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Question

Difficulty: MediumEconomic Growth, National Income Accounting, and Development Indicators

Consider the following statements regarding the national income accounting framework and price indices in India:

1. Gross Value Added (GVA) at basic prices includes product taxes and excludes product subsidies.
2. The GDP deflator reflects the prices of all domestically produced final goods and services, including capital goods, unlike the Consumer Price Index (CPI).
3. Real GDP measures economic output evaluated at current market prices without adjusting for inflation.

Which of the statements given above is/are correct?

  1. 2 onlyAnswer
  2. B
    1 and 2 only
  3. C
    1 and 3 only
  4. D
    1, 2 and 3

Answer

Only Statement 2 is correct.
The statement specifying that the GDP deflator includes all domestically produced final goods and services while CPI covers a specific consumer basket and includes imports is factually correct. Meanwhile, GVA at basic prices excludes product taxes/subsidies (it includes only production taxes/subsidies), and Real GDP uses constant prices rather than current prices.

Step-by-Step Solution

1
Analyze Statement 1 regarding GVA at basic prices
Statement 1 is incorrect.
GVA at basic prices equals GVA at factor cost plus production taxes minus production subsidies. Product taxes (such as GST or excise duty) and product subsidies are accounted for when transitioning from basic prices to market prices (GDP at market prices), not at basic prices.
2
Analyze Statement 2 comparing GDP Deflator and CPI
Statement 2 is correct.
The GDP deflator covers all domestic output, including capital goods, and does not include imported goods. CPI covers only a representative consumption basket, which includes imported consumer items.
3
Analyze Statement 3 defining Real GDP
Statement 3 is incorrect.
Real GDP evaluates current production using constant base-year prices to remove the effect of price changes (inflation). Output measured at current prices without inflation adjustment is Nominal GDP.

Key Concept

Distinction between GVA at basic prices vs market prices, GDP deflator vs CPI scope, and Real vs Nominal GDP.
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Topics

Economic Growth, National Income Accounting, and Development Indicators