Statement I: Without the government imposing indirect taxes and subsidies, GDP becomes identically equal to National Income.
Statement II: Out of the value of final goods output, profit is paid first, and wages are whatever is left over.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
Statement I: Without the government imposing indirect taxes and subsidies, GDP becomes identically equal to National Income. — Correct. Indirect taxes and subsidies are the only gap between the value of output and factor incomes here, so GDP equals National Income.
Statement II: Out of the value of final goods output, profit is paid first, and wages are whatever is left over. — Incorrect. It is the other way round: wages, interest and rent are paid, and profit is what is left over for the entrepreneur.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … Observe also, that without the government imposing indirect taxes and subsidies, the total value of final goods and services produced in the economy, GDP, becomes identically equal to the National Income. Henceforth, throughout the rest of the chapter, we shall refer to Y as GDP or National Income interchangeably.” “4.3.3 The Multiplier Mechanism … The production of final goods employs factors such as labour, capital, land and entrepreneurship. In the absence of indirect taxes or subsidies, the total value of the final goods output is distributed among different factors of production – wages to labour, interest to capital, rent to land etc. Whatever is left over is appropriated by the entrepreneur and is called profit.” |