Aggregates related to national income - GNP

Correct answer: C. 14,600

Explanation: First convert NNP into GNP by adding depreciation: GNPMP = NNPMP + depreciation = 13,500 + 1,500 = 15,000. Next use GNPMP = GDPMP + NFIA. Therefore, GDPMP = GNPMP − NFIA = 15,000 − 400 = 14,600. Because NFIA is positive, GNP is greater than GDP by 400. The calculation keeps the market-price basis unchanged throughout and correctly reverses the gross-to-net and domestic-to-national adjustments. Hence, option C is correct.

Correct answer: A. Interest may be a factor-income payment, whereas principal repayment is a financial transaction

Explanation: Interest is a return paid for the use of a lender’s financial capital. When it is paid to a foreign lender, it can be recorded as factor income paid abroad and therefore affects NFIA. Repayment of the principal merely reduces an outstanding financial liability; it does not represent payment for current production and is not factor income. Consequently, principal repayment is excluded from GNP and NFIA. Neither item is automatically an export, private consumption, or depreciation. Option A correctly separates an income flow from a financial transaction.

Correct answer: A. 294 lakh crore

Explanation: First calculate net factor income from abroad: NFIA = factor income received from abroad − factor income paid to foreign residents domestically = 12 − 18 = −6 lakh crore. Then apply GNP = GDP + NFIA. Thus, GNP = 300 + (−6) = 294 lakh crore. The student incorrectly added only the receipt of 12 lakh crore and ignored the 18 lakh crore paid to foreign residents. Because NFIA is negative, GNP must be below GDP.

Correct answer: B. NIT changes the price concept, whereas NFIA changes the domestic-national concept

Explanation: NIT, or net indirect taxes, is the difference between indirect taxes and subsidies. It is used when converting between market-price and factor-cost measures, so it changes the valuation or price concept. NFIA, or net factor income from abroad, is the difference between residents’ factor income from abroad and non-residents’ factor income earned domestically. It converts a domestic aggregate into a national aggregate. Since they perform different adjustments, combining them carelessly can produce an incorrect GNP.

Correct answer: B. Because NFIA includes only factor income, not transfer receipts

Explanation: NFIA means net factor income from abroad, so it records factor incomes such as wages, rent, interest and profit received from abroad minus similar payments made abroad. A pension may be a unilateral transfer rather than payment for current factor services. Such a transfer is therefore not automatically included in NFIA. Hence, option B is correct.

Correct answer: C. Both Statement I and Statement II are correct

Explanation: Net factor income from abroad equals factor income received by residents minus factor income paid to foreign residents: NFIA = ₹300 crore − ₹420 crore = −₹120 crore. Using GNP = GDP + NFIA, GNP = ₹5,000 crore − ₹120 crore = ₹4,880 crore. Since NFIA is negative, GNP is lower than GDP. Thus, both Statement I and Statement II are correct, so option C is the answer.

Correct answer: A. Because it can be factor income from abroad of a normal resident.

Explanation: GNP is based on the income earned by a country’s normal residents, not simply on the location of production. If a company is treated as a resident enterprise, profit earned by its branch abroad may represent factor income received from abroad by that resident. Such income enters the receipt side of NFIA and can therefore increase GNP, although the foreign production is not part of domestic GDP.

Correct answer: A. Whether the person is a normal resident of the country or not

Explanation: GNP follows the normal-residence principle. Income is included when it belongs to a normal resident of the country, even if it is earned abroad; it is not included merely because the person has that country’s citizenship or ancestry. Therefore, the person’s actual status as a normal resident must be established before deciding whether the income contributes to national income and NFIA.

Correct answer: A. The adjustment between domestic product and national product will be incorrect.

Explanation: NFIA and net exports are different macroeconomic concepts. NFIA is the difference between factor income received from abroad and factor income paid to foreign residents, while net exports are exports of goods and services minus imports. The correct identity for the domestic-to-national adjustment is GNP = GDP + NFIA. Substituting net exports produces an incorrect GNP unless the two amounts happen to coincide by chance.

Correct answer: A. The first is related to the payment side and the second to the receipt side of NFIA.

Explanation: Profit earned domestically by a foreign-owned company represents factor income accruing to non-residents, so it is treated as a payment to the rest of the world when calculating NFIA. Profit earned abroad by a resident company represents factor income received from abroad and belongs on the receipt side. Thus the two profits have opposite effects on NFIA and on the relationship between GNP and GDP.

Correct answer: A. NFIA, depreciation and NIT

Explanation: To derive NNPFC correctly, the three relevant adjustments are the national–domestic adjustment, the gross–net adjustment, and the market-price–factor-cost adjustment. If starting from GDP, NFIA must be considered to obtain GNP; depreciation is deducted to change gross into net; and net indirect taxes are deducted to change market price into factor cost. Thus, NFIA, depreciation and NIT are the required checks, with their signs determined by the starting aggregate.

Correct answer: C. 1,200

Explanation: First convert NNP at market price into NNP at factor cost by subtracting net indirect taxes: NNPFC = NNPMP − NIT = 23,500 − 700 = 22,800. Depreciation is the difference between a gross and the corresponding net measure at the same factor-cost basis. Therefore, depreciation = GNPFC − NNPFC = 24,000 − 22,800 = 1,200. Hence, option C is correct.

Correct answer: A. NFIA and net indirect taxes

Explanation: The conversion from GDPMP to GNPFC involves two changes. First, the domestic basis must become a national basis, so net factor income from abroad (NFIA) is added: GDPMP + NFIA = GNPMP. Second, the valuation must change from market price to factor cost, so net indirect taxes (NIT) are deducted: GNPFC = GNPMP − NIT. Depreciation is not used because both GDP and GNP in the question are gross measures.

Correct answer: A. ₹65,000 crore

Explanation: Use the conversion formula GNPFC = GDPMP + NFIA − NIT. Substituting the values gives GNPFC = 70,000 + (−1,800) − 3,200 = 70,000 − 1,800 − 3,200 = ₹65,000 crore. The intermediate amount ₹68,200 crore is GNP at market price, obtained before deducting NIT. Therefore, option A is the only correct answer.

Correct answer: A. ₹5,000 crore

Explanation: To move from GNPMP to NNPFC, subtract both depreciation and net indirect taxes: NNPFC = GNPMP − depreciation − NIT. Rearranging, depreciation = GNPMP − NNPFC − NIT. Therefore, depreciation = 90,000 − 82,000 − 3,000 = ₹5,000 crore. The amount ₹3,000 crore is only NIT, while ₹8,000 crore is the combined reduction before separating the two adjustments.

Correct answer: A. Keep domestic production in GDP and deduct payment to the non-resident in NFIA

Explanation: GDP follows the domestic-territory principle, so the output produced by a foreign company inside the country must remain included in GDP. GNP follows the resident or ownership-related income principle. When the company’s profit is paid to non-residents, that factor payment is included as an outflow in NFIA and is deducted while moving from GDP to GNP. The production itself is not removed from GDP, and profit is neither aid nor depreciation.

Correct answer: A. ₹50,600 crore

Explanation: Use NNPFC = GDPMP + NFIA − depreciation − NIT. First, GNPMP = 56,000 + 1,400 = ₹57,400 crore. Subtracting depreciation gives NNPMP of ₹53,200 crore; subtracting NIT converts market price to factor cost: 57,400 − 4,200 − 2,600 = ₹50,600 crore. Therefore, A is correct.

Correct answer: A. Questions involving embassies, foreign branches, and international institutions

Explanation: Economic territory is not identical to a country’s geographical boundary. It includes certain areas such as embassies and may involve institutional arrangements affecting the classification of production and income. Questions about embassies, foreign branches, and international organisations therefore require careful distinction between domestic territory, residents, GDP, and GNP.

Correct answer: A. When it is received by a resident as factor income from abroad

Explanation: GNP is based on the income and production associated with the normal residents of a country, not merely on activities within its territory. If a resident owns a foreign portfolio asset and receives a dividend from it, that return is factor income from abroad and enters the addition side of net factor income from abroad (NFIA). It can therefore be added while converting GDP into GNP.

Correct answer: A. Because they work in domestic production, but their wages may be factor income of non-residents

Explanation: GDP follows the domestic-territory principle, so production performed within the country can include the output generated by foreign workers. GNP follows the resident principle and therefore adjusts for factor income flowing between residents and non-residents. Wages paid to foreign workers may be factor income sent abroad; such payments are included in the relevant NFIA adjustment so that the national measure reflects residents rather than territory alone.

Correct answer: A. It will enter GDP but be adjusted in GNP through NFIA

Explanation: GDP follows the domestic-territory principle, so production taking place within the country is included regardless of whether the enterprise is domestically or foreign owned. GNP follows the resident or ownership-related income principle. If the foreign owners receive factor income from this production, that income flows abroad and is reflected through NFIA, generally reducing GNP relative to GDP. Thus, option A is the correct statement.

Correct answer: A. First adjust GDP for NFIA to obtain GNP, then apply price and gross–net adjustments as required

Explanation: A reliable solution begins by identifying whether the given aggregate is domestic or national and whether it is gross or net and at market price or factor cost. To move from GDP to GNP, add NFIA. After that, apply the required conversion for market price versus factor cost and gross versus net status. Gifts, loans, and intermediate goods are not valid GNP adjustments.

Correct answer: A. Wages earned abroad by a normal resident of India

Explanation: GDP follows the domestic-territory principle, whereas GNP follows the normal-residence principle. Wages earned abroad by an Indian normal resident are factor income from abroad, so they are added through NFIA to domestic product when calculating GNP. Profits earned in India by a foreign company belong to domestic production and are part of GDP, while a second-hand sale is not current production.

Correct answer: B. Interest received by an Indian resident on bonds issued by a foreign company

Explanation: Interest received by an Indian normal resident on foreign-company bonds is factor income from abroad. It is not generated within India’s domestic territory, so it is absent from GDP, but it is attributable to an Indian resident and is included in GNP through NFIA. Option A is domestic factor income paid to a foreign resident, while C and D arise within India.

Correct answer: B. Because it can be factor income from abroad of a normal resident

Explanation: GNP uses the residence principle. If a company is a normal resident of the country, profit earned by its foreign branch can represent factor income attributable to that resident entity from abroad. Such income may enter the received side of NFIA and therefore be added to GDP to obtain GNP. It is not depreciation or a net indirect tax.