Why is foreign aid not directly added to GNP?
Answer and explanation
Correct answer: Because it is a transfer receipt, not income earned by factors of production
GNP includes current final production by a country’s residents and net factor income earned from abroad. Foreign aid is generally a transfer receipt: the recipient does not provide a current productive factor service in exchange for it. Consequently, aid is not treated as factor income or added directly through NFIA. Wages, rent, interest, and profit earned from abroad may enter NFIA, but grants and aid do not.
Frequently asked questions
What is the correct answer to this question?
Because it is a transfer receipt, not income earned by factors of production
Why is this the correct answer?
GNP includes current final production by a country’s residents and net factor income earned from abroad. Foreign aid is generally a transfer receipt: the recipient does not provide a current productive factor service in exchange for it. Consequently, aid is not treated as factor income or added directly through NFIA. Wages, rent, interest, and profit earned from abroad may enter NFIA, but grants and aid do not.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Aggregates related to national income - GNP.
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