Aggregates related to national income - Market price and factor cost

Correct answer: A. Subtract net indirect taxes

Explanation: Market price includes the effect of indirect taxes and subsidies, while factor cost reflects the amount accruing to factors of production. Net indirect taxes are indirect taxes minus subsidies. Therefore, the conversion is GDP at factor cost = GDP at market price − net indirect taxes. Depreciation changes gross to net, and NFIA changes domestic to national; neither performs this price-basis adjustment.

Correct answer: A. GDP at factor cost will be greater than GDP at market price

Explanation: Net indirect taxes are calculated as indirect taxes minus subsidies. If subsidies exceed indirect taxes, net indirect taxes are negative. Using GDP at factor cost = GDP at market price − NIT, subtracting a negative amount increases the result; therefore GDP at factor cost is greater than GDP at market price. Equality occurs only when net indirect taxes are zero, not when subsidies exceed taxes.

Correct answer: A. 7800

Explanation: To convert GDP at market price into NDP at factor cost, first subtract depreciation to remove the replacement value of worn-out capital, and then subtract net indirect taxes to change market prices into factor cost. Therefore, NDP at factor cost = 9000 − 700 − 500 = 7800. Hence, option A is correct.

Correct answer: A. 6300

Explanation: The relationship is GDP at Market Price = GDP at Factor Cost + Net Indirect Taxes. Therefore, GDP at Market Price = 6000 + 300 = 6300. Net indirect taxes equal indirect taxes minus subsidies, so a positive NIT raises the market-price measure above the factor-cost measure. Hence option A is correct; 5700 would be obtained by subtracting NIT, which is the wrong direction here.

Correct answer: A. 750

Explanation: To convert GDP at market price into NDP at factor cost, first remove depreciation because gross must become net, and then remove net indirect taxes because the valuation must change from market prices to factor cost. The formula is NDP at factor cost = GDP at market price − depreciation − net indirect taxes = 1000 − 100 − 150 = 750. Thus, option A is correct; 900 would be NDP at market price only.

Correct answer: A. When net indirect taxes are zero

Explanation: The relationship is GDP at market price = GDP at factor cost + net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies. Therefore, if net indirect taxes are zero, the addition becomes zero and both measures have the same value. Depreciation concerns gross versus net aggregates, while imports and exports do not determine the MP–FC difference.

Correct answer: A. 1350

Explanation: To convert GDP at market price into GDP at factor cost, subtract net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies: 210 − 60 = 150. Therefore, GDP at factor cost = 1500 − 150 = 1350. Equivalently, use GDPFC = GDPMP − indirect taxes + subsidies. Thus option A is correct; subsidies reduce the difference between market price and factor cost.

Correct answer: B. 7750

Explanation: First calculate net indirect taxes: indirect taxes minus subsidies = 900 − 250 = 650. GDP at factor cost is obtained by subtracting net indirect taxes from GDP at market price: 8400 − 650 = 7750. The same result follows from GDPFC = GDPMP − indirect taxes + subsidies, or 8400 − 900 + 250 = 7750. Therefore, option B is the only correct answer.

Correct answer: C. 7,650

Explanation: To convert GDP at factor cost into GDP at market price, add net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies: 600 − 150 = 450. Therefore, GDP₍MP₎ = GDP₍FC₎ + net indirect taxes = 7,200 + 450 = 7,650. Hence, option C is correct. Subsidies are subtracted because they reduce the market price paid by buyers.

Correct answer: B. GDP at factor cost may be higher than market price

Explanation: The relationship is GDP at market price = GDP at factor cost + indirect taxes − subsidies. If subsidies exceed indirect taxes, net indirect taxes become negative. Consequently, market price can be lower than factor cost, which means GDP at factor cost may be higher than GDP at market price. Therefore, option B is correct.

Correct answer: B. ₹1,070 crore

Explanation: The conversion from GDP at factor cost to GDP at market price requires adding net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies: ₹180 crore − ₹70 crore = ₹110 crore. Therefore, GDP at market price = ₹960 crore + ₹110 crore = ₹1,070 crore. Subsidies must be subtracted because they reduce the price paid by buyers relative to factor cost.

Correct answer: A. 150

Explanation: The relationship between GDP at market price and GDP at factor cost is: GDPₘₚ = GDP𝒇𝒄 + net indirect taxes. Therefore, net indirect taxes = GDPₘₚ − GDP𝒇𝒄 = 3000 − 2850 = 150. Thus, option A is correct. Market price includes the effect of indirect taxes after deducting subsidies, whereas factor cost reflects the payments received by factors of production.

Correct answer: A. Because a subsidy is not a final good purchased as payment for production

Explanation: A subsidy is a government payment or policy adjustment, not a separately produced final good or service. GDP measures the value of current production, so the subsidy itself is not added as additional output. In national-income accounting, subsidies are relevant when converting between market prices and factor cost, where net indirect taxes equal indirect taxes minus subsidies.

Correct answer: A. 10,400

Explanation: Net indirect taxes equal indirect taxes minus subsidies: 700 − 100 = 600. To convert GDP at factor cost into GDP at market price, add net indirect taxes because market prices include taxes and exclude the effect of subsidies relative to factor payments. Therefore, GDP₍MP₎ = 9,800 + 600 = 10,400, so option A is correct.

Correct answer: A. Real output may not have risen as much

Explanation: Nominal GDP is measured at current prices, so it can rise because of higher prices even when the physical quantity of output changes little. The GDP deflator indicates the price component of this increase. To judge actual production growth, economists use real GDP measured at constant or comparable prices. Therefore, a sharp deflator increase means nominal growth may exaggerate real output growth.

Correct answer: A. Rewards received by factors of production

Explanation: Factor cost is the amount paid to the factors of production for their contribution to producing goods and services. It includes factor incomes such as wages and salaries for labour, rent for land, interest for capital, and profit for entrepreneurship. The consumer’s market price differs from factor cost because of net indirect taxes, namely indirect taxes minus subsidies.

Correct answer: A. The price paid by the buyer, reflecting indirect taxes and subsidies

Explanation: Market price is the price at which a good or service is purchased by the buyer in the market. In national-income accounting, it includes the effect of indirect taxes and subsidies. The relationship is: Market Price = Factor Cost + Net Indirect Taxes, where net indirect taxes equal indirect taxes minus subsidies. Thus, market price is not merely a wage or an import price.

Correct answer: A. Net indirect taxes are zero

Explanation: GDP at market price is related to GDP at factor cost by the expression GDPₘₚ = GDP𝒻𝒸 + net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. Therefore, if both GDP measures are equal, net indirect taxes must be zero; indirect taxes and subsidies are equal in amount. Depreciation, imports, and population do not explain this equality.

Correct answer: A. 3300

Explanation: To convert GDP at market price into GDP at factor cost, subtract net indirect taxes. Net indirect taxes equal indirect taxes minus subsidies: 420 − 120 = 300. Therefore, GDP at factor cost = 3600 − 300 = 3300. Equivalently, use GDPFC = GDPMP − indirect taxes + subsidies. Thus, option A is correct.

Correct answer: A. 2400

Explanation: The relationship between GDP at market price and GDP at factor cost is GDP_MP = GDP_FC + net indirect taxes. Substituting the given values gives GDP_MP = 2500 + (-100) = 2400. A negative value of net indirect taxes means that subsidies exceed indirect taxes, so the market-price measure is lower than the factor-cost measure. Therefore, option A is correct.

Correct answer: C. Net indirect taxes

Explanation: The governing conversion is NDP at factor cost = NDP at market price − net indirect taxes. Market prices include indirect taxes and exclude subsidies, so net indirect taxes are removed to obtain the income accruing to factors of production. Therefore, option C is correct. Depreciation has already been deducted when moving from GDP to NDP, while NFIA and exports are unrelated to this particular price-to-cost conversion.

Correct answer: D. NDP_MP = NDP_FC + NIT

Explanation: To move from factor cost to market price, add net indirect taxes because market prices reflect indirect taxes net of subsidies. The formula is NDP at market price = NDP at factor cost + NIT. Thus option D is correct. Subtracting NIT performs the reverse conversion, depreciation changes gross into net rather than factor cost into market price, and NFIA changes domestic to national income.

Correct answer: B. On the basis of the cost of production

Explanation: Government hospitals generally provide non-market services for which no meaningful market price is available. In national-income accounting, such services are valued at their cost of production, commonly including compensation of employees, intermediate consumption, and consumption of fixed capital where applicable. The number of patients may measure activity, but it does not by itself provide the accounting value of the service.

Correct answer: B. Net indirect taxes are negative

Explanation: The relationship is NDP at market price = NDP at factor cost + net indirect taxes, where net indirect taxes equal indirect taxes minus subsidies. If market-price NDP is lower than factor-cost NDP, the adjustment must be negative. This occurs when subsidies are greater than indirect taxes, making net indirect taxes negative. Depreciation and net factor income from abroad do not determine the difference between market price and factor cost for domestic product.

Correct answer: B. 950 crore rupees

Explanation: Under the income method, NDP at factor cost is the sum of compensation of employees, operating surplus and mixed income. Therefore, operating surplus = NDP at factor cost − compensation of employees − mixed income = 4,100 − 2,500 − 650 = 950 crore rupees. Option B is correct. The other values result from omitting one component or making an incorrect subtraction.