CBSE Class 12 Economics HOTs Economics Forms of Market and Price Determination Set 04

'Very Short Answer' Objective Type Questions

Question. Name the methods for measuring national income.
Answer: (i) Product method or value added method, (ii) Income method, and (iii) Expenditure method.

Question. What is meant by value added method?
Answer: Value added method is that method which measures GDP as the sum total of value addition by all producing units within the domestic territory of a country.

Question. What do you mean by the error of double counting?
Answer: Error of double counting occurs when the value of some goods produced in the economy is counted more than once in the estimation of national income. Example: Entire value of wheat sold by the farmers is considered along with the value of wheat purchased by the miller who uses wheat as an input for producing wheat flour.

Question. What is meant by income method?
Answer: Income method is that method which measures national income as the sum total of factor incomes (compensation of employees, rent, interest and profit) earned by normal residents of a country during an accounting year.

Question. What is meant by expenditure method?
Answer: Expenditure method is that method which measures national income in terms of the expenditure (consumption expenditure + investment expenditure) on the purchase of final goods and services produced in the economy during the period of an accounting year.

Question. How is expenditure on final goods and services produced within the domestic territory identical with \( GDP_{MP} \)?
Answer: Expenditure on final goods and services produced within the domestic territory is identical with \( GDP_{MP} \), because goods and services are purchased at the market price, and \( GDP_{MP} \) refers to the market price of goods and services produced within the domestic territory of a country.

Question. Why should the producers maintain inventory stocks?
Answer: Inventory stocks of finished goods are maintained to cope with demand for these goods in the near future. Inventory stocks of raw material are maintained to avoid all time dependence on the market which is full of uncertainties.

Question. Why are exports included in the estimation of domestic income?
Answer: Exports are included in the estimation of domestic income because exports are a part of domestically produced goods and services, or because exports are a part of goods and services produced within the domestic territory of a country.

Question. Why are imports considered as a negative item in the estimation of domestic income?
Answer: Imports are considered as a negative item in the estimation of domestic income because imports are not an expenditure on the domestically produced goods and services in an accounting year. It is an expenditure on the goods produced abroad.

Question. How is net export different from net factor income from abroad?
Answer: Net export refers to the difference between exports and imports during an accounting year.
Net Exports = Exports – Imports
Net factor income from abroad refers to:
Factor income earned by our residents from rest of the world
– Factor income earned by non-residents from the domestic territory of our country.

Reason-based Questions (Comprehension of the Subject-matter)

Read the following statements carefully. Write True or False with a reason.

Question. Value addition occurs even when goods do not undergo any material transformation.
Answer: True. Value addition occurs even when goods are purchased for resale, without any material transformation.

Question. Export of goods is not a part of expenditure on the domestic production.
Answer: False. Export of goods is a part of the expenditure on the domestic production because it is the foreign demand for domestic product.

Question. ‘Change in stock’ is not a stock variable.
Answer: True. Change in stock is measured per unit of time period. Accordingly, it is a flow variable.

Question. Change in stock is not a component of aggregate expenditure in the economy.
Answer: False. Change in stock as a part of investment expenditure is a component of aggregate expenditure in the economy.

Question. Money spent by the NRIs settled abroad on the on-line purchase of domestic products is a transfer payment.
Answer: False. Any on-line purchase of domestic products by the people settled abroad is to be treated as exports.

Question. Undistributed profits are not a part of domestic factor income.
Answer: False. Undistributed profits are retained earnings of the firms. These are a part of domestic factor income.

Question. GDP is estimated only in the context of a closed economy.
Answer: False. GDP is estimated in the context of an open economy as well. ‘Exports – imports’ are a part of GDP, and are related to an open economy.

Question. Remittances by the NRIs are a part of our national income.
Answer: False. Remittances by the NRIs are transfer payments.

Question. Mixed income of self-employed includes transfer payments.
Answer: False. Mixed income of the self-employed includes only factor incomes.

Question. Compensation of employees includes compensation received after retirement.
Answer: True. Compensation of employees = Wages and salaries in cash + Payment in kind + Employer’s contribution to social security schemes + Pension on retirement.

Question. Capital formation includes capital goods only.
Answer: False. Change in the inventory stock is an important component of capital stock. And inventory stock includes both capital goods as well as consumer goods.

Question. Purchase of machinery from abroad is never considered as intermediate consumption.
Answer: False. Purchase of machinery from abroad is considered as intermediate consumption when it is purchased for purpose of resale.

Question. Purchase of machinery from abroad is a part of domestic capital formation.
Answer: True. Purchase of machinery from abroad is a part of domestic capital formation. Because, it adds to the existing stock of capital in the domestic economy.

Question. Salaries to Indian employees working in Indian embassies abroad are a part of net factor income from abroad.
Answer: False. Indian embassies abroad are a part of domestic territory of India. Therefore, salaries to Indian employees working in Indian embassies abroad are a part of domestic factor income.

Question. Profits earned by non-resident companies in India are not a part of our domestic income.
Answer: False. It is a part of domestic factor income of India because non-resident companies are within the domestic territory of India.

Question. The market value of both final and intermediate goods is included in the estimation of national income.
Answer: False. Only the value of final goods is included in the estimation of national income. Reason: The value of intermediate goods is reflected in the value of final goods.

Question. Expenditure on the purchase of second-hand plant and machinery from rest of the world is a part of domestic capital formation.
Answer: True. Expenditure on the purchase of second-hand plant and machinery from rest of the world is a part of domestic capital formation. Because, it adds to the stock of capital in the domestic economy.

Question. Expenditure by the households on the construction of residential buildings should not be treated as investment expenditure.
Answer: False. Expenditure on the construction of residential buildings by the households is a part of investment expenditure. Because, residential buildings are income generating fixed assets.

Question. Imputed rent on owner occupied houses does not involve any payment to others. Accordingly, it should not be included in the estimation of national income.
Answer: False. Imputed rent is included in the estimation of national income as a component of rent. Houses are income generating assets, no matter who occupies them.

Question. Goods produced but retained for self-use (and not sold in the market) are not included in the estimation of national income.
Answer: False. Goods produced and retained for self-use are included in the estimation of national income. Because these goods involve value-addition.

Question. Free dress provided to nurses by the hospital is included in the estimation of national income.
Answer: False. Free dress provided to nurses by the hospital is not included in the estimation of national income if the dress is a uniform provided by the hospital at the time of work. It is to be treated as an intermediate consumption.

Question. Investment on the purchase of shares is a part of net capital formation.
Answer: False. Net capital formation leads to increase in the stock of capital whereas shares only lead to the transfer of ownership.

Question. In the estimation of GDP (using expenditure method), we focus only on expenditure by the residents of a country.
Answer: False. In the estimation of GDP, we include all expenditure on the domestically produced goods both by the residents as well as non-residents of a country.

Question. Income from exports is a part of net factor income from abroad.
Answer: False. Income from exports is a part of net exports and therefore, a component of gross domestic product.

HOTS & Applications

Question. Is net factor income from abroad zero in case exports = imports?
Answer: No. Net factor income from abroad is the difference between the factor income earned by normal residents of a country from abroad and the factor income earned by non-residents in our country. It has nothing to do with exports and imports.

Question. Is brokerage paid to Real Estate Agents on the sale and purchase of only new (and not the old) houses included in the estimation of national income?
Answer: No. Brokerage paid to Real Estate Agents on the sale and purchase of new as well as old houses is included in the estimation of national income. Reason: Brokerage relates to payment for services, no matter on new or old houses.

Question. Show how the sum of value added is equal to sum of factor incomes.
Answer: All value added is distributed as factor incomes. Therefore, sum total of value added is bound to be equal to sum total of factor incomes.

Question. Do you think income in the form of capital gains is a part of capital formation?
Answer: Income in the form of capital gains means income accruing to the individuals on account of increase in prices of land, shares, bonds, etc. They do not add to the stock of physical capital. Hence, taking income in the form of capital gains as capital formation is wrong.

Question. National income exceeds domestic income only when exports are greater than imports. Comment.
Answer: The given statement is incorrect. When factor income from abroad is greater than factor income to abroad, national income exceeds domestic income. Exports/imports have nothing to do with net factor income from abroad.

Question. Only those goods are included in the estimation of domestic product which are sold or purchased in domestic market of a country. Defend or refute.
Answer: The above statement is incorrect. Exports are also a part of domestic product. Exports include goods produced in the domestic economy and sold in rest of the world.

Question. How are dividends, corporate taxes and undistributed profits treated in national income?
Answer: (i) Dividends: These are included in the estimation of national income as these are a part of factor payments.
(ii) Corporate Taxes: These are not included, as all taxes are transfer payments.
(iii) Undistributed Profits: These are retained earnings of the firms and are a part of factor payments. Therefore, these are included in the estimation of national income.