Suppose an Indian citizen makes an investment abroad and earns a positive return on her investment. Which of the following is correct?

Q: What is the answer to CAPF 2023 Paper I Q28?

B. Correct — B, her income is part of India's national income, but not part of India's GDP. Gross Domestic Product is a territorial measure: it values what is produced inside India's domestic territory, whoever owns the land, labour or capital that produced it. Her capital is employed abroad, and the return it earns is generated outside that territory, so nothing about it can enter GDP. National income is a residence measure. It counts the factor incomes earned by the normal residents of India wherever in the world they earn them, which is exactly what Gross National Product does when it adds net factor income from abroad to GDP. She is a resident earning income abroad, so her return is added on and appears in the national aggregate.

(a)Her income is part of India's GDP, but not part of India's national income.
(b)Her income is part of India's national income, but not part of India's GDP.
(c)Her income is part of both India's GDP and national income.
(d)Her income is neither part of India's GDP, nor its national income.

Answer

Why

Correct — B, her income is part of India's national income, but not part of India's GDP. Gross Domestic Product is a territorial measure: it values what is produced inside India's domestic territory, whoever owns the land, labour or capital that produced it. Her capital is employed abroad, and the return it earns is generated outside that territory, so nothing about it can enter GDP. National income is a residence measure. It counts the factor incomes earned by the normal residents of India wherever in the world they earn them, which is exactly what Gross National Product does when it adds net factor income from abroad to GDP. She is a resident earning income abroad, so her return is added on and appears in the national aggregate.

Why the others are wrong

(a)Her income is part of India's GDP, but not part of India's national income. — This swaps the two definitions. Income produced outside the domestic territory is the one thing GDP is built to exclude, and income earned by a resident is the one thing the national aggregate is built to include.
(c)Her income is part of both India's GDP and national income. — It would have to be true that the production happened inside India for GDP to pick it up. The investment is abroad, so only the national measure reaches it.
(d)Her income is neither part of India's GDP, nor its national income. — Leaving a resident's earnings out of the resident aggregate contradicts the definition of national income. This is the answer for a non-resident earning abroad, not for an Indian resident.

Concept

Two ideas are being separated. Domestic territory is a geographical boundary, widened slightly to take in ships and aircraft operated by residents, embassies and consulates abroad, and fishing vessels and oil rigs operated by residents in international waters. Residence is a matter of where a person's centre of economic interest lies, not of the passport held. Gross National Product equals GDP plus net factor income from abroad, that is, factor income earned by residents outside the country minus factor income earned by non-residents inside it. National Income in Indian national accounting is Net National Product at factor cost, which is GNP after deducting depreciation and net indirect taxes.

Every signal in the stem points towards India — an Indian citizen, her money, her return — which is why the GDP option feels safe. GDP is indifferent to all of it and asks only where the production took place. Run the same test on a Japanese firm's factory in Chennai and the answer flips: its output is inside India's GDP and outside India's national income. Because foreign-owned capital working in India earns more than Indian-owned capital earns abroad, India's net factor income from abroad has been negative in recent years, so India's GNP runs slightly below its GDP — a small gap, but one that runs the opposite way from what students often assume.

Key facts

GDP measures production inside the domestic territory regardless of who owns the factors of production.
GNP equals GDP plus net factor income from abroad.
National Income in Indian national accounting is Net National Product at factor cost.
Residence, not citizenship, decides whether a person's earnings enter the national aggregate.
India's net factor income from abroad has been negative in recent years, so India's GNP is a little smaller than its GDP.

Where the production happened against who earned it

Indian resident, capital employed abroad→Outside GDP, inside national income

Foreign firm producing in India→Inside GDP, outside national income

Indian resident producing in India→Inside both

Foreign firm producing abroad→Outside both

GDP asks where; the national aggregate asks who. The two questions agree on the middle rows and part company on the first two.

Study next

Net factor income from abroad and how it is estimatedMarket prices against factor cost, and the treatment of net indirect taxesGross and net aggregates, and why depreciation is deductedReal against nominal GDP and the GDP deflatorWhich transactions are left out of national income — second-hand sales, transfer payments and intermediate goods

Common traps

Letting the word citizen pull the answer towards GDP, which does not look at nationality at all.
Assuming India's GNP must exceed its GDP because so many Indians work abroad.
Mixing up national income with GNP at market prices; national income is the net figure at factor cost.

Asked as a two-way classification — one transaction, two aggregates, and the candidate has to know that one is territorial and the other is residential.

Related PYQs

UPSC_1997_GS1_Q991997Open & attempt →

National Income is the

(a) Net National Product at market price
(b) Net National Product at factor cost
(c) Net Domestic Product at market price
(d) Net Domestic Product at factor cost

Answer(b) Net National Product at factor cost

The definition this question leans on, asked directly. Two of its four options are domestic rather than national, so answering it correctly means having already fixed in mind that the national aggregate reaches beyond the country's territory while the domestic one does not.

CDS_GK_2024_I_Q752024Open & attempt →

Which one of the following statements is not correct for National Income Accounting for India?

(a) Imports are subtracted in calculating Gross Domestic Product.
(b) Net factor payments earned from abroad are included in Gross Domestic Product.
(c) Purchase and sale of second-hand goods are not included in Gross Domestic Product.
(d) Inventories are included in Gross Domestic Capital Formation.

Answer(b) Net factor payments earned from abroad are included in Gross Domestic Product.

The identical point in reverse. The statement to be rejected there is that factor income from abroad enters GDP — the very inclusion this question rules out — so the two items settle the same boundary between the domestic and the national aggregate.

Practice

practice — not a real PYQ
A Japanese company operates a factory in Chennai and repatriates its profit. The profit earned is
- (a)part of India's GDP and part of India's national income
- (b)part of India's GDP but not part of India's national income
- (c)part of India's national income but not part of India's GDP
- (d)part of neither
Answer(b) part of India's GDP but not part of India's national income — the output is produced inside India's domestic territory, but the factor income accrues to a non-resident and is deducted when moving from GDP to GNP.
practice — not a real PYQ
If a country's net factor income from abroad is negative, then
- (a)its GNP exceeds its GDP
- (b)its GDP exceeds its GNP
- (c)its GNP equals its GDP
- (d)its GDP must be falling
Answer(b) its GDP exceeds its GNP — GNP is GDP plus net factor income from abroad, so a negative addition leaves the national figure below the domestic one.