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

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

1. Gross Value Added (GVA) at basic prices includes net product taxes (product taxes minus product subsidies) and excludes net production taxes.
2. The GDP deflator includes the price changes of imported goods, whereas the Consumer Price Index (CPI) strictly excludes imported consumer goods.
3. The GDP deflator is calculated as the ratio of Nominal GDP to Real GDP, expressed as a percentage.

Which of the statements given above is/are correct?

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

Answer

The statement stating '3 only' is correct.
Statement 3 is the only correct statement. The GDP Deflator is an overall price index calculated by dividing Nominal GDP (current prices) by Real GDP (constant prices) and multiplying by 100. Statement 1 incorrectly swaps production and product taxes; basic prices include net production taxes while excluding net product taxes. Statement 2 incorrectly claims GDP deflator includes imports; GDP deflator reflects only domestic production, whereas CPI includes imported consumer items.

Step-by-Step Solution

1
Analyze Statement 1 regarding GVA at basic prices
GVA at basic prices = Factor Cost + Net Production Taxes (Production Taxes - Production Subsidies). Product taxes (like GST) are added later to obtain GDP at market prices. Thus, Statement 1 is incorrect.
Basic prices incorporate taxes/subsidies on production processes (e.g., land revenue, stamp duty) rather than on final products.
2
Analyze Statement 2 regarding GDP Deflator vs CPI scope
The GDP deflator covers all domestically produced goods and services and excludes imports. The CPI measures prices of goods/services consumed by households, which includes imported consumer items. Thus, Statement 2 is incorrect.
GDP by definition measures domestic production, so imported items do not enter the GDP deflator.
3
Analyze Statement 3 regarding the GDP Deflator formula
GDP Deflator = (Nominal GDP / Real GDP) × 100. Thus, Statement 3 is correct.
Nominal GDP measures output at current prices, whereas Real GDP measures output at constant base-year prices.

Key Concept

Distinction between GVA basic prices vs market prices, and structural differences between GDP Deflator and CPI
Estimated Time:1m 30s
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Topics

Economic Growth, National Income Accounting, and Development Indicators