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Question

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

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

1. Gross Value Added (GVA) at basic prices is calculated by adding net production taxes (production taxes minus production subsidies) to GVA at factor cost.
2. Gross Domestic Product (GDP) at market prices is obtained by adding net product taxes (product taxes minus product subsidies) to GVA at basic prices.
3. The GDP Deflator incorporates price changes of imported goods consumed domestically, whereas the Consumer Price Index (CPI) reflects only domestically produced goods.

Which of the statements given above are correct?

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

Answer

Statements 1 and 2 are correct, while Statement 3 is incorrect.
Statements 1 and 2 accurately describe the relationship between Factor Cost, Basic Prices, and Market Prices established under India's revised national accounts methodology. Statement 3 is incorrect because the GDP Deflator strictly covers domestically produced output and excludes imports, whereas the Consumer Price Index includes imported consumer items.

Step-by-Step Solution

1
Evaluate Statement 1 regarding GVA at basic prices
Statement 1 is correct
GVA at basic prices equals GVA at factor cost plus net production taxes (production taxes minus production subsidies). Production taxes (like land revenue and stamp duty) are independent of the volume of production.
2
Evaluate Statement 2 regarding GDP at market prices
Statement 2 is correct
GDP at market prices is derived by adding net product taxes (product taxes like GST minus product subsidies) to GVA at basic prices.
3
Evaluate Statement 3 regarding GDP Deflator versus CPI
Statement 3 is incorrect
The GDP Deflator measures the price level changes of all domestically produced final goods and services included in GDP and excludes imported goods. Conversely, the Consumer Price Index (CPI) includes prices of imported consumer goods.

Key Concept

National Income Accounting Identities and Price Deflators
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Topics

Economic Growth, National Income Accounting, and Development Indicators