Examkin

Question

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

Consider the following statements regarding the national income accounting methodology adopted in India:

Statement I: Gross Value Added (GVA) at basic prices includes production taxes and excludes production subsidies.
Statement II: Gross Domestic Product (GDP) at market prices is derived by adding product taxes and subtracting product subsidies from GVA at basic prices.
Statement III: The GDP deflator reflects price changes across all domestically produced final goods and services, whereas the Consumer Price Index (CPI) covers a specific basket of consumer goods that includes imported goods.

Which of the statements given above are correct?

  1. A
    1 and 2 only
  2. B
    2 and 3 only
  3. C
    1 and 3 only
  4. 1, 2 and 3Answer

Answer

All three statements (1, 2 and 3) are correct.
All three statements are conceptually and methodologically correct. Statement I accurately states that GVA at basic prices equals factor cost plus production taxes minus production subsidies. Statement II accurately defines the transition from GVA at basic prices to GDP at market prices by adding net product taxes (product taxes minus product subsidies). Statement III correctly captures the key conceptual distinction between the GDP deflator (which covers all domestic production) and CPI (which covers a fixed consumer basket including imported items).

Step-by-Step Solution

1
Analyze Statement I regarding GVA at basic prices
Basic Price = Factor Cost + Production Taxes - Production Subsidies. Production taxes/subsidies are independent of actual production volume (e.g., land revenues, stamp registration fees, land subsidies). Thus, Statement I is correct.
Verify the structural definition of GVA at basic prices established by the Central Statistics Office.
2
Analyze Statement II regarding GDP at market prices
GDP at Market Prices = GVA at basic prices + Product Taxes - Product Subsidies. Product taxes/subsidies depend directly on volume produced/sold (e.g., GST, excise duties). Thus, Statement II is correct.
Verify the conversion link between sectoral GVA aggregates and economy-wide aggregate GDP.
3
Analyze Statement III regarding price deflator coverage
The GDP deflator measures price changes for the entire basket of domestically produced final goods and services (including capital equipment and exports). CPI measures prices of a specific, fixed retail consumer basket that includes imported consumption goods. Thus, Statement III is correct.
Distinguish between comprehensive national accounts deflators and targeted price index series.

Key Concept

National Income Accounting Identifies, Basic Prices vs Market Prices, and Price Deflators
Estimated Time:1m 30s
Rate this question

Topics

Economic Growth, National Income Accounting, and Development Indicators