GDP and National Income: Concepts, Methods and Formulas

The correct answer is B. GDP measures production inside the borders of a country in one accounting year, whoever the producer may be. A foreign firm making cars in India adds to India's GDP, because the test is the place of production and not the nationality of the producer.

Option A describes Gross National Product, which counts what the residents of a country produce anywhere in the world; the two differ by net factor income from abroad. Option C is wrong because GDP covers the whole economy, private and public, organised and, as far as it can be estimated, unorganised. Option D contradicts the definition: only final goods are counted, since including intermediate goods would count the same value more than once, as with wheat, flour and bread. This idea of value added at each stage is the basis of the product method of measurement.

The correct answer is A. Net factor income from abroad is the income residents earn outside the country minus the income foreigners earn inside it. Adding it to GDP converts a domestic concept into a national one, which is exactly what GNP is.

Option B gives Net Domestic Product, because subtracting depreciation turns a gross figure into a net one; the word depreciation always signals the shift from gross to net, never from domestic to national. Options C and D confuse the two aggregates with the difference between market price and factor cost, where factor cost equals market price minus indirect taxes plus subsidies. Keep the two axes separate in your mind: gross against net is decided by depreciation, and domestic against national by net factor income from abroad.

The correct answer is B, depreciation. Machines, buildings and vehicles wear out as they are used, and the value of that wear and tear must be set aside if the country is to keep its capital intact. Deducting it from GNP gives NNP, and NNP measured at factor cost is what economists call national income.

Option A, indirect taxes, and Option C, subsidies, connect market price with factor cost, not gross with net. Option D, net factor income from abroad, is the item that connects the domestic aggregates with the national ones, so subtracting it from GNP would take you back to GDP rather than to NNP. Note the parallel: GDP minus depreciation gives NDP in just the same way that GNP minus depreciation gives NNP.

The correct answer is C, Dadabhai Naoroji. He made the earliest estimate of India's national income in the nineteenth century and used it to argue that British rule was draining wealth out of the country, putting the average income at about twenty rupees a person a year. His work is the starting point of every account of national income estimation in India.

Option A, V. K. R. V. Rao, made the first scientific estimate, for the year 1931-32, using methods close to those in use today. Option B, P. C. Mahalanobis, chaired the National Income Committee appointed in 1949, which gave the country its first official series and submitted its report in 1954. Option D, D. R. Gadgil, was a member of that committee along with Rao. Learn the four names as a sequence rather than separately.

The correct answer is A, P. C. Mahalanobis. The committee was appointed in 1949 to prepare official estimates of national income after independence, and it submitted its final report in 1954. Its other members were D. R. Gadgil and V. K. R. V. Rao. Mahalanobis is also remembered as the architect of the Second Five Year Plan and as the founder of the Indian Statistical Institute.

Option B, Dadabhai Naoroji, belongs to the nineteenth century and made the first estimate of all. Option C, V. K. R. V. Rao, was a member of the committee and had earlier made the first scientific estimate for 1931-32, but he did not chair it. Option D, C. Rangarajan, is associated with later committees on statistics and on the measurement of poverty, not with the committee of 1949.

The correct answer is B. A market price contains the indirect taxes the buyer pays, which never reach the producer, so they must be taken out. A subsidy works the other way: the producer receives it although the buyer does not pay it in the price, so it must be added back. Hence factor cost equals market price minus indirect taxes plus subsidies.

Option A reverses both adjustments and is the usual trap; it would give market price from factor cost instead. Options C and D treat taxes and subsidies in the same direction, which cannot be right, since one is a payment to the government and the other a payment from it. Factor cost is so named because it measures what the factors of production actually earn as rent, wages, interest and profit.

The correct answer is B, constant prices of a base year. When output of every year is valued at the same fixed set of prices, any change in the total must come from a change in the quantity produced. That is why real GDP is the measure used for growth rates, and why the base year of the national accounts series is revised from time to time to keep it relevant.

Option A describes nominal GDP, which rises with inflation even when production stands still. Option C is meaningless, since factor cost is a way of valuing output and not a choice of year. Option D points to GDP at purchasing power parity, which is used for comparing countries rather than for measuring a country's own growth. The ratio of nominal to real GDP, multiplied by a hundred, gives the GDP deflator.

The correct answer is B. The deflator compares what the year's output costs at this year's prices with what the same output would cost at base year prices, so nominal GDP goes on top and real GDP below, and the ratio is expressed as a percentage. A value above a hundred means the general price level has risen since the base year.

Option A inverts the fraction and would show prices falling whenever they are in fact rising. Option C gives a difference in rupees, which is not an index and cannot be compared across years or countries. Option D is the formula for per capita income, not for a price index. The deflator differs from the consumer and wholesale price indices in covering every good and service included in GDP rather than a fixed basket.

The correct answer is A, exports minus imports, a figure called net exports. Exports are goods produced at home and sold abroad, so they belong in domestic production. Imports are produced abroad but are already included in the spending of households, firms and government, so they must be taken out to leave only what the country itself produced.

Option B reverses the subtraction and would wrongly reduce GDP whenever a country exports more than it imports. Option C counts exports while ignoring imports and therefore overstates domestic production. Option D, depreciation, plays no part in this identity; it appears only when a gross figure is converted into a net one. The identity in short form is: GDP equals C plus I plus G plus net exports.

The correct answer is B. The National Statistical Office, formed by merging the Central Statistical Office with the National Sample Survey Office, prepares the national accounts under the Ministry of Statistics and Programme Implementation. It fixes the base year of the series, releases the estimates of GDP and gross value added, and follows the Indian financial year from 1 April to 31 March.

Option A, the Reserve Bank of India, is the central bank; it publishes economic data and manages monetary policy but does not compile the national accounts. Option C, the Finance Commission, is a constitutional body that recommends how taxes are shared between the Union and the states. Option D, SEBI, regulates the securities market. Questions in this area often pair an organisation with a function, so learn the pairs together.

The correct answer is A. Per capita income is the average income of a person in a year, found by dividing national income by the entire population, including children and those who do not work. It is used to compare living standards between countries and between states, and it improves only when income grows faster than the population.

Option B would give income for each worker, a different measure altogether, since the whole population shares the income earned. Option C mixes up a level with a rate of change and produces no meaningful figure. Option D describes household savings, which are a part of income that is not consumed. Remember that per capita income is an average and hides inequality: two countries with the same per capita income can have very different patterns of distribution.