Question

Which of the following options is correct? In theory ---------and ------ should be equal, but in practice they typically differ because they are constructed in different approaches.

1. National Income and Net National Product.
2. Real GDP and Nominal GDP.
3. Consumer price Index and Producer Price Index.

• A. i, ii
• B. iii only
• C. i only
• D. ii, iii

Answer 1

Answer:

C. i only

• In economic theory, National Income (NI) is defined as the sum of all factor incomes (wages, rent, interest, profit) accruing to the normal residents of a country during an accounting year.

• Net National Product (NNP) at Factor Cost is the monetary value of all final goods and services produced by the normal residents of a country during an accounting year, valued at the cost of factors of production.

• Theoretical Equality:

  • By definition, NNP at Factor Cost conceptually represents the total income earned by the factors of production within a country's economy. This total income is precisely what is defined as National Income.

  • Therefore, in an ideal theoretical framework, without any measurement errors or statistical discrepancies, NNP at Factor Cost should be exactly equal to National Income.

• Practical Differences:

  • In practice, these two figures often differ due to the diverse methodologies used for their calculation.

  • NNP is typically derived from the expenditure approach (GDP - Depreciation - Net Indirect Taxes) or the product approach, which focuses on the value of goods and services produced.

  • National Income, on the other hand, is directly calculated using the income approach, summing up factor incomes.

  • These different data collection methods, statistical inaccuracies, unrecorded economic activities (e.g., informal sector, black money), and timing differences in data reporting contribute to the practical divergence between the two figures.

Key Facts for Competitive Exams:

• NNP at Market Price is obtained by subtracting depreciation from Gross National Product (GNP at Market Price).

• To convert NNP at Market Price to NNP at Factor Cost (which is National Income), Net Indirect Taxes (Indirect Taxes - Subsidies) are subtracted from NNP at Market Price.

• The most common methods for calculating National Income are the Income Method, Product (or Value Added) Method, and Expenditure Method.

• Real GDP vs. Nominal GDP: These two are not theoretically equal. Nominal GDP measures output at current prices, while Real GDP measures output at constant prices (adjusted for inflation). They serve different purposes in economic analysis.

• Consumer Price Index (CPI) vs. Producer Price Index (PPI): These are both measures of inflation, but they track prices at different stages. CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. PPI measures the average change over time in the selling prices received by domestic producers for their output. They are not expected to be equal, as they cover different sets of goods/services and stages of production/consumption.