Aggregates related to national income - Market price and factor cost

Correct answer: D. Net indirect taxes are subtracted

Explanation: Market price includes net indirect taxes, whereas factor cost shows the income received by factors of production. Therefore, net indirect taxes are subtracted when moving from market price to factor cost. The relationship is: Factor cost = Market price − net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies.

Correct answer: A. Indirect taxes minus subsidies

Explanation: Net indirect taxes are calculated by subtracting subsidies from indirect taxes. The formula is Net Indirect Taxes = Indirect Taxes − Subsidies. Taxes raise the price paid by buyers, while subsidies reduce the effective market price; therefore, their net effect explains the difference between market price and factor cost.

Correct answer: D. 20

Explanation: Net indirect tax is calculated by subtracting subsidies from indirect taxes because taxes increase the difference between market price and factor cost, whereas subsidies reduce it. The calculation is: Net indirect tax = Indirect tax − Subsidy = 30 − 10 = 20. Therefore, option D is correct. Option A incorrectly adds the figures, while B and C use only one component or the difference in the wrong direction.

Correct answer: B. 520

Explanation: National income is obtained by converting domestic factor income into national factor income. The required adjustment is to add net factor income from abroad, because it represents factor income received from the rest of the world after subtracting factor income paid abroad. Thus, National Income = Domestic Product at Factor Cost + NFIA = 500 + 20 = 520.

Correct answer: C. 390

Explanation: National income is calculated by adding net factor income from abroad to domestic product. When NFIA is negative, factor payments made to foreigners exceed factor income received from abroad, so the negative amount reduces national income. Therefore, National Income = 400 + (−10) = 390. Hence, option C is correct.

Correct answer: A. It reduces net indirect taxes

Explanation: A subsidy is financial assistance provided by the government, usually to producers or consumers. In national-income accounting, it is deducted from indirect taxes to calculate net indirect taxes: net indirect taxes = indirect taxes − subsidies. Since market price = factor cost + net indirect taxes, a subsidy reduces the difference between market price and factor cost. Therefore, option A is correct.

Correct answer: A. 30

Explanation: Net indirect tax is calculated as indirect taxes minus subsidies. Subsidies reduce the effective tax burden included in the market price. Hence, Net Indirect Tax = 45 − 15 = 30. Adding the two figures would incorrectly treat the subsidy as an additional tax. Therefore, option A is the correct answer.

Correct answer: D. ₹550

Explanation: To convert value added at market price into value added at factor cost, subtract net indirect tax from the market-price measure. The reason is that market prices include indirect taxes net of subsidies, whereas factor cost reflects payments to factors of production. Therefore, value added at factor cost = ₹600 − ₹50 = ₹550. Thus, option D is correct.

Correct answer: D. 60

Explanation: Net factor income from abroad (NFIA) is calculated by subtracting factor income paid to the rest of the world from factor income received from the rest of the world. Thus, NFIA = Factor income received from abroad − Factor income paid abroad = 150 − 90 = 60. Therefore, the correct answer is option D, 60. A positive NFIA means that residents receive more factor income from abroad than non-residents earn domestically.

Correct answer: A. Net indirect taxes

Explanation: To convert NDP at market price into NDP at factor cost, net indirect taxes are deducted. Market price includes indirect taxes and excludes subsidies, whereas factor cost reflects the income actually received by factors of production. Therefore, NDP_FC = NDP_MP − Net Indirect Taxes, where net indirect taxes equal indirect taxes minus subsidies.

Correct answer: A. NDP_FC

Explanation: Domestic income is another name for NDP at factor cost, written as NDP_FC. It represents the net factor income generated within the domestic territory of a country during an accounting period. The word net indicates that depreciation has been deducted, while factor cost indicates that the measure reflects payments to factors of production rather than market-price taxes and subsidies.

Correct answer: A. NDP₍FC₎

Explanation: Domestic income at factor cost is represented by NDP at factor cost, written as NDPFC. It is the net value of production generated within the domestic territory, valued according to payments made to factors of production. “Domestic” requires D, “net” requires N, and “factor cost” requires FC. GDPMP is gross and at market price, NNPFC is a national rather than domestic aggregate, and GNPMP is gross national product at market price.

Correct answer: A. ₹6,700 crore

Explanation: To convert GNP at market price into GNP at factor cost, subtract net indirect taxes: GNP at factor cost = GNP at market price − net indirect taxes. Thus, ₹7,200 crore − ₹500 crore = ₹6,700 crore. The answer is therefore option A. Adding the tax would move in the opposite direction and produce an incorrect value.

Correct answer: A. Net factor income from abroad

Explanation: GNP measures the value of final goods and services produced by the normal residents of a country, whereas GDP measures production within its domestic territory. The adjustment is net factor income from abroad (NFIA). Hence, GNP = GDP + NFIA. Depreciation is used when moving from gross to net, not from GDP to GNP.

Correct answer: A. Subtract net indirect taxes

Explanation: To convert an aggregate from market price to factor cost, net indirect taxes must be subtracted. The relationship is GNP at factor cost = GNP at market price − net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. Market prices include the effect of taxes and subsidies, while factor cost reflects the payment received by factors of production. Depreciation changes gross to net, not market price to factor cost.

Correct answer: A. ₹11,550 crore

Explanation: To convert GNP from market price to factor cost, subtract net indirect taxes because market price contains this net tax component. The calculation is GNPFC = GNPMP − NIT = ₹12,500 crore − ₹950 crore = ₹11,550 crore. Adding the tax would incorrectly convert in the opposite direction, from factor cost toward market price.

Correct answer: A. Net indirect taxes

Explanation: Factor cost measures the payments received by factors of production, whereas market price also reflects net indirect taxes. Therefore, when converting from GNPFC to GNPMP, net indirect taxes are added: GNPMP = GNPFC + NIT. Depreciation affects the gross or net distinction, and transfer payments or foreign aid are not the relevant price-basis adjustment.

Correct answer: C. ₹15,400 crore

Explanation: When moving from factor cost to market price, net indirect taxes are added. Use the formula GNPMP = GNPFC + NIT. Thus, GNPMP = ₹14,600 crore + ₹800 crore = ₹15,400 crore. Subtracting NIT would produce ₹13,800 crore, but that operation is used for the reverse conversion from market price to factor cost.

Correct answer: A. Net indirect taxes

Explanation: Market price is the price paid by the buyer and includes indirect taxes, while factor cost is the income received by factors of production. The difference between the two is net indirect taxes, calculated as indirect taxes minus subsidies. Thus, factor cost equals market price minus net indirect taxes, and market price equals factor cost plus net indirect taxes. Option A is correct.

Correct answer: C. ₹24,100 crore

Explanation: To convert a national-income aggregate from factor cost to market price, net indirect taxes are added: GNPMP = GNPFC + NIT. Substituting the values gives ₹22,000 + ₹2,100 = ₹24,100 crore. Therefore, option C is correct. Subtracting NIT would be appropriate when moving from market price to factor cost, not in this direction.

Correct answer: B. Net indirect taxes

Explanation: Market price includes the effect of indirect taxes paid by buyers and excludes subsidies received from the government. The net effect is called net indirect taxes, or NIT. Therefore, GNPMP = GNPFC + NIT, and the difference between the two measures is NIT. Depreciation instead explains the difference between gross and net aggregates, such as GNP and NNP.

Correct answer: A. ₹1,350 crore

Explanation: The conversion identity is GNPMP = GNPFC + NIT. Rearranging it gives NIT = GNPMP - GNPFC. Hence, NIT = ₹27,400 - ₹26,050 = ₹1,350 crore. Option A is correct. The values ₹26,050 crore and ₹27,400 crore are the given aggregates themselves, while ₹2,700 crore does not equal their difference.

Correct answer: A. ₹3,200 crore

Explanation: The conversion formula is GNPMP = GNPFC + NIT. Hence, NIT = GNPMP − GNPFC = ₹79,200 crore − ₹76,000 crore = ₹3,200 crore. Net indirect tax represents indirect taxes after deducting subsidies. Therefore, option A is correct. The other values are either one of the given aggregates or their sum, not the required difference.

Correct answer: C. At both market price and factor cost

Explanation: NNP can be expressed at both market price and factor cost. NNP at market price includes net indirect taxes through the market valuation, while NNP at factor cost values the net product according to payments made to factors of production. The two are related through net indirect taxes: NNPFC = NNPMP − Net Indirect Taxes.

Correct answer: A. Net National Product at market prices

Explanation: NNPMP is an abbreviation for Net National Product at Market Prices. It represents the net value of final goods and services produced by the normal residents of a country, valued at the prices paid in the market. Net means depreciation has been deducted, while market price means the valuation includes the effect of indirect taxes and subsidies.