during the current year and therefore represents current production. It can be included in GNP, while the old car’s principal value cannot.