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Aggregates related to national income - Market price and factor cost
राष्ट्रीय आय से संबंधित समुच्चय: बाजार मूल्य और साधन लागत
In this Class 12 Economics topic from National Income and Related Aggregates, students learn how national income measures are expressed at market price and factor cost. The topic explains the role of net indirect taxes, including indirect taxes and subsidies, in converting one valuation to the other. Students also connect these concepts with aggregates such as GDP, NDP, GNP and NNP, helping them interpret national income data and apply the relevant relationships in numerical questions.
Practice questions
01 Why can the value of products at market prices in GNP be higher than their value at factor cost?
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Answer and explanation
Correct answer: A. Because positive net indirect taxes raise market prices above factor cost
Explanation: Market price includes the effect of indirect taxes and subsidies, whereas factor cost reflects the payments made to factors of production. The relationship is MP = FC + net indirect taxes. When indirect taxes exceed subsidies, net indirect taxes are positive, so the market-price value of GNP is higher than its factor-cost value.
02 If GNP at market price is ₹1,00,000 crore and NIT is ₹7,000 crore, which statement is correct?
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Answer and explanation
Correct answer: A. GNP at factor cost will be ₹93,000 crore
Explanation: Market price includes net indirect taxes, while factor cost excludes them. Therefore, when converting an aggregate from market price to factor cost, NIT must be subtracted: GNPFC = GNPMP − NIT = ₹1,00,000 crore − ₹7,000 crore = ₹93,000 crore. NNPFC cannot be found without depreciation, and the given NIT cannot be treated as depreciation. Thus, option A is correct.
03 While moving from GNP at market price to GNP at factor cost, which item is subtracted?
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Answer and explanation
Correct answer: B. Net indirect taxes
Explanation: Market price includes the effect of indirect taxes and subsidies, whereas factor cost measures the payments received by factors of production. The conversion is GNP at factor cost = GNP at market price − net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. Depreciation changes a gross measure into a net measure, and NFIA changes domestic to national scope. Therefore, net indirect taxes are subtracted.
04 Why are net indirect taxes deducted when moving from GNP at market price to GNP at factor cost?
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Answer and explanation
Correct answer: A. Because they are not income of factor owners
Explanation: Market price includes the effect of indirect taxes and subsidies, whereas factor cost measures the actual remuneration received by the factors of production. Net indirect taxes are indirect taxes minus subsidies. Since these taxes are collected by the government and are not payments to labour, land, capital, or entrepreneurship, they are deducted to convert GNP at market price into GNP at factor cost: GNPFC = GNPMP − NIT.
05 If GNP at market price is ₹132,000 crore and NIT is ₹8,500 crore, what is GNP at factor cost?
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Answer and explanation
Correct answer: A. ₹123,500 crore
Explanation: To convert GNP at market price into GNP at factor cost, subtract net indirect taxes because market price contains the tax-subsidy component that is not factor remuneration. The calculation is GNPFC = GNPMP − NIT = ₹132,000 crore − ₹8,500 crore = ₹123,500 crore. Therefore, option A is correct. Adding NIT would incorrectly move from factor cost toward market price rather than the reverse.
06 What is done to convert NNP at market price (NNP_MP) into NNP at factor cost (NNP_FC)?
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Answer and explanation
Correct answer: B. Net indirect taxes are subtracted
Explanation: Market price includes net indirect taxes, whereas factor cost measures the payments accruing to factors of production. Therefore, to convert NNP_MP into NNP_FC, net indirect taxes are deducted: NNP_FC = NNP_MP − net indirect taxes. Depreciation and NFIA are not the adjustment required here.
07 What does factor cost mean in NNP at factor cost?
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Answer and explanation
Correct answer: A. Cost paid to factors for their contribution
Explanation: Factor cost is the amount paid to the factors of production for their contribution to producing goods and services. It includes factor rewards such as wages and salaries for labour, rent for land, interest for capital, and profit for entrepreneurship. NNP at factor cost therefore measures net national product from the income or factor-reward viewpoint, after depreciation has been deducted.
08 What does market price mean in NNP at market price?
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Answer and explanation
Correct answer: B. Price paid by buyer including effect of indirect taxes and subsidies
Explanation: Market price is the price paid by the purchaser for a final good or service. It reflects the effect of indirect taxes, which raise the price received from buyers, and subsidies, which can lower the effective price. In national-income accounting, the relationship is NNP at market price = NNP at factor cost + net indirect taxes. Therefore, option B is correct.
09 Which of the following is subtracted from NNP at market price (NNPMP) to obtain NNP at factor cost (NNPFC)?
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Answer and explanation
Correct answer: B. Net indirect taxes
Explanation: To convert a national product measured at market prices into one measured at factor cost, net indirect taxes are deducted: NNPFC = NNPMP − NIT. Net indirect taxes equal indirect taxes minus subsidies. Depreciation is used to convert gross to net, while NFIA converts domestic to national, so neither is the required deduction here.
10 Which valuation basis is used for NNP at factor cost (NNP₍FC₎)?
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Answer and explanation
Correct answer: A. Rewards received by factors of production
Explanation: The correct answer is A. Factor cost values final output according to the income actually received by the factors of production—land, labour, capital, and entrepreneurship—for their contribution to production. It is therefore associated with factor income rather than the price paid by the final buyer. Market price includes net indirect taxes, whereas factor cost excludes their effect and reflects factor payments more directly.
11 Why are net indirect taxes reflected in NNP at market price?
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Answer and explanation
Correct answer: A. Because market price represents the price paid by the buyer
Explanation: The correct answer is A. Market price is the amount paid by the purchaser for a final good or service, so it incorporates indirect taxes and is reduced by subsidies. The difference between market price and factor cost is represented by net indirect taxes: NNP₍FC₎ = NNP₍MP₎ − NIT, or equivalently NNP₍MP₎ = NNP₍FC₎ + NIT. Thus NIT must be reflected in the market-price measure.
12 If GDP at market price is ₹1,700 crore, NFIA is ₹80 crore, depreciation is ₹200 crore, and NIT is ₹100 crore, what is NNP at factor cost?
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Answer and explanation
Correct answer: A. ₹1,480 crore
Explanation: Start with GDP at market price and add NFIA to convert the domestic aggregate into the national aggregate: ₹1,700 + ₹80 = ₹1,780 crore, which is GNPMP. Deduct depreciation to obtain NNPMP: ₹1,780 − ₹200 = ₹1,580 crore. Finally, deduct NIT to convert market price into factor cost: ₹1,580 − ₹100 = ₹1,480 crore. Hence, option A is correct.
13 Which statement correctly describes Net National Product at Factor Cost (NNPFC)?
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Answer and explanation
Correct answer: B. It is the factor income earned by normal residents after deducting depreciation.
Explanation: NNPFC is a national and net measure. It represents the factor income earned by the normal residents of a country after depreciation has been deducted and after the adjustment from market prices to factor cost. It is not limited to domestic territory or public-sector production.
Explanation: The conversion from net to gross is made by adding depreciation, because gross value includes the replacement value of capital wear and tear. NFIA converts a domestic measure into a national measure by accounting for factor income from abroad. NIT converts market-price values into factor-cost values. Therefore, matching net to gross with NFIA is incorrect, making option D the answer.
15 In the context of NNP, what is the most accurate meaning of negative NIT?
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Answer and explanation
Correct answer: A. Subsidies are greater than indirect taxes
Explanation: Net indirect taxes are defined as NIT = indirect taxes − subsidies. Therefore, NIT becomes negative when the value of subsidies is greater than the value of indirect taxes. If indirect taxes exceeded subsidies, NIT would be positive; if they were equal, NIT would be zero. NFIA, mentioned in option D, is a different adjustment and does not determine the sign of NIT.
16 Which aggregate measures the net national income earned by the normal residents of a country at market prices?
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Answer and explanation
Correct answer: A. Net National Product at Market Price (NNP_MP)
Explanation: Net National Product at Market Price measures the value of final goods and services produced by the normal residents of a country after deducting consumption of fixed capital, with valuation at market prices. It can be expressed as NNP_MP = GNP_MP − depreciation. GDP refers to domestic territory, NDP is domestic rather than national, and GNP at factor cost uses a different valuation basis.
17 In the factor-cost concept of NNP, through what does the effect of subsidies enter?
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Answer and explanation
Correct answer: A. Through NIT
Explanation: The relationship between market price and factor cost uses net indirect taxes: NIT = indirect taxes − subsidies. To convert an aggregate from market price to factor cost, NIT is deducted. A subsidy reduces the value of NIT, so it indirectly raises the factor-cost measure relative to market price. Subsidies do not represent depreciation, NFIA, or a population adjustment. Therefore, option A is correct.
18 While treating (NNP_{FC}) as national income, what should not be included in factor income?
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Answer and explanation
Correct answer: A. Gift received without service
Explanation: National income includes income earned by providing factor services: wages for labour, rent for land, interest for capital, and profit for entrepreneurship. A gift received without providing any service is a transfer receipt, not factor income, because it is not earned through productive factor participation. Hence option A is correct.
19 If GDP at factor cost (GDP_FC) is 7,200 crore and net indirect taxes (NIT) are -300 crore, what will be GDP at market price (GDP_MP)?
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Answer and explanation
Correct answer: A. 6,900 crore
Explanation: GDP at market price is obtained by adding net indirect taxes to GDP at factor cost: GDP_MP = GDP_FC + NIT. Therefore, GDP_MP = 7,200 + (-300) = 6,900 crore. A negative NIT means that subsidies exceed indirect taxes, so the market-price measure is lower than the factor-cost measure by 300 crore. Hence, option A is correct.
20 Whose effect is removed when GDP at market price is converted into GDP at factor cost?
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Answer and explanation
Correct answer: A. Net indirect taxes
Explanation: Market price includes the effect of indirect taxes and subsidies, whereas factor cost reflects the payments received by factors of production. The standard conversion is GDP at factor cost equals GDP at market price minus net indirect taxes, where net indirect taxes are indirect taxes minus subsidies. Net factor income from abroad is used to move between domestic and national aggregates, not between market price and factor cost.
21 If GDP at market price is ₹9,100 crore and net indirect taxes are ₹650 crore, what is GDP at factor cost?
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Answer and explanation
Correct answer: A. ₹8,450 crore
Explanation: To convert GDP at market price into GDP at factor cost, subtract net indirect taxes because market price contains the net tax component. The formula is GDP at factor cost = GDP at market price − net indirect taxes. Therefore, ₹9,100 crore − ₹650 crore = ₹8,450 crore. Adding the tax would move in the wrong direction and produce an incorrect answer.
22 If GDP at factor cost is ₹7,600 crore and net indirect taxes are ₹480 crore, what is GDP at market price?
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Answer and explanation
Correct answer: C. ₹8,080 crore
Explanation: When moving from factor cost to market price, net indirect taxes must be added. The relevant formula is GDP at market price = GDP at factor cost + net indirect taxes. Substituting the values gives ₹7,600 crore + ₹480 crore = ₹8,080 crore. Subtracting the tax would incorrectly convert in the opposite direction, while ₹7,600 crore is only the given factor-cost value.
23 If NDP at factor cost is ₹8,200 crore, depreciation is ₹900 crore and NIT is −₹150 crore, what will be GDP at market price?
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Answer and explanation
Correct answer: A. ₹8,950 crore
Explanation: Use the conversion formula GDP at market price = NDP at factor cost + depreciation + net indirect taxes. Substitution gives ₹8,200 + ₹900 + (−₹150) = ₹8,950 crore. Because NIT is negative, it lowers the result by ₹150 crore. The answer ₹9,100 crore incorrectly ignores the negative NIT, while the other values use an incorrect conversion.
24 If GDP at market price is ₹11,200 crore, indirect taxes are ₹1,000 crore and subsidies are ₹300 crore, what will be GDP at factor cost?
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Answer and explanation
Correct answer: A. ₹10,500 crore
Explanation: Net indirect taxes equal indirect taxes minus subsidies: ₹1,000 − ₹300 = ₹700 crore. To move from market price to factor cost, subtract net indirect taxes: GDP at factor cost = ₹11,200 − ₹700 = ₹10,500 crore. Equivalently, subtract the full indirect taxes and add subsidies. Thus ₹10,900 crore incorrectly subtracts only the tax amount without adding back the subsidy.
25 If a farmer grows wheat for family consumption and its proper valuation is possible, how is it treated in GDP?
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Answer and explanation
Correct answer: A. It may be included
Explanation: GDP aims to measure production, not merely market sales. Agricultural output produced for self-consumption can be included when a reliable market-equivalent value is available, because it represents real current production and provides a consumption service to the household. Its non-market nature makes valuation more difficult, but it does not automatically make the output an import, an intermediate good, or an item that must always be excluded.
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