ECONOMICS PROJECT FILE

NATIONAL INCOME AND

RELATED AGGREGATES

Submitted to: [Name of Teacher / Designation]

Submitted by:
Name: [Your Full Name]
Class: XII - [Your Section (e.g., A/B/Commerce)]
Roll No.: [Your Roll Number]
Session: [Current Academic Session, e.g., 2024-25]

[Your School Name]

[Your City, State]
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my Economics teacher,

[Teacher’s Name], for their invaluable guidance, encouragement, and motivation
throughout the process of completing this project on National Income and Related
Aggregates. Their expertise ensured that I was on the right track and provided me
with the necessary resources and insights to delve deep into this crucial topic.
I am also thankful to our Principal, [Principal’s Name], for providing the platform
and resources necessary for the successful completion of this academic project.
Furthermore, I extend my heartfelt thanks to my parents and friends, who provided
constant support, encouragement, and constructive criticism whenever needed. Their
faith in my abilities helped me to overcome challenges and complete the project within
the stipulated time.
This project has been an enriching experience, significantly improving my
understanding of the macroeconomic concepts of National Income, its measurement,
and its importance in assessing the economic health of a nation.

[Your Name]
Class XII
 CERTIFICATE

CERTIFICATE OF COMPLETION

This is to certify that Mr./Ms. [Your Full Name], a student of Class XII
[Your Section] in [Your School Name] has successfully completed the project work on
the topic “NATIONAL INCOME AND RELATED AGGREGATES” during
the academic session [Current Academic Session] as prescribed by the Central Board of
Secondary Education (CBSE).
The work done is original and authentic to the best of my knowledge and satisfaction.
The student has shown sincerity, dedication, and diligence in completing the project.

Internal Examiner External Examiner Principal

Teacher’s Signature:
 Contents

1. INTRODUCTION 5
1.1 Project Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2. FUNDAMENTALS OF NATIONAL INCOME 6

2.1 Definition of National Income . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1.1 Key Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

3. RELATED AGGREGATES 7
3.1 Gross vs. Net (Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Domestic vs. National (NFIA) . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Market Price vs. Factor Cost (NIT) . . . . . . . . . . . . . . . . . . . . . . 9

4. MEASUREMENT METHODS 10
4.1 Value Added Method (Product Method) . . . . . . . . . . . . . . . . . . . 10
4.1.1 Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1.2 Precautions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Numerical Example: Value Added Method . . . . . . . . . . . . . . . . . . 11
4.3 Income Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3.1 Components of Domestic Income (NDPFC ) . . . . . . . . . . . . . . 12
4.3.2 Precautions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 Numerical Example: Income Method . . . . . . . . . . . . . . . . . . . . . 13
4.5 Expenditure Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.5.1 Components of Final Domestic Expenditure (GDPMP ) . . . . . . . 14
4.5.2 Precautions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6 Numerical Example: Expenditure Method . . . . . . . . . . . . . . . . . . 15

5. CHALLENGES IN MEASUREMENT 16
5.1 Difficulties in Measuring National Income . . . . . . . . . . . . . . . . . . 16
5.1.1 Conceptual Difficulties . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.1.2 Practical Difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . 16

6. NATIONAL INCOME AND WELFARE 17

6.1 Is High National Income equal to High Welfare? . . . . . . . . . . . . . . . 17
6.1.1 Limitations of GDP as a Measure of Welfare . . . . . . . . . . . . . 17

7. CIRCULAR FLOW OF INCOME 18

7.1 The Two-Sector Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1.1 The Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

8. REAL VS. NOMINAL INCOME 19

8.1 Nominal GDP (GDP at Current Prices) . . . . . . . . . . . . . . . . . . . 19
8.2 Real GDP (GDP at Constant Prices) . . . . . . . . . . . . . . . . . . . . . 19

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 8.2.1 Why Real GDP is a Better Measure . . . . . . . . . . . . . . . . . . 19
8.3 GDP Deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

9. GREEN GNP 20
9.1 The Need for Sustainable Income . . . . . . . . . . . . . . . . . . . . . . . 20
9.2 Concept of Green GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.2.1 Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.2.2 Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

10. CONCLUSION 21

11. BIBLIOGRAPHY/REFERENCES 22

12. SUMMARY OF NATIONAL INCOME AGGREGATES 23

12.1 Key Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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 1. INTRODUCTION

National Income is arguably the most vital concept in macroeconomics. It serves as the
primary yardstick for measuring the economic performance and health of a nation. This
project aims to provide a comprehensive analysis of National Income, covering its
fundamental definitions, the complex set of related aggregates, and the three distinct
methods used for its calculation.
The study of National Income is not merely an academic exercise; it is crucial for
policymakers, businesses, and economists alike. It helps in formulating economic
policies, comparing standards of living across different countries, and understanding the
distribution of income within an economy.
This file is a sincere attempt by [Your Name], a student of Class XII, to
systematically investigate and present the concepts and numerical application of
National Income as per the CBSE curriculum. The project is structured to first lay
down the theoretical foundation and then provide practical numerical examples for
better comprehension of the subject.

1.1 Project Scope

• Define National Income and its fundamental concepts.

• Detailed explanation of the three methods of calculation: Value Added, Income,

and Expenditure.

• Provision of a solved numerical problem for each of the three methods.

• Discussion on the concept of National Welfare and the challenges associated with
National Income measurement.

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 2. FUNDAMENTALS OF
NATIONAL INCOME

2.1 Definition of National Income

National Income refers to the money value of all final goods and services produced by
the normal residents of a country during an accounting year. In macroeconomic terms,
it is generally represented by Net National Product at Factor Cost (NNPFC ).

2.1.1 Key Features

• Monetary Value: It is expressed in terms of money, not physical units.

• Final Goods and Services: Only the value of final goods and services is included
to avoid the problem of double counting.

• Normal Residents: It includes income earned only by the residents of the country,
whether working within the domestic territory or outside.

• Accounting Year: It is measured over a specific period, typically one financial

year.

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 3. RELATED AGGREGATES

3.1 Gross vs. Net (Depreciation)

The difference between ’Gross’ and ’Net’ measures of product is Depreciation.

3.1.1 Gross Domestic Product (GDPMP )

It is the market value of all final goods and services produced within the domestic
territory of a country during an accounting year.

3.1.2 Net Domestic Product (NDPMP )

It is the market value of all final goods and services produced within the domestic
territory of a country during an accounting year, excluding the depreciation on capital
goods.

Net = Gross − Depreciation

Gross = Net + Depreciation

Aggregate Formula Description

Gross National Product (GNP) GNP = NNP + Depreciation Total output, including capital consu
Net National Product (NNP) NNP = GNP − Depreciation Total output, excluding capital consu

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3.2 Domestic vs. National (NFIA)
The difference between ’Domestic’ and ’National’ aggregates is Net Factor Income from
Abroad (NFIA).

3.2.1 Domestic Income (NDPFC )

It is the sum of factor incomes generated within the domestic territory of a country
during an accounting year.

3.2.2 National Income (NNPFC )

It is the sum of factor incomes accruing to the normal residents of a country during an
accounting year.

National = Domestic + NFIA

Domestic = National − NFIA

Net Factor Income from Abroad (NFIA)

NFIA is the difference between the factor income received by normal residents from the
rest of the world and the factor income paid to non-residents within the domestic
territory.

Factor Income earned Factor Income paid

   
NFIA = −
by residents from ROW to non-residents in DT

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3.3 Market Price vs. Factor Cost (NIT)
The difference between ’Market Price’ (MP) and ’Factor Cost’ (FC) is Net Indirect Tax
(NIT).

3.3.1 Factor Cost (FC)

It is the cost of factors of production (land, labor, capital, enterprise) used in the
production process.

3.3.2 Market Price (MP)

It is the price at which a product is actually sold in the market.

MP = FC + NIT

FC = MP − NIT

Net Indirect Tax (NIT)

NIT is the difference between Indirect Taxes and Subsidies.

• Indirect Taxes (IT): Taxes imposed by the government on the production and
sale of goods and services (e.g., GST).

• Subsidies (S): Financial assistance given by the government to firms to encourage

the production of certain goods.

NIT = Indirect Taxes − Subsidies

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 4. MEASUREMENT METHODS

4.1 Value Added Method (Product Method)

This method measures National Income by estimating the contribution of each
producing enterprise to the national output. It is the sum of the value added by all the
firms in the economy.

4.1.1 Steps
1. Estimate Value of Output (VO): VO = Sales + Change in Stock.

2. Estimate Value Added (VA): VA = VO − Intermediate Consumption (IC).

3. Calculate GDPMP : Sum of VA of all producing sectors (Primary, Secondary,

Tertiary).

4. Derive NNPFC (National Income):

NNPFC = GDPMP − Depreciation − NIT + NFIA

4.1.2 Precautions
• Avoid double counting (only value of final goods/services must be included).

• Value of intermediate goods should not be included.

• Value of goods produced for self-consumption should be included.

• Sale of second-hand goods is not included.

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4.2 Numerical Example: Value Added Method

Problem 1: Calculate NNPFC (National Income)

S. No. Particulars Amount (Rs. Crores)
i. Sales 10,000
ii. Opening Stock 500
iii. Closing Stock 800
iv. Intermediate Consumption 3,000
v. Indirect Taxes 600
vi. Consumption of Fixed Capital (Depreciation) 200
vii. Subsidies 100
viii. Net Factor Income from Abroad (NFIA) 50

Solution 1
1. Calculate Change in Stock (∆S):

∆S = Closing Stock − Opening Stock = 800 − 500 = 300

2. Calculate Value of Output (VO):

VO = Sales + ∆S = 10, 000 + 300 = 10, 300

3. Calculate GDPMP (Value Added):

GDPMP = VO − Intermediate Consumption

GDPMP = 10, 300 − 3, 000 = Rs. 7,300 Crores

4. Calculate National Income (NNPFC ):

NIT = Indirect Taxes − Subsidies = 600 − 100 = 500

NNPFC = GDPMP − Depreciation − NIT + NFIA

NNPFC = 7, 300 − 200 − 500 + 50 = Rs. 6,650 Crores

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4.3 Income Method
This method measures National Income by summing up all the factor incomes (rent,
wages, interest, profit) paid to the factors of production for their services in the
production of final goods and services within the domestic territory of a country.

4.3.1 Components of Domestic Income (NDPFC )

NDPFC = COE + OS + MI

1. Compensation of Employees (COE): Wages and salaries (in cash and kind),
and employers’ contribution to social security schemes.

2. Operating Surplus (OS): Income from property and entrepreneurship.

OS = Rent + Royalty + Interest + Profit

3. Mixed Income of Self-Employed (MI): Income of sole proprietors/farmers

where factor incomes are not easily distinguishable.

4.3.2 Precautions
• Transfer payments (e.g., old-age pension) are not included.

• Income from the sale of second-hand goods is not included.

• Capital gains (e.g., from sale of shares) are not included.

• Income from illegal activities is not included.

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4.4 Numerical Example: Income Method

Problem 2: Calculate GDPMP and National Income (NNPFC )

S. No. Particulars Amount (Rs. Crores)
i. Compensation of Employees (COE) 4,500
ii. Rent and Royalty 500
iii. Interest 300
iv. Corporation Tax 100
v. Dividend 150
vi. Undistributed Profits (Retained Earnings) 50
vii. Mixed Income of Self-Employed 1,200
viii. Net Factor Income to Abroad (NFITA) 70
ix. Indirect Taxes 400
x. Subsidies 100
xi. Depreciation 200

Solution 2
1. Calculate Operating Surplus (OS):

Profit = Corporation Tax + Dividend + Undistributed Profits

Profit = 100 + 150 + 50 = 300

OS = Rent + Interest + Profit = 500 + 300 + 300 = 1, 100

2. Calculate Domestic Income (NDPFC ):

NDPFC = COE + OS + MI

NDPFC = 4, 500 + 1, 100 + 1, 200 = Rs. 6,800 Crores

3. Calculate GDPMP :

NIT = Indirect Taxes − Subsidies = 400 − 100 = 300

GDPMP = NDPFC + Depreciation + NIT

GDPMP = 6, 800 + 200 + 300 = Rs. 7,300 Crores

4. Calculate National Income (NNPFC ):

NFIA = −NFITA = −70

NNPFC = NDPFC + NFIA = 6, 800 − 70 = Rs. 6,730 Crores

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4.5 Expenditure Method
This method measures National Income by estimating the final expenditure incurred by
households, government, firms, and the rest of the world on final goods and services
produced within the domestic territory of a country.

4.5.1 Components of Final Domestic Expenditure (GDPMP )

GDPMP = PFCE + GFCE + GDCF + NX

1. Private Final Consumption Expenditure (PFCE): Expenditure by house-

holds and private non-profit institutions serving households.

2. Government Final Consumption Expenditure (GFCE): Expenditure on col-

lective services (defence, education, healthcare).

3. Gross Domestic Capital Formation (GDCF): Investment expenditure.

GDCF = Gross Domestic Fixed Capital Formation + Change in Stock

4. Net Exports (NX): Difference between Exports and Imports.

NX = Exports − Imports

4.5.2 Precautions
• Expenditure on intermediate goods is not included.

• Expenditure on second-hand goods is not included.

• Expenditure on financial assets (shares, bonds) is not included.

• Transfer expenditure (e.g., gifts) is not included.

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4.6 Numerical Example: Expenditure Method

Problem 3: Calculate NNPFC (National Income)

S. No. Particulars Amount (Rs. Crores)

i. Private Final Consumption Expenditure (PFCE) 2,000
ii. Net Domestic Capital Formation (NDCF) 500
iii. Government Final Consumption Expenditure (GFCE) 800
iv. Net Exports (NX) −100
v. Consumption of Fixed Capital (Depreciation) 150
vi. Net Indirect Tax (NIT) 250
vii. Net Factor Income to Abroad (NFITA) 30

Solution 3
1. Calculate Gross Domestic Capital Formation (GDCF):

GDCF = NDCF + Depreciation = 500 + 150 = 650

2. Calculate GDPMP (Final Domestic Expenditure):

GDPMP = PFCE + GFCE + GDCF + NX

GDPMP = 2, 000 + 800 + 650 + (−100) = Rs. 3,350 Crores

3. Calculate National Income (NNPFC ):

NFIA = −NFITA = −30

NNPFC = GDPMP − Depreciation − NIT + NFIA

NNPFC = 3, 350 − 150 − 250 + (−30) = Rs. 2,920 Crores

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 5. CHALLENGES IN
MEASUREMENT

5.1 Difficulties in Measuring National Income

Accurate estimation of National Income is hampered by several conceptual and
practical difficulties, especially in developing countries like India.

5.1.1 Conceptual Difficulties

• Treatment of Non-Monetized Transactions: Services rendered for self-consumption
(e.g., a farmer consuming his own produce) are difficult to value and often excluded
or underestimated.

• Underestimation of Production: Production by the informal sector, or output

from household production (like services of a housewife), are excluded due to lack
of market transactions.

• Treatment of Government Sector: Difficulty in assessing the value of services

provided by the government (e.g., defense, public administration) as they are not
sold in the market. They are generally valued at cost.

5.1.2 Practical Difficulties

• Problem of Double Counting: If the value of intermediate goods is incorrectly
added, the national income is artificially inflated. This is a common pitfall.

• Lack of Reliable Data: Incomplete or inaccurate data collection, especially in

the agricultural and small-scale sectors.

• Illiteracy and Ignorance: Lack of proper accounting practices among producers,

leading to inaccurate reporting of income or expenditure.

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 6. NATIONAL INCOME AND
WELFARE

6.1 Is High National Income equal to High Welfare?

National Income (NNPFC ) or GDP is often used as a measure of economic welfare.
However, it is not a perfect measure. Economic Welfare is the level of prosperity,
well-being, and living standards of the people.

6.1.1 Limitations of GDP as a Measure of Welfare

• Distribution of GDP: If the growth in GDP is concentrated among a few rich
individuals, it does not represent an improvement in the welfare of the majority.

• Non-Monetary Exchanges: Many goods and services (like leisure, voluntary

services) contribute to welfare but are not included in GDP.

• Externalities (Non-Market Activities):

– Negative: Industrial pollution reduces welfare but GDP increases (due to

industrial output). The cost of cleaning is not accounted for.
– Positive: Creation of public parks increases welfare but doesn’t contribute
directly to GDP.

• Composition of Output: GDP may rise due to the production of harmful goods
(e.g., cigarettes) or goods used for defense, which may not improve the general
welfare as much as essential goods (e.g., education, healthcare).

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7. CIRCULAR FLOW OF INCOME

7.1 The Two-Sector Model

The circular flow of income is a model of the economy in which the major exchanges are
represented as flows of money, goods, and services between economic agents. The
two-sector model includes only Households and Firms.

7.1.1 The Flows

1. Real Flow (Inner Flow):

• From Households to Firms: Supply of factor services (Land, Labour, Cap-

ital, Enterprise).
• From Firms to Households: Supply of final goods and services.

2. Money Flow (Outer Flow):

• From Firms to Households: Factor payments (Rent, Wages, Interest,

Profit).
• From Households to Firms: Consumption expenditure on goods and ser-
vices.

In this simplified model, the total factor payments received by households equals their
total consumption expenditure, which in turn equals the value of output produced by
firms. This ensures that:

Production = Income = Expenditure

Placeholder for Circular Flow Diagram

In the final project file, a diagram depicting the real and money flows between
the Household and Firm sectors should be placed here.

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8. REAL VS. NOMINAL INCOME

8.1 Nominal GDP (GDP at Current Prices)

Nominal GDP is the market value of the final goods and services produced within the
domestic territory of a country during an accounting year, valued at the current
year’s prices.

8.2 Real GDP (GDP at Constant Prices)

Real GDP is the market value of the final goods and services produced within the
domestic territory of a country during an accounting year, valued at the prices of a
base year.

8.2.1 Why Real GDP is a Better Measure

Real GDP is a better measure of economic growth and welfare because it reflects the
change in the physical output of goods and services. Nominal GDP can increase simply
due to inflation (rise in price level) without any actual increase in production. By
keeping prices constant, Real GDP accurately reflects the true growth of the economy.

8.3 GDP Deflator

The GDP Deflator is a measure of the average level of prices of all the goods and
services that constitute GDP. It acts as an index of price change.
Nominal GDP
GDP Deflator = × 100
Real GDP

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 9. GREEN GNP

9.1 The Need for Sustainable Income

Traditional measures of National Income (like GDP and GNP) focus solely on the value
of goods and services produced, often overlooking the environmental costs associated
with production. Economic growth that causes significant environmental damage is
unsustainable in the long run.

9.2 Concept of Green GNP

Green Gross National Product (Green GNP) is an indicator used to measure National
Income while taking into account the costs of environmental degradation and natural
resource depletion. It is a step towards sustainable income measurement.

9.2.1 Calculation
Green GNP = GNP−Cost of Environmental Damage−Cost of Depletion of Natural Resources

9.2.2 Significance
• It provides a more realistic measure of economic welfare by deducting the negative
externalities.

• It highlights the need for sustainable consumption and production practices.

• It encourages policymakers to adopt environmental conservation policies.

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 10. CONCLUSION

This project has successfully explored the multi-faceted concept of National Income and
its related aggregates. It is evident that National Income (NNPFC ) is the most
comprehensive measure of the economy’s output and factor payments, derived from
three distinct but mutually consistent methods: the Value Added Method, the Income
Method, and the Expenditure Method.
The successful application of numerical problems demonstrates that regardless of the
method used, the final value of National Income remains the same, highlighting the
crucial identity that Production = Income = Expenditure.
However, the analysis of National Income and Welfare reveals that while a high National
Income is desirable, it is not an end in itself. Economic welfare must also account for
factors like income distribution, non-monetary exchanges, and the environmental cost of
production. Moving towards concepts like Real GDP and Green GNP is essential for a
more holistic assessment of a nation’s true economic health and its citizens’ well-being.
In conclusion, the study of National Income is foundational to understanding
macroeconomics and essential for effective planning and policy formulation aimed at
achieving inclusive and sustainable economic development.

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 11.
BIBLIOGRAPHY/REFERENCES

The following resources were consulted and used in the preparation of this project:

1. NCERT Textbook: Introductory Macroeconomics, Class XII, National Council

of Educational Research and Training (NCERT).

2. Reference Book: T.R. Jain and V.K. Ohri. Introductory Macroeconomics (Latest
Edition).

3. Online Sources:

• Ministry of Statistics and Programme Implementation (MoSPI), Government

of India website.
• Various academic articles and online lecture notes on National Income ac-
counting.

4. Teacher’s Notes: Class notes and discussions provided by the subject teacher,
[Teacher’s Name].
 12. SUMMARY OF NATIONAL
INCOME AGGREGATES

12.1 Key Conversions

This page serves as a quick reference for the relationships between the main
macroeconomic aggregates.

The Three Bridges

Conversion Add/Subtract Connecting Term

Gross → Net Subtract Depreciation (Consumption of Fixed C
Net → Gross Add Depreciation
Domestic → National Add NFIA (Net Factor Income from Abroad
National → Domestic Subtract NFIA
Market Price (MP) → Factor Cost (FC) Subtract NIT (Net Indirect Tax)
Factor Cost (FC) → Market Price (MP) Add NIT

The Goal Aggregate

The final objective of all calculations is:

National Income = NNPFC

This can be reached from any other aggregate using the three bridges:

NNPFC = GDPMP − Depreciation + NFIA − NIT

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