National Income — Set 7

Correct Answer: B. Current market prices

• **Nominal National Income** = measured at current market prices, reflecting both changes in production volume and changes in the price level. • **Inflation distortion** — Nominal Income can rise even with zero real growth if prices simply increase. • 💡 Wrong-option analysis: [Option A] Factor cost only: factor cost is a production-cost measure; nominal vs real relates to the price level; [Option C] Base year prices: that is how Real (not Nominal) national income is measured; [Option D] Wholesale prices: WPI is an index; national income is not measured using wholesale prices alone.

Correct Answer: D. Lower

• **NDP is always lower than GDP** — because NDP = GDP - Depreciation, and depreciation is always a positive value in any functioning economy. • **Capital consumption reality** — every economy has some wear and tear; therefore the net domestic product is invariably lower than the gross. • 💡 Wrong-option analysis: [Option A] Higher: impossible since subtracting depreciation always reduces the value; [Option B] Equal: would require zero depreciation, which never happens in a functioning economy; [Option C] Double: has no economic basis.

Correct Answer: D. Machine bought by a firm for production

• **Machine bought by a firm for production** = a Final Good used for capital investment, as it is not converted into another product within the same accounting year. • **Capital good vs intermediate good** — a final good is either consumed by households or invested as capital; machines are investment final goods. • 💡 Wrong-option analysis: [Option A] Cotton bought by a textile mill: an intermediate good, used in producing cloth; [Option B] Sugar used by a sweet shop: an intermediate good, used in making sweets; [Option C] Coal used by a power plant: an intermediate good, used to generate electricity.

Correct Answer: D. Final expenditures on goods and services

• **Expenditure Method** = measures GDP by summing all final expenditures: Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X-M). • **Demand-side view** — it captures GDP from the perspective of who buys the final output, not who produces it. • 💡 Wrong-option analysis: [Option A] Factor incomes: that is the basis of the Income Method; [Option B] Total profits of all firms: only one component of factor income; [Option C] Value added by all sectors: that is the Product (Value Added) Method.

Correct Answer: A. National income is growing faster than population

• **Per Capita Income increases** when National Income grows faster than population — on average, the residents become wealthier. • **Distribution caveat** — rising per capita income does not ensure every citizen benefits; inequality can persist alongside aggregate growth. • 💡 Wrong-option analysis: [Option B] Population is decreasing: a declining population can raise per capita income but is not the necessary condition; [Option C] Price levels are falling: deflation might affect nominal per capita income without indicating real growth; [Option D] Total production is decreasing: declining output would lower, not raise, per capita income.

Correct Answer: D. Stock of finished and semi-finished goods

• **Inventory Investment** = change in the stock of raw materials, semi-finished goods, and finished products held by firms. • **Part of total investment (I)** — in national income accounting, investment includes both fixed investment and inventory changes. • 💡 Wrong-option analysis: [Option A] Fixed capital assets: changes in fixed capital are fixed investment, not inventory investment; [Option B] Number of shares in the market: a financial market variable unrelated to inventory; [Option C] Foreign exchange reserves: a balance of payments item, not a national income investment component.

Correct Answer: C. Net compensation of employees

• **NFIA components** = net compensation of employees + net property and entrepreneurial income + net retained earnings from abroad. • **Converts Domestic to National** — NFIA bridges the gap between what is produced domestically and what residents earn globally. • 💡 Wrong-option analysis: [Option A] Domestic savings: a financial flow concept, not a component of NFIA; [Option B] Government subsidies: part of net indirect taxes, not NFIA; [Option D] Indirect taxes collected from abroad: not a recognised component of NFIA.

Correct Answer: B. NDP

• **NDP** = the only aggregate that excludes both depreciation (being 'net') and net factor income from abroad (being 'domestic'). • **Domestic and Net** — NDP = GDP - Depreciation; it stays within borders and accounts for capital wear and tear. • 💡 Wrong-option analysis: [Option A] NNP: net but national (includes NFIA); [Option C] GDP: gross and domestic (includes depreciation, excludes NFIA); [Option D] GNP: gross and national (includes depreciation and NFIA both).

Correct Answer: B. Net Indirect Taxes

• **Market Price = Factor Cost + Net Indirect Taxes** — taxes raise the price consumers pay above the cost of production factors. • **Consumer-producer price gap** — this relationship explains why the shelf price of goods exceeds the raw production cost. • 💡 Wrong-option analysis: [Option A] Depreciation: converts Gross to Net, not Factor Cost to Market Price; [Option C] NFIA: adjusts GDP to GNP via cross-border factor income; [Option D] Personal Savings: a household financial decision, unrelated to price formation.

Correct Answer: C. Both residents and non-residents within borders

• **Domestic Income** = factor income generated by both residents and non-residents within a country's geographical boundaries. • **Location, not nationality** — it does not matter whether the producer is a citizen or a foreign worker; what matters is where production occurs. • 💡 Wrong-option analysis: [Option A] Residents only: that would define National Income (GNP/NNP basis), not Domestic Income; [Option B] Non-residents only: clearly incorrect as residents inside the country also contribute; [Option D] Residents living abroad: their income from abroad is part of National Income via NFIA, not Domestic Income.