National Income — Practice Questions
UPSC Prelims-pattern practice questions on national income with full explanations: GDP vs GNP, real vs nominal, methods of measurement and taxes.
Questions
These are original UPSC-pattern practice questions. Attempt each one before revealing the answer.
In national income accounting, Gross National Product minus Gross Domestic Product is equal to which of the following?
Solution
GNP = GDP + net factor income from abroad (NFIA), so the gap is NFIA. Depreciation separates gross from net measures; net indirect taxes separate market prices from factor cost; net exports (X − M) are a component of expenditure-side GDP, not the GNP–GDP gap.
Answer: C
Which of the following compiles the official national accounts (GDP estimates) of India?
Solution
The National Statistical Office (NSO) of MoSPI, formed in 2019 by merging the Central Statistics Office and the National Sample Survey Office, compiles the national accounts. The RBI compiles monetary and balance of payments statistics; NITI Aayog is a policy think tank; the Office of the Economic Adviser (DPIIT) compiles the Wholesale Price Index.
Answer: A
Consider the following statements:
- Real GDP values the output of a year at the constant prices of a base year.
- If the GDP deflator rises during a year, nominal GDP growth for that year exceeds real GDP growth.
- Scholarships paid by the government are included in GDP.
Which of the statements given above is/are correct?
Solution
Statement 1 is correct: real GDP uses base-year (constant) prices. Statement 2 is correct: nominal growth ≈ real growth + rise in the deflator. Statement 3 is incorrect: scholarships are transfer payments; nothing is produced in return, so they are excluded.
Answer: B
Consider the following pairs:
| Method | What it adds up | |
|---|---|---|
| 1 | Production method | Value of output minus intermediate consumption |
| 2 | Income method | Compensation of employees, operating surplus and mixed income |
| 3 | Expenditure method | Final consumption, gross capital formation and net exports |
| 4 | Expenditure method | Total intermediate consumption of all firms |
How many of the pairs given above are correctly matched?
Solution
Pairs 1, 2 and 3 correctly describe the value-added, income and expenditure methods. Pair 4 is wrong: adding intermediate consumption would double count, since intermediate goods are already included in the value of final goods. That makes three correct pairs.
Answer: C
Which one of the following is treated as a product tax in India’s national accounts?
Solution
Product taxes are levied per unit of a product: GST, excise and customs duties. They are added to GVA at basic prices to reach GDP at market prices. Land revenue, stamp and registration fees and professional tax are production taxes: paid irrespective of the volume of output and already included in GVA at basic prices.
Answer: D
Why did India shift from GDP at factor cost to GVA at basic prices and GDP at market prices in its national accounts? Examine the debate over the reliability of India’s growth statistics.
Solution
Introduction: In January 2015 the then CSO revised the base year of national accounts from 2004-05 to 2011-12 and aligned the presentation with the UN System of National Accounts 2008: sector growth is now reported as GVA at basic prices and headline growth as GDP at market prices.
Body:
- Why basic prices: production taxes (land revenue, stamp duty) are part of the cost a producer actually faces, so GVA at basic prices is a truer measure of sectoral value added than factor cost.
- Why market prices for headline GDP: it matches international practice and the expenditure side (what buyers pay, including product taxes).
- Better data: the MCA-21 corporate database replaced older sample-based estimates for the organised private sector; more comprehensive coverage of the corporate sector.
- Concerns raised: sharp upward revisions to growth in the transition years; the use of proxies for the informal sector; sampling issues in the MCA-21 data; the gap between GDP growth and indicators like credit, exports and tax revenue in some years.
- Institutional response: periodic base-year revisions, the formation of the NSO (2019) and greater release of methodology and data have aimed to improve credibility.
Conclusion: The shift brought India closer to global standards. Credibility now rests on timely base-year revisions, a fresh economic census and survey data for the informal sector, and the institutional autonomy of the statistical system.