Class 12 Economics Chapter 2 National Income Accounting

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Class 12 Economics Chapter 2 National Income Accounting

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National Income Accounting

Chapter: 2

PART – A

VERY SHORT TYPE QUESTIONS ANSWERS

1. Who wrote the “An Enquiry into the Nature and cause of the wealth of Nations?

Ans : Adam Smith.

2. Define final goods.

Ans : Final goods refer to those goods which have crossed all phases of production and readily available for the final users.

3. Define Gross Investment of an economy.

Ans : The total addition made to the capital stock of economy in a given period is termed as gross investment. Capital stock consists of fixed assets and unsold stock. So, gross investment is the expenditure on purchase of fixed assets and unsold stock during the accounting year.

4. Define depreciation.

Ans : Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time and obsolescence or change in technology.

5. Define Gross Domestic Product.

Ans : (a) Gross domestic product at market price (GDP_MP ): It  is the gross market value of all final goods and service produced within the domestic territory of a country during a period of one year.

(b)  Gross domestic product at factor cost (GDP_FC) : GDP_FC is the gross money value f all the final goods and service produced within the domestic territory of a country during a period of one year.

GDP_FC =GDP_MP –Net indirect taxes.

6. Does depreciation take into account an accidental loss of a capital good?

Ans : “No”.

7. Fill in the blanks : 

In an year the total production of final goods of an economy can be either in th farm of consumption or ———

Ans : Investment.

8. What is macro economics model?

Ans : Economic model reflects some basis feature of economic activities in a society.

9. What is value added of a firm?

Ans : Inventory is a stock variable. In economics, the stock of unsold finished goods, or semi-finished goods or raw-materials which a firm carries from one year to the next is called inventory.

Value added of a firm = value of production of the firm-value of intermediate goods used by the firm. The value of added of a firm is distributed among its four factor of production, mainly labour, capital, entrepreneurship and bond. Therefore, wage, interest, profits and rent, paid out by the firm must add up to the value added of the firm. Value added is a flow variable.

10. Among whom i the value added of a firm distributed?

Ans : Among the four factors of production.

11. Fill in the blanks :

Depreciation is ______ of fixed capital.

Ans : Consumption.

12. Why do we need to calculate value added in measuring the national income.

Ans : To measure the National Income.

13. Write true or false: Value added of a firm is a flow variable.

Ans : True

14. What is gross value added?

Ans : It is the money value of all the outpost produced in all the sectors of an economy.

15. What is net value added?

Ans : When depreciation cost and net indirect tax is deducted from gross value added, it is called net value added.

16. What is inventory?

Ans : Inventory is a stock variable. In economics, the stock of unsold finished goods, or semi-finished goods or raw-materials which a firm carries from one year to the next is called inventory.

Value added of a firm = value of production of the firm- value of intermediate goods used by the firm. The value added of a firm is distributed among its four factors of production, mainly labour, capital, entrepreneurship and bond. Therefore, wage, interest, profits and rent, paid out by the firm must add up to the value added of the firm. Value added is a flow variable.

17. Write true or false: Inventory is a stock variable, but change in inventory is a flow variable.

Ans : True.

18. Write true or false: Inventories are treated as capital.

Ans : True.

19. Why are the expenditure on intermediate not included in the estimation of GDP?

Ans : Because, it is non factor input.

20. Which part of the following equation refers to budget deficit? 

(I –S) + (G – T) = M –X

Ans : G – T.

21. (I –S) + (G – T) = M –X.

– In this equation, what does the part M –X  refer to?

Ans : Import Export (m – x)

22. Fill in the blank: GNP = GNP + _________.

Ans : NFIFA

23. Fill in the blank: NNP = GNP ______.

Ans : Depreciation.

24. What is GDP deflator?

Ans : It is seen that, nominal GDP is affected by both changes in price and physical output. On the other hand, Real GDP is affected by change in physical output only. From these two concepts, a third concept is computed and it is termed as ‘GDP Deflator’. GDP deflator measures the average level of prices of all the goods and services that make up GDP. It is used to eliminate the effects of price changes and to determine the real change in physical output.

25. Suppose the GDP at market price of a country is Rs 950crores. If the amount of depreciation is Rs 100crores, find out the NDP at market price.

Ans : We know, NDP _MP = GDP _MP – Depreciation = 950-100 = Rs. 850crs

26. Who is the founder father of modern economics?

Ans : Adam Smith

27. What is National Income?

Ans : National income means income earned by the normal residents of a country in an accounting year.

28. What is base year?

Ans : Bas year is the reference period with which the analysis is made.

29. What is consumer price index?

Ans : Consumer price index measure the average percentage change in prices paid by the consumer of a particular section of the population at two different time periods.

30. What is investment? Distinguish between gross investment and net investment.

Ans : Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. Investment is related to saving or deferring consumption.

31. Give any two examples of macroeconomic variable.

Ans : National income ( measured in Gross Domestic Product ), employment, inflation and investment are some examples of macroeconomic variable.

32. What is Personal Disposable Income (PDI)?

Ans : Personal disposable income is the total amount of money that households have available for spending and saving after income taxes have been paid.

SHORT ANSWER QUESTION TYPE – II : ( MARKS : 3 )

1. Suppose the GDP at market price of a country is Rs 1100crores. Again, net factor income from abroad is Rs 150crores and depreciation is Rs 80crors. Now, if the value of indirect taxed subsidies is Rs 120crores, find out the value of national income. 

Ans : Given,

   GDP _Mp = 1100cr.

   NFIFA = 150cr.

   Depreciation = 80cr.

   Subsidies = 120cr.

∴   NNP _FC = GDP _MP dep + NFIFA – NIT

= 110 – 80 + 150 – [0 – 120] = Rs 129cr.

2. Suppose the net national product at market price (NNP at market price) of a country is Rs 1600crores. If the total indirect tax is Rs 100crores and the total amount of subsidy paid by the government is Rs 80crores, find out the level of national income of the country.

Ans : Given,

    NNP _MP = 1600cr.

    Indirect Tax (IT) = 100cr.

    Subsidies = 80cr.

∴   NNP _{FC =} NNP _MP – NIT = 1600 – [100-80] = Rs. 1580cr.

3. The value of the nominal GNP of an economy in a particular year is Rs 2,800. The value of GNP of that country during the same year evaluated at the prices of the year in percentage terms has the price level risen between the base year and the year under consideration?

Ans : Given,

National GNP = Rs 2800cr.

Real GNP = Rs3200cr.

We know that,

4. The value of nominal GNP of an economy in a particular year is R 4,000 crores. While calculate GNP for the same year at constant price becomes Rs 3500 crores. Calculate the value of GNP deflator of the year at percentage terms.

Ans : Given,

  Nominal GNP = Rs 4000cr.

  Gnp (Constant prices) = Rs 3500cr.       

5. The excess of private investment over savings of a country in a particular year was R 3000 crores. The amount of budget deficit was (-) Rs 800 crores. What was the volume of trade deficit of that country?

Ans : We know that _______

  (M-X) = (I – S) + (G – I) + (G – I)

= 3000 + (-800) = .2200cr, is the trade deficit.

6. Explain the concept of intermediate goods.

Ans : Intermediate goods refer to those goods, which are used either for resale or for further production in the same year.

7. Distinguish between gross investment and net investment.

Ans : Investment or capital formation refers to the capital stock of economy. For example construction of building, purchase of machinery etc.  Investment can be looked up in two forms.  (a) Gross investment and (b) Net investment.

The total addition made to the capital stock of economy in a given period is termed as gross investment. Capital stock consists of fixed assets and unsold stock. So, gross investment is the expenditure on purchase of fixed assets and unsold stock during the accounting year.

The actual addition made to the capital stock of economy in a given period is termed a Net investment.

Net investment = Gross investment – Depreciation.

Depreciation refers to a fall in the value assets due to normal wear and tear, passage of time and expected obsolescence or change in technology.

8. Describe the circular causation between the act if consumption and production in a simple economy.

Ans : In a two sector simple economy, it was assumed that there are no savings, i.e. households spend their entire income on purchase of goods and services and firms spend all the receipts from sale of goods and services in making factors payments.

But in actual practice, households do not spend their entire income on consumption, i.e. a part of their income is saved. Similarly firms also save some part of their receipt for expansion or other reasons. Firms also borrow money to finance their expansion programmer. All savings and borrowing are channelized through a financial market. Financial market refers to institutions such as banks, insurance companies etc. Which transact in loan able funds. Saving of households accumulated in the financial market are utilised by firms for investment purpose. So, the circular flow of income continues as shown in the following diagram.

9. Explain the concepts of value added, gross value added and net value added.

Ans : See Q. No 13, 14 & 15 of (very short Answer)

10. Distinguish between gross value added and net value added.

Ans : See Q. No 14 & 15 of (very short Answer)

11. A firms produces goods of Rs 500 per year and intermediate goods used by the firm is of worth Rs 250. The cost capital consumption is Rs 20 per year. – Calculate gross value added and net value added by the firm.

Ans : Gross value Added = Value of output – Intermediate Goods.

    = 500 – 250 = 250 rupees

12. Explain the concept of inventory.

Ans : Inventory is a stock variable. In economics, the stock of unsold finished goods, or semi-finished goods or raw-material which a firm carries from one year to the next is called inventory. The change in inventories means increase or decrease in inventory. If the value of inventories isles at the end of the year compared to the beginning of the year, inventories have aid to be decreased and if it may have a value at the beginning of the year, it may have a higher value at the end of the year then it is the case of increase in inventories. Therefore, change of inventories of a firm during a year = production of the firm during the year -0 sale of the firm during the year. Value added of a firm means the net contribution made by a firm in an economy.

13. A firm had a inventory if Rs 80 at the beginning of the year. During the year the firm has produced goods of worth Rs 500 and sold goods of worth R 400. – Calculate the change in inventories for the year.

Ans : Change in inventory = Closing inventory – Opening inventory

    = [500-400] – [80] = 100 – 80 = Rs 20

14. Give an imaginary example of unplanned accumulation of inventories.

Ans : The difference between planned and unplanned inventory accumulation is that in planned inventory, accumulation there is an unexpected rise in sales of a firms and in unplanned inventory, accumulation there is an unexpected fall in sales. The firm will have unsold stock of goods which it had not anticipated.

Inventory is a stock variable. In economic, the stock of unsold finished goods, or semi-finished goods or raw-materials which a firm carries from one year to the next is called inventory. The change in inventories means increase or decrease in inventory. If the value of inventories is less at the end of the year compared to the beginning of the year, inventories have said to be increased and if it may have a value at the beginning of the year, it may have a higher value at the end of the year then it is the case of increase in inventories. Therefore, change of inventories of a firm during a year = production of the firm during the year- sale of the firm during the year. Value added of a firm means the net contribution made by a firm in an economy.

Value added of a firm = value of production of the firm-value of intermediate goods use by the firm. The value added of a firm is distributed among its four factors of production, mainly labour, capital, entrepreneurship and bond. Therefore, wage, interest, profits and rent, paid out by the firm must add up to the value added of the firm. Value added is a flow variable.

15. Explain the concept of gross domestic products on the basis of the following:

GDP ≥ Eⁿ _{i = 1}GVAi

Ans : The Product or value Added Method : 

where, = the sum total of gross value added of all the ‘n’ firms.

The Expenditure Methods:

GDP = C+I+G+X-M

Where, C = consumption expenditure

I = investment expenditure

G = govt. Expenditure

X – M = Export-Import

The Income Method:

GDP = W_i +P_i+In_i+R_i

Where, W_i = wages and salaries receive by the household in a particular year.

P_i = gross Profit.

In_i = Interest Payments.

R_i = Rent received.

The aggregate of incomes received by the households is equal to the expenditure received by the firms, because the income method and expenditure method would give us the same figure of GDP.

16. Explain the concept of net domestic product on the basis of the following : 

Ans :  NDP≥, means the total money value of all the final goods and services produced by 

‘in’ number of firms in n economy during a particular year and also after deducting depreciation cost. ( i = 1,2,3…….. ).

17. Explain how to calculate gross national product from gross domestic product.

Ans : GNP is calculate from GDP by adding the net factor income from abroad ( NFIFA ), i.e.,

GNP = GDP + NFIA.

18. What is national disposable income?

Ans : It refers to the income which is available to the entire country for disposal.

19. What is net national product at factor cost.

Ans : It is the net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

20. Distinguish between real GDP and nominal GDP.

Ans : Nominal GDP or GDP at current price refers to the production of goods and services solved at current prices and Real GDP or GDP at constant price refers to the production of goods and services valued at constant prices.

Real GDP is better as compared to Nominal GP, the because of following reasons

1. Real GDP helps in determining the effect of increased production of goods and services as it is affected by change in physical output only. On the other hand, nominal GDP can increase even without any increase in physical output as it is affected by changes in prices also.
2. Real GDP is a better measure to make periodic comparison in the physical output of goods and services over different years.
3. Real GDP facilitates international comparison of economic performance across the countries.

Therefore, real GDP is better than nominal GDP as it truly reflects the growth of an economy.

21. Distinguish between intermediate goods and final goods.

Ans : Goods which are used for further production or for resale in the same year are known as intermediate goods. Intermediate goods are purchased by one production unit from other production units. eg. are – wheat purchased by the flour mill, cotton for the spinning mill.

Final goods are meant for final consumption and final investment. The strength of a macro economy is seen in its capability of producing final goods and services.

SHORT ANSWER QUESTION TYPE – I : ( MARKS : 4 )

1. Distinguish between consumer goods and capital goods.

Ans : Consumption goods refer to those goods which satisfy the wants of the consumers directly. Examples bread, butter, shirts, pens etc. Consumption goods are of four kinds.

They are: 

1. Durable goods such as Television, refrigerator etc.
2. Semi-durable goods, like clothes, shoes.
3. Nondurable goods. For example. Milk bread, paper.
4. Services like services of teachers, doctors, banks etc.

Again, capital goods are those final goods, which help in production of other goods and services. Examples machinery, equipments, plants etc.

Differences between consumption goods and capital goods are given

1. Consumption goods satisfy human wants directly. So, such goods have direct demand. But         capital goods satisfy human wants indirectly. So, such goods have derived demand.
2. Consumption goods not promote production capacity. On the other hand, capital goods help in raising producing capacity.
3. Most of the consumption goods have limited expected life. Capital goods generally have an expected life of more than one year.

2. Distinguish between stocks and flows in regards to National Income.

Ans : The main difference between stock and flow are as follows:

1. Stock variable refers to that variable, which is measured at a particular point of time. Flow variable refers to that variable, which is measured over a period of time.
2.  Stock does not have a time dimension and flow has a time dimension as its magnitude can be measured over a period of time.
3. Stock is a static concept and flow is a dynamic concept.
4. Name the four factors of production and their features.

Ans : Land, Labour, capital, organisation.

3. What is unplanned accumulation of inventories? How it differs from unplanned declination of inventories.___ Explain

Ans : The difference between planned and unplanned inventory accumulation is that in planned inventory, accumulation there is an unexpected rise in sale of a firm and in unplanned inventory, accumulation there is an unexpected fall in sales. The firm will have unsold stock of goods which it had not anticipated.

Inventory is a stock variable. In economics, the stock of unsold finished goods, or semi-finished goods or raw-material which a firm carries from one year to the next is called inventory. The change in inventories means increase or decrease in inventory. If the value of inventories is less at the end of the year compared to the beginning of the year, inventories have said to be decreased and if it may have a value at the beginning of the year, it may have a higher value at the end of the year then it is the case of increase in inventories. Therefore, change of inventories of a firm during a year = production of the firm during the year- sale of the firm during the year. Value added of a firm means the net contribution made by a firm in an economy.

5. Explain the meaning of

Ans : Same as See Q. No. 8 (b) Short Q. Ans.

6. Define and distinguish personal from private income.2014, 16.

Ans : Private income refers to the income, which occurs to the private sector from all the sources within and outside the country.

Personal income is the sum total of all the incomes that are actually received by households from all the sources.

7. Define and distinguish between consumer price index and whole ale price index.

Ans : consumer price index shows the average increase in the cost of the commodities consumed by a class of people. Here, the retail prices of goods are taken. However the wholesale price index numbers measures the general changes in the wholesale prices of goods in a country and here only the wholesale prices of goods are taken into account.

8. Distinguish between gross national product and gross domestic product.

Ans : (a) Gross domestic product at market price ( GDP _Mp) : It is the gross market value of all final goods and service produced within the domestic territory of a country during a period of one year.

(b) Gross domestic product at factor cost (GDP _FC): GDP _FC is the gross money value of all the final goods and services produced within the domestic territory of a country during a period of one year.

GDP_FC=GDP_MP – Net in direct taxes.

(c) Gross National product at market price (GNP_MP): GNP_MP is the gross market value of all the final goods and services produced by the normal residents of a country during a period of one year.

GNP _FC = GNP _MP – Net indirect taxes.

9. A country’s national product at factor cost in a particular year is Rs 2100crores. The personal disposable income of the household is Rs 1500crores. The personal income taxes paid by them is Rs 500crores and the value of retained earnings of the firm and government is valued at Rs 300crores. There is no interest payments made by the household to the firms/government or by the firms/government to the households. – calculate the value of transfer payments made by the government to the government and firms to the household.

Ans : Personal income = personal disposable income (PDI) + personal income tax

= 1200 + 600 = 1800 = Rs. 1800 crores.

PDI = NNpat FC – Net retained earning to the firm’s government + transfer payments – personal income tax.

1200 = 1900 – 200 + transfer payments – 600

Transfer payments = 1900 – 200 – 1200 – 600

(-) Transfer payment = (-) 100 = Rs. 100 crores.

10. A firm produces goods of Rs. 1200 per year. The intermediate goods used by the firm is of worth Rs. 750. If the net value added by the firm is Rs. 400, calculate the gross value added and the consumption of the fixed capital (depreciation).

Ans : We know that,

   Gross Value Added

= Value of output – Intermediate Goods = 1200 – 750 = 450

Again, Depreciation = Gross Value Added _ Net Value Added

      = 450 – 400 = 50

11. Distinguish between factors income and transfer income.

Ans : The differences between factors income and transfer income are as follows:

The differences between the two is whether or not the income (payment) received is for rendering productive service. Payment received in exchange for rendering productive service is factor income whereas the one received without providing any service (or good) in return is transfer income. Mind national income includes only factor incomes and not transfer incomes.

For further clarification, the two concepts are compared below:

Factor payment (Income): 1. It comprises rent, wages, interest and profit. 2. It is received in return for rendering productive service. 3. It is an earned income (earning concept). 4. It is bilateral payment.

Transfer payment (Income): 1. It comprises gifts, subsidies, donations, scholarships, etc. 2. It is received without providing any goods or service in return. 3. It is an unearned income (receipt concept). 4. It is unilateral payment.

12. It is planned to increase national income by Rs. 1,000 crore in an economy, How much increase in investment is required to achieve this goal if MPC = 0.6?

Ans : Given that ∆y = 1,000crore MPC = 0.6

Thus, Rs. 400 crore will be needed as additional investment to achieve the planned goal.

13. Suppose the GDP at the market price of a country in a particular year is Rs. 1110 crore. Net Factors Income from abroad is Rs. 100 crore. The value of net Indirect Tax is Rs. 150 crore and National Income is Rs. 850 crore. Calculate the aggregate value of depreciation.

Ans : We know that, GDP _{(Market Price)} = National Income – NFIA + Net Indirect tax + Depreciation

Therefore,

Depreciation = GDP _(MP) – NI + NFIA – Net Indirect Tax

= 1,100 – 850 + 100 – 150 = 200 crore.

4. LONG ANSWER QUESTION TYPE : (MARKS : 5)

1. From the following data, calculate personal income and personal disposable income.

Ans : We know that,

NDP _FC = GDP _MP – Depreciation – NIT = 9000 – 500 – 100 = 8400cr. Again, Private income =  NDP _FC + NFIFA + Transfer income + Interest Received (household) = 8400 + 200 + 1200 + 800 = 10,600cr.

Therefore,

1. Personal Income = Private Income – corporate Tax – Nudist profit = 10,300 – 1000 – 1,500 = Rs. 81cr.
2. Personal Disposable Income = Personal Income – Interest paid (household) – Direct tax = 8100 – 1000 – 600 = Rs. 6500cr.
3. In a particular year a businessman gets Rs. 8000 by selling his products. The depreciation value of his equipment is Rs. 500. Out of the remaining Rs. 7,500 he pays a sales tax of Rs. 800 and buying of new equipment. And finally, he pays 10% of his income as income tax – On the basis of the above information calculate his contribution to the following measures of income.        (i) GDP at market price (ii) NNP at market price (iii) NNP at factor cost (iv) Personal disposable income.

Ans :  Value added by firm A :

= Sales by firm A + change in stock of firm A – purchase by firm A from firm C = 500 + 20- 320 = Rs. 200 crore.

Value added by firm B : 

= Sales by firm B to general government + Sales by firm B to households + (Closing stock of firm B – Opening stock of firm B) – purchase by firm B from firm A = 100+350+(40-30)-200 = 260 = Rs. 260 crores.

Gross Domestic product at market price 

= Value added by firm A + value added by firm B

200 + 260 = Rs. 460 crores.

Net value added at factor cost.

= Gross Domestic product at market price- consumption of fixed capital-indirect taxes paid by both the firms.

= 460-120-75= Rs. 265 crores.

3. Explain the circular flow of income simplified economy with two sectors – household and firms.

Ans : A simple economy assumes the existence of only two sectors. i.e. household sector and firm sector. Households are the owners of factors of production and consumers of goods and services. Firms produce goods and services and sell them to the households.

A two-sector circular flow model i drawn on the following assumptions.

1. There are only 2 sectors in the economy households and firms. It means, there is no government and foreign sector.
2. Household sector supplies factor services only to firms and the firms hire factor services only from households.
3. Firm produce goods and services and sell their entire output to the households.
4. Households receive factor income for their services and spend the entire amount on consumption of goods and services.
5. There are no savings in the economy i.e. neither the households save from their incomes, nor the firms save from their profits.

The circular flow in two-sector economy can be better understood with the help of a figure.

The outer loop of diagram shows the real flow, i.e. flow of factor service from households to firms and corresponding flow of goods and services flow from firms to households. The inner lop shows the money flow, i.e. flow of factor payments from firm to households and the corresponding flow of consumption expenditure from households to firms. It must be noted that entire amount of money, which is paid by firms as factor payments is paid back by the factor owners to the firms, so, here is a circular and continuous flow of money income.

In the circular flow of income, production generates factor income, which is converted into expenditure. This flow of income continues as production is a continuous activity due to never-ending human wants. It makes the flow of income circular.

Conclusions of circular flow in a simple economy: 

Total production = Total consumption

Factor payments = Factors income

Consumption expenditure = Factor income

Real Flow = Money flow.

4. Explain the value added method of calculating GDP.

Ans : The various precautions to be taken in value added method are given below :

1. Intermediate goods are not to be included: The value of intermediate goods is not included in the national income, since it is already included in the value of final goods and if it is included again, it will lead to double counting.
2. Sale and purchase of second hand goods is not included: Sale and purchase of used goods do not add to current flow of goods and services and cannot be treated as fresh production. They were included in the year in which they were produced. So, they do not qualify for inclusion in national income.
3. Domestic services are not included: Domestic services like services of a housewife, kitchen, gardening etc. Are not included in the national income, since it is difficult to measure their market value. These services are produced and consumed at home and never enter the market place and are termed s non-market transactions.
4. Production for self-consumption will be included: Value of goods, that are retained for consumption by the producer himself will be included in the national income as they contribute to the current output. Their value is to be estimated or imputed as they are not sold in the market.
5. Imputed value of owner occupied house-hold be included: People, who like in their won house do not pay any rent. But they enjoy housing service similar to those people who stay in rented houses. Therefore, value of such housing services is estimated according to market rent of similar accommodation. Such an estimated rent is known as imputed rent.
6. Change in stock of goods (inventory will be included): Net increase in the stock of inventories will be included in the national income as it is a part of capital formation
7. Explain the following equation:

Ans : 

 implies that the gross domestic product (GDP) of a country is equal to the expenditure incurred by all the sectors of the economy, they are:

Consumption expenditure (c) by the household sector,

Investment expenditure (I) by the firm sector,

Government expenditure (G) by the Government sector

and Export and Import (X –M) by the foreign or external sector.

6. Explain the income method of calculating GDP.

Ans : The various steps involved in estimating national income by income method are-

Step 1: Identify and classify the production units. All the producing enterprises employing various factors of production are identified and classified into primary, secondary and tertiary sector.

Step 2: Estimate the factor income paid by each sector. The factor incomes paid by each sector are classified under the following heads, (a) Compensation of employees, (b) Interest, (c) Profit, (d) Mixed income.

Step 3: Calculate domestic income (NDP _FC): When factor incomes of all the sectors are summed up, we get domestic income. In short NDP _FC = Compensation of employees + Rent and Realty + Interest + Profit + Mixed income.

Step 4: Estimate Net factor income from abroad (NFIA) to arrive at National Income. In the final Step, NFIA is added to domestic income to arrive at national income.

NNP _FC = NDP _FC = Net factor income from aboard.

While calculating national income by income method following precautions are required.

1. Transfer income will not be included: Transfer earnings like scholarships, donations, charity, old age pensions etc. Are not included in the national income, because such receipts are not connected with any productive activity and there is no value addition.
2. Income from sale of second hand goods will not be included: Any income from sale of second hand goods is not to be included in national income as their original sale has already been counted. If they are included again. It would lead to double counting.
3. Incomes from sale of shares and bonds is not included: Such income will not be included as such transactions are not related to flow of goods and services. Such financial assets are mere paper claims and do not contribute to the production of goods and services.
4. Windfall gains will not be included: Windfall gains, like income from lotteries, horse race etc. Are not included as there is no productive activity connected with them.
5. Imputed value of services provided by owners of production units will be included: Imputed value of owner occupied houses, interest on own capital, production of self consumption etc. Will be included as there are productive activities and add to the flow of goods and services.
6. Payments out of past savings are not included: Payments like death duties, gift tax, wealth tax etc. Are paid out of the wealth or past savings of the tax-payers. Hence, they should not be included in the national income as they do not and to the current flow of goods and services.
7. Indirect taxes are not included: Taxes like sale tax, excise duty, custom duty etc. Raise the market price of goods and services. So, such taxes are to be included in national income at market price but not in national income at factor cost.
8. Discuss the reasons why it will not be correct to say that GDP is the index for measuring welfare of the people of a country.

Ans : It is not always correct to say that GDP is the index for measuring welfare of the people of a country, because of distribution of GDP may not always be favourable. Sometimes there may be increased production of war equipments rather capital equipments and it may not lead to welfare. Again, non-monetary or non economic services are not included in GDP. But such activities to influence the economic welfare. Besides, GDP increases due to rise in prices and not due to increase in physical output, then also we can not say it is a good measure of welfare.

8. From the following data, calculate the net national product at factor cost, Personal Income and Personal Disposable Income.

Ans : See Q. No. 1 (Long Type).

9. Data related to the national income accounting of a country is given below:

Ans : See Q. No. 2 (Long Type).

10. What do you understand by the problem of double counting? Explain the need for avoiding double counting in the estimation of national income.

Ans : Double counting means counting of the value of the same product ( or expenditure ) more than once. How?

According to output method (an alternative method to value added method) of calculating national income, value of only final goods and services produced by all the production units of a country during a year should be counted. In other words, value of intermediate goods which enter into final goods (e.g., paper used in printing of books, raw cotton used in garments, wheat used in making bread, etc.) should not be taken into account.

But in actual practice, while taking value of final goods, value of intermediate goods also gets included because every producer treats the commodity he sells as final product irrespective of whether it is used as intermediate or final good. For instance, while taking value of final goods like cycles, the value of tyres, tubes, frames, bells, etc. (intermediate goods) used in manufacturing these cycles also gets included inadvertently.

In this way certain items are counted more than once resulting in over-estimation of national product to the extent of the value of intermediate goods included. This is called the problem of double counting which means counting value of the same commodity more than once.

Theoretically, we may say that there may be two alternative ways of avoiding double counting, namely, (i) final product approach and (ii) value added approach. But in actual practice, double counting still occurs unintentionally in final product approach because every producer treats the product he sells as a final product though the same might have been used by the buyer as an intermediate product.

Therefore this problem is perfectly solved by value added method. According to this method, instead of taking value of final products, value added by each stage of production is included.

11. Explain the Precautions needed to be taken while calculating National Income by expenditure method.

Ans : The various precautions to be taken while using Expenditure Methods are:

1. Expenditure on Intermediate Goods will not be included in the national income as it is already included in the value of final expenditure. If it is included again, it will lead to double counting of expenditures.
2. Transfer Payments are not included as such payments are not connected with any productive activity and there is no value addition.
3. Purchase of second-hand goods will not be included as such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of goods and services. However, any commission or brokerage on such goods is included as it is a payment made for productive service.
4. Purchase of financial assets (shares, debentures, bonds etc.) will not be included as such transactions do not contribute to current flow of goods and services. These financial assets are mere paper claims and involve a change of title only. However, any commission or brokerage on such financial assets is included as it is a productive service.
5. Expenditure on own account production (like production for self-consumption, imputed value of owner occupied houses, free services from general government and private non-profit making institutions serving households) will be included in the national income since these are productive services.
6. Mention any two types of leakages found in the Circular Flow of Income.

Ans : In a closed circular income stream, money flows continuously from firms to households. Households spend all of their money on goods and business and spend all of their money on labour and expansion. The basic model of the circular flow of income ignores common consumer action that take money out of the circular of income, or leakage. For instance, most households save money and some companies retain earning.

13. Mention four differences between Direct taxes and Indirect taxes.

Ans : The following are the four differences between direct tax and indirect tax:

1. Direct tax is levied on income and activities conducted. While indirect taxes are levied on product or services.
2. The burden of direct tax cannot be shifted. While the burden of indirect tax can be shifted.
3. In case of direct tax, tax collection is difficult. But it is relatively easier in case of indirect tax.
4. Direct tax is paid after the income reaches in the hands of the tax payer. While, indirect tax is paid before goods/service reaches the tax payer.
5. From the data given below calculate:
6. GDP at factor cost

Ans : GDP at factor cost = C + I + G + X – M

Where C = Consumption expenditure, I = Investment expenditure, G = Government expenditure, X = Export, M = Import

∴ GDP at factor cost = Rs. 2000 crores + Rs. 1200 crores + Rs. 450 crores + Rs. 80 crores – Rs. Crores. = Rs. (3730 – 95) = Rs. 3635 crores.

2. GNP at market price

Ans : GNP _MP = GDP + Net factor income from abroad

        = Rs. (3635 + 60) crores = Rs. 3690 crores.

Dev Kirtonia

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