UPSC CIVIL SERVICES EXAMINATION

PRELIMS 2019 SPECIAL

LECTURE 34

MCQs – STATIC – ECONOMY

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HOME RULE LEAGUE MOVEMENT

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✓Concept of National Income

✓Gross Domestic Product & Gross National Product

✓Net Domestic Product & Net National Product

✓Government’s Reaction

✓Reasons for fade-out

✓Significance of the Movement

From the modern point of view, national income is defined as “the net output of commodities and servicesflowing during the year from the country’s productive system in the hands of the ultimate consumers.”

2

National Income is the total value of all final goods and services produced by the country in certain year. Thegrowth of National Income helps to know the progress of the country.

1

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CONCEPT OF NATIONAL INCOME

NATIONAL INCOME ACCOUNTING

National Income Accounting is a method or technique used to measure the economic activity in the nationaleconomy as a whole.

1

GDP GNP NNP NNPFC NDP

GROSS DOMESTIC PRODUCT

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In this case, the final produce of resident citizens as well as foreign nationals who reside within that geographicalboundary is considered.

2

The total value of all final goods and services produced within the geographical boundary of the country during agiven period of time (generally one year) is called as GDP.

1

GDP = TQ X P

▪ TQ = Total quantity of final goods and services produced in the country (both by resident Indians and foreign

nationals residing within the geographical Boundary of India)

▪ P = Prices of the final goods and services.

4

REAL GDP

NOMINAL GDP

Prices at base year – therefore the inflationary impact is excluded.

Prices at current year– therefore the inflationary impact is included.

GROSS NATIONAL PRODUCT

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The income of national citizens is included, irrespective of whether they are within the geographical boundary ofthe country or residing in a foreign land is taken into account while the income of foreigners is excluded.

2

GNP is the total value of the total production or final goods and services produced by the nationals of a countryduring a given period of time (generally one year)

1

‘NATIONAL’ is the key word

GNP = GDP + Net factor Income from abroad

Net factor Income from abroad = EX - IM

EX = income earned by nationals in foreign land

IM = income earned by foreigners in domestic land

MARKET PRICE and FACTOR COST

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GDP and GNP are measured on the basis of Market Price and Factor Cost.

Market Price Factor Cost

▪ It refers to the actual transacted price.▪ It includes indirect taxes such as custom duty, excise

duty, sales tax, service tax etc. (impending Goods andServices Tax).

▪ These taxes tend to raise the prices of the goods in aneconomy.

▪ Subsidies are excluded.

▪ It is the cost of factors of production i.e. rent (land), interest (capital), wages (labour) and profit(entrepreneurship).

▪ This is equal to price of the final goods and services leaves the producers.

▪ Factor Cost = Market Price – Indirect Taxes + Subsidies

NET INDIRECT TAX = [INDIRECT TAX – SUBSIDIES]

NET DOMESTIC PRODUCT

NDP of an economy is always lower than its GDP, since their depreciation can never be reduced to zero.2

It is the calculated GDP after adjusting the value of depreciation. This is basically, Net form of GDP, i.e. GDP –total value of wear and tear.

1

‘NET’ is the key word

The concept of NDP and NNP are not used to compare different economies because the method of calculatingdepreciation varies from country to country.

3

‘DOMESTIC’ is the key word The income of both resident citizens as well as theforeigners who reside within the geographical territoryof the country will be taken into account.

NET NATIONAL PRODUCT

This deduction is done because a part of current produce goes to replace the depreciated parts of the productsalready produced. This part does not add value to current year’s total produce. It is used to keep the productsalready produced intact and hence it is deducted.

2

It is calculated by subtracting Depreciation from Gross National Product.1

‘NET’ is the key word

‘NATIONAL’ is the key word The income of only citizens both resident and non-resident will be taken into account.

GDP METHOD IN INDIA

As per the new formula, the market price paid by the consumers is taken into account, thereby taking intoaccount the net of indirect taxes.

2

India used to calculate GDP at factor or the basic cost, which took into account the prices of products received bythe producers.

1

This newly adopted method is in line with the international practice and is likely to capture the changing structureof the Indian Economy in a better way.

3

In addition to this the base year for the calculation of GDP has also been updated from 2004-05 to 2011-12.4

GOVERNMENT’S REACTION

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A case was instituted against Tilak which was, however, rescinded by the high court. Tilak was barred fromentering the Punjab and Delhi.

2

The government came down with severe repression, especially in Madras where the students were prohibitedfrom attending political meetings.

1

In June 1917, Annie Besant and her associates, B.P. Wadia and George Arundale, were arrested. This invitednationwide protest.

3

In a dramatic gesture, Sir S. Subramaniya Aiyar renounced his knighthood while Tilak advocated a programme ofpassive resistance.

4

METHOD OF CALCULATING NATIONAL INCOME

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INCOME METHOD EXPENDITURE METHOD OUTPUT METHOD

▪ By this National Incomeis calculated compilingincome of factors ofproduction viz., land,labour, capital andentrepreneur.

▪ It measures all spending on currently-produced final goods and services only in aneconomy.

▪ Personal Consumption made by households,the payment of which is paid by householdsdirectly to the firms which produced thegoods and services desired by thehouseholds.

▪ Investment by firms as well as governmentssector for the creation of assets.

▪ Government expenditure on pensionschemes, scholarships, unemploymentallowances etc. are not included in this as allof them come under transfer payments.

▪ Net of Export expenditure is included in this.

▪ It is used by economists to calculate GDPat market prices, which are the totalvalues of outputs produced at differentstages of production.

▪ Complementary goods and services arealso included in this.

▪ Second hand items and purchase andsale of the same is excluded as no newproduction takes place in the economy.

▪ Transfer Payments such as scholarships,pensions etc. are excluded as there isincome received, but no good or serviceis produced in return.

Q. Expenditure method is one of the technique for National Income Accounting. Which of the

following will be taken into account while accounting for National Income using expenditure

method?

1) Expenditure by the Government to pay its personnel for their services.

2) Expenditure made by the government on pension schemes, scholarships, unemployment

allowances etc..

3) Expenditure made by the government on purchasing Rafael fighter jets from France.

Which of the above is/are correct?

a) 1 only

b) 2 and 3 only

c) 1 and 3 only

d) All will be taken into account

Answer : a

QUESTION 1

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Q. Consider the following statements regarding Gross Domestic Product (GDP) of a country:

(A) – The focus of GDP is on who produced the output rather than where the output is produced.

(B) – Final produce of resident citizens as well as foreign nationals who reside within the geographical

boundary of the country is considered while accounting for GDP.

Select the correct option?

a) Both (A) and (R) are correct and (R) is the correct explanation of (A)

b) Both (A) and (R) are correct but (R) is not the correct explanation of (A)

c) (A) is true (R) is false

d) (R) is true (A) is false

Answer : d

QUESTION 2

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Q. In context of ‘real’ and ‘nominal’ GDP which of the following is / are correctly matched?

Select the correct code:

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 or 2

Answer : c

QUESTION 3

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1 – Real GDP It does not take into account the price rise due to inflation

2 – Nominal GDP It takes into account the price rise caused due to inflation

Q. Which of the following statement/s correctly depict/s the difference between the Net

Domestic Product (NDP) and Net National Product (NNP) .

1. NNP excludes the impact of depreciation, while NNP includes the same.

2. NDP excludes the net factor income from abroad while the NNP includes the same.

Select the correct code:

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 or 2

Answer : b

QUESTION 4

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Q. In order to better capture the changing structure of Indian Economy, the Indian government

has adopted new method for GDP calculation. Which of the following statements in this regard

is/are correct?

1. The base year of the GDP has been changed from 2008-09 to 2011-12.

2. The GDP will now take into account the prices of products received by the producers.

3. As per the new method of GDP calculation, the indirect taxes will be added while the subsidies will

be subtracted while calculating the national income. .

Select the correct code:

a) 1 only

b) 1 and 2 only

c) 3 only

d) All of the above

Answer : c

QUESTION 5

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