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Difficulty: Very hardEconomic Growth, National Income Accounting, and Development Indicators

With reference to the Indian national income accounting framework and price deflators under the revised CSO/NSO methodology, consider the following statements:

1. Gross Value Added (GVA) at basic prices is obtained by adding product taxes and deducting product subsidies from GVA at factor cost.
2. The GDP Deflator accounts for price changes in all domestically produced final goods and services, whereas the Consumer Price Index (CPI) also reflects price variations of imported consumer goods.
3. Gross Domestic Product (GDP) at market prices is derived by adding net product taxes (product taxes minus product subsidies) to GVA at basic prices.

Which of the statements given above is/are correct?

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

Answer

The correct option is the one stating that statements 2 and 3 only are correct.
Statement 2 is correct because the GDP Deflator excludes imported goods (only measuring domestic output), while CPI includes imported consumer goods in its basket. Statement 3 is correct because GDP at market prices is explicitly calculated by adding net product taxes to GVA at basic prices. Statement 1 is incorrect because GVA at basic prices is derived by adjusting GVA at factor cost with net PRODUCTION taxes (not net PRODUCT taxes).

Step-by-Step Solution

1
Analyze Statement 1 regarding GVA at basic prices
Statement 1 is incorrect.
GVA at basic prices includes PRODUCTION taxes (e.g., land revenue, stamp duty) and excludes PRODUCTION subsidies (e.g., subsidies to railways, farm subsidies). PRODUCT taxes (e.g., GST, excise duty) and PRODUCT subsidies (e.g., food/fertilizer subsidies) are per-unit charges added/subtracted later to obtain GDP at market prices.
2
Analyze Statement 2 regarding GDP Deflator vs CPI coverage
Statement 2 is correct.
The GDP Deflator measures the overall price level of all final goods and services produced domestically within an economy's borders. In contrast, the Consumer Price Index (CPI) reflects the cost of a fixed basket of goods consumed by households, which includes imported consumer items.
3
Analyze Statement 3 regarding GDP at market prices formula
Statement 3 is correct.
By national accounting convention: GDP at Market Prices = GVA at Basic Prices + Net Product Taxes (Product Taxes - Product Subsidies).

Key Concept

GVA at Basic Prices vs GDP at Market Prices and GDP Deflator vs CPI
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Topics

Economic Growth, National Income Accounting, and Development Indicators