Static Quiz, March 29, 2022

Gross National Income (GNI)

• GNI is the total amount of money earned by a nation’s people and businesses. It is used to
• measure and track a nation’s wealth from year to year. The number includes the nation’s gross
• domestic product plus the income it receives from overseas sources.
• GNI is an alternative to gross domestic product (GDP) as a means of measuring and tracking a
• nation’s wealth and is considered a more accurate indicator for some nations.
• Understanding GNI
• GNI calculates the total income earned by a nation’s people and businesses, including
• investment income, regardless of where it was earned. It also covers money received from
• abroad such as foreign investment and economic development aid.
• GDP is the total market value of all finished goods and services produced within
• a country in a set time period. Hence, option (c) is correct.
• GNI is the total income received by the country from its residents and businesses
• regardless of whether they are located in the country or abroad.
• GNP includes the income of all of a country’s residents and businesses whether it flows
• back to the country or is spent abroad. It also adds subsidies and taxes from foreign

Washington consensus

• The term ‘Washington Consensus’ was coined by the US economist John Williamson (in 1989)
• under which he had suggested a set of policy reforms which most of the official in Washington

• (i.e., International Monetary Fund and World Bank) thought would be good for the crisis-

driven Latin American countries of the time.

• Of the final goods, we can distinguish between consumption goods and capital goods. Goods
• like food and clothing, and services like recreation that are consumed when
• purchased by their ultimate consumers are called consumption goods or consumer
• Hence, statement 1 is incorrect.
• (This also includes services which are consumed but for convenience we may refer to them as
• consumer goods.) Then there are other goods that are of durable character which are used in
• the production process. These are tools, implements and machines.

• Of the final goods, we can distinguish between consumption goods and capital goods. Goods
• like food and clothing, and services like recreation that are consumed when
• purchased by their ultimate consumers are called consumption goods or consumer
• Hence, statement 1 is incorrect.
• (This also includes services which are consumed but for convenience we may refer to them as
• consumer goods.) Then there are other goods that are of durable character which are used in
• the production process. These are tools, implements and machines.

• Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July
• 2017, on supply of goods and services, right from the manufacturer/ service provider to the
• It is a destination-based consumption tax with facility of Input Tax Credit in the
• supply chain. It is applicable throughout the country with one rate for one type of
• goods/service. It has amalgamated a large number of Central and State taxes and cesses. It
• has replaced large number of taxes on goods and services levied on production/sale of goods
• or provision of service.
• GST has simplified the multiplicity of taxes on goods and services.
• The laws, procedures and rates of taxes across the country are standardized. It
• has facilitated the freedom of movement of goods and services and created a
• common market in the country.

• In India, the most highlighted measure of national income has been the GDP at factor cost. The
• Central Statistics Office (CSO) of the Government of India has been reporting the GDP at
• factor cost and at market prices. In its revision in January 2015 the CSO replaced GDP at
• factor cost with the GVA at basic prices, and the GDP at market prices, which is now called
• only GDP, is now the most highlighted measure.
• Here we discuss the concept of basic prices. The distinction between factor cost, basic prices
• and market prices is based on the distinction between net production taxes (production taxes
• less production subsidies) and net product taxes (product taxes less product subsidies).
• Production taxes and subsidies are paid or received in relation to production and are
• independent of the volume of production such as land revenues, stamp and
• registration fee. Product taxes and subsidies, on the other hand, are paid or received

• NNP at factor cost o National Income (NI) = NNP at market prices – (Indirect taxes –
• Subsidies) = NNP at market prices – Net indirect taxes (Net indirect taxes o Indirect taxes –
• Subsidies)
• We can further subdivide the National Income into smaller categories. Let us try to find the
• expression for the part of NI which is received by households. We shall call this Personal
• Income (PI). First, let us note that out of NI, which is earned by the firms and government
• enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP).
• Personal Income (PI) = NI – Undistributed profits – Net interest payments made by
• households – Corporate tax + Transfer payments to the households from the
• government and firms.
• All the above are correct.

• CPI (and analogously WPI) may differ from GDP deflator because
• The goods purchased by consumers do not represent all the goods which are
• produced in a country. GDP deflator takes into account all such goods and services.
• Hence, statement 2 is correct.
• CPI includes prices of goods consumed by the representative consumer; hence it
• includes prices of imported goods. GDP deflator does not include prices of imported
• The weights are constant in CPI – but they differ according to production level of
• each good in GDP deflator.

• GDP is the sum total of value of goods and services created within the geographical boundary
• of a country in a particular year. It gets distributed among the people as incomes (except for
• retained earnings). So we may be tempted to treat higher level of GDP of a country as an index
• of greater well-being of the people of that country (to account for price changes, we may take
• the value of real GDP instead of nominal GDP).

• Banks can lend simply because they do not expect all the depositors to withdraw what they
• have deposited at the same time. When the banks lend to any person, a new deposit is opened
• in that person’s name. Thus money supply increases to old deposits plus new deposit (plus
• ) Let us take an example. Assume that there is only one bank in the country. Let us
• construct a fictional balance sheet for this bank. Balance sheet is a record of assets and
• liabilities of any firm. Conventionally, the assets of the firm are recorded on the left-hand side
• and liabilities on the right-hand side. Accounting rules say that both sides of the balance sheet
• must be equal or total assets must be equal to the total liabilities. Assets are things a firm
• owns or what a firm can claim from others. In case of a bank, apart from buildings, furniture,
• , its assets are loans given to public. When the bank gives out loan of Rs 100 to a person,
• this is the bank’s claim on that person for Rs 100. Another asset that a bank has is reserves.
• Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of
• India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of
• financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to
• deposits we keep with banks. We keep deposits and these deposits are our assets, they can be
• withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their
• deposits with RBI and these are called Reserves.
• Assets = Reserves + Loans
• Liabilities for any firm are its debts or what it owes to others. For a bank, the main
• liability is the deposits which people keep with it. Hence, statement 3 is incorrect.
• Liabilities = Deposits