Two friends, Ravi and Harry were discussing whether the money received from sale of an old car should be included in India’s National income.
Ravi was of the view that it should be included in India’s National income while Harry did not agree with him.
They also had difference of opinion on the treatment of brokerage paid to the car dealer.
As their Economics teacher, state the treatments with valid arguments.
Two friends, Ravi and Harry were discussing whether the money received from sale of an old car should be included in India’s National income.
Ravi was of the view that it should be included in India’s National income while Harry did not agree with him.
They also had difference of opinion on the treatment of brokerage paid to the car dealer.
As their Economics teacher, state the treatments with valid arguments.
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Solution and Explanation
National income measures the value of goods and services produced in the economy during the current year. It is a flow, not a stock.
So a payment is counted only if it is linked to current production. Payments for goods made earlier, or for assets that only change hands, are left out.
Step 2: Treatment of money from sale of the old car:
Harry is correct and Ravi is wrong. The old car was produced in an earlier year.
Its value was already counted in national income of that earlier year, when the car was first made and sold.
Selling it again only moves ownership from one person to another. No new goods or services are created this year.
So the money received from the sale of the old car is not included in national income, because counting it again would be double counting.
Step 3: Treatment of brokerage paid to the car dealer:
The dealer arranged the sale and earned brokerage for it. This is a payment for a service rendered in the current year.
A service produced this year adds to the current flow of goods and services. It is part of the income earned by the dealer.
So the brokerage paid to the car dealer is included in national income.
Step 4: Compare the two items:
Sale of the old car: transfer of an existing asset, no current production, so excluded.
Brokerage: payment for a current productive service, so included.
Final Answer:
Money from the sale of the old car is excluded (Harry is right). Brokerage paid to the car dealer is included.
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