National Income and Related Aggregates

Questions

Write true or false with reason.

1. Domestic income as well as national income include only factor incomes.

2. Profits earned by non-resident companies in India are not a part of our domestic income.
3. Salaries to Indian employees working in Indian embassies abroad are a part of net factor income from abroad.
4. Net factor income from abroad is treated as a component of income from domestic product accruing to the government sector.
5. National income is always greater than domestic income.
6. Increase in national income always implies increase in domestic income.
7. Domestic product refers to value addition only by the resident producers.
8. Market price includes the impact of indirect taxes, but not of subsidies.
9. Net indirect taxes are never equal to zero.
10. There is no difference between GDP at market price and GDP at factor cost in a two sector economy including household sector and
producer sector.
11. National income at market price is always greater than national income at factor cost.
12. National income at current prices can increase even when the quantum of goods and services produced during the year remains constant.
13. Increase in national income implies increase in the flow of goods and services in the economy.
14. GDP growth as an index of welfare loses its significance if there is a deep economic divide in the economy.

Others

1. Profits earned by a company in India, which is owned by a non-resident is included in national income of India? Is it true?
2. An ambassador in US embassy in India stays in his job for a period exceeding one year. Would he be treated as a resident or non-resident
of India? Give reason.
3. Why is the income earned by foreigners working in a branch of a foreign bank in India a part of the domestic factor income of India?
4. When will domestic factor income be greater than national income?
5. 'Subsidies to the producers, should be treated as transfer payments.' Defend or refute the given statement with valid reason.
6. "Management of a water polluting oil refinery says that the it (oil refinery) ensures welfare through its contribution to Gross Domestic
Product." Defend or refute the argument of management with respect to GDP as a welfare measure of the economy.
7. Production of defence goods is a limitation of GDP as an index of social welfare. How?
8. "In the determination of social welfare, what matters is the quantum of output rather than the composition of output." Defend or refute the
given statement.
9. "India's GDP is expected to expand 7.5% in 2019-20: World Bank."
-The Economic Times
Does the given statement mean that welfare of people of India will increase at the same rate? Comment with reason.
10. The government withdraws subsidy on petrol in the domestic market. But petrol may now be selling cheaper than before. Explain.
Frame your answer in the light of price of petrol in the international market.
11. Will the following factor incomes be included in domestic factor income of India? Give reasons for your answer.
(i) Compensation of employees to the residents of Japan working in Indian embassy in Japan.
(ii) Profits earned by a branch of foreign bank in India.
(iii) Rent received by an Indian resident from Russian embassy in India.
12. Will the following be included in the domestic product of India? Give reasons for your answer.
(i) Profits earned by foreign companies in India.
(ii) Salaries of Indians working in the Russian Embassy in India.
(iii) Profits earned by a branch of State Bank of India in Japan.
13. Will the following be included in the national income of India? Give reasons for your answer.
(i) Financial assistance to flood victims.
(ii) Profits earned by the branches of a foreign bank in India.
(iii) Salaries of Indians working in the American Embassy in India.
Answers

Ans 1. True. National income is the sum total of factor incomes earned by normal residents of a country during a given year. Domestic
income is the sum total of factor incomes generated within the domestic territory of a country.
Ans 2. False. It is a part of domestic factor income of India because non-resident companies are within the domestic territory of India.
Ans 3. False. Indian embassies abroad are a part of domestic territory of India. Therefore, salaries to Indian employees working in Indian
embassies abroad are a part of domestic factor income.
Ans 4. False. Net factor income from abroad is a component of national income. It is added to domestic income to get national income.
Ans 5. False. National income can be less than domestic income. National income is greater than domestic income only when net factor
income from abroad is some positive number.
Ans 6. False. National income = Domestic income + Net factor income from abroad.
This equation shows that national income can increase when net factor income from abroad increases even when domestic income is
constant.
Ans 7. False. Domestic product/income refers to value addition or income generated in the domestic territory of a country by all producers
(resident and non-resident) during one year.
Ans 8. False. Market price includes the impact of both indirect taxes and subsidies. Indirect taxes raise the market price while subsidies
lower it.
Ans 9. False. Net indirect taxes are equal to zero in case indirect taxes are equal to subsidies.
Ans 10. True. Difference between GDP at market price and GDP at factor cost is the net indirect taxes.
Net Indirect Taxes = Indirect taxes - Subsidies
The parameters of tax and subsidies emerge only when we are considering a three sector economy including households, producers and the
government.
Ans 11. False. National income at market price = National income at factor cost + Net indirect taxes.
National income at market price can be less than national income at factor cost in case net indirect taxes is a negative number.
Ans 12. True. Increase in the price level can cause an increase in national income at current prices without increase in the quantum of goods
and services.
Ans 13. True. Provided that, national income (as the market value of final goods and services produced during the year) is estimated at
constant prices, NOT at current prices.
Ans 14. True. Economic divide indicates the gulf between the rich and the poor. If the gulf increases, GDP growth loses its significance.
Others
Ans 1. No. Because this is the income which does not belong to the normal residents of India.
[Note: Profits earned by a company in India, which is owned by a non-resident is a part of domestic factor income of India, because the
company is generating profit within the domestic territory of India. But these profits are a part of income from domestic product accruing to
rest of the world. Therefore, these are not reflected in the estimation of national income. These are deducted from domestic income to find
national income.]

Ans 2. Resident of a country is defined as a person who normally resides in the country (or does not leave the country for a period exceeding
one year) and whose centre of interest lies in the country concerned. However, there are certain rules of thumb in national income
accounting (based on standard practices rather than any logic). One such rule of thumb is that the foreign diplomats like ambassadors
continue to be treated as non-residents even if their stay exceeds one year. Moreover, centre of interest of such diplomats continues to be in
the country they belong to. Accordingly. US ambassador in India would be treated as non-resident of India, even when his stay in India
exceeds the period of one year.

Ans 3. This is because the foreign bank is located within the domestic territory of India. Domestic factor income includes all factor incomes
generated within the domestic territory of a country.

Ans 4. Domestic factor income is greater than national income when net factor income from abroad is negative.

Ans 5. Subsidies are a part of NNPC. and are therefore an integral component of national income. Accordingly, these are not to be treated as
transfer payments.

Ans 6. Doubtless, oil refinery contributes to GDP and thereby welfare of the people. But this claim needs to be discounted in so far as it
impairs welfare by way by of water pollution. Increase in environmental pollution (through water pollution) causes increase in water borne
diseases and thereby leads to higher social cost of the maintenance of health. It also impairs the level of sustainable development, implying
loss of welfare of future generations.

Ans 7. Production of defence goods is a limitation of GDP as an index of social welfare. Because, defence goods do not make any direct
contribution to the welfare of the individuals and households of a country.

Ans 8. The given statement is incorrect. Social welfare depends both on the quantum of output as well as the composition of output. If goods
are produced primarily for richer sections of the society (ignoring the interest of poorer sections of the society), social welfare is bound to
remain low even when the quantum of output is rising.

Ans 9. No. Generally it is considered that an increase in Gross Domestic Product (GDP) of any economy (India in this case) ensures increase
in welfare of the people of the country, but there are strong exceptions to this generalisation. Following are the reasons:
(i) If with every increase in the level of GDP, distribution of GDP becomes more unequal, welfare level of the society may not rise.
(ii) Composition of GDP may not be welfare-oriented even when the level of GDP tends to rise. There is no direct increase in the welfare of
the masses if GDP has risen owing largely to the increase in the production of defence goods
(iii) Non-monetary exchanges remain un-recorded, to which extent GDP remains underestimated. To that extent, rise in welfare is not
reflected through GDP

Ans 10. Other things remaining constant, withdrawal of subsidy should lead to a rise in market price of the commodity. Implying a fall in
real income of the people. However, petrol is a distinct case. The bulk of domestic supply of petrol is met through imports. The price of
petrol in the international market has so significantly reduced that, even after withdrawal of subsidy in the domestic market, petrol is
available to the people at a rate cheaper than before. Thus, real income of the people has risen not because of withdrawal of subsidy, but
because of a substantial fall in price of petrol in the international market, leading to a fall in price in the domestic market.
Ans 11.
(i) Compensation of employees to the residents of Japan working in Indian embassy in Japan is included in the domestic factor income of
india because Indian embassy in Japan is a part of domestic territory of India.
(ii) Profits earned by a branch of foreign bank in India is included in the domestic factor income of India because the branch of foreign bank
is within the domestic territory of India.
(iii) Rent received by an Indian resident from Russian embassy in India is not included in the domestic factor income of India because
Russian embassy in India is not a part of domestic territory of India.

Ans 12.
(i) Profits earned by foreign companies in India is a part of domestic product of India because the companies are within the domestic
territory of India.
(ii) Salary of Indians working in the Russian Embassy in India is not included in the domestic product of India because Russian Embassy is
not a part of domestic territory of India.
(iii) Profits earned by a branch of State Bank of India in Japan is not a part of the domestic product of India because the branch of State
Bank of India in Japan is not within the domestic territory of India.

Ans 13.
(i) Financial assistance to flood victims is not included in the national income of India. This is because financial assistance is a transfer
income.
(ii) Profits earned by the branches of a foreign bank in India is reflected in the national income of India as a negative component because it
is a part of factor income to rest of the world.
(iii) Salaries of Indians working in the American Embassy in India is included in national income of India because it is a part of factor
income from rest of the world.