Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): The profits earned by a Korean-owned car factory in India are subtracted from India’s GDP to obtain India’s GNP.
Reason (R): GNP deducts the factor income earned by factors of production of the rest of the world employed in the domestic economy.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
GNP measures the income of a country’s own citizens and factors. Income going to foreign-owned factors inside the country is taken out of GDP.
Assertion (A): The profits earned by a Korean-owned car factory in India are subtracted from India’s GDP to obtain India’s GNP. — True. The profit is produced in India, so it is in India’s GDP. But it belongs to a foreign owner.
Reason (R): GNP deducts the factor income earned by factors of production of the rest of the world employed in the domestic economy. — True. GNP = GDP + Net factor income from abroad.
Why R explains A?
Profit is a factor income, and the Korean-owned factory is a factor of the rest of the world working in India. R gives the general rule, and A is one case of it.
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. … 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. … 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” |