National Income — Set 3

Correct Answer: A. Net Factor Income from Abroad

• **GNP = GDP + NFIA** — Gross National Product adds Net Factor Income from Abroad to measure output by a country's residents worldwide. • **Nationality focus** — GNP counts what residents of a country produce regardless of their location. • 💡 Wrong-option analysis: [Option B] Net Indirect Taxes: used to convert factor cost to market price; [Option C] Consumption of fixed capital (depreciation): subtracting it from GNP gives NNP; [Option D] Subsidies: part of the indirect tax adjustment, not a GDP-to-GNP bridge.

Correct Answer: B. Real National Income

• **Real National Income** = national income calculated at base year prices, eliminating inflation to show actual changes in production volume. • **True growth indicator** — economists compare Real National Income across years to judge actual economic progress. • 💡 Wrong-option analysis: [Option A] Gross National Income: includes gross totals without adjusting for inflation; [Option C] Personal Disposable Income: income available to households after direct taxes; [Option D] Nominal National Income: measured at current prices, includes inflation effects.

Correct Answer: A. It ignores non-monetary exchanges

• **Non-monetary exchanges** = household work, barter, and subsistence farming are excluded from GDP, underestimating welfare especially in developing economies. • **Income inequality ignored** — a high GDP can coexist with extreme poverty if wealth is concentrated, making GDP a poor welfare proxy. • 💡 Wrong-option analysis: [Option B] It ignores inflation: Real GDP corrects for inflation, so this is not a true limitation; [Option C] It includes only industrial output: GDP includes services and agriculture too; [Option D] It is calculated annually: frequency of calculation is not a welfare limitation.

Correct Answer: B. Indirect Taxes

• **Indirect Taxes** = NOT a primary component of the Expenditure Method, which sums C + I + G + (X - M). • **Expenditure Method formula: C + I + G + NX** — Consumption + Investment + Government Spending + Net Exports. • 💡 Wrong-option analysis: [Option A] Private Final Consumption Expenditure (C): the largest component of GDP in most economies; [Option C] Government Final Consumption Expenditure (G): direct government spending on goods and services; [Option D] Net Exports: exports minus imports, the external sector contribution.

Correct Answer: B. Depreciation

• **Depreciation** = the technical term is 'Consumption of Fixed Capital', representing the loss in value of assets due to wear, tear, or obsolescence. • **Gross minus Depreciation = Net** — subtracting depreciation from any gross aggregate gives the corresponding net aggregate. • 💡 Wrong-option analysis: [Option A] Investment: refers to addition to capital stock, the opposite of depreciation; [Option C] Inventory: refers to unsold stocks of goods; [Option D] Profit: the return to entrepreneurship, a factor income.

Correct Answer: D. Embassies and consulates located abroad

• **Economic Territory** = includes geographical borders, territorial waters, and a country's embassies and military bases located abroad. • **Embassy example** — an Indian embassy in France is part of India's economic territory, not France's. • 💡 Wrong-option analysis: [Option A] Only the landmass: excludes territorial waters and overseas embassies; [Option B] Foreign ships in international waters: not part of any country's economic territory; [Option C] International organizations in the country: excluded from domestic economic territory as they have special status.

Correct Answer: A. Income received by individuals from all sources

• **Personal Income** = total income actually received by individuals and households, including factor incomes plus transfer payments. • **Differs from National Income** — it excludes corporate taxes and undistributed profits which are earned but not received by households. • 💡 Wrong-option analysis: [Option B] Income earned only from labour: Personal Income includes rent, interest, profit, and transfers too; [Option C] Total profit of all corporations: a sub-component of national income, not personal income; [Option D] Income after paying all taxes: that defines Disposable Income, not Personal Income.

Correct Answer: C. Cost of inputs used in production

• **Factor Cost** = total cost of land, labour, capital, and entrepreneurship used in production, excluding taxes and subsidies. • **Producer's perspective** — factor cost reflects what producers actually pay for inputs, before government interventions are added or removed. • 💡 Wrong-option analysis: [Option A] Price after adding subsidies: subsidies reduce market price, they do not add to factor cost; [Option B] Wholesale price: refers to bulk sale price, not the cost of production factors; [Option D] Price paid by final consumer: that is the market price, which includes indirect taxes.

Correct Answer: D. GDP is greater than GNP

• **Negative NFIA means GDP > GNP** — when foreigners earn more within the country than residents earn abroad, domestic production exceeds national income. • **Common in FDI-receiving countries** — nations with heavy foreign investment typically have more income outflow than inflow. • 💡 Wrong-option analysis: [Option A] GNP = GDP: that would mean NFIA is zero, not negative; [Option B] NNP > GNP: NNP is always less than GNP since depreciation is positive; [Option C] GNP > GDP: that occurs when NFIA is positive.

Correct Answer: B. National Income

• **National Income is a Flow variable** = it is measured over a period (one year), representing the rate of income generation. • **Stock vs Flow** — Wealth (stock) is measured at a point in time; Income (flow) is measured over a period. • 💡 Wrong-option analysis: [Option A] National Wealth: a stock variable measured at a specific point in time; [Option C] Money Supply: also a stock variable measured at a specific date; [Option D] Foreign Exchange Reserves: a stock variable representing accumulated holdings at a point in time.