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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 If only net indirect tax is deducted from GVA at market prices and depreciation is not deducted, which measure is obtained?
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Answer and explanation
Correct answer: A. GVA at factor cost (GVA₍FC₎)
Explanation: The difference between market price and factor cost is adjusted through net indirect tax: GVA at factor cost equals GVA at market prices minus net indirect tax. Since depreciation has not been deducted, the measure remains gross. Therefore, the result is GVA at factor cost, not NVA at factor cost. NVA would require an additional deduction of depreciation.
02 If GNP at market price is ₹1,20,000 crore, depreciation is ₹8,000 crore, and net indirect taxes are ₹6,000 crore, what is national income?
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Answer and explanation
Correct answer: A. ₹1,06,000 crore
Explanation: National income is NNP at factor cost. To convert GNP at market price into NNP at factor cost, subtract depreciation to remove the gross component and subtract net indirect taxes to move from market prices to factor cost: NNPFC = GNPMP − depreciation − NIT = ₹1,20,000 − ₹8,000 − ₹6,000 = ₹1,06,000 crore. Thus A is correct.
03 If GDP at market price is ₹95,000 crore, NFIA is ₹2,500 crore, NIT is ₹4,000 crore, and depreciation is ₹5,500 crore, what is GNP at factor cost?
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Answer and explanation
Correct answer: A. ₹93,500 crore
Explanation: First convert GDP at market price into GNP at market price by adding NFIA: GNPMP = ₹95,000 + ₹2,500 = ₹97,500 crore. Then convert market price to factor cost by subtracting NIT: GNPFC = ₹97,500 − ₹4,000 = ₹93,500 crore. Depreciation is not deducted because the requested aggregate remains gross.
04 If GNP at market price is ₹95,000 crore and GNP at factor cost is ₹90,500 crore, which conclusion is correct?
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Answer and explanation
Correct answer: B. Net indirect taxes are ₹4,500 crore
Explanation: The difference between a gross aggregate at market price and the same gross aggregate at factor cost is caused by net indirect taxes. Therefore, NIT = GNPMP − GNPFC = ₹95,000 − ₹90,500 = ₹4,500 crore. Depreciation would require a comparison between gross and net product, while NFIA compares a domestic aggregate with a national aggregate. Hence, option B is correct.
05 In which situation is the difference between NNP at market price and NNP at factor cost best explained?
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Answer and explanation
Correct answer: A. When indirect taxes and subsidies exist
Explanation: The difference between market price and factor cost is explained by net indirect taxes, which are indirect taxes minus subsidies. Market price includes the effect of these taxes and subsidies, while factor cost reflects payments to factors of production. Depreciation explains the gross-net distinction, and NFIA explains the domestic-national distinction, not the price-cost difference.
06 When GDP at market price is directly converted into NNP at factor cost, which adjustment is complete and correct?
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Answer and explanation
Correct answer: A. Add NFIA, deduct depreciation and deduct NIT
Explanation: GDPMP is domestic, gross and valued at market prices. To obtain NNPFC, first add NFIA to change domestic into national, subtract depreciation to change gross into net, and subtract NIT to change market price into factor cost. Therefore, NNPFC = GDPMP + NFIA − depreciation − NIT, making option A the complete adjustment.
07 In national income accounting, which statement correctly identifies Net National Product at market price (NNPMP)?
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Answer and explanation
Correct answer: B. The market value of final goods and services produced by normal residents after deducting depreciation
Explanation: NNPMP is obtained from GNPMP by deducting depreciation: NNPMP = GNPMP − depreciation. The word national refers to production by normal residents rather than activity within domestic territory, and net means depreciation has been subtracted. Option A is GDPMP, option C is NDPMP, and option D is neither the correct product aggregate nor net.
08 If NNP at factor cost is falling while NNP at market price is constant, which reason is possible?
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Answer and explanation
Correct answer: A. NIT is increasing
Explanation: The relevant identity is NNPFC = NNPMP − NIT. If NNPMP remains constant and NIT increases, the larger deduction causes NNPFC to fall. A fall in NIT would instead raise NNPFC, assuming the market-price value is unchanged. NFIA and depreciation do not directly alter the conversion between NNP at market price and NNP at factor cost once NNPMP is given.
09 When national income is derived from GNP at market price (GNPMP), which adjustment is not required?
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Answer and explanation
Correct answer: A. NFIA adjustment
Explanation: GNP is already a national aggregate because it includes net factor income from abroad. Hence, no further NFIA adjustment is needed. To obtain national income, convert gross to net by subtracting depreciation and convert market price to factor cost by subtracting NIT.
10 If indirect taxes are subtracted from GDP at market prices and subsidies are added, which measure is obtained?
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Answer and explanation
Correct answer: A. GDP at factor cost (GDP₍FC₎)
Explanation: Market price includes net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. To convert GDP at market prices into GDP at factor cost, net indirect taxes are subtracted: GDPFC = GDPMP − (indirect taxes − subsidies), or equivalently GDPMP − indirect taxes + subsidies. No adjustment for depreciation or net factor income from abroad is made, so the result remains GDP and becomes factor-cost GDP. Option A is correct.
11 If GDP at market price is 2200, depreciation is 300, and net indirect taxes are 250, what is NDP at factor cost?
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Answer and explanation
Correct answer: A. 1650
Explanation: To convert GDP at market price into NDP at factor cost, first subtract depreciation to remove the consumption of fixed capital: NDPMP = 2200 − 300 = 1900. Then subtract net indirect taxes to change market prices into factor cost: NDPFC = 1900 − 250 = 1650. Therefore, option A is correct. Option B is only NDP at market price.
12 If GDP at market price is 12500, indirect taxes are 1000, and subsidies are 350, what is GDP at factor cost?
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Answer and explanation
Correct answer: A. 11850
Explanation: The conversion formula is GDP at factor cost = GDP at market price − net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies: 1000 − 350 = 650. Therefore, GDP at factor cost = 12500 − 650 = 11850. Subsidies are subtracted from taxes because they reduce the market price relative to the factor payments received by producers.
13 Which two main deductions are needed to derive NDP at factor cost (NDP₍FC₎) from GDP at market price (GDP₍MP₎)?
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Answer and explanation
Correct answer: A. Depreciation and net indirect taxes
Explanation: To convert GDP at market price into NDP at factor cost, first deduct depreciation to change the gross measure into a net measure. Then deduct net indirect taxes, calculated as indirect taxes minus subsidies, to move from market prices to factor cost. The formula is NDP₍FC₎ = GDP₍MP₎ − depreciation − net indirect taxes.
14 If GDP₍MP₎ = 14,000, depreciation = 1,100, indirect taxes = 900, and subsidies = 300, what is NDP₍FC₎?
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Answer and explanation
Correct answer: A. 12,300
Explanation: First calculate NDP at market price by deducting depreciation: 14,000 − 1,100 = 12,900. Next calculate net indirect taxes: 900 − 300 = 600. Since factor cost is obtained from market price by subtracting net indirect taxes, NDP₍FC₎ = 12,900 − 600 = 12,300. Hence option A is correct.
15 If GDP at market price is 5,000, depreciation is 700, and net indirect taxes are 300, what is NDP at factor cost?
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Answer and explanation
Correct answer: A. 4,000
Explanation: To convert GDP at market price into NDP at factor cost, first subtract depreciation to obtain NDP at market price and then subtract net indirect taxes to remove the market-price adjustment: NDPFC = GDPMP − depreciation − net indirect taxes = 5,000 − 700 − 300 = 4,000. Hence, option A is correct.
16 If NDP at market price equals NDP at factor cost but indirect taxes are 250 crore rupees, what are subsidies?
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Answer and explanation
Correct answer: C. 250 crore rupees
Explanation: The governing relationship is NDP at market price = NDP at factor cost + indirect taxes − subsidies. Since the two NDP measures are equal, net indirect taxes must be zero: indirect taxes − subsidies = 0. With indirect taxes of ₹250 crore, subsidies must also be ₹250 crore. Therefore option C is correct; zero, ₹125 crore, and ₹500 crore do not satisfy the equality.
17 If market price is ₹880 crore, factor cost is ₹820 crore and subsidies are ₹25 crore, what are indirect taxes?
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Answer and explanation
Correct answer: C. ₹85 crore
Explanation: Use the relation MP = FC + Indirect Taxes − Subsidies. First find net indirect taxes: MP − FC = ₹880 crore − ₹820 crore = ₹60 crore. Since net indirect taxes = indirect taxes − subsidies, indirect taxes = ₹60 crore + ₹25 crore = ₹85 crore. Therefore option C is correct. Option B is only the net amount, not the total indirect tax.
18 If output at market price rises by 10 percent and output at factor cost rises by 8 percent, what is needed to correctly assess the change in net indirect taxes?
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Answer and explanation
Correct answer: B. The initial levels of market price and factor cost
Explanation: Net indirect taxes are measured by the absolute difference between market-price and factor-cost aggregates. A difference between growth rates, such as 10% − 8% = 2%, does not reveal the change in that absolute gap unless the initial values are known. The base levels allow both years’ amounts and gaps to be calculated. Therefore option B is correct; depreciation and population are not required for this comparison.
19 If producers receive ₹250 crore more at factor cost than at market price, what is the most appropriate reason?
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Answer and explanation
Correct answer: B. Subsidies exceed indirect taxes by ₹250 crore
Explanation: The governing relationship is Market Price = Factor Cost + Net Indirect Taxes, where Net Indirect Taxes = Indirect Taxes − Subsidies. If factor cost is ₹250 crore higher than market price, the net indirect tax must be −₹250 crore. Therefore, subsidies exceed indirect taxes by ₹250 crore, making option B correct. Direct taxes and depreciation affect other calculations, not this price-valuation conversion.
20 If net indirect taxes are 15% of factor cost and market price is ₹23,000 crore, what will be the factor cost?
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Answer and explanation
Correct answer: C. ₹20,000 crore
Explanation: Use the valuation formula Market Price = Factor Cost + Net Indirect Taxes. Since net indirect taxes equal 15% of factor cost, let factor cost be x. Then market price = x + 0.15x = 1.15x. Therefore, 1.15x = ₹23,000 crore, so x = ₹20,000 crore. Hence option C is correct. The percentage must be applied to factor cost, not directly to market price.
21 If net indirect taxes are 20% of market price and factor cost is ₹16,000 crore, what will be the market price?
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Answer and explanation
Correct answer: C. ₹20,000 crore
Explanation: Let market price be x. Net indirect taxes are 20% of market price, so factor cost equals market price minus those taxes: x − 0.20x = 0.80x. Given factor cost is ₹16,000 crore, 0.80x = 16,000, which gives x = ₹20,000 crore. Thus option C is correct. The crucial point is that the 20% is calculated on market price, not on factor cost.
22 If the ratio of indirect taxes to subsidies is 5:2 and net indirect taxes are ₹900 crore, what will be the indirect taxes?
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Answer and explanation
Correct answer: B. ₹1,500 crore
Explanation: Net indirect taxes equal indirect taxes minus subsidies. With a ratio of 5:2, the difference is 5 − 2 = 3 parts. These 3 parts equal ₹900 crore, so 1 part equals ₹300 crore. Indirect taxes represent 5 parts, giving 5 × ₹300 crore = ₹1,500 crore. Therefore, option B is correct; the subsidy amount would be ₹600 crore.
23 If the ratio of indirect taxes to subsidies is 3:5 and net indirect taxes are minus ₹400 crore, what will be the subsidies?
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Answer and explanation
Correct answer: C. ₹1,000 crore
Explanation: Net indirect taxes are indirect taxes minus subsidies. The ratio 3:5 means subsidies exceed taxes by 2 parts. Since the net amount is −₹400 crore, that difference of 2 parts equals ₹400 crore. One part is therefore ₹200 crore, and subsidies equal 5 parts: 5 × ₹200 crore = ₹1,000 crore. Hence option C is correct; the negative sign confirms that subsidies are larger.
24 If GDP at market price is ₹30,000 crore, depreciation is ₹2,500 crore, net factor income from abroad is ₹700 crore, and net indirect taxes are ₹1,300 crore, what will be national income?
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Answer and explanation
Correct answer: C. ₹26,900 crore
Explanation: National income is NNP at factor cost. Starting with GDP at market price, subtract depreciation to obtain NDP at market price: ₹30,000 − ₹2,500 = ₹27,500 crore. Subtract net indirect taxes to obtain NDP at factor cost: ₹27,500 − ₹1,300 = ₹26,200 crore. Add NFIA of ₹700 crore to obtain national income of ₹26,900 crore. Thus option C is correct.
25 If NNP at market price is ₹18,500 crore, national income is ₹17,900 crore, and subsidies are ₹250 crore, what will be the indirect taxes?
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Answer and explanation
Correct answer: C. ₹850 crore
Explanation: The governing conversion is NNP at market price = national income + net indirect taxes. Therefore, net indirect taxes = 18,500 − 17,900 = ₹600 crore. Since net indirect taxes equal indirect taxes minus subsidies, indirect taxes = 600 + 250 = ₹850 crore. Thus option C is correct; ₹600 crore is only the net amount, while the other values do not satisfy the formula.
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