X pays Rs. 5 lakhs to a person to transport fake currency worth Rs. 50 lakhs. The Police department pays Rs. 5 lakhs to a detective to investigate the crime. The detective's income is taxed at 10%. If these transactions happen in the same year within a country, the contribution to GDP (in Rs. lakhs) is
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Answer: (B)
The Rs. 5 lakh paid to transport fake currency is payment for an illegal activity and is excluded from official GDP. The Rs. 5 lakh the police pay the detective is a government purchase of a service and is counted once.
The 10% income tax is a transfer within the economy and does not add to or subtract from GDP. So the contribution is Rs. 5 lakhs, option (B).
Adding both the fake-currency payment and the detective's fee (to reach 10) double counts an excluded illegal transaction; only the legitimate government service enters GDP.
National income accounting has come up 132 times in 6 exams since 2010.
This question is on What counts in GDP, part of National income accounting in Macroeconomics.
The boundary of GDP: which transactions and goods are counted and which are not.
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Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.