The government gives subsidies on items such as food and fertilisers, which is an expenditure in its budget. While calculating National Income from NNP at market prices, such subsidies are:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → added
Subsidies lower market prices below factor cost. So to go from NNP at market prices to national income, net indirect taxes are subtracted, which means subsidies are added.
This question uses National Income Accounting and Government Budget and the Economy together.
NCERT (2026-27): “2.3 Some Macroeconomic Identities It is to be noted that all these variables are evaluated at market prices. Through the expression given above, we get the value of NNP evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost or National Income. Thus, NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)” “Chapter 5: Government Budget and the Economy – 5.1.3 Classification of Expenditure: … Apart from providing implicit subsidies through under-pricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers. …” |