Aggregates related to national income - GNP

Net National Product (NNP) is obtained by deducting depreciation, also called consumption of fixed capital, from Gross National Product (GNP). Therefore, NNP = GNP − depreciation = ₹6,000 crore − ₹500 crore = ₹5,500 crore. The gross measure is converted into a net measure after this deduction.

Gross Domestic Product (GDP) measures production within the domestic territory, while Gross National Product (GNP) measures production associated with the normal residents of a country. The relationship is GNP = GDP + Net Factor Income from Abroad (NFIA). Thus, NFIA is the item that creates the difference between GDP and GNP.

Net Factor Income from Abroad (NFIA) is the difference between Gross National Product and Gross Domestic Product. The relationship is GNP = GDP + NFIA, so NFIA = GNP − GDP. Substituting the given values: ₹10,200 crore − ₹9,800 crore = ₹400 crore. Since GNP is greater than GDP, NFIA is positive, indicating that factor income received from abroad exceeds factor income paid to foreign factors within the country.

GNP is based on the income of a country’s normal residents, not merely on production within its geographical boundaries. If the Indian engineer is a normal resident, the salary earned abroad is factor income from abroad. It contributes to NFIA and is added to GDP while calculating GNP. Residence, rather than nationality alone, is the key criterion.

A foreign company producing in India contributes to India’s GDP because production occurs within domestic territory. However, if its profit belongs to non-resident owners or factors and is paid abroad, it is factor income paid abroad. This payment is subtracted when calculating NFIA: NFIA = factor income from abroad − factor income paid abroad. Hence it lowers GNP relative to GDP.

First calculate Net Factor Income from Abroad: NFIA = factor income received from abroad − factor income paid abroad = ₹900 crore − ₹700 crore = ₹200 crore. Then use GNP = GDP + NFIA. Therefore, GNP = ₹15,000 crore + ₹200 crore = ₹15,200 crore. The correct answer is option C.

GNP measures the value of production associated with a country’s normal residents and includes factor incomes arising from productive services. Foreign aid is generally a transfer receipt, not payment for a factor service such as labour, land, capital, or entrepreneurship. Therefore, it is not directly counted as part of GNP, although it may influence spending or saving in the economy.

Only final goods and services are counted in GNP to avoid double counting. The value of an intermediate good is already embodied in the price of the final product in which it is used. If both intermediate and final goods were added, the same production value would be counted more than once, overstating national output and income.

To convert GNP from factor cost to market price, add net indirect taxes because market price includes indirect taxes after deducting subsidies, while factor cost reflects payments to factors of production. The formula is GNPMP = GNPFC + NIT. Therefore, GNPMP = ₹11,000 crore + ₹900 crore = ₹11,900 crore. Hence, option C is correct.

To obtain NNP at factor cost, deduct both depreciation and net indirect taxes from GNP at market price. Thus, NNPFC = ₹16,000 − ₹1,200 − ₹800 = ₹14,000 crore. Option B deducts only depreciation, option C deducts only net indirect taxes, and option D does not make both required adjustments.

The sale of an old machine is a transfer of ownership of an asset produced in an earlier period. Counting its full sale value again would duplicate past production. GNP measures the value of goods and services produced during the current period, although a current repair or brokerage service connected with the sale may be counted.

The sale value of an old share represents a transfer of ownership of an existing financial asset, not current production. In contrast, a broker performs a current service by arranging and facilitating the transaction. The brokerage commission is payment for that service and can therefore be included as current service income in national income.

A lottery winning is a transfer-like receipt rather than payment for a good or service produced by the winner. GNP records the value of current production and the factor incomes generated by that production. Since the winning does not arise from a productive service supplied by the recipient, the receipt itself is excluded from GNP.

GNP is based on the income generated by the factors owned by a country's residents, wherever those factors operate. Therefore, a resident's income earned from providing labour, capital, land or entrepreneurship abroad is included through net factor income from abroad (NFIA). Gifts, loans and lottery winnings are transfers or financial transactions, not factor income.

Net Factor Income from Abroad (NFIA) is calculated as factor income received from abroad minus factor income paid to foreign factors: NFIA = ₹300 crore − ₹500 crore = −₹200 crore. The negative result means that payments to foreign factors exceed income received from abroad by ₹200 crore. Therefore, option B is correct.

The relationship is GNP = GDP + NFIA. Substituting the values gives GNP = ₹20,000 crore + (−₹200 crore) = ₹19,800 crore. Thus, GNP is ₹200 crore less than GDP. A negative NFIA lowers GNP below GDP because factor payments to foreign residents exceed factor income received from abroad.

GNP at factor cost measures the total factor income earned by the normal residents of a country during an accounting period, before deducting depreciation. Since factor payments such as wages, rent, interest and profit are incomes earned from production, GNP at factor cost can be treated as gross national income. Therefore, option A is correct.

GNP is based on the production or factor income of a country’s normal residents, wherever they work, whereas GDP is based on production within domestic territory. Factor income earned abroad by an Indian resident is added through NFIA and raises GNP, but it is outside India’s domestic territory and therefore does not directly raise India’s GDP. Option A is correct.

Production taking place within a country’s domestic territory is included in GDP, even when it is carried out by a non-resident company. However, the company’s profit is factor income payable to foreign owners and is deducted through NFIA when moving from GDP to GNP. Therefore, option A correctly describes the situation.

First convert GDP at market price into GNP at market price by adding NFIA: GNPMP = ₹12,500 + ₹300 = ₹12,800 crore. Then subtract net indirect taxes to convert market price into factor cost: GNPFC = ₹12,800 − ₹1,000 = ₹11,800 crore. Thus, option A is correct; ₹12,800 crore is only GNP at market price.

A household loan is a financial transaction that transfers purchasing power from a lender to a borrower. The loan itself does not represent newly produced goods or services and is not factor income generated during the current period. Therefore, it is excluded from GNP. If the borrowed money purchases a newly produced good, the production may be counted, but the loan amount is not.

GNP measures the value of final goods and services produced during the current period by the normal residents of a country. Some output, such as grain retained by a farmer for household consumption, is not sold in the market. It can nevertheless be included if its imputed or estimated market value can be reasonably calculated. Gifts, loans, and old goods are not current production and therefore do not qualify.

GDP is measured according to production within the domestic territory, regardless of whether the producers are residents or non-residents. GNP uses the resident basis: it adds factor income received by residents from abroad and subtracts factor income paid to non-residents. Thus, the relevant change is the treatment of income earned by factors of production, represented by NFIA.

The word ‘gross’ includes depreciation, whereas ‘net’ excludes it. Therefore, NNP = GNP − depreciation, so depreciation = GNP − NNP. Substituting the values gives ₹13,200 crore − ₹12,450 crore = ₹750 crore. Hence, option A is correct. The other options merely repeat one of the given figures or add the two figures and do not represent the gross-to-net adjustment.

The basic relationship is GNP = GDP + NFIA, where NFIA means net factor income from abroad. Rearranging gives NFIA = GNP − GDP. Therefore, NFIA = ₹17,000 crore − ₹17,250 crore = −₹250 crore. The negative sign is essential: it indicates that factor income paid to foreigners is greater than factor income received by residents from abroad. Thus, option B is correct, not option A.