Aggregates related to national income - GNP

GNP measures the value of current final goods and services produced by resident factors. Old or second-hand transactions do not represent current production, transfer payments merely redistribute income, and intermediate goods must not be counted again because their value is already embodied in final goods. Separating these items prevents overstatement and double counting in GNP.

NFIA is calculated as factor income received from abroad minus factor income paid to abroad. A foreign investor receiving profit generated by production inside the country represents a payment of factor income to a non-resident. Therefore, the paid-abroad component rises and NFIA falls, unless an offsetting increase in receipts occurs. Option B identifies the direct effect; it is not depreciation or a tax adjustment.

At factor cost, the value of output is expressed as payments to the factors of production—such as wages, rent, interest and profits—rather than as a market-price total including net indirect taxes. GNP is called gross because depreciation has not yet been deducted. Thus, GNPFC corresponds conceptually to the gross national income earned by resident factors during the accounting period.

The relationship between the two aggregates is GNP = GDP + NFIA. Rearranging gives NFIA = GNP − GDP. Substituting the values, NFIA = ₹72,000 − ₹70,500 = ₹1,500 crore. The positive result means factor income received from abroad exceeded factor income paid abroad by ₹1,500 crore. Therefore, option B is correct; the negative sign in option A is incorrect.

Net Factor Income from Abroad, or NFIA, is calculated as factor income received by the residents of a country from the rest of the world minus factor income paid to non-residents for production carried out within the country. It includes items such as wages, rent, interest and profit when they are factor incomes. NFIA does not mean foreign aid, borrowing, gifts, taxes, subsidies, depreciation or capital gains. The relationship is GNP at the same price concept = GDP at that price concept + NFIA.

First calculate Net Factor Income from Abroad: NFIA = factor income received from abroad − factor income paid abroad = 1,400 − 900 = 500. Since GDP measures production within domestic territory and GNP adjusts it for the income of normal residents, GNP at market price = GDP at market price + NFIA = 15,000 + 500 = 15,500. Therefore, option C is correct; option B incorrectly ignores the positive NFIA.

At the same valuation basis, GNP at market price is obtained by adding Net Factor Income from Abroad to GDP at market price: GNPMP = GDPMP + NFIA. NFIA records the net factor income accruing to residents from abroad after subtracting factor income paid to non-residents. Depreciation is used to move from gross to net, net indirect taxes help convert between market prices and factor cost, and inventory change is an investment component, not the domestic-to-national adjustment.

GNP at market price equals GDP at market price plus NFIA. NFIA is calculated as factor income received from abroad minus factor income paid abroad. If the two foreign factor-income flows are equal, their difference is zero, so NFIA = 0 and no adjustment is made: GNPMP = GDPMP. Depreciation and net indirect taxes affect other conversions, while a received amount greater than the paid amount would make GNP exceed GDP.

GDP follows the domestic-territory principle, so it includes production and factor income generated within India, regardless of whether the producer is resident or non-resident. GNP follows the normal-resident principle, so it includes factor income earned by Indian residents even when they work or own productive assets abroad. Therefore, factor income earned abroad by an Indian resident enters India's GNP but not India's GDP. A non-resident's income earned in India enters GDP and is offset in GNP through NFIA. A gift is a transfer, not factor income or current production.

GNP measures the income earned by a country’s normal residents, regardless of where production takes place. Therefore, profit earned by an Indian resident’s enterprise abroad is included in India’s GNP through net factor income from abroad, but it is not part of India’s GDP because the production occurs outside India. A foreign company’s Indian profit belongs to domestic production and is included in GDP. Gifts and capital gains are not current factor production income. The relationship is GNP = GDP + NFIA.

NFIA means net factor income from abroad. Interest received by residents from foreign sources is factor income flowing into the country, so it is added. Interest paid to foreign lenders is factor income flowing out of the country, so it is deducted. Thus, NFIA = factor income received from abroad − factor income paid abroad. Since GNP = GDP + NFIA, a positive NFIA raises GNP above GDP, while a negative NFIA lowers it. Interest is not depreciation or an export receipt merely because it involves another country.

GNP includes current factor income earned by the country’s normal residents, whether they produce inside the country or abroad. Hence, wages earned abroad by a resident are included in the country’s GNP as foreign factor income received. Income earned by a foreign company inside the country is associated with domestic production and is counted in GDP, not national income. The resale of an old car does not represent current production, and an old-age pension is a transfer payment rather than payment for current productive services. Therefore, B is the only suitable answer.

NFIA records the difference between factor income received from abroad and factor income paid to abroad, such as wages, rent, interest, and profits. Export receipts arise from selling domestically produced goods or services to foreign buyers. They are recorded under exports and enter the expenditure or trade components of national income, not NFIA. An export may generate business revenue, but that does not make the entire receipt foreign factor income. Therefore, option A correctly distinguishes trade receipts from factor-income flows.

The central distinction is residence versus location. GNP counts factor income earned by India’s normal residents anywhere in the world, whereas GDP counts production within India’s domestic territory. Wages earned by an Indian resident working in Dubai are foreign factor income received and are included in GNP but not India’s GDP. Wages earned in India are included in both measures. Rent earned in India by a foreign company belongs to domestic production and GDP, while foreign aid is a transfer and not factor income.

At the same valuation, GNP is obtained from GDP by adding NFIA: GNP at market price = GDP at market price + NFIA. If GNP is lower than GDP, NFIA must be negative. NFIA is negative when factor income paid to foreign residents exceeds factor income received by domestic residents from abroad. This conclusion does not require depreciation to be negative, and it does not mean that both international income flows are zero. Hence, option B follows directly from the identity.

NFIA changes the geographical basis of an aggregate from domestic to national. Specifically, GNP = GDP + NFIA, and NNP = NDP + NFIA when the same price basis is used. Thus, NFIA adds residents’ factor income from abroad and subtracts factor income paid to foreign residents. The gross-to-net conversion is performed by subtracting depreciation, while the market-price-to-factor-cost conversion is made using net indirect taxes. Therefore, option B states the correct role of NFIA.

GNP measures the income generated by a country’s normal residents, regardless of where production takes place. Therefore, wages earned by a resident while working abroad are included in GNP as factor income received from abroad, but they are not included in domestic GDP. GDP is based on production within domestic territory. The relationship is GNP = GDP + NFIA, where NFIA is net factor income from abroad. Option B belongs to domestic production and is counted in GDP.

NFIA is calculated as factor income received from abroad minus factor income paid to foreign factors within the domestic territory. Writing the two sides separately prevents confusion about which amount is added and which is subtracted. The sign is important because GNP = GDP + NFIA. If payments abroad exceed receipts from abroad, NFIA is negative and GNP is lower than GDP. Thus, option B is the only correct reason.

GNP follows the residence or nationality-based income concept, whereas GDP follows the domestic-territory production concept. Wages earned by an Indian normal resident in the United Arab Emirates are factor income of an Indian resident and are therefore included in India’s GNP. They are excluded from India’s GDP because the work was performed outside India. Wages earned by a foreign resident in India enter India’s GDP, while a used-car sale is generally a transfer of an existing asset, not current production.

Rent is a return to a factor of production and is treated as factor income in national-income accounting. When rent generated within the country is paid to a non-resident, it is factor income paid abroad. It therefore appears on the payment side of NFIA and reduces NFIA. Since GNP = GDP + NFIA, this payment lowers GNP relative to GDP. It is not depreciation, and it is not net indirect tax (NIT), because neither describes a payment of factor income to a foreign resident.

GNP measures the income of a country’s normal residents, not simply all production occurring inside its borders. To convert GDP into GNP, factor income received by residents from abroad is added, while factor income earned domestically by non-residents is subtracted. Their difference is NFIA, and GNP = GDP + NFIA. Foreign trade is different: exports and imports are recorded in expenditure accounting, but they are not themselves NFIA. Therefore, option C is correct.

A dividend received by a country’s normal resident from ownership of a foreign investment represents a return on an external financial asset. In school-level national-income accounting, such investment income is treated as factor income received from abroad and is included on the receipt side of NFIA. It can therefore raise GNP relative to GDP. A sales tax, export price, and loan principal are not factor-income receipts and must not be included in NFIA for this reason.

Factor income earned abroad by an Indian normal resident is included in India’s GNP because GNP follows the resident-based concept. It is excluded from India’s GDP because the production or service occurred outside Indian domestic territory. Output of a foreign company located in India and services sold in India to foreign tourists are part of India’s domestic production and therefore enter GDP. A machine produced in India also belongs to domestic output and is counted in GDP.

The relationship between GNP at market price and GNP at factor cost is: GNP₍MP₎ = GNP₍FC₎ + NIT. Rearranging gives NIT = GNP₍MP₎ − GNP₍FC₎. Substituting the values, NIT = 14,400 − 15,000 = −600. Therefore, the correct answer is option B, −600. The negative value means that subsidies exceed indirect taxes by 600, so factor cost is higher than market price.

GNP is a gross measure because it includes consumption of fixed capital, commonly called depreciation. To obtain the corresponding net measure, this amount must be deducted: NNP at market prices = GNP at market prices − consumption of fixed capital. NFIA changes domestic to national, while NIT changes market price to factor cost. Therefore, option A is correct.