Aggregates related to national income - GNP

GNP is obtained from GDP by adding net factor income from abroad: GNP = GDP + NFIA. Wages earned by an Indian resident for work performed abroad are factor income received from abroad and therefore enter NFIA as a receipt. Wages paid to a foreign resident in India are factor income paid abroad, while a pension is generally a transfer and an imported car’s sale value is not foreign factor income. Thus, A is correct.

GNP is based on the national or resident concept rather than only the domestic-territory concept. It includes income earned by a country’s normal residents, even when production occurs abroad. Therefore, profit earned abroad by a resident can be included through net factor income from abroad. Profit is not automatically net exports, and foreign income is not ignored. Hence, option A is correct.

GNP measures the income generated by a country’s normal residents, irrespective of whether production occurs inside or outside the domestic territory. An Indian company operating in the United States earns profit for an Indian resident and this income enters India’s GNP through NFIA. Japanese-company profit in India belongs to India’s GDP, interest paid abroad is a factor payment, and an old-house sale is not current production. Therefore, B is correct.

NFIA records the net balance of factor incomes received from and paid to the rest of the world, including wages, rent, interest and profit. Foreign aid, grants and donations are generally unilateral transfers; they are not payments made to a factor of production for current services. Consequently, aid cannot be added automatically to NFIA. Therefore, option A is correct.

Wages are factor payments to labour. Wages received by domestic residents from abroad are factor income receipts, while wages paid to foreign residents are factor income payments. Their difference is included in net factor income from abroad, or NFIA. Net exports measure exports minus imports, depreciation concerns fixed capital, and NIT concerns taxes and subsidies. Hence, option A is correct.

GNP measures the value of final goods and services produced by a country’s normal residents, whereas GDP measures production within domestic territory. The relationship is GNP = GDP + net factor income from abroad (NFIA). Therefore, when residents receive more factor income from abroad than foreign residents earn domestically, NFIA is positive and GNP exceeds GDP.

To find depreciation, compare gross and net national product at the same factor-cost valuation. The formula is NNP at factor cost = GNP at factor cost − depreciation. Therefore, depreciation = 33,800 − 32,000 = 1,800. The market-price figure is not required for this calculation because the two relevant figures are already both at factor cost.

Wages earned by an Indian normal resident for labour supplied abroad are factor income from abroad. They increase India’s net factor income from abroad and therefore raise GNP through the formula GNP = GDP + NFIA. Since the labour service is performed outside India, it does not add to India’s domestic production and does not increase GDP. A gift is a transfer, not factor income.

At the same market-price valuation, GNPMP = GDPMP + net factor income from abroad. Net factor income from abroad is factor income received by residents from abroad minus factor income paid to non-residents working or investing domestically. If the first amount exceeds the second, NFIA is positive, so GNPMP becomes greater than GDPMP. Taxes and subsidies do not determine this difference.

GNP is measured on the basis of the normal residents of a country, whereas GDP is measured on the basis of production within its domestic territory. Wages earned abroad by an Indian resident are factor income from abroad, so they are added to GDP while calculating GNP. The income of a foreign company operating in India is already included in India’s GDP and is deducted through net factor income from abroad when relevant. Second-hand sales do not represent current production, and old-age pensions are transfer payments.

A reliable method is to identify the starting aggregate and the desired aggregate before applying any formula. First determine or use NFIA to move between GDP and GNP, because that changes the domestic basis to the national basis. Next use depreciation to move between gross and net measures, and use NIT to move between market price and factor cost. Keeping these adjustments separate prevents sign errors and double counting.

GNP measures the value of final goods and services attributable to the normal residents of a country, regardless of whether the production takes place inside or outside the domestic territory. Consequently, factor income earned abroad by residents is added to GDP through NFIA. Conversely, factor income earned domestically by non-residents is deducted. This resident-based principle distinguishes GNP from territory-based GDP.

The basic relationship is GNP = GDP + NFIA. Rearranging gives NFIA = GNP − GDP. If GNP is ₹2,500 crore less than GDP, then GNP − GDP equals −₹2,500 crore. The negative sign indicates that factor income paid to foreign factors within the domestic economy exceeds factor income received by residents from abroad. Therefore, option B is correct; a positive value would imply that GNP exceeds GDP.

GDP measures production occurring within a country’s domestic territory, regardless of who owns the factors of production. GNP measures the income generated by the country’s residents, wherever production occurs. The difference is net factor income from abroad (NFIA): GNP = GDP + NFIA. If residents earn substantial income abroad and non-residents earn income domestically, the two aggregates differ clearly.

The sale of an old share does not represent current production; it merely transfers ownership of an existing financial asset. However, the stockbroker performs a current service by arranging or executing the transaction. The broker’s commission is therefore factor income generated by current economic activity and can be included in national income, while the value of the old share itself is not counted again.

First calculate net factor income from abroad: NFIA = factor income from abroad − factor income paid abroad = ₹4,200 − ₹3,600 = ₹600 crore. Then GNPMP = GDPMP + NFIA = ₹88,000 + ₹600 = ₹88,600 crore. Finally convert market price to factor cost by subtracting NIT: GNPFC = ₹88,600 − ₹5,000 = ₹83,600 crore. Thus option A is correct.

A foreign loan is borrowed finance that creates a repayment obligation or liability; receiving the principal is not income generated by current production. Foreign factor income, such as wages, rent, interest or profit earned by residents from production factors supplied abroad, is a factor payment. Such income may enter NFIA and affect GNP. Therefore, the two items must not be treated identically.

Foreign aid is generally a transfer payment because it is received without a directly corresponding provision of a current production service. It is therefore not factor income. A resident’s wage earned abroad is payment for labour supplied in production and is factor income from abroad. It can enter NFIA and thereby affect GNP, subject to the relevant accounting and residency definitions.

Intermediate goods are used as inputs in producing final goods, and their value is already reflected in the price of the final output. If intermediate goods are added separately to final goods, the same production value is counted more than once. This is called double counting and causes an overestimation of GNP. National accounting avoids it by counting only final goods or by using value added at each production stage.

Interest received by a resident from property located in another country is income earned by a domestic factor of production from abroad. Therefore, it is included in factor income from abroad and contributes positively to Net Factor Income from Abroad (NFIA). GNP is calculated as GDP plus NFIA, so this receipt raises GNP, provided it is not already included in domestic production.

NFIA is calculated as factor income received from abroad minus factor income paid to the rest of the world. Here, residents receive ₹700 crore from abroad, while non-residents receive ₹900 crore inside the country. Thus NFIA = 700 − 900 = −₹200 crore. The negative sign shows that payments to foreign factors exceed receipts.

A good produced for self-consumption may represent current production, even though it is not sold in a market. To include it in GNP, statisticians must assign a reliable imputed value, usually based on the comparable market price. Gifts, old purchases, and the source of finance do not determine whether current production is counted.

A scholarship is generally a transfer payment because it is not made in exchange for a currently produced good or service. A teacher’s salary, in contrast, is factor income paid for the current educational service supplied by the teacher. Therefore, salary is related to current production and may enter national income, while the scholarship itself is excluded.

A government pension is generally a transfer payment: it transfers purchasing power to the recipient without requiring a currently produced good or service in return. GNP measures the value of current production and the factor incomes generated by that production. Therefore, the pension payment itself is not included, although goods purchased with it may be counted when produced.

The identity is GNP = GDP + NFIA. Rearranging gives NFIA = GNP − GDP. Thus NFIA = 96,000 − 98,400 = −₹2,400 crore. The negative value means factor payments made to the rest of the world exceed factor income received from abroad. The difference cannot by itself measure depreciation.