[Mission 2024] STATIC QUIZ, 9 October 2023 – Economy

Solution: b)

Option 3 is incorrect.

National Income is defined as the total monetary value of all goods and services produced within a country during a given period of time. Gains on sale of land will not be included in the estimation of National Income. Capital gains will not be included in the national income as they do not add to the current flow of goods and services in the economy.

Solution: b)

Statement 3 is incorrect.

In India, the most highlighted measure of national income has been the GDP at factor cost. The Central Statistics Office (CSO) of the Government of India has been reporting the GDP at factor cost and at market prices.

The distinction between factor cost, basic prices and market prices is based on the distinction between net production taxes (production taxes less production subsidies) and net product taxes (product taxes less product subsidies). Production taxes and subsidies are paid or received in relation to production and are independent of the volume of production such as land revenues, stamp and registration fee. Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise tax, service tax, export and import duties etc. Factor cost includes only the payment to factors of production, it does not include any tax. 

Solution: b)

Statement 3 is incorrect.

For any financial year, the two main variables of national income are GDP and GVA (or Gross Value Added). The GDP calculates India’s national income by adding up all the expenditures in the economy while the GVA calculates the national income from the supply side by looking at the value-added in each sector of the economy.

While both the variables measure national income, they are linked as follows:

GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government).

As such, if the government earned more from taxes than what it spent on subsidies, GDP will be higher than GVA. If, on the other hand, the government provided subsidies in excess of its tax revenues, the absolute level of GVA would be higher than the absolute level of GDP.

Solution: c)

A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services.

What is included in subsidy?

• Income and Price support: Subsidy can also be any form of income or price support granted by the government.
• Taxes and charges: It include not only direct transfer payments by the governments but also taxes and charges that are not collected.

Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good.

Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers.

Solution: a)

Only statement 3 is correct.

CPI may differ from GDP deflator because:

1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services.
2. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported goods.
3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.

Ministry of Statistics and Programme Implementation (MOSPI) comes out with GDP deflator in National Accounts Statistics as price indices.