Giving valid reasons, explain how the following would be treated while estimating National income : (a) Payment of indirect taxes by a firm. (b) Purchase of goods by foregin tourists. Using the following information, calculate and analyse the value of Gross Domestic Product (GDP) deflator :

Question

Accepted Answer

(a) Payment of indirect taxes by a firm: Indirect taxes are part of Net Indirect Taxes (NIT = Indirect Taxes - Subsidies). They are subtracted when converting from market price to factor cost: GDP_FC = GDP_MP - NIT. Indirect taxes are not directly included in national income as factor income, but they form part of the market price.

(b) Purchase of goods by foreign tourists: This is included in national income through the Expenditure Method as it represents exports. Expenditure by non-residents on domestically produced goods forms part of Net Exports (X-M). As per the chapter resources, expenditure incurred by foreign tourists in the country is included in domestic income as goods purchased by the tourist are exports produced within the domestic territory.