CBSE Class 12 Economics HOTs Economics Forms of Market and Price Determination Set 05

Question. Giving reason, explain the treatment assigned to the following while estimating national income:
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on adding a floor to the office building.
Answer: (i) Expenditure on maintenance of an office building is not included in national income, as it is a part of intermediate consumption.
(ii) Expenditure on adding a floor to the office building is included in national income because it is a part of investment expenditure or capital formation.

Question. Calculate Operating Surplus from the following data:
Items (Rs. in crore)
(i) Compensation of employees 300
(ii) Indirect taxes 200
(iii) Consumption of fixed capital 100
(iv) Subsidies 50
(v) Gross domestic product at market price 600
Answer: Net Domestic Product at Factor Cost = Gross domestic product at market price \( - \) Consumption of fixed capital \( - \) Indirect taxes \( + \) Subsidies
\( = Rs. 600 \text{ crore} - Rs. 100 \text{ crore} - Rs. 200 \text{ crore} + Rs. 50 \text{ crore} \)
\( = Rs. 350 \text{ crore} \)
Operating Surplus = Net domestic product at factor cost \( - \) Compensation of employees
\( = Rs. 350 \text{ crore} - Rs. 300 \text{ crore} \)
\( = Rs. 50 \text{ crore} \).
Operating surplus \( = Rs. 50 \text{ crore} \).

Question. From the following data relating to a firm, calculate its Net Value Added at Factor Cost:
Items (Rs. in lakh)
(i) Subsidy 40
(ii) Sales 800
(iii) Depreciation 30
(iv) Exports 100
(v) Closing stock 20
(vi) Opening stock 50
(vii) Intermediate purchases 500
(viii) Purchase of machinery for own use 200
(ix) Import of raw material 60
Answer: Gross Value Added at Market Price (\( GVA_{MP} \))
\( = \text{Sales} + \text{Change in stock (Closing stock – Opening stock)} - \text{Intermediate consumption} \)
\( = Rs. 800 \text{ lakh} + Rs. (20 \text{ lakh} - 50 \text{ lakh}) - Rs. 500 \text{ lakh} \)
\( = Rs. 800 \text{ lakh} - Rs. 30 \text{ lakh} - Rs. 500 \text{ lakh} \)
\( = Rs. 270 \text{ lakh} \)
Net Value Added at Factor Cost
\( = GVA_{MP} - \text{Depreciation} + \text{Subsidy} \)
\( = Rs. 270 \text{ lakh} - Rs. 30 \text{ lakh} + Rs. 40 \text{ lakh} \)
\( = Rs. 280 \text{ lakh} \)
Net value added at factor cost \( = Rs. 280 \text{ lakh} \).
[Note: Exports are treated as part of total sales.]

Question. Calculate Gross Fixed Capital Formation from the following data:
Items (Rs. in crore)
(i) Private final consumption expenditure 1,000
(ii) Government final consumption expenditure 500
(iii) Net exports (\(-\)) 50
(iv) Net factor income from abroad 20
(v) Gross domestic product at market price 2,500
(vi) Opening stock 300
(vii) Closing stock 200
Answer: Gross Fixed Capital Formation
\( = \text{Gross domestic product at market price} - \text{Private final consumption expenditure} - \text{Government final consumption expenditure}
- \text{Net exports} - \text{Change in stock (Closing stock – Opening stock)} \)
\( = Rs. 2,500 \text{ crore} - Rs. 1,000 \text{ crore} - Rs. 500 \text{ crore} - (-Rs. 50 \text{ crore}) - (Rs. 200 \text{ crore} - Rs. 300 \text{ crore}) \)
\( = Rs. 2,500 \text{ crore} - Rs. 1,000 \text{ crore} - Rs. 500 \text{ crore} + Rs. 50 \text{ crore} + Rs. 100 \text{ crore} \)
\( = Rs. 1,150 \text{ crore} \)
Gross fixed capital formation \( = Rs. 1,150 \text{ crore} \).

Question. Calculate Net Value Added at Factor Cost from the following data:
Items (Rs. in crore)
(i) Purchase of machinery to be used in the production unit 100
(ii) Sales 200
(iii) Intermediate costs 90
(iv) Indirect taxes 12
(v) Change in stock 10
(vi) Excise duty 6
(vii) Stock of raw material 5
Answer: Gross Value Added at Market Price
\( = \text{Sales} + \text{Change in stock} - \text{Intermediate costs} \)
\( = Rs. 200 \text{ crore} + Rs. 10 \text{ crore} - Rs. 90 \text{ crore} \)
\( = Rs. 120 \text{ crore} \)
Net Value Added at Factor Cost
\( = \text{Gross value added at market price} - \text{Indirect tax} \)
\( = Rs. 120 \text{ crore} - Rs. 12 \text{ crore} \)
\( = Rs. 108 \text{ crore} \)
Net value added at factor cost \( = Rs. 108 \text{ crore} \).
[Note: Indirect taxes include excise duty.]

Question. From the following data calculate Gross National Product at Factor Cost by (a) Income Method, and (b) expenditure method:
Items (Rs. in crore)
(i) Net domestic capital formation 500
(ii) Compensation of employees 1,850
(iii) Consumption of fixed capital 100
(iv) Government final consumption expenditure 1,100
(v) Private final consumption expenditure 2,600
(vi) Rent 400
(vii) Dividend 200
(viii) Interest 500
(ix) Net exports (\(-\)) 100
(x) Profit 1,100
(xi) Net factor income from abroad (\(-\)) 50
(xii) Net indirect taxes 250
Answer: (a) Income Method
Gross National Product at Factor Cost
\( = \text{Compensation of employees} + \text{Operating surplus (Rent + Interest + Profit)} + \text{Consumption of fixed capital} + \text{Net factor income from abroad} \)
\( = Rs. 1,850 \text{ crore} + (Rs. 400 \text{ crore} + Rs. 500 \text{ crore} + Rs. 1,100 \text{ crore}) + Rs. 100 \text{ crore} + (-Rs. 50 \text{ crore}) \)
\( = Rs. 1,850 \text{ crore} + Rs. 2,000 \text{ crore} + Rs. 100 \text{ crore} - Rs. 50 \text{ crore} \)
\( = Rs. 3,900 \text{ crore} \)
(b) Expenditure Method
Gross National Product at Factor Cost
\( = \text{Private final consumption expenditure} + \text{Government final consumption expenditure} + \text{Gross domestic capital formation} +
\text{Net exports} - \text{Net indirect taxes} + \text{Net factor income from abroad} \)
\( = Rs. 2,600 \text{ crore} + Rs. 1,100 \text{ crore} + (Rs. 500 \text{ crore} + Rs. 100 \text{ crore}) + (-Rs. 100 \text{ crore}) - Rs. 250 \text{ crore} - Rs. 50 \text{ crore} \)
\( = Rs. 2,600 \text{ crore} + Rs. 1,100 \text{ crore} + Rs. 600 \text{ crore} - Rs. 100 \text{ crore} - Rs. 250 \text{ crore} - Rs. 50 \text{ crore} \)
\( = Rs. 3,900 \text{ crore} \)
(a) Gross national product at factor cost (by income method) \( = Rs. 3,900 \text{ crore} \).
(b) Gross national product at factor cost (by expenditure method) \( = Rs. 3,900 \text{ crore} \).

Question. The government exports goods worth Rs. 60,000 and imports goods worth Rs. 65,000. Domestic final consumption expenditure = Rs. 5,00,000, and there is no change in the stock of national capital. Replacement investment = Rs. 10,000. There are no subsidies; rather the producers are to pay excise duty of Rs. 5,000 to the government. Find factor income generated within the domestic economy.
Answer: Factor Income
\( = \text{Exports} - \text{Imports} + \text{Domestic final consumption expenditure} - \text{Excise duty} \)
\( = Rs. 60,000 - Rs. 65,000 + Rs. 5,00,000 - Rs. 5,000 \)
\( = Rs. 4,90,000 \)
Factor income \( = Rs. 4,90,000 \).

Question. Given the following data, find Net Value Added at Factor Cost by a farmer producing wheat:
Items (Rs. in crore)
(i) Sale of wheat by the farmer in the local market 6,80,000
(ii) Purchase of a tractor 5,00,000
(iii) Procurement of wheat by the government from the farmer 20,000
(iv) Consumption of wheat by the farming family during the year 5,000
(v) Subsidy 2,000
(vi) Expenditure on the maintenance of existing capital stock 10,000
Answer: Net Value Added at Factor Cost
\( = \text{Sale of wheat by the farmer in the local market} + \text{Procurement of wheat by the government from the farmer} + \text{Consumption of wheat by the farming family during the year} + \text{Subsidy} - \text{Expenditure on the maintenance of existing capital stock} \)
\( = Rs. 6,80,000 \text{ crore} + Rs. 20,000 \text{ crore} + Rs. 5,000 \text{ crore} + Rs. 2,000 \text{ crore} - Rs. 10,000 \text{ crore} \)
\( = Rs. 6,97,000 \text{ crore} \)
Net value added at factor cost \( = Rs. 6,97,000 \text{ crore} \).

Question. From the following data, calculate National Income:
Items (Rs. in crore)
(i) Profit 1,500
(ii) Rent 1,300
(iii) Net indirect taxes 350
(iv) Mixed income of self-employed 600
(v) Compensation of employees 3,000
(vi) Reimbursement to the employees for medical expenses 300
(vii) Depreciation 200
(viii) Excess of factor income to rest of the world over factor income from rest of the world 50
(ix) Excess of imports over exports 40
(x) Interest 1,100
Answer: National Income
\( = \text{Compensation of employees} + \text{Profit} + \text{Rent} + \text{Interest} + \text{Mixed income of self-employed} - \text{Excess of factor income to rest of the world over factor income from rest of the world} \)
\( = Rs. 3,000 \text{ crore} + Rs. 1,500 \text{ crore} + Rs. 1,300 \text{ crore} + Rs. 1,100 \text{ crore} + Rs. 600 \text{ crore} - Rs. 50 \text{ crore} \)
\( = Rs. 7,450 \text{ crore} \)
National income \( = Rs. 7,450 \text{ crore} \).

Question. From the following data estimate: (a) Net Indirect Taxes, and (b) Net Domestic Product at Factor Cost.
Items (Rs. in crore)
(i) Net national product at market price 1,400
(ii) Net factor income from abroad (\(-\)) 20
(iii) Gross national product at factor cost 1,300
(iv) Consumption of fixed capital 100
(v) National debt interest 18
Answer: (a) Net Indirect Taxes
\( = \text{Net national product at market price} - \text{Net national product at factor cost (Gross national product at factor cost \( - \) Consumption of fixed capital)} \)
\( = Rs. 1,400 \text{ crore} - (Rs. 1,300 \text{ crore} - Rs. 100 \text{ crore}) \)
\( = Rs. 1,400 \text{ crore} - Rs. 1,200 \text{ crore} \)
\( = Rs. 200 \text{ crore} \)
(b) Net Domestic Product at Factor Cost
\( = \text{Gross national product at factor cost} - \text{Consumption of fixed capital} - \text{Net factor income from abroad} \)
\( = Rs. 1,300 \text{ crore} - Rs. 100 \text{ crore} - (-Rs. 20 \text{ crore}) \)
\( = Rs. 1,300 \text{ crore} - Rs. 100 \text{ crore} + Rs. 20 \text{ crore} \)
\( = Rs. 1,220 \text{ crore} \)
(a) Net indirect taxes \( = Rs. 200 \text{ crore} \).
(b) Net domestic product at factor cost \( = Rs. 1,220 \text{ crore} \).

Question. State whether the following statements are true or false. Give reasons for your answer:
(i) Nominal GDP can never be less than Real GDP.
(ii) Gross domestic capital formation is always greater than gross fixed capital formation.
Answer: (i) The statement is false. Nominal GDP can be less than real GDP when price of goods and services prevailing during the base year is greater than the price of goods and services prevailing during the current year.
(ii) The statement is false. We know that,
Gross Domestic Capital Formation \( = \) Gross fixed capital formation \( + \) Change in stock.
Accordingly, gross domestic capital formation can be less than gross fixed capital formation when change in stock (closing stock \( - \) opening stock) is negative.

Question. Giving reason, explain the treatment assigned to the following while estimating national income:
(i) Subsidy on the wheat produced.
(ii) Contribution to provident fund by the employees.
(iii) Contribution to provident fund by the employers.
Answer: (i) Subsidy on the wheat produced is not included while estimating national income. It simply lowers the market value of the final goods and services. It is given to the producers as a transfer payment.
(ii) Contribution to provident fund by the employees is not separately included in the estimation of national income as it is paid out of their income.
(iii) 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. Ceasefire violations by Pakistan have led to the death of many Indian soldiers in Jammu and Kashmir. Will the payment of family pension to the families of the soldiers be included in the estimation of national income?
Answer: Yes. Because payment of family pension is like payment of the retirement pension. It is related to the employment contract signed by the government with the soldiers.

Question. Mona purchased a car worth Rs. 5,50,000 to commute between her home and the office. Would you treat it as an intermediate consumption and therefore not included in the estimation of national income? Justify your answer.
Answer: Car purchased by Mona will not be treated as intermediate good. Because, Mona is not using her car for purpose of value adding through intermediate consumption. Mona's car would be treated as a final good, being finally used by her as a consumer durable. Mona’s expenditure on car would be treated as private final consumption expenditure.

Question. In what sense can defence and security services provided by the government be treated as intermediate services?
Answer: Defence and security services provided by the government can be treated as intermediate services in the sense that these services offer a peaceful environment to the producers for the production of goods and services.

Question. Cash transfer of subsidy on LPG raises annual income of the households. Does it mean a rise in domestic income? Justify your answer.
Answer: No. Cash transfer of subsidy is to be treated as transfer payment. Of course, it increases annual income of the households. But this increase is not related to factor services rendered by the households. Accordingly, transfer of cash subsidy does not lead to any rise in domestic income.

Analysis & Evaluation

Question. How can estimates of GDP using income method and expenditure method be identical when households do not spend their entire income on the purchase of goods and services, and a part of them remain unsold during an accounting year?
Answer: Goods which remain unsold during the year are treated as a part of change in stock during the year. These goods become a part of inventory investment of the producers. Accordingly, income method and expenditure method must yield identical estimates of GDP.

Question. Explain the economic value of using net output method for the estimation of GDP.
Answer: Net output method refers to value added method of estimating national income. Because:
Output \( - \) Intermediate consumption \( = \) Net output \( = \) Value added.
When we estimate value added by each producing unit in the country, we make an assessment of the level of production activity in the economy. Low value added in the economy (compared to other economies of the world) implies low level of output, and therefore, low level of income and employment. It points to low quality of life of the people.
Since value added is estimated across different sectors of the economy (primary, secondary and tertiary sectors), we are also able to assess the relative contribution of these sectors in GDP. This helps the government to formulate sector wise policies of growth and development.
GST is based on the use of value added method. It is a single tax replacing all indirect taxes in the economy.

Question. Calculate ‘National Income’:
Items (Rs. in crore)
(i) Personal tax 80
(ii) Private final consumption expenditure 600
(iii) Undistributed profits 30
(iv) Private income 650
(v) Government final consumption expenditure 100
(vi) Corporate tax 50
(vii) Net domestic fixed capital formation 70
(viii) Net indirect tax 60
(ix) Depreciation 14
(x) Change in stocks (\(-\)) 10
(xi) Net imports 20
(xii) Net factor income to abroad 10
[Page 420] [CBSE Delhi 2015]
Answer: National Income
\( = \text{Private final consumption expenditure} + \text{Government final consumption expenditure} + (\text{Net domestic fixed capital formation} + \text{Change in stocks}) - \text{Net imports} - \text{Net indirect tax} - \text{Net factor income to abroad} \)
\( = 600 + 100 + (70 - 10) - 20 - 60 - 10 \)
\( = 600 + 100 + 60 - 20 - 60 - 10 \)
\( = 670 \text{ crore} \).
Ans. National Income \( = Rs. 670 \text{ crore} \).

Question. Calculate ‘Gross National Product at Market Price’:
Items (Rs. in crore)
(i) Rent 100
(ii) Net current transfers to rest of the world 30
(iii) Social security contributions by employers 47
(iv) Mixed income 600
(v) Gross domestic capital formation 140
(vi) Royalty 20
(vii) Interest 110
(viii) Compensation of employees 500
(ix) Net domestic capital formation 120
(x) Net factor income from abroad (\(-\)) 10
Answer: Gross National Product at Market Price
\( = \text{Compensation of employees} + (\text{Rent} + \text{Royalty} + \text{Interest} + \text{Mixed income}) + \text{Net factor income from abroad} + \text{Consumption of fixed capital (Gross domestic capital formation \( - \) Net domestic capital formation)} + \text{Net indirect taxes (not given)} \)
Wait, GNP at MP calc in image.
\( = \text{NDP at Factor Cost} + \text{Consumption of fixed capital} + \text{Net factor income from abroad} + \text{Net indirect taxes} \)?
Logic from image: \( \text{NDP at FC} = \text{COE} + \text{Rent} + \text{Royalty} + \text{Interest} + \text{Mixed Income} = 500 + 100 + 20 + 110 + 600 = 1,330 \).
Depreciation \( = 140 - 120 = 20 \).
NFIA \( = -10 \).
GNP at MP \( = 1,330 + 20 + (-10) = 1,340 \text{ crore} \)? No NIT? Assuming 0.
Ans. Gross National Product at Market Price \( = Rs. 1,340 \text{ crore} \).