# NIOS Class 12 Economics Chapter 25 National Income And It’s Measurement

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## NIOS Class 12 Economics Chapter 25 National Income And It’s Measurement

Also, you can read the NIOS book online in these sections Solutions by Expert Teachers as per National Institute of Open Schooling (NIOS) Book guidelines. These solutions are part of NIOS All Subject Solutions. Here we have given NIOS Class 12 Economics Chapter 25 National Income And It’s Measurement, NIOS Senior Secondary Course Economics Solutions for All Chapters, You can practice these here.

### National Income And It’s Measurement

Chapter: 25

Module – IX: National Income Accounting

INTEXT QUESTIONS 25.1.

Q. 1. Fill in the blanks with the help of clues given below:

Primary sector, secondary sector, industrial sectors, value of production for self-consumption, tertiary sector.

(i) Fishing is a part of____________ sector.

Ans. primary.

(ii) The first step of estimating national income with the help of value-added method is to identify the different economic activities and classifying them into different_____________ according to their activities.

Ans. industrial sectors.

(iii) _____________ should be included in the estimation of value of output.

Ans. Value of production for self-consumption.

(iv) Transportation is a part of _____________ sector.

Ans. tertiary.

INTEXT QUESTIONS 25.2.

Q. 1. Which of the following are included in National Income and why as per income method.

(a) The income of dentist.

Ans. Included, as it is payment for find service/ factor payment.

(b) Rent received on two bed room apartment.

Ans. Included as it is payment for final service used by the tenant.

(c) The service of painter painting his own room.

Ans. Excluded, as it is not a market transaction.

(d) The monthly pocket money received by student from his father.

Ans. Excluded, as it is a transfer payment.

INTEXT QUESTIONS 25.3.

Q. 1. Which of the following are included in GDPmp and why as Expenditure Method?

(a) A purchase of a share.

Ans. Excluded, as it is were transfer of ownership from one person to another.

(b) Construction of a room in existing building.

Ans. Included, as it is a part of gross investment.

(c) Purchase of machinery.

Ans. Included, as it is a part of gross investment.

(d) Money received by student who has sold his book back to book seller.

Ans. Excluded, as it is second hand transection and value had asked been counted at the time of its production.

INTEXT QUESTIONS 25.4.

Q. 1. Fill in the blanks:

tertiary, compensation, transfer, investment, consumption:

(i) Gifts, donations taxes etc. are ___________ payments.

Ans. transfer.

(ii) Interest payment on loans taken to meet ___________ expenditure is not treated as factor income.

Ans. consumption.

(iii) Benefits in kind received by the employees is a part of the ____________ of employees.

Ans. compensation.

(iv) The expenditure on purchasing furni – true by a production unit is a part of_____________.

Ans. investment.

(v) Employing of domestic servant is a part of _____________sector.

Ans. tertiary.

TERMINAL EXERCISE

Q. 1. Explain the three phases of circular flow of national income.

Ans. The production units produce goods and services with a view to selling them in the market. For this purpose they employ the four factors of production, viz. land, labour, capital and entrepreneurship. When these factors of production jointly produce goods and services, it leads to the generation (creation) of income termed as ‘value added’. This angle, i.e. the value added angle, is the first angle of looking at the flow of national income. The national income measured from this angle is said to be measured through the ‘value added’ or the ‘production’ method.

The income created in the production units is distributed among the different factors of production in the form of compensation of employees, rent, interest and profit. When we add all these factor incomes, we get domestic income. This is the second angle leading to the ‘income distribution’ method of estimating national income. This angle gives the same figure of national income as the value.

The incomes received by the owners of the factors of production are spent on purchasing of goods and services from the production units for the purpose of consumption and investment. In short, production generates income, income leads to expenditure, and expenditure in turn leads to further production. There are three phases of circular flow of national income. They are:

(ii) Income Method.

(iii) Expenditure Method.

Q. 2. Explain the nature of functions of primary, secondary and tertiary sectors.

Ans. All producing enterprises in an economy are broadly classified into three industrial sectors according to their activities. These are:

(i) Primary sector: Primary sector con- sists of those producing units which are carried out by using natural resources. It includes productive activities like agriculture, forestry, fishing, mining, etc.

(ii) Secondary sector: This sector includes those producing units which transform inputs into output. For example, transformation of wood into a chair. It includes sub-services like construction, manufacturing, electricity, gas and water supply.

(iii) Tertiary sector: Producing units of this sector produce services of all kinds such as banking, trade, transport, etc. This is also known as service sector. This sector includes transportation, communication, banking services, etc.

Q. 3. Explain the steps taken in measuring national income through the value added method.

Ans. Value added method measures the contribution of each producing unit to production or the value added by each enterprise in the production process. Main steps in measuring national income in this methods are:

(i) To classify the production units located within the economic territory into the distinct industrial sectors according to their activities.

(ii) Net value added of each producing unit of the economy is estimated from their gross value of output which is calculated by multiplying total volume of goods produced with their prices. After deducting

(a) value of intermediate goods.

(b) depreciation. and

(c) net indirect taxes we get Net Value Added at FC of the producing units.

Or

Net Value Added at FC = Gross value of output-IC-Dep-NIT.

By adding up Net Value Added at FC of all producing units of a sector we get net value added at FC of that particular sector. The sum total of Net Value Added at FC of all the three sectors in the domestic territory of a country gives us Net Domestic Product at Factor Cost.

(iii) Net National Product at Factor Cost is obtained by adding net factor income from rest of the world to net domestic product at factor cost. If net factor income from rest of the world is negative, NDP at FC will be greater than net national product at factor cost (National Income), and if it is positive, national income will be greater than NDP at FC.

Q. 4. What are the main precautions required to be taken in estimating national income by the value added method?

Ans. The following precautions are necessary while estimating national income by the value added method:

(i) Production for self-consumption: That output which is produced for self- consumption and whose value can be estimated, must be included in the estimates of production, because it is a part of production of current year.

(ii) Sale of second hand goods: The sale of second hand goods should not be included in national income because the value of these goods had already been included earlier.

(iii) Commission paid to the broker for sale and purchase of second hand goods should be included because it is payment made for the services provided in the current year.

(iv) Value of intermediate goods should not be included because it leads to double counting.

(v) Services of housewife should not be included because it is very difficult to evaluate them.

Q. 5. Explain the steps involved in estimating national income through the income distribution method.

Ans. Income distribution method is used for measuring national income at distribution level. According to this method, national income is estimated by adding incomes earned by all the factors of production for their factor services during a year. It includes the following steps:

(i) Classify the production units into primary, secondary and tertiary sectors.

(ii) Estimate the following factor incomes paid out by the production units in each industrial sector.

(a) Compensation of employees.

(b) Rent.

(c) Interest.

(d) Profit.

(e) Mixed income of self-employed.

The sum total of the above factor incomes paid out is the same as net value added at factor cost by the industrial sectors.

(iii) Take the sum of the factor payments by all the industrial sectors to arrive at the net domestic product at factor cost.

(iv) Add net factor income from abroad to the net domestic product at factor cost to arrive at net national product at factor cost.

Q. 6. What are the main precautions required to be taken in estimating national income by the income distribution method?

Ans. The following are some of the main precautions which must be taken while estimating national income by the income distribution method:

(i) While estimating compensation of employees all benefits accruing to the employees whether in cash or in kind must be included.

(ii) In estimating interest, the interest on only those loans should be included which are taken for production. The interest on loans taken to meet consumption expenditure is not included in national income as it is treated as transfer payment.

(iii) Gifts, donations, charities, taxes, fines, income from lotteries, etc. are not factor incomes but transfer incomes. These should not be included in estimating national income.

(iv) Income from sale of second hand goods should not be included as it is not the income received from the goods produced in the current year.

Q. 7. What are the main steps in the expenditure method of estimating national income?

Ans. The main steps involved in measuring national income by this method are:

(i) To estimate the following expenditure incurred on the final products of all the sectors of the economy.

(a) Private final consumption expenditure.

(b) Government final consumption expenditure.

(c) Gross investment.

(d) Net exports (exports-imports).

The sum total of all the above expenditures on final products of all the sectors of the economy gives us gross domestic product at market price.

(ii) Deduct consumption of fixed capital (Depreciation) and net indirect taxes from gross domestic product at market price to get net domestic product at factor cost.

NDPFC = GDPMP – Consumption of fixed capital – Net indirect tax (indirect taxes-subsidies).

(iii) Add net factor income from abroad to the net domestic product at factor cost to obtain net national product at factor cost which is the national income.

NNPFC = NDPFC + Net factor income from abroad (National Income)

Q. 8. Point out some of the precautions taken in estimating national income through the final expenditure method.

Ans. The main precautions required to be taken in estimating national income by expenditure method are:

(i) Expenditure on intermediate products should not be included to avoid the problem of double counting.

(ii) Expenditure on gifts, donations, taxes, scholarships, etc. should not be included in national income as these are transfer payments.

(iii) Expenditure incurred on purchase of second hand goods should not be included as the expenditure of these goods has already been included when bought for the first time.

(iv) Expenditure on purchase of bonds and shares should not be included as these are financial transactions.

Q. 9. From the following data, estimate the net value added at factor cost and show that it is equal to the sum of factor incomes:

Ans. Net valued added at Fc = Gross value output – Ic – Dep – NIT

Net value added at FC = 9600 + 2080 + 2150 – 5400 – 250 – 750 – 2370 – 450 – 310

= 13830 – 9530 = 4300

Q. 10. Find out Net value added at factor cost by an enterprise from the following data:

Ans. Net value added at FC = Gross value output – IC – Dep – NIT

Net value added at FC = 125 + 5 – 75 – 10 – 25

= 130 – 110 = 20 crores

Q. 11. Calculate value added by Firm A and B from the following data:

Ans. Value added by Firm A and B = 80 + 5 (gain in stock by Firm B) + 10 (gain in stock by Firm B) – 40 – 10 – 5 – 20 = 20

Q. 12. From the data given below, calculate:

(a) National income.

(b) Private income.

(c) Personal income.

(e) Gross National disposable income.

(d) Personal disposable income.

Ans. (a) National Income = 1000 + 2500 + 50 + 20 + 200 + 100 + 500 + 300 + 600 + 70 + 30 + 20 + 15 + 70

= 3550 + 1120 + 700 + 105

= 5475

(b) Private Income = 1000 + 2500 + 20 + 70 + 60 + 70

= 3500 + 220

= 3720

(c) Personal Income = Private Income – Depreciation

= 3720 – 20

= 3700

(d) Personal disposable Income = Personal income – Direct taxes paid by household

= 3700 – 15

= 3685

(e) Gross national disposable Income

= 1000 + 2500 + 20 + 200 + 100 + 500 + 300 + 60 + 70 + 30 + 20 + 15 – 50 – 70

= 4695

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