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

Question. Giving reasons explain how should the following be treated in estimation of national income:
(i) Expenditure by a firm on payment of fees to a chartered accountant.
(ii) Payment of corporate tax by a firm.
(iii) Purchase of refrigerator by a firm for own use. 
Answer: (i) Expenditure by a firm on payment of fees to a chartered accountant is not included in the estimation of national income because fees to a chartered accountant is an intermediate expenditure for the firm and not a final expenditure.
(ii) Payment of corporate tax by a firm should not be included in the estimation of national income because it is a transfer payment by the firm. It is paid out of income and therefore, it is not to be separately added in the national income.
(iii) Purchase of refrigerator by a firm is included in the estimation of national income because it is investment expenditure or capital formation. A refrigerator is used by the firm for several years and the firm is a final user of it.

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
Answer: National Income
= Private final consumption expenditure + Government final consumption expenditure + Net domestic fixed capital formation + Change in stocks - Net imports - Net indirect tax - Net factor income to abroad
= Rs. 600 crore + Rs. 100 crore + Rs. 70 crore + (-) Rs. 10 crore - Rs. 20 crore - Rs. 60 crore - Rs. 10 crore
= Rs. 600 crore + Rs. 100 crore + Rs. 70 crore - Rs. 10 crore - Rs. 20 crore - Rs. 60 crore - Rs. 10 crore
= Rs. 670 crore
National income = Rs. 670 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
(xi) Net indirect tax: 150
(xii) Profit: 200
Answer: Gross National Product at Market Price
= Compensation of employees + Rent + Royalty + Interest + Profit + Mixed income + Consumption of fixed capital (Gross domestic capital formation - Net domestic capital formation) + Net indirect tax + Net factor income from abroad
= Rs. 500 crore + Rs. 100 crore + Rs. 20 crore + Rs. 110 crore + Rs. 200 crore + Rs. 600 crore + (Rs. 140 crore - Rs. 120 crore) + Rs. 150 crore + (-) Rs. 10 crore
= Rs. 500 crore + Rs. 100 crore + Rs. 20 crore + Rs. 110 crore + Rs. 200 crore + Rs. 600 crore + Rs. 20 crore + Rs. 150 crore - Rs. 10 crore
= Rs. 1,690 crore
Gross national product at market price = Rs. 1,690 crore.

Question. Calculate 'Net Domestic Product at Factor Cost':
Items (Rs. in crore)
(i) Net current transfers to abroad: 15
(ii) Private final consumption expenditure: 800
(iii) Net imports: (-) 20
(iv) Net domestic capital formation: 100
(v) Net factor income to abroad: 10
(vi) Depreciation: 50
(vii) Change in stocks: 17
(viii) Net indirect tax: 120
(ix) Government final consumption expenditure: 200
(x) Exports: 30
Answer: Net Domestic Product at Factor Cost
= Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation - Net imports - Net indirect tax
= Rs. 800 crore + Rs. 200 crore + Rs. 100 crore - (-) Rs. 20 crore - Rs. 120 crore
= Rs. 800 crore + Rs. 200 crore + Rs. 100 crore + Rs. 20 crore - Rs. 120 crore
= Rs. 1,000 crore
Net domestic product at factor cost = Rs. 1,000 crore.

Question. If the Real GDP is Rs. 400 and Nominal GDP is Rs. 450, calculate the Price Index (base = 100). 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
\( 400 = \frac{450}{Price\ Index} \times 100 \)
\( Price\ Index = \frac{450}{400} \times 100 = 112.5 \)
Price index = 112.5.

Question. If the Real GDP is Rs. 500 and Price Index (base = 100) is 125, calculate the Nominal GDP. 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
\( 500 = \frac{Nominal\ GDP}{125} \times 100 \)
\( Nominal\ GDP = 500 \times \frac{125}{100} = 625 \)
Nominal GDP = Rs. 625.

Question. If the Nominal GDP is 600 and Price Index (base = 100) is 120, calculate the Real GDP. 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
\( Real\ GDP = \frac{600}{120} \times 100 = 500 \)
Real GDP = 500.

Question. Giving reasons explain how should the following be treated in estimation of national income:
(i) Payment of interest by a firm to a bank.
(ii) Payment of interest by a bank to an individual.
(iii) Payment of interest by an individual to a bank. 
Answer: (i) Payment of interest by a firm to a bank is included in national income because firm borrows money for production purpose and thus, it is a factor payment.
(ii) Payment of interest by a bank to an individual is included in national income because the bank is expected to have used individual's saving for productive purpose and thus, this is a factor payment.
(iii) Payment of interest by an individual to a bank is not included in national income because the individual uses the loan amount for consumption purpose and not for investment or productive purpose.

Question. Calculate the 'National Income':
Items (Rs. in crore)
(i) Rent: 200
(ii) Net factor income to abroad: 10
(iii) National debt interest: 15
(iv) Wages and salaries: 700
(v) Current transfers from government: 10
(vi) Undistributed profits: 20
(vii) Corporation tax: 30
(viii) Interest: 150
(ix) Social security contributions by employers: 100
(x) Net domestic product accruing to government: 250
(xi) Net current transfers to rest of the world: 5
(xii) Dividend: 50
Answer: National Income
= Wages and salaries + Social security contributions by employers + Rent + Interest + Undistributed profits + Corporation tax + Dividend - Net factor income to abroad
= Rs. 700 crore + Rs. 100 crore + Rs. 200 crore + Rs. 150 crore + Rs. 20 crore + Rs. 30 crore + Rs. 50 crore - Rs. 10 crore
= Rs. 1,240 crore
National income = Rs. 1,240 crore.

Question. Calculate 'Net National Product at Market Price':
Items (Rs. in crore)
(i) Transfer payments by government: 7
(ii) Government final consumption expenditure: 50
(iii) Net imports: (-) 10
(iv) Net domestic fixed capital formation: 60
(v) Private final consumption expenditure: 300
(vi) Private income: 280
(vii) Net factor income to abroad: (-) 5
(viii) Closing stock: 8
(ix) Opening stock: 8
(x) Depreciation: 12
(xi) Corporate tax: 60
(xii) Retained earnings of corporations: 20
Answer: Net National Product at Market Price
= Private final consumption expenditure + Government final consumption expenditure + Net domestic fixed capital formation + Closing stock - Opening stock - Net imports - Net factor income to abroad
= Rs. 300 crore + Rs. 50 crore + Rs. 60 crore + Rs. 8 crore - Rs. 8 crore - (-) Rs. 10 crore - (-) Rs. 5 crore
= Rs. 300 crore + Rs. 50 crore + Rs. 60 crore + Rs. 8 crore - Rs. 8 crore + Rs. 10 crore + Rs. 5 crore
= Rs. 425 crore
Net national product at market price = Rs. 425 crore.

Question. Calculate 'Net Domestic Product at Market Price':
Items (Rs. in crore)
(i) Private final consumption expenditure: 400
(ii) Opening stock: 10
(iii) Consumption of fixed capital: 25
(iv) Imports: 15
(v) Government final consumption expenditure: 90
(vi) Net current transfers to rest of the world: 5
(vii) Gross domestic fixed capital formation: 80
(viii) Closing stock: 20
(ix) Exports: 10
(x) Net factor income to abroad: (-) 5
Answer: Net Domestic Product at Market Price
= Private final consumption expenditure + Government final consumption expenditure + Gross domestic fixed capital formation + Closing stock - Opening stock + Exports - Imports - Consumption of fixed capital
= Rs. 400 crore + Rs. 90 crore + Rs. 80 crore + Rs. 20 crore - Rs. 10 crore + Rs. 10 crore - Rs. 15 crore - Rs. 25 crore
= Rs. 550 crore
Net domestic product at market price = Rs. 550 crore.

Question. If the Nominal Gross Domestic Product = Rs. 4,400 and the Price Index (base = 100) = 110, calculate the Real Gross Domestic Product. 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
\( = \frac{4,400}{110} \times 100 = 4,000 \)
Real gross domestic product = Rs. 4,000.

Question. If the Real Gross Domestic Product is Rs. 200 and the Nominal Gross Domestic Product is Rs. 210, calculate the Price Index (base = 100). 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
Or, \( Price\ Index = \frac{Nominal\ GDP}{Real\ GDP} \times 100 \)
\( = \frac{210}{200} \times 100 = 105 \)
Price index = 105.

Question. If the Real Gross Domestic Product is Rs. 250 and the Price Index (base = 100) is 120, calculate the Nominal Gross Domestic Product. 
Answer: \( Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \)
Or, \( Nominal\ GDP = \frac{Real\ GDP \times Price\ Index}{100} \)
\( = \frac{250 \times 120}{100} = 300 \)
Nominal gross domestic product = Rs. 300.

Question. Giving reasons explain how should the following be treated in estimation of national income:
(i) Payment of corporate tax by a firm.
(ii) Purchase of machinery by a factory for own use.
(iii) Purchase of uniforms for nurses by a hospital. 
Answer: (i) Payment of corporate tax by a firm should not be included in the estimation of national income because it is a transfer payment by the firm. It is paid out of income and therefore, it is not to be separately added in the national income.
(ii) Purchase of machinery by a factory is included in the estimation of national income because it is investment expenditure or capital formation.
(iii) Purchase of uniforms for nurses by a hospital is not included in the estimation of national income, because uniform is provided by the hospital at the time of work. It is to be treated as an intermediate consumption.

Question. Calculate the Gross National Product at Market Price:
Items (Rs. in crore)
(i) Wages and salaries: 800
(ii) Personal tax: 150
(iii) Operating surplus: 200
(iv) Undistributed profits: 10
(v) Social security contributions by employers: 100
(vi) Corporate tax: 50
(vii) Net factor income to abroad: (-) 20
(viii) Personal disposable income: 1,200
(ix) Net indirect tax: 70
(x) Consumption of fixed capital: 30
(xi) Mixed income of self-employed: 500
(xii) Royalty: 9
Answer: Gross National Product at Market Price
= Wages and salaries + Social security contributions by employers + Operating surplus + Mixed income of self-employed + Consumption of fixed capital + Net indirect tax - Net factor income to abroad
= Rs. 800 crore + Rs. 100 crore + Rs. 200 crore + Rs. 500 crore + Rs. 30 crore + Rs. 70 crore - (-) Rs. 20 crore
= Rs. 800 crore + Rs. 100 crore + Rs. 200 crore + Rs. 500 crore + Rs. 30 crore + Rs. 70 crore + 20 crore
= Rs. 1,720 crore
Gross national product at market price = Rs. 1,720 crore.

Question. Calculate National Income:
Items (Rs. in crore)
(i) Net imports: 5
(ii) Net domestic capital formation: 15
(iii) Personal income: 90
(iv) National debt interest: 10
(v) Corporate tax: 25
(vi) Government final consumption expenditure: 20
(vii) Net factor income to abroad: (-) 5
(viii) Net indirect tax: 10
(ix) Undistributed profits: 0
(x) Private final consumption expenditure: 100
Answer: National Income
= Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation - Net imports - Net indirect tax - Net factor income to abroad
= Rs. 100 crore + Rs. 20 crore + Rs. 15 crore - Rs. 5 crore - Rs. 10 crore - (-) Rs. 5 crore
= Rs. 100 crore + Rs. 20 crore + Rs. 15 crore - Rs. 5 crore - Rs. 10 crore + Rs. 5 crore
= Rs. 125 crore
National income = Rs. 125 crore.

Question. Calculate Net National Product at Market Price:
Items (Rs. in crore)
(i) Net factor income to abroad: (-) 10
(ii) Net current transfers to abroad: 5
(iii) Consumption of fixed capital: 40
(iv) Compensation of employees: 700
(v) Corporate tax: 30
(vi) Undistributed profits: 10
(vii) Interest: 90
(viii) Rent: 100
(ix) Dividends: 20
(x) Net indirect tax: 110
(xi) Social security contributions by employees: 11
Answer: Net National Product at Market Price
= Compensation of employees + Rent + Interest + Corporate tax + Undistributed profits + Dividends + Net indirect tax - Net factor income to abroad
= Rs. 700 crore + Rs. 100 crore + Rs. 90 crore + Rs. 30 crore + Rs. 10 crore + Rs. 20 crore + Rs. 110 crore - (-) Rs. 10 crore
= Rs. 700 crore + Rs. 100 crore + Rs. 90 crore + Rs. 30 crore + Rs. 10 crore + Rs. 20 crore + Rs. 110 crore + Rs. 10 crore
= Rs. 1,070 crore
Net national product at market price = Rs. 1,070 crore.

Question. Depreciation of fixed capital assets refers to: (choose the correct alternative)
(a) normal wear and tear
(b) foreseen obsolescence
(c) normal wear and tear and foreseen obsolescence
(d) unforeseen obsolescence
Answer: (c) normal wear and tear and foreseen obsolescence

Question. Define stocks. 
Answer: Stock is the quantity which is measured at a point of time.

Question. Find Net Value Added at Factor Cost:
Items (Rs. in lakh)
(i) Durable use producer goods with a life span of 10 years: 10
(ii) Single use producer goods: 5
(iii) Sales: 20
(iv) Unsold output produced during the year: 2
(v) Taxes on production: 1
Answer: Net Value Added at Factor Cost
= Sales + Change in stock - Single use producer goods - Depreciation - Taxes on production
= Rs. 20 lakh + Rs. 2 lakh - Rs. 5 lakh - Rs. 1 lakh - Rs. 1 lakh
= Rs. 15 lakh
Net value added at factor cost = Rs. 15 lakh.
[Note: Annual Depreciation = \( \frac{Value\ of\ durable\ use\ producer\ goods}{Life\ span\ of\ producer\ goods} = \frac{Rs.\ 10\ lakh}{10} = Rs.\ 1\ lakh. \) ]

Question. Find Net Value Added at Market Price:
Items (Rs. in lakh)
(i) Fixed capital good with a life span of 5 years: 15
(ii) Raw materials: 6
(iii) Sales: 25
(iv) Net change in stock: (-) 2
(v) Taxes on production: 1
Answer: Net Value Added at Market Price
= Sales + Net change in stock - Raw materials - Depreciation
= Rs. 25 lakh + (-) Rs. 2 lakh - Rs. 6 lakh - Rs. 3 lakh
= Rs. 25 lakh - Rs. 2 lakh - Rs. 6 lakh - Rs. 3 lakh
= Rs. 14 lakh
Net value added at market price = Rs. 14 lakh.
[Note: Annual Depreciation = \( \frac{Value\ of\ fixed\ capital\ good}{Life\ span\ of\ fixed\ capital\ good} = \frac{Rs.\ 15\ lakh}{5} = Rs.\ 3\ lakh. \) ]

Question. Find Gross Value Added at Market Price:
Items (Rs. in lakh)
(i) Depreciation: 20
(ii) Domestic sales: 200
(iii) Net change in stocks: (-) 10
(iv) Exports: 10
(v) Single use producer goods: 120
Answer: Gross Value Added at Market Price
= Domestic sales + Net change in stocks - Single use producer goods + Exports
= Rs. 200 lakh + (-) Rs. 10 lakh - Rs. 120 lakh + Rs. 10 lakh
= Rs. 200 lakh - Rs. 10 lakh - Rs. 120 lakh + Rs. 10 lakh
= Rs. 80 lakh
Gross value added at market price = Rs. 80 lakh.

Question. Government incurs expenditure to popularize yoga among the masses. Analyse its impact on gross domestic product and welfare of the people. 
Answer: (a) Impact on Gross Domestic Product (GDP):
Government expenditure adds to aggregate demand in the economy. It has a multiplier effect on GDP. To illustrate:
If government expenditure is Rs. 100 and MPC is assumed to be 0.5, then increase in GDP would be equal to
\( = \frac{1}{1 - MPC} \times 100 \)
\( = \frac{1}{1 - 0.5} \times 100 \)
\( = \frac{100}{0.5} = 200 \)
(b) Impact on Welfare:
Expenditure on yoga is expected to improve physical and mental health of the people. Accordingly, skill formation as well as efficiency are expected to rise. This would improve welfare of the people.

Question. Find National Income:
Items (Rs. in crore)
(i) Wages and salaries: 1,000
(ii) Net current transfers to abroad: 20
(iii) Net factor income paid to abroad: 10
(iv) Profit: 400
(v) National debt interest: 120
(vi) Social security contributions by employers: 100
(vii) Current transfers from government: 60
(viii) National income accruing to government: 150
(ix) Rent: 200
(x) Interest: 300
(xi) Royalty: 50
Answer: National Income
= Wages and salaries + Social security contributions by employers + Rent + Royalty + Interest + Profit - Net factor income paid to abroad
= Rs. 1,000 crore + Rs. 100 crore + Rs. 200 crore + Rs. 50 crore + Rs. 300 crore + Rs. 400 crore - Rs. 10 crore
= Rs. 2,040 crore
National income = Rs. 2,040 crore.

Question. Find Net Domestic Product at Factor Cost:
Items (Rs. in crore)
(i) Rent: 200
(ii) Net current transfers to abroad: 10
(iii) National debt interest: 60
(iv) Corporate tax: 100
(v) Compensation of employees: 900
(vi) Current transfers by government: 150
(vii) Interest: 400
(viii) Undistributed profits: 50
(ix) Dividend: 250
(x) Net factor income to abroad: (-) 10
(xi) Income accruing to government: 120
Answer: Net Domestic Product at Factor Cost
= Compensation of employees + Rent + Interest + Corporate tax + Undistributed profits + Dividend
= Rs. 900 crore + Rs. 200 crore + Rs. 400 crore + Rs. 100 crore + Rs. 50 crore + Rs. 250 crore
= Rs. 1,900 crore
Net domestic product at factor cost = Rs. 1,900 crore.

Question. Find Net National Product at Market Price:
Items (Rs. in crore)
(i) Personal taxes: 200
(ii) Wage and salaries: 1,200
(iii) Undistributed profit: 50
(iv) Rent: 300
(v) Corporation tax: 200
(vi) Private income: 2,000
(vii) Interest: 400
(viii) Net indirect tax: 300
(ix) Net factor income to abroad: 20
(x) Profit: 500
(xi) Social security contributions by employers: 250
Answer: Net National Product at Market Price
= Wages and salaries + Social security contributions by employers + Rent + Interest + Profit + Net indirect tax - Net factor income to abroad
= Rs. 1,200 crore + Rs. 250 crore + Rs. 300 crore + Rs. 400 crore + Rs. 500 crore + Rs. 300 crore - Rs. 20 crore
= Rs. 2,930 crore
Net national product at market price = Rs. 2,930 crore.

Question. National income is the sum of factors incomes accruing to: (choose the correct alternative)
(a) nationals
(b) economic territory
(c) residents
(d) both residents and non-residents
Answer: (c) residents

Question. Define flows. 
Answer: Flow is the quantity which is measured per unit of time period.

Question. Assuming real income to be Rs. 200 crore and price index to be 135, calculate nominal income. 
Answer: \( Real\ Income = \frac{Nominal\ Income}{Price\ Index} \times 100 \)
Or, \( Nominal\ Income = \frac{Real\ Income \times Price\ Index}{100} \)
\( = \frac{200 \times 135}{100} = 270 \)
Nominal income = Rs. 270 crore.

Question. If nominal income is Rs. 500 and price index is 125, calculate real income. 
Answer: \( Real\ Income = \frac{Nominal\ Income}{Price\ Index} \times 100 \)
\( = \frac{500}{125} \times 100 = 400 \)
Real income = Rs. 400.

Question. If real income is Rs. 400 and price index is 105, calculate nominal income. 
Answer: \( Nominal\ Income = \frac{Real\ Income \times Price\ Index}{100} \)
\( = \frac{400 \times 105}{100} = 420 \)
Nominal income = Rs. 420.

Question. Sale of petrol and diesel cars is rising particularly in big cities. Analyse its impact on gross domestic product and welfare. 
Answer: (a) Impact on Gross Domestic Product (GDP):
GDP = Sales, in case there is no change in stocks during the year. Accordingly, increase in sale of cars during the year indicates increase in GDP.
(b) Impact on Welfare:
Rise in sale of cars leads to a rise in the consumption of petrol and diesel. Both these fuels (particularly diesel) cause emission of carbon dioxide. It increases environmental pollution. It adversely impacts welfare of the people. Because increase in environmental pollution causes increase in expenditure on the maintenance of health. It also reduces the level of sustainable development. Implying loss of welfare of future generations.

Question. Find Gross National Product at Market Price:
Items (Rs. in crore)
(i) Private final consumption expenditure: 800
(ii) Net current transfers to abroad: 20
(iii) Net factor income to abroad: (-) 10
(iv) Government final consumption expenditure: 300
(v) Net indirect tax: 150
(vi) Net domestic capital formation: 200
(vii) Current transfers from government: 40
(viii) Depreciation: 100
(ix) Net imports: 30
(x) Income accruing to government: 90
(xi) National debt interest: 50
Answer: Gross National Product at Market Price
= Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Depreciation - Net imports - Net factor income to abroad
= Rs. 800 crore + Rs. 300 crore + Rs. 200 crore + Rs. 100 crore - Rs. 30 crore - (-) Rs. 10 crore
= Rs. 800 crore + Rs. 300 crore + Rs. 200 crore + Rs. 100 crore - Rs. 30 crore + Rs. 10 crore
= Rs. 1,380 crore
Gross national product at market = Rs. 1,380 crore.

Question. Calculate Net National Product at Market Price:
Items (Rs. in crore)
(i) Net current transfers to abroad: 10
(ii) Private final consumption expenditure: 500
(iii) Current transfers from government: 30
(iv) Net factor income to abroad: 20
(v) Net exports: (-) 20
(vi) Net indirect tax: 120
(vii) National debt interest: 70
(viii) Net domestic capital formation: 80
(ix) Income accruing to government: 60
(x) Government final consumption expenditure: 100
Answer: Net National Product at Market Price
= Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Net exports - Net factor income to abroad
= Rs. 500 crore + Rs. 100 crore + Rs. 80 crore + (-) Rs. 20 crore - Rs. 20 crore
= Rs. 500 crore + Rs. 100 crore + Rs. 80 crore - Rs. 20 crore - Rs. 20 crore
= Rs. 640 crore
Net national product at market = Rs. 640 crore.

Question. Calculate National Income:
Items (Rs. in crore)
(i) Corporation tax: 100
(ii) Private final consumption expenditure: 900
(iii) Personal income tax: 120
(iv) Government final consumption expenditure: 200
(v) Undistributed profits: 50
(vi) Change in stocks: (-) 20
(vii) Net domestic fixed capital formation: 120
(viii) Net imports: 10
(ix) Net indirect tax: 150
(x) Net factor income from abroad: (-) 10
(xi) Private income: 1,000
Answer: National Income
= Private final consumption expenditure + Government final consumption expenditure + Net domestic fixed capital formation + Change in stocks - Net imports - Net indirect tax + Net factor income from abroad
= Rs. 900 crore + Rs. 200 crore + Rs. 120 crore + (-) Rs. 20 crore - Rs. 10 crore - Rs. 150 crore + (-) Rs. 10 crore
= Rs. 900 crore + Rs. 20 crore + Rs. 120 crore - Rs. 20 crore - Rs. 10 crore - Rs. 150 crore - Rs. 10 crore
= Rs. 1,030 crore
National income = Rs. 1,030 crore.

Question. Unforseen obsolescence of fixed capital assets during production is: (choose the correct alternative) 
(a) consumption of fixed capital
(b) capital loss
(c) income loss
(d) None of the options
Answer: (b) capital loss

Question. Define gross investment. 
Answer: Gross investment is the sum total of expenditure on the purchase of new assets (Net Investment) and depreciation during the year.
Gross Investment = Net Investment + Depreciation

Question. Given real income to be 400 and price index be 100, calculate nominal income. 
Answer: \( Real\ Income = \frac{Nominal\ Income}{Price\ Index} \times 100 \)
Or, \( Nominal\ Income = \frac{Real\ Income \times Price\ Index}{100} \)
\( = \frac{400 \times 100}{100} = 400 \)
Nominal income = 400.

Question. Given nominal income to be Rs. 375 and price index 125, calculate real income. 
Answer: \( Real\ Income = \frac{Nominal\ Income}{Price\ Index} \times 100 \)
\( = \frac{375}{125} \times 100 = 300 \)
Real income = Rs. 300.

Question. If nominal income is Rs. 600 and price index is 100, find real income. 
Answer: \( Real\ Income = \frac{Nominal\ Income}{Price\ Index} \times 100 \)
\( = \frac{600}{100} \times 100 = 600 \)
Real income = Rs. 600.

Question. Governments spends on child immunization programme. Analyse its impact on Gross Domestic Product and welfare of the people. 
Answer: (a) Impact on Gross Domestic Product (GDP):
Government expenditure adds to aggregate demand in the economy. It has a multiplier effect on GDP. To illustrate:
If government expenditure = Rs. 100 and MPC is assumed to be 0.5, then increase in GDP would be equal to
\( \frac{1}{1 - MPC} \times 100 = \frac{1}{1 - 0.5} \times 100 = \frac{100}{0.5} = 200 \)
(b) Impact on Welfare:
Expenditure on child immunization programme is expected to improve health of the children. Accordingly, younger generation becomes robust as well as efficient. This would improve welfare of the people.

Question. Distinguish between final goods and intermediate goods. Give an example of each.  Or Distinguish between final goods and intermediate goods. Give suitable examples. 
Answer: Final goods are those goods which are used either for final consumption or for investment.
Example: Refrigerator purchased by a household is a final good.
Intermediate goods are those goods which are used as raw material for further production or are purchased for resale.
Example: Leather used by a shoe-making firm is an intermediate good.

Question. Explain 'non-monetary exchanges' as a limitation of using gross domestic product as an index of welfare of a country. 
Answer: Non-monetary exchanges refer to such exchanges which do not involve the use of money as a medium of exchange. In such exchanges, goods are exchanged for goods.
In economies like of India, barter system of exchange is not totally non-existent. Non-monetary transactions are quite evident in rural areas where payments for farm-labour are often made in kind rather than cash. But such transactions are not recorded, because they are outside the monetary system of exchange. To this extent, GDP remains underestimated. Thus, non-monetary exchanges make gross domestic product an inappropriate index of welfare.
However, in developed economies, non-monetary transactions are almost non-existent. Accordingly, their impact on GDP estimation is almost nil.

Question. How will you treat the following while estimating domestic product of a country? Give reasons for your answer:
(a) Profits earned by branches of country's bank in other countries.
(b) Gifts given by an employer to his employees on independence day.
(c) Purchase of goods by foreign tourists. 
Answer: (a) Profits earned by branches of country's bank in other countries is not a part of domestic product of India because the branches are outside the domestic territory of India. Hence, it is not included in domestic product of India.
(b) Gifts given by an employer to his employees is not included in domestic product of India because these are transfer payments.
(c) Purchase of goods by foreign tourists is included in domestic product of India since these are like exports which is a component of gross domestic product.

Question. Calculate Net Domestic Product at Factor Cost:
Items (Rs. in crore)
(i) Private final consumption expenditure: 8,000
(ii) Government final consumption expenditure: 1,000
(iii) Exports: 70
(iv) Imports: 120
(v) Consumption of fixed capital: 60
(vi) Gross domestic fixed capital formation: 500
(vii) Change in stock: 100
(viii) Factor income to abroad: 40
(ix) Factor income from abroad: 90
(x) Indirect taxes: 700
(xi) Subsidies: 50
(xii) Net current transfers to abroad: (-) 30
Answer: Net Domestic Product at Factor Cost
= Private final consumption expenditure + Government final consumption expenditure + Gross domestic fixed capital formation + Change in stock + Exports - Imports - Consumption of fixed capital - Indirect taxes + Subsidies
= Rs. 8,000 crore + Rs. 1,000 crore + Rs. 500 crore + Rs. 100 crore + Rs. 70 crore - Rs. 120 crore - Rs. 60 crore - Rs. 700 crore + Rs. 50 crore
= Rs. 8,840 crore
Net domestic product at factor cost = Rs. 8,840 crore.

Question. Calculate National Income:
Items (Rs. in crore)
(i) Net factor income to abroad: (-) 50
(ii) Net indirect taxes: 800
(iii) Net current transfers from rest of the world: 100
(iv) Net imports: 200
(v) Private final consumption expenditure: 5,000
(vi) Government final consumption expenditure: 3,000
(vii) Gross domestic capital formation: 1,000
(viii) Consumption of fixed capital: 150
(ix) Change in stock: (-) 50
(x) Mixed income: 4,000
(xi) Scholarship to students: 80
Answer: National Income
= Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation - Net imports - Consumption of fixed capital - Net indirect taxes - Net factor income to abroad
= Rs. 5,000 crore + Rs. 3,000 crore + Rs. 1,000 crore - Rs. 200 crore - Rs. 150 crore - Rs. 800 crore - (-) Rs. 50 crore
= Rs. 5,000 crore + Rs. 3,000 crore + Rs. 1,000 crore - Rs. 200 crore - Rs. 150 crore - Rs. 800 crore + Rs. 50 crore
= Rs. 7,900 crore
National income = Rs. 7,900 crore.

Question. Calculate Net National Product at Market Price:
Items (Rs. in crore)
(i) Gross domestic fixed capital formation: 400
(ii) Private final consumption expenditure: 8,000
(iii) Government final consumption expenditure: 3,000
(iv) Change in stock: 50
(v) Consumption of fixed capital: 40
(vi) Net indirect taxes: 100
(vii) Net exports: (-) 60
(viii) Net factor income to abroad: (-) 80
(ix) Net current transfers from abroad: 100
(x) Dividend: 100
Answer: Net National Product at Market Price
= Private final consumption expenditure + Government final consumption expenditure + Gross domestic fixed capital formation + Change in stock + Net exports - Consumption of fixed capital - Net factor income to abroad
= Rs. 8,000 crore + Rs. 3,000 crore + Rs. 400 crore + Rs. 50 crore + (-) Rs. 60 crore - Rs. 40 crore - (-) Rs. 80 crore
= Rs. 8,000 crore + Rs. 3,000 crore + Rs. 400 crore + Rs. 50 crore - Rs. 60 crore - Rs. 40 crore + Rs. 80 crore
= Rs. 11,430 crore
Net national product at market price = Rs. 11,430 crore.

Question. Explain with the help of an example, the basis of classifying goods into final goods and intermediate goods. 
Answer: Goods which are used by the producers in the process of production as raw material or are purchased for resale are known as intermediate goods. Example: Shirt purchased by a firm for resale is an intermediate good.
Goods which are used by their final users are known as final goods. These goods are not resold. Example: Shirt purchased by the household is a final good.
'End-use' of the goods is the basis of classifying the goods as 'final' and 'intermediate'. Goods are final if they have crossed the boundary line of production and are ready for use by their final users (consumers or producers). Goods are intermediate if they are within the boundary line of production and are not ready for use by their final users. Value is yet to be added to intermediate goods.

Question. Explain the circular flow of income. 
Answer: The flow of production, income and expenditure is a circular flow. Production gives rise to income, income gives rise to demand for goods and services, and demand in turn gives rise to expenditure. Expenditure leads to further production. Thus, the flow of production, income and expenditure becomes circular with no beginning or no end. The flow includes:

• Production: Firms produce goods and services.
• Income: Households receive income for providing factor services.
• Expenditure: Households spend income to purchase goods and services from firms.

Question. Distinguish between stocks and flows. Give an example of each. Or Distinguish between stock and flow variables with suitable examples. 
Answer: Stocks:

• Stock is that quantity of an economic variable which is measured at a particular point of time.
• Stock has no time dimension.
• Stock is a static concept.
• Examples: Quantity of money, wealth.

Flows:

• Flow is that quantity of an economic variable which is measured during the period of time.
• Flow has time dimension as per hour, per day, per month.
• Flow is a dynamic concept.
• Examples: Consumption, investment.

Question. Explain the precautions that should be taken while estimating national income by expenditure method.  Or What precautions should be taken while estimating national income by expenditure method? Explain. 
Answer: The following precautions are to be taken while estimating national income by expenditure method:

(i) Only final expenditure is to be taken into account to avoid error of double counting. Expenditure on intermediate goods (also called intermediate expenditure) is not to be considered.

(ii) Expenditure on second-hand goods is not to be included.

(iii) Expenditure on shares and bonds is not to be included.

(iv) Expenditure on transfer payments (called transfer expenditure) is not to be included.