Aggregates related to national income - Market price and factor cost

Correct answer: B. Subtract net indirect taxes

Explanation: Market prices include net indirect taxes, which are indirect taxes minus subsidies. To convert net value added at market price into net value added at factor cost, subtract net indirect taxes: NVA at FC = NVA at MP − NIT. Subtracting only subsidies is incomplete because taxes must also be considered.

Correct answer: C. ₹4,300

Explanation: Market prices include net indirect taxes, whereas factor cost measures the payments received by factors of production. Therefore, to convert NDP at market price into NDP at factor cost, net indirect taxes must be subtracted. NDP at factor cost = ₹4,600 − ₹300 = ₹4,300. Adding the taxes would move the value in the opposite direction.

Correct answer: C. 990

Explanation: First convert gross value added into net value added by subtracting depreciation: 1,200 − 150 = 1,050. Net indirect taxes are indirect taxes minus subsidies, so they equal 100 − 40 = 60. To move from market prices to factor cost, subtract net indirect taxes: 1,050 − 60 = 990. Hence, option C is correct.

Correct answer: A. 720

Explanation: Market-price valuation includes net indirect taxes, while factor-cost valuation excludes them. To convert net value added at market price into net value added at factor cost, subtract net indirect tax: NVA at factor cost = 780 − 60 = 720. Therefore, option A is correct; adding the tax would move in the opposite direction.

Correct answer: B. 5750

Explanation: National income is measured as net national product at factor cost. It is obtained from net domestic product at factor cost by adding net factor income from abroad: 6000 + (−250) = 6000 − 250 = 5750. Because the foreign factor income is negative, it lowers national income. Therefore, option B is correct.

Correct answer: A. NDP at factor cost (NDPFC)

Explanation: Subtracting depreciation converts a gross measure into a net measure, so GDP becomes NDP. Starting from market prices, subtracting net indirect taxes removes the difference between market prices and factor cost, changing the valuation to factor cost. No NFIA adjustment is made, so the measure remains domestic. Consequently, GDPMP − depreciation − net indirect taxes equals NDPFC.

Correct answer: A. GDP at factor cost (GDPFC)

Explanation: The conversion from market price to factor cost requires deducting net indirect taxes, because market prices include taxes net of subsidies. The conversion from gross to net requires deducting depreciation. Since only net indirect taxes are deducted here, the measure changes from GDP at market price to GDP at factor cost, while it remains gross because depreciation has not been removed.

Correct answer: A. Adjustment from market price to factor cost

Explanation: Subtracting depreciation correctly changes a gross measure into a net measure. Adding net factor income from abroad changes a domestic measure into a national measure. However, GDP at market price still contains net indirect taxes. To reach a factor-cost measure, net indirect taxes must also be deducted. Thus, the missing adjustment is the movement from market price to factor cost.

Correct answer: A. Market price

Explanation: The expenditure approach adds the market-value of final consumption, investment, government purchases, and net exports. When C, I and G are already measured at prices paid by purchasers, including applicable indirect taxes, their initial aggregate represents GDP at market prices, GDPMP. It is not yet GDP at factor cost; to move from market price to factor cost, net indirect taxes must subsequently be deducted. Constant or current price depends on the price basis used in the data, not on this conversion.

Correct answer: A. GDPMP − Depreciation − Net Indirect Taxes

Explanation: To convert GDPMP into NDPFC, two adjustments are required. First, depreciation, or consumption of fixed capital, is deducted because the move from gross to net removes the value of capital used up during production. Second, net indirect taxes are deducted because the move from market prices to factor cost removes the excess of indirect taxes over subsidies. Therefore, NDPFC = GDPMP − depreciation − net indirect taxes. NFIA is not used because it converts a domestic aggregate into a national aggregate.

Correct answer: B. Net indirect taxes

Explanation: Market price includes indirect taxes paid on products and excludes the benefit of subsidies received by producers. The combined adjustment is called net indirect taxes: indirect taxes minus subsidies. To convert a measure at market price into a measure at factor cost, net indirect taxes are subtracted. Depreciation changes gross into net measures, while net exports and stock changes are components of expenditure, not the adjustment between these two valuations.

Correct answer: A. The value of final goods and services is taken at market prices

Explanation: GNP at market price values the final goods and services attributable to a nation’s residents using the prices paid by purchasers in the market. These prices generally include net indirect taxes, meaning indirect taxes minus subsidies. It is a gross measure because depreciation has not been deducted. Factor-cost valuation instead focuses on payments received by factors of production.

Correct answer: A. Net indirect taxes are deducted

Explanation: Market price includes net indirect taxes, whereas factor cost measures the payments received by factors of production. Therefore, to convert GNP at market price into GNP at factor cost, net indirect taxes are deducted. The relevant relationship is: GNP at factor cost = GNP at market price − net indirect taxes. Depreciation and transfer payments are not used for this conversion.

Correct answer: A. Subtract net indirect taxes

Explanation: Market price includes net indirect taxes, which are indirect taxes minus subsidies. To obtain the factor-cost measure from a market-price measure, net indirect taxes must be subtracted: GNP at factor cost = GNP at market price − net indirect taxes. Depreciation changes a gross measure into a net measure; it does not convert market price into factor cost.

Correct answer: A. Net indirect taxes

Explanation: Market price includes net indirect taxes, whereas factor cost measures the income actually received by factors of production. Therefore, to convert GNP at market price into GNP at factor cost, net indirect taxes are deducted: GNPFC = GNPMP − NIT. Factor income from abroad, depreciation and private consumption are not the relevant conversion adjustments here.

Correct answer: A. ₹7,750 crore

Explanation: To convert GNP at market price into GNP at factor cost, subtract net indirect taxes because market price includes those taxes. The calculation is: GNPFC = GNPMP − NIT = ₹8,400 crore − ₹650 crore = ₹7,750 crore. Hence option A is correct; adding the tax would incorrectly move in the opposite direction.

Correct answer: A. Net indirect taxes

Explanation: GNP at factor cost records factor payments, while GNP at market price reflects the prices paid in the market. The difference between the two is net indirect taxes. Thus, GNPMP = GNPFC + NIT. Depreciation changes gross and net measures, but it does not convert factor cost into market price.

Correct answer: A. Deduct depreciation and net indirect taxes

Explanation: Two separate conversions are required. First, depreciation is deducted from GNP to change the gross measure into NNP. Second, net indirect taxes are deducted to change the market-price measure into the factor-cost measure. Hence NNPFC = GNPMP − depreciation − NIT; NFIA, gifts, loans and pensions are not these adjustments.

Correct answer: A. ₹16,000 crore

Explanation: First calculate GNP at market price: GNPMP = GDPMP + NFIA = ₹18,000 + (−₹600) = ₹17,400 crore. Next subtract net indirect taxes to obtain GNP at factor cost: GNPFC = ₹17,400 − ₹1,400 = ₹16,000 crore. Therefore, option A is correct. Option B is only the intermediate GNP at market price.

Correct answer: A. Net indirect taxes

Explanation: The difference between market price and factor cost is measured by net indirect taxes, which equal indirect taxes minus subsidies. Market price includes taxes paid by buyers and is reduced by subsidies, whereas factor cost represents the payments received by factors of production. Thus, the conversion is: factor cost = market price − net indirect taxes. Net factor income from abroad changes domestic product into national product, and depreciation changes gross measures into net measures; neither creates this particular price-cost difference.

Correct answer: A. Net indirect taxes are deducted

Explanation: Market price includes the effect of indirect taxes and subsidies, summarized as net indirect taxes. To move from market price to factor cost, net indirect taxes are deducted: GNPFC = GNPMP − net indirect taxes. Depreciation changes a gross aggregate into a net aggregate, while factor income changes domestic and national measures, so neither is the required adjustment here.

Correct answer: A. ₹900 crore

Explanation: The relationship between the two valuation measures is GNP at market price = GNP at factor cost + net indirect taxes. Therefore, NIT = GNPMP − GNPFC = ₹17,500 crore − ₹16,600 crore = ₹900 crore. The positive difference means that net indirect taxes raise the market-price valuation above the factor-cost valuation.

Correct answer: B. Gross and net differ by depreciation; domestic and national differ by NFIA

Explanation: The word gross indicates that depreciation has not yet been deducted. Thus, Net National Product equals Gross National Product minus depreciation. The distinction between domestic and national aggregates is based on the residence principle and is made through NFIA: GNP = GDP + NFIA. Indirect taxes are relevant to conversion between market price and factor cost, while exports are part of trade accounting, not the basic gross-net or domestic-national distinction.

Correct answer: A. Net indirect taxes

Explanation: Market price includes the effect of indirect taxes and subsidies, while factor cost reflects the payments made to factors of production. The conversion formula is GNP at factor cost = GNP at market price − net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. Hence, the difference between the two measures is net indirect taxes.

Correct answer: A. GNPMP includes the effect of net indirect taxes, whereas GNPFC measures factor earnings.

Explanation: GNP at market price includes the impact of net indirect taxes, which are indirect taxes minus subsidies. The relationship is GNPMP = GNPFC + NIT. Therefore, when moving from factor cost to market price, net indirect taxes are added; when moving in the reverse direction, they are subtracted. Depreciation is unrelated to this particular conversion.