Indian residents working for a few weeks on a contract abroad earn wages of Rs 50 crore from foreign firms. Other things remain the same. Which of the following is correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → GDP does not change, GNP and National Disposable Income rise by Rs 50 crore, and the current account improves by Rs 50 crore.
The wages are a factor income earned abroad by Indian residents.
Option (1) GDP and GNP do not change, National Disposable Income rises by Rs 50 crore, and the current account improves by Rs 50 crore. — Incorrect. GNP does change: it adds factor income earned abroad.
Option (2) GDP does not change, GNP and National Disposable Income rise by Rs 50 crore, and the current account improves by Rs 50 crore. — Correct. GDP counts only production inside India, so it does not change. GNP adds factor income earned abroad, so it rises by Rs 50 crore. NDI starts from NNP at market prices, so it rises too. Factor income is part of trade in services, recorded in the current account.
Option (3) GDP and GNP rise by Rs 50 crore, National Disposable Income does not change, and the capital account improves by Rs 50 crore. — Incorrect. GDP counts only production inside the country, and NDI does rise.
Option (4) GDP does not change, GNP and National Disposable Income rise by Rs 50 crore, and the capital account improves by Rs 50 crore. — Incorrect. Wages earned abroad are factor income, recorded in the current account.
This question uses National Income Accounting and Open Economy Macroeconomics together.
NCERT (2026-27): “2.3 Some Macroeconomic Identities Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year. But the whole of it may not accrue to the citizens of the country. For example, a citizen of India working in Saudi Arabia may be earning her wage and it will be included in the Saudi Arabian GDP. But legally speaking, she is an Indian. Is there a way to take into account the earnings made by Indians abroad or by the factors of production owned by Indians? When we try to do this, in order to maintain symmetry, we must deduct the earnings of the foreigners who are working within our domestic economy, or the payments to the factors of production owned by the foreigners. For example, the profits earned by the Korean-owned Hyundai car factory will have to be subtracted from the GDP of India. The macroeconomic variable which takes into account such additions and subtractions is known as Gross National Product (GNP). It is, therefore, defined as follows GNP ≡ GDP + Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy Hence, GNP ≡ GDP + Net factor income from abroad …” “… National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world” Open Economy Macroeconomics: “6.1 The Balance of Payments Current Account is the record of trade in goods and services and transfer payments. Figure 6.1 illustrates the components of Current Account. Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. …” |