The government raises the excise tax on cars. The output of every good and all other taxes and subsidies stay the same. What is the effect on GDP at market prices and GVA at basic prices?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → GDP at market prices rises; GVA at basic prices does not change.
Excise tax is a product tax, paid per unit. Product taxes come in only when we move from basic prices to market prices.
Option (1) GDP at market prices rises; GVA at basic prices does not change. — Correct. GDP at market prices = GVA at basic prices + net product taxes. Only the second part rises.
Option (2) Both GDP at market prices and GVA at basic prices rise. — Incorrect. GVA at basic prices includes production taxes only, so a product tax leaves it unchanged.
Option (3) GVA at basic prices rises; GDP at market prices does not change. — Incorrect. This reverses the two measures. The tax enters at market prices, not at basic prices.
Option (4) Neither GDP at market prices nor GVA at basic prices changes. — Incorrect. Market prices include product taxes, so a higher excise tax raises GDP at market prices even when output is the same.
NCERT (2026-27): “2.2.4 Factor Cost, Basic Prices and Market Prices … Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise tax, service tax, export and import duties etc. … The basic prices lie in between: they include the production taxes (less production subsidies) but not product taxes (less product subsidies). Therefore in order to arrive at market prices we have to add product taxes (less product subsidies) to the basic prices.” |