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

Question. Free medical treatment of the employees by the employer is included in the estimation of national income.
Answer: True. Free medical treatment of the employees by the employer is included in the estimation of national income because it is a kind of wages in kind and therefore, a part of compensation of employees.

Question. Contribution to provident fund by the employers is included in the national income.
Answer: True. Contribution to provident fund by the employers is included in national income, because it is paid by the employers on behalf of the employees. It is included in national income as a part of the compensation of employees.

Question. Contribution to provident fund by the employees is added in the estimation of national income.
Answer: False. Contribution to provident fund by the employees is paid out of their income. It is, therefore, not separately added in the estimation of national income.

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. Leisure is not included in GNP.
Answer: True. Leisure is not included in GNP because it does not involve rendering of any factor service.

Question. Prize won in a lottery is included in the national income.
Answer: False. Prize won in a lottery is not included in the national income because it is just a windfall gain, involving no value addition.

Multiple Choice Questions

Question. Nominal GDP refers to:
(a) GDP at constant prices
(b) GDP at base year prices
(c) GDP estimated at current prices
(d) None of the options
Answer: (c) GDP estimated at current prices

Question. Increase in real GDP implies:
(a) increase in the price level in the economy
(b) increase in the flow of goods and services in the economy
(c) increase in the income level in the economy
(d) None of the options
Answer: (b) increase in the flow of goods and services in the economy

Question. GDP deflator shows change in GDP due to change in the:
(a) real income
(b) monetary income
(c) price level
(d) flow of goods and services
Answer: (c) price level

Question. Which of the following is the better index of economic growth?
(a) Real GDP
(b) Nominal GDP
(c) Both real as well as nominal GDP
(d) Neither of the two
Answer: (a) Real GDP

Question. When nominal GDP is 840 and price index is 120, real GDP will be:
(a) 7
(b) 700
(c) 720
(d) 960
Answer: (b) 700

Fill in the Blanks

Question. Real GDP refers to GDP at _______ prices. (current/constant)
Answer: constant

Question. Nominal GDP refers to GDP at _______ prices. (constant/current)
Answer: current

Question. Current year prices are the prices prevailing during the _______. (base year/year of estimation)
Answer: year of estimation

Question. _______ is an appropriate index of economic growth. (Real GDP/Nominal GDP)
Answer: Real GDP

Question. Nominal GDP can be converted into real GDP by using _______. (quantity index/price index)
Answer: price index

True or False

Question. \( GDP\ Deflator = \frac{Nominal\ GDP}{Real\ GDP} \times 100 \).
Answer: True

Question. Monetary GDP is estimated using the base year prices.
Answer: False

Question. If a country's nominal GDP increases, it means the country is producing more goods and services.
Answer: False

Question. Real GDP is a good measure of welfare of people.
Answer: True

Question. \( Nominal\ GDP = Real\ GDP \times \frac{Price\ Index}{100} \).
Answer: True

Very Short Answer Questions

Question. Define nominal GDP.
Answer: Nominal GDP (also called GDP at current prices) refers to market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the current year prices.

Question. Define real GDP.
Answer: Real GDP (also called GDP at constant prices) refers to market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the base year prices.

Question. How is GDP at current prices converted into GDP at constant prices?
Answer: GDP at current prices is converted into GDP at constant prices by using the following formula:
\( GDP\ at\ Constant\ Prices\ or\ Real\ GDP = \frac{GDP\ at\ Current\ Prices}{Current\ Price\ Index} \times 100 \)

Question. What is a GNP deflator?
Answer: The GNP deflator measures the average level of the prices of all the goods and services that make up GNP. GNP deflator is measured as the ratio of nominal GNP to real GNP, multiplied by 100.

Reason-based Questions 

Question. Nominal GDP is estimated at the base year prices.
Answer: False. Nominal GDP is estimated at prices prevailing during the year of estimation.

Question. Real GDP increases with increase in the price level in the economy.
Answer: False. Real GDP does not increase with increase in the price level in the economy because it is estimated at constant prices, or base year prices.

Question. Current year prices are the prices prevailing during the base year.
Answer: False. Current year prices are the prices prevailing during the year of estimation.

Question. Nominal GDP can be converted into real GDP by using the quantity index.
Answer: False. Nominal GDP can be converted into real GDP by using the price index, not the quantity index.

Question. \( GDP\ Deflator = \frac{Real\ GDP}{Current\ Price\ Index} \times 100 \).
Answer: False. \( GDP\ Deflator = \frac{Nominal\ GDP}{Real\ GDP} \times 100 \).

GDP AND WELFARE

Multiple Choice Questions

Question. Real GDP is considered as an index of:
(a) price level in the economy
(b) welfare of the people
(c) profit maximisation
(d) None of the options
Answer: (b) welfare of the people

Question. Which of the following makes GDP an inappropriate index of welfare?
(a) Non-monetary transactions
(b) Externalities
(c) Composition and distribution of GDP
(d) All of the options
Answer: (d) All of the options

Question. Smoke emitted by a chemical factory and causing air pollution is an example of:
(a) positive externalities
(b) negative externalities
(c) either of the two
(d) neither of the two
Answer: (b) negative externalities

Fill in the Blanks

Question. Industrial waste driven into rivers is an example of _______ externality. (positive/negative)
Answer: negative

Question. _______ the growth of GDP, greater is the flow of goods and services. (Higher/Lower)
Answer: Higher

Question. _______ are a limitation of GDP as an index of welfare. (Monetary exchanges /Non-monetary exchanges)
Answer: Non-monetary exchanges

True or False

Question. GDP fails to account for the impact of externalities on social welfare.
Answer: True

Question. Environmental pollution causes a loss of social welfare.
Answer: True

Question. Externalities are only the good impact of an activity without paying the price for that.
Answer: False

Very Short Answer Questions

Question. How are GDP and welfare related to each other?
Answer: Other things remaining constant, higher GDP implies higher welfare. So that there is a positive relationship between GDP and welfare.

Question. Define externalities.
Answer: Externalities refer to positive and negative impact of an economic activity on the others without involving any price or penalty.

Reason-based Questions 

Question. Welfare of the people in an economy is measured in terms of the availability of average income per person.
Answer: False. Welfare of the people is measured in terms of the availability of goods and services per person.

Question. With every increase in the level of GDP, social welfare definitely increases in the economy.
Answer: False. If increase in the level of GDP is associated with higher level of income inequality, social welfare may not increase.

HOTS & Applications

Question. Should we treat subsidies to the producers as transfer payments?
Answer: No, subsidies to the producers should not be treated as transfer payments. Transfer payments are those payments corresponding to which there is no value addition in the economy, like scholarships to the students or old-age pensions. In the case of subsidies, value addition has already occurred. In fact, subsidies tend to lower the market value of the goods produced. Accordingly, these are added to the market price (while indirect tax is deducted) to make it equal to the factor cost. Subsidies are a part of \( NNP_{FC} \) which is why these are deducted from factor cost to equate it with market price.

Question. Is net of exports (X - M) a part of net factor income from abroad?
Answer: No, it is not. Income from exports is a part of domestic income. Because, what we export is a part of domestic product. Imports are just the opposite of exports. Thus, net of exports is a component of domestic product or expenditure on domestic product.

Question. Rajiv purchases a generator for his office. Giving reasons, answer the following questions: (i) Purchase of a generator by Rajiv is an intermediate expenditure. (ii) Expenditure on the maintenance of the generator is an intermediate expenditure.
Answer: (i) No, purchase of a generator by Rajiv is a final investment expenditure because generator is a fixed asset for the office/firm.
(ii) Yes, expenditure on the maintenance of the generator is an intermediate expenditure. Because, things purchased for repair and maintenance are used up during the period of one year and are therefore, treated as intermediate consumption.

Analysis & Evaluation

Question. Saving is both a virtue as well as a vice. Explain how.
Answer: At the micro level, saving is a virtue. But it may be a vice at the macro level. If an individual saves more, he accumulates more wealth. It enhances his ability to earn more. But at the macro level, if everyone starts saving more, demand for goods and services may fall. It will adversely impact the inducement to invest. Consequently, the level of income and employment may shrink, pushing the economy into a state of depression.

Question. Explain the economic value of high component of net exports (X - M) in the total expenditure on final goods and services.
Answer: High component of 'X - M' in the total expenditure on final goods and services is a sign of higher exports than imports of the domestic economy. It implies:
(i) that the inflow of foreign exchange (on account of exports) is greater than the outflow of foreign exchange (on account of imports). Accordingly, balance of trade is favourable.
(ii) that the domestically produced goods are able to find markets abroad. So that, deficiency of domestic demand no longer remains a hurdle in the growth process of the domestic economy.
(iii) that we are, by and large, self-sufficient. Our imports are so limited that we don't have to depend much on other countries. Briefly, high component of X - M is a pointer to high rate of GDP growth.

Question. If Real GDP is Rs. 200 and Price Index (with base = 100) is 110, calculate Nominal GDP. 
Answer:
\( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
Or,
\( Nominal\ GDP = \frac{Real\ GDP \times Price\ Index}{100} \)
\( = \frac{200 \times 110}{100} = 220 \)
Nominal GDP = Rs. 220.

Question. If the Nominal GDP is Rs. 1,200 and Price Index (with base = 100) is 120, calculate Real GDP. 
Answer:
\( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
\( = \frac{1,200}{120} \times 100 = 1,000 \)
Real GDP = Rs. 1,000.

Question. If the Real GDP is Rs. 300 and Nominal GDP is Rs. 330, calculate Price Index (base = 100). 
Answer:
\( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
Or,
\( Price\ Index = \frac{Nominal\ GDP}{Real\ GDP} \times 100 \)
\( = \frac{330}{300} \times 100 = 110 \)
Price index = 110.