Examkin

Question

Difficulty: Very hardEconomic Developments, Union & State Budgets, and Economic Surveys

Consider the following statements regarding national income accounting conventions and macroeconomic indicators highlighted in economic surveys:

1. Gross Value Added (GVA) at basic prices includes product taxes and excludes product subsidies relative to GVA at factor cost.
2. The Consumer Price Index (CPI) Combined assigns a substantially higher weightage to food and beverages than the Wholesale Price Index (WPI).
3. Nominal GDP measures economic output at constant base-year prices, whereas Real GDP measures output at current market prices inclusive of inflation.

Which of the statements given above is/are correct?

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

Answer

The statement regarding CPI Combined assigning a higher weightage to food and beverages than WPI is the only correct statement.
Statement 2 is factually accurate. In India's price index frameworks, CPI Combined places a weightage of roughly 45.86% on food and beverages, reflecting the consumer consumption basket. In contrast, WPI assigns a much smaller share (~15.26% for primary food articles and ~9.12% for manufactured food products). Statements 1 and 3 are conceptually false.

Step-by-Step Solution

1
Evaluate Statement 1 regarding GVA basic prices vs factor cost.
Statement 1 is false. GVA at basic prices equals GVA at factor cost plus production taxes minus production subsidies. Product taxes and product subsidies are only added/subtracted when converting basic prices to market prices (GDP).
National income accounting strictly distinguishes between production taxes/subsidies (land revenue, stamp duty, factory license fees) and product taxes/subsidies (GST, excise, food/fertilizer subsidies).
2
Evaluate Statement 2 regarding CPI Combined vs WPI weightages.
Statement 2 is true. Food and beverages constitute about 45.86% of the CPI Combined basket, reflecting retail consumption patterns, whereas in WPI, food articles and manufactured food products combined hold a much lower weight (~24.38%).
CPI reflects consumer household spending where food forms a large share, while WPI reflects wholesale transactions dominated by manufactured products.
3
Evaluate Statement 3 regarding Real GDP vs Nominal GDP definitions.
Statement 3 is false. Real GDP measures economic volume adjusted for inflation using constant base-year prices, whereas Nominal GDP measures output at current prevailing market prices without adjusting for price changes.
The candidate reversed the definitions of Real and Nominal GDP.

Key Concept

Distinction between production vs product taxes in GVA, basket composition of CPI vs WPI, and Real vs Nominal GDP.
Rate this question

Topics

Economic Developments, Union & State Budgets, and Economic Surveys

More questions from this topic