Computing District Income from a Newspaper Report
A newspaper reports the following for a district economy in a year (₹ crore): household consumption expenditure 5,000; government final consumption expenditure 1,200, of which ₹300 is social security pensions paid to the elderly; private investment 1,800, including ₹200 of unsold finished goods held by firms; exports 900; imports 1,100; depreciation 500; indirect taxes 700; subsidies 150; net factor income from abroad −100. A local college asks students to estimate GDP at market prices and national income at factor cost. One student argues that pensions should be added because they are government spending, and another argues that unsold goods should be excluded because they were not sold. The teacher asks the class to correct these errors and to explain the treatment of a farmer selling a ten-year-old tractor to another farmer for ₹2 lakh while buying a new tractor for ₹6 lakh.
1. Compute GDP at market prices. Explain how you treated pensions and unsold goods, and why.
Read the worked answer
GDP at market prices = C + I + G + X − M.
Government final consumption expenditure must exclude pensions: 1,200 − 300 = ₹900 crore. Pensions are transfer payments, not payments for goods or services produced; they redistribute income and do not add to current output.
Private investment includes the ₹200 crore of unsold finished goods. These are inventory investment: output produced this year but not sold is still part of this year’s production and is treated as investment by firms. Excluding them would understate GDP.
GDP at market prices = 5,000 + 1,800 + 900 + 900 − 1,100 = ₹7,500 crore.
2. Compute national income (NNP at factor cost) from GDP at market prices. Show the adjustment for depreciation, indirect taxes, subsidies and net factor income from abroad.
Read the worked answer
Start from GDP at market prices and adjust:
- Subtract depreciation: −500
- Subtract net indirect taxes (indirect taxes − subsidies): −(700 − 150) = −550
- Add net factor income from abroad: −100
NNP at factor cost = 7,500 − 500 − 550 − 100 = ₹6,350 crore.
National income is the sum of factor incomes earned by normal residents, so depreciation is removed to get net domestic product, net indirect taxes are removed to move from market prices to factor cost, and net factor income from abroad is added to move from domestic to national income. The negative NFIA means foreign factor incomes earned in the district exceed the factor income residents earn abroad.
3. Should the sale of the old tractor for ₹2 lakh and purchase of the new tractor for ₹6 lakh be included in this year’s GDP? Explain with the concept of final vs intermediate and second-hand goods.
Read the worked answer
The old tractor is a second-hand good. Its original production was counted in GDP in the year it was manufactured. The ₹2 lakh resale is only a transfer of ownership, not new production, so it is excluded. If a dealer charges a commission for the resale service, that commission is new production and would be included.
The new tractor is a final capital good bought by a farmer for use over several years. It is not an intermediate good because it is not used up within the year. Its ₹6 lakh value enters gross domestic capital formation and GDP for this year, provided it is domestically produced. If it is imported, investment rises by ₹6 lakh but imports also rise by ₹6 lakh, so the net effect on GDP is approximately zero apart from distribution margins.