National income at factor cost is obtained from national income at market price by
- A.adding indirect taxes and subtracting subsidies
- B.subtracting indirect taxes and adding subsidies
- C.adding both indirect taxes and subsidies
- D.subtracting both indirect taxes and subsidies
Correct answer
Explanation
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.
Read the full article: GDP and National Income: Concepts, Methods and Formulas
Practice Questions
View allGross Domestic Product (GDP) is the value of all final goods and services produced
- A.by the residents of a country, wherever they may be
- B.within the domestic territory of a country in a year
- C.by the government sector alone in a year
- D.including intermediate goods used in production
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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.
Read the full explanation →Gross National Product (GNP) is equal to which of the following?
- A.GDP + net factor income from abroad
- B.GDP - depreciation
- C.GDP + indirect taxes
- D.GDP - subsidies
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Net factor income from abroad is the income residents earn outside the country minus the income foreigners earn inside it.
Read the full explanation →Net National Product (NNP) is obtained by subtracting which item from Gross National Product?
- A.Indirect taxes
- B.Depreciation
- C.Subsidies
- D.Net factor income from abroad
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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.
Read the full explanation →Who made the first estimate of the national income of India?
- A.V. K. R. V. Rao
- B.P. C. Mahalanobis
- C.Dadabhai Naoroji
- D.D. R. Gadgil
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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.
Read the full explanation →The National Income Committee, set up by the Government of India in 1949, was chaired by
- A.P. C. Mahalanobis
- B.Dadabhai Naoroji
- C.V. K. R. V. Rao
- D.C. Rangarajan
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The committee was appointed in 1949 to prepare official estimates of national income after independence, and it submitted its final report in 1954.
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