CBSE Class 12 Economics National Income Accounting Notes Set A

PART B- INTRODUCTORY MACRO ECONOMICS

Unit VI: NATIONAL INCOME AND RELATED AGGREGATES:

KEY CONCEPTS
• Macro Economics: Its meaning
• Consumption goods, capital goods, final goods, intermediate goods, stock and flow, gross investment and depreciation.
• Circular flow of income
• Methods of calculation of national income
• Value added method (product method)
• Expenditure method
• Income method
•Concepts and aggregates related to national income
• Gross national product
• Net National product
• Gross and Net domestic product at market price and at factor cost.
• National disposable income (Gross and net)
• Private income
• Personal income
• Personal disposable income
•Real and Nominal GDP
• GDP and welfare

Macro Economics: - Macroeconomics is the study of aggregate economic variables of an economy.

Consumption goods:- Are those which are bought by consumers as final or ultimate goods to satisfy their wants.
Eg: Durable goods car, television, radio etc.
Non-durable goods and services like fruit, oil, milk, vegetable etc.
Semi durable goods such as crockery etc.

Capital goods – capital goods are those final goods, which are used and help in the process of production of other goods and services. E.g.: plant, machinery etc.

Final goods: Are those goods, which are used either for final consumption or for investment. It includes final consumer goods and final production goods. They are not meant for resale. So, no value is added to these goods. Their value is included in the national income.

Intermediate goods intermediate goods are those goods, which are used either for resale or for further production. Example for intermediate good is- milk used by a tea shop for selling tea.

Stock : - Quantity of an economic variable which is measured at a particular point of time. Stock has no time dimension. Stock is static concept. Eg: wealth, water in a tank. 

Flow : Flow is that quantity of an economic variable, which is measured during the period of time.
Flow has time dimension- like per hr, per day etc.
Flow is a dynamic concept.
Eg: Investment, water in a stream.

Investment: Investment is the net addition made to the existing stock of capital.

Net Investment = Gross investment – depreciation.

Depreciation: - depreciation refers to fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence. Circular flow in a two sector economy.

Producers (firms) and households are the constituents in a two sectors economy. Households give factors of production to firm and firms in turn supply goods and services to households.

Related aggregates

Gross Domestic product at market price

It is the money value of all final goods and services produced during an accounting year with in the domestic territory of a country.

Gross National product at market price:

It is a money value of all final goods and services produced by a country during an accounting year including net factor income from abroad.

Net factor income from abroad:

Difference between the factor incomes earned by our residents from abroad and factor income earned by non-residents with in our country.
Components of Net factor income from abroad

• Net compensation of employees
• Net income from property and entrepreneurship (other than retained earnings of resident companies of abroad)
• Net retained earnings of resident companies abroad

Formulas

• NNP Mp = GNP mp - depreciation

• NDP Mp = GDPmp - depreciation 

• NDP _Fc = NDP _mp – Net indirect taxes (indirect tax – subsidies)

• GDP _Fc = NDP _fc + depreciation

• NNP _Fc = GDP _mp - depreciation + Net factor income from abroad – Net indirect taxes

• (NNP _FC is the sum total of factor income earned by normal residents of a country during the accounting year)

• NNP fc = NDP fc + Net factor income from abroad.

Concept of domestic (economic) territory
Domestic territory is a geographical territory administered by a government within which persons, goods and capital circulate freely. (Areas of operation generating domestic income, freedom of circulation of persons, goods and capital)

Scope identified as
*Political frontiers including territorial waters and air space.
*Embassies, consulates, military bases etc. located abroad but including those locates within the political frontiers.
*Ships, aircrafts etc., operated by the residents between two or more countries.
*Fishing vessels, oil and natural gas rigs etc. operated by the residents in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction.

Resident (normal resident):-
Normal resident is a person or an institution who ordinarily resides in that country and whose center of economic interest lies in that country.
(The Centre of economic interest implies :-( 1) the resident lives or is located within the economic territory. (2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location 3. His center of interest lies in that country.

Relation between national product and Domestic product.
Domestic product concept is based on the production units located within domestic (economic) territory, operated both by residents and non-residents.
National product concept based on resident and includes their contribution to production both within and outside the economic territory.
National product = Domestic product + Residents contribution to production outside the economic territory (Factor income from abroad) - Non- resident contribution to production inside the economic territory (Factor income to abroad)

Methods of calculation of national income
I - PRODUCT METHOD (Value added method):
• Sales + change in stock = value of output
• Change in stock = closing stock – opening stock
• Value of output - Intermediate consumption = Gross value added (GDPMp)
• NNP Fc (N.I) = GDPMp (-) consumption of fixed capital (depreciation) (+) Net factor income from abroad ( -) Net indirect tax.

Income method:
1. Compensation of employees.
2. Operating surplus. (Image 4)
3. Mixed income of self-employed.
• NDP fc = (1) + (2) + (3)
• NNP fc = NDP fc (+) Net factor income from abroad
• GNP mp = NDP fc + consumption of fixed capital + Net indirect tax (Indirect tax – subsidy)

Expenditure method:
1. Government final consumption expenditure.
2. Private final consumption expenditure.
3. Net Export.
NNP fc = GDPmp - consumption of fixed capital + NFIA- Net indirect taxes
Note: If capital formation is given as Net domestic capital formation we arrive at NDPmp.
Capital formation = Investment

CALCULATION OF NATIONAL DISPOSABLE INCOME, PRIVATE INCOME,
PERSONAL INCOME AND PERSONAL DISPOSABLE INCOME

National Disposable

income

Private Income includes factor

income as well as Transfer

income (Earned income + Unearned income)

It is the income from all the sources (Earned Income as well as transfer payment from abroad) available to resident of a country for consumption expenditure or saving during a year. NNPFC + Net Indirect tax + Net current transfer from abroad =Net National disposable income. (Gross National Disposable Income includes depreciation) Factor income from net domestic product accruing to private sector includes income from enterprises owned and controlled by the private individual.

Excludes:-
1. Property and entrepreneurial income of the Gov. departmental enterprise
2. Savings of the Non-departmental Enterprise.
Factor Income from NDP Accruing to private sector = NDPFC (-) income from properly entrepreneurship accruing to the govt departmental Enterprises (-) savings of Non departmental enterprises.

Private Income Includes
* Factor income from net domestic product accruing to private sector.
+ Net factor income from abroad
+ Interest on National Debt
+ Current transfer from Govt. + Current transfer from rest of the world.
PI is the income Actually received by the individuals and households from all sources in the form of factor income and current transfers.
Personal income = Private
Income (-) corporation tax
(-) Corporate Savings OR Undistributed profits

Personal disposable income
Personal income (-) Direct Personal tax (-) Miscellaneous Receipts of the govt.
Administrative department (fees and fines paid by house hold.)

Question. When will the domestic income be greater than the national income?

Ans: When the net factor income from abroad is negative.

Question. What is national disposable income?

Ans: It is the income, which is available to the whole economy for spending or disposal NNP Mp + net current transfers from abroad = NDI

Question. What must be added to domestic factor income to obtain national income?

Ans: Net factor income from abroad.

Question. Explain the meaning of non-market activities

Ans: Non marketing activities refer to acquiring of many final goods and services not through regular market transactions. E.g. vegetable grown in the backyard of the house.

Question. Define nominal GNP

Ans: GNP measured in terms of current market prices is called nominal GNP.

Question. Define Real GNP.

Ans: GNP computed at constant prices (base year price) is called real GNP.

Question. Meaning of real flow.

Ans: It refers to the flow of goods and services between different sectors of the economy. Eg. Flow of factor services from household to firm and flow of goods and services from firm to household.

Question. Define money flow.

It refers to the flow of money between different sectors of the economy such as firm, household etc. Eg. Flow of factor income from firm to house hold and consumption expenditure from house hold to firm.

Question. Distinguish between GDPMp and GNP FC

Ans: The difference between both arise due to (1) Net factor income from abroad. and 2) Net indirect taxes. In GDPMp Net factor income from abroad is not included but it includes net indirect taxes.
GNP FC = GDPMp + net factor income from abroad – net indirect taxes

Question. Distinguish between personal income and private income

Ans: Personal income: -It is the sum total of earned income and transfer incomes received by persons from all sources within and outside the country.

Personal income = private income – corporate tax –corporate savings (undistributed profit) Private income consists of factor income and transfer income received from all sources by private sectors within and outside the country.

Question. Distinguish between nominal GNP and real GNP

Ans: Nominal GNP is measured at current prices. Since this aggregate measures the value of goods and services at current year prices, GNP will change when volume of product changes or price changes or when both changes.

Real GNP is computed at the constant prices. Under real GNP, value is expressed in terms of prices prevailing in the base year. This measure takes only quantity changes. Real GNP is the indicator of real income level in the economy.

Question. Explain the main steps involved in measuring national income through product method

Ans:
a) Classify the producing units into industrial sectors like primary, secondary and tertiary sectors.
b) Estimate the net value added at the factor cost.
c) Estimate value of output by sales + change in stock
d) Estimate gross value added by value of output – intermediate consumption
e) Deduct depreciation and net indirect tax from gross value added at market price to arrive at net value added at factor cost = NDP Fc
f) Add net factor income received from abroad to NDP Fc to obtain NNP FC which is national income

Question. Explain the steps involved in calculation of national income through income method
Ans:
a) Classify the producing enterprises into industrial sectors like primary, secondary and tertiary.
b) Estimate the following factor income paid out by the producing units in each sector i.e.
*Compensation of employees
*Operating surplus
*Mixed income of self employed
c) Take the sum of the factor income by all the industrial sectors to arrive at the NDP Fc (Which is called domestic income)
d) Add net factor income from abroad to the net domestic product at factor cost to arrive at the net national product at factor cost.

Question. Explain the main steps involved in measuring national income through expenditure method.
Ans:
a) Classify the economic units incurring final expenditure into distant groups like households, government, firms etc.
b) .Estimate the following expenditure on final products by all economic units
· Private final consumption expenditure
· Government final consumption expenditure
· Gross domestic capital formation
· Net export
(Sum total of above gives GDPMp)
c) Deduct depreciation, net indirect taxes to get NDP Fc
d) Add net factor income from abroad to NDP Fc to arrive at NNP FC.

Question. What are the precautions to be taken while calculating national income through product method (value added method)
Ans:
a) Avoid double counting of production, take only value added by each production unit.
b) The output produced for self-consumption to be included
c) The sale & purchase of second hand goods should not be included.
d) Value of intermediate consumption should not be included
e) The value of services rendered in sales must be included.

Question. Precautions to be taken while calculating national income through income method.
Ans:
a) Income from owner occupied house to be included.
b) Wages & salaries in cash and kind both to be included.
c) Transfer income should not be included
d) Interest on loans taken for production only to be included. Interest on loan taken for consumption expenditure is non-factor income and so not included.

Question. Precautions to be taken while calculations N.I under expenditure method.
Ans:
a) Avoid double counting of expenditure by not including expenditure on intermediate product
b) Transfer expenditure not to be included
c) Expenditure on purchase of second hand goods not to be included.

Question. Write down the limitations of using GDP as an index of welfare of a country
Ans:
1) The national income figures give no indications of the population, skill and resources of the country. A country may be having high national income but it may be consumed by the increasing population, so that the level of people’s wellbeing or welfare standard of living remains low.
2) High N. I may be due to greater area of the country or due to the concentration of
some resources in out particular country.
3) National income does not consider the level of prices of the country. People may be having income but may not be able to enjoy high standard of living due to high prices.
4) High N. I may be due to the large contribution made by a few industrialists
5) Level of unemployment is not taken into account.
6) National income does not care to reduce ecological degradation. Due to excess of economic activity which leads to ecological degradation reduces the welfare of the people.
Hence GNP and economic welfare are not positively related. Income in GNP does not bring about increase in economic welfare.

Question. ‘Machine purchased is always a final good’ do you agree? Give reason for your answer
Ans:
Whether machine is a final good or it depends on how it is being used (end use). If machine is bought by a household, then it is a final good. If machine is bought by a firm for its own use, then also it is a final good. If the machine is bought by a firm for resale then it is an intermediate good.

Question. What is double counting? How can it be avoided?
Ans:
Counting the value of commodities at every stage of production more than one time is called double counting.
It can be avoided by
a) taking value added method in the calculation of the national income.
b) By taking the value of final commodity only while calculating N.I

Question. State whether following is true or false. Give reason for your answer.
Ans:
a) Capital formation is a flow
True, because it is measured over a period of time.
b) Bread is always a consumer good.
False, it depends upon the end use of bread. When it is purchased by a household it is a consumer good. When purchased by restaurant for making sandwich, it is an intermediate (producer) good.
c) Nominal GDP can never be less that real GDP
False. Nominal GDP can be less than the real GDP when the prices in the base year is more than the current year.
d) Gross domestic capital formation is always greater than gross fixed capital formation.
False, gross domestic capital formation can be less than gross fixed capital formation if change in stock is negative.

Question. Why are exports included in the estimation of domestic product by the expenditure method? Can the gross domestic product be greater than the gross national product? Explain
Ans:
Expenditure method estimates expenditure on domestic product i.e., expenditure on final goods and services produced within the economic territory of the country. It includes expenditure by residents and non-residents both. Exports though purchased by non residents are produced within the economic territory and therefore a part of domestic product. Domestic product can be greater than national product, if the factor income paid to the rest of the world is greater than the factor income received from the rest of the world i.e, when net factor income received from abroad is negative.

Question. How will you treat the following while estimating domestic product of India?
Ans:
a) Rent received by resident Indian from his property in Singapore.
No, it will not be included in domestic product as this income is earned outside the economic territory of India.
b) Salaries of Indians working in Japanese Embassy in India
It will not be included in domestic product of India as embassy of Japan is not a part of economic territory of India.
c) Profits earned by branch of American bank in India.
Yes, it is included as part of domestic product since the branch of American bank is located within the economic territory of India.
d) Salaries paid to Koreans working in the Indian embassy in Korea
Yes, it will be part of domestic product of India because the income is earned within the economic territory of India. Indian embassy in Korea is a part of economic territory of India.

Question. How are the following treated in estimating national income from expenditure method? Give reason.
Ans:
a) Purchase of new car by a household: purchase of car is included in the national income because it is final consumption expenditure, which is part of national income.
b) Purchase of raw material by purchase unit: purchase of raw material by purchase unit is not included in the national income because raw material is intermediate goods and intermediate goods and service are excluded from the national income. Purchase of raw material, if included in national income will result in double counting.
c) Expenditure by the government on scholarship to student is not included in the national income because it is a transfer payment and no productive service is rendered by the student in exchange.

Question. Are the following item included in the estimating a country‘s national income? Give reason.
Ans:
1) Free cloth given to workers: free cloth given to worker is a part of wages in kind i.e. compensation to employee such compensation to employee is paid for the productive services in the economy, it is included in the national income.
2) Commission paid to dealer in old car: commission paid to dealer in old car is included inthe  estimation of national income because it is the income of the dealer for his productive services to various parties.
3) Growing vegetable in a kitchen garden of the house: growing vegetable in a kitchen garden of the house amount to production, though not for sale for self-consumption. It is included in the national income because it adds to the production of goods.

NATIONAL INCOME – NUMERICALS
1. Calculate Value Added at factor cost from the following.
      ITEMS                              Rs. CRORES
a. Purchase of raw materials    30
b. Depreciation                         12
c. Sales                                     200
d. Excise tax                             20
e. Opening stock                      15
f. Intermediate consumption    48
g. Closing stock                       10

Ans: Sales + Δ in stock = value of output
200 + (cl. St – op. st)
200 + (10 -15)
= 200 -5=195
Value of output – intermediate consumption
= value added at MP
195-48 = 147
V.A at FC = V.A at MP – Net indirect tax
147 – 20
127 crores

2. Calculate (a) Net National Product at MP, and (b) Gross National Disposable Income
ITEMS                                                         Rs. crores
a. Private final Consumption expenditure      200
b. Net indirect taxes                                       20
c. Change in stocks                                  (--)15
d. Net current transfers from abroad        (--)10
e. Govt. final consumption expenditure         50
f. Consumption of fixed capital                      15
g. Net domestic capital formation                  30
h. Net factor income from abroad                   5
i. Net imports                                                 10

Ans: (a) + (e) + (g) + (-i) = NDP MP
200 + 50+ 30 -10
280 -10 = 270 crores
NNP MP = NDP MP + NFIFA
270 + 5 = 275
NNP MP + 275 crores
GNDI = NNP PC + NFIFA + Net indirect taxes + Net current transfers from abroad +
Depreciation (comp of fixed capital)
NNP MP – net in tax = 275 – 20 =255 crores
GNDI = 255 + 20 + 5 + (-10) + 15
= 295 – 10 = 285 crores
GNDI = 285 crores

3. Calculate Gross Domestic Product at Market Price by
(a) Production Method and (b) Income Method
ITEMS                                              Rs. crores
a. Intermediate consumption by
i) Primary sector                                   500
ii) Secondary sector                             400
iii) Tertiary sector                                  400
b. Value of output by
i) Primary sector                                  1000
ii) Secondary sector                             900
iii) Tertiary sector                                  700
c. Rent                                                 10
d. Compensation of employees          400
e. Mixed income                                 550
f. Operating surplus                            300
h. Net factor income from abroad   (--)20
i. Interest                                             5
j. Consumption of fixed capital           40
k. Net indirect taxes                           10

Ans: GDP MP by production method
(b) (i) + (ii) + (iii) – a (i) + (ii) + ( iii) = value added
(1000+ 900 + 700) – (500 -400-400)
2600 – 1300 = 1300 crores Value added at MP (GDP MP)
InCcoommpee nmseattihoond o f employees + operating surplus + mixed income = NDP FC
= 400 + 300 + 550 = 1250 crores
GDP MP = NDP FC + conspn of fixed capital + net In. tax
= 1250+ 40 + 10
GDP MP =1300

4. Calculate Net National Disposable Income from the following data.
ITEMS                                                                     Rs. crores
a. Gross domestic product at MP                              1000
b. Net factor income from abroad                           (-) 20
c. Net indirect taxes                                                    120
d. Consumption of fixed capital                                  100
e. Net current transfers from abroad                           50

Ans: NNDI = GDP MP – consumption of fixed capital + Net FIFA + Net current transfer
from abroad
= 1000- 100 + 50 + (-20)
= 880 + 50 = 930 crores

5. Calculate Gross National Disposable Income from the following.
          ITEMS                                                           Rs. crores
a) National Income                                                     2000
b) Net current transfers from rest of the world           200
c) Consumption of fixed capital                                 100
d) Net factor income from abroad                             (-) 50
e) Net indirect taxes                                                      25

Ans: GNDI= (a) + (b) +(c) + (e)
= 2000 + 200 + 100 + 250
GNDI = 2550 crores

6. ESTIMATE NATIONAL INCOME BY
(a) EXPENDITURE METHOD (b) INCOME METHOD FROM THE FOLLOWING
DATA                                                                Rs. in crores
1. Private final consumption expenditure                 210
2. Govt: final consumption expenditure                    50
3. Net domestic capital formation                             40
4. Net exports                                                        (-) 5
5. Wages & Salaries                                               170
6. Employer’s contribution                                      10
7. Profit                                                                    45
8. Interest                                                                20
9. Indirect taxes                                                       30
10. Subsidies                                                           05
11. Rent                                                                   10
12. Factor income from abroad                                03
13. Consumption of fixed capital                              25
14. Royalty                                                               15

Ans: National Income (NNP FC)
Expenditure Method
(1) + (2) + (3) + (4) = NDP MP
210 + 50 + 40 + (-5) = 295
NNP FC = NDP MP + factor Income from abroad – net Indirect tax ( Indirect tax – subsidy)
295 + 3 – (30 -5)
295 + 3 – 25
= 298 – 25 = 273
NNP FC= 273 crores
Income method:
(5) + (6) + (7) + (8) + (11) + (15)
170 + 10 + 45 + 20 + 10 + 15
= 270 (NDP FC)
NDP FC = NDP FC + FIFA
= 270 + 3= 273 crores

7. FROM THE FOLLOWING DATA CALCULATE
(a) NATIONAL INCOME            (b) PERSONAL DISPOSIBLE INCOME.
1. Profit                                                                   500
2. Rent                                                                    200
3. Private income                                                   2000
4. Mixed income of self-employed                          800
5. Compensation of employers                              1000
6. Consumption of fixed capital                              100
7. Net factor income from abroad                          -(50)
8. Net retained earnings of private employees’      150
9. Interest                                                               250
10. Net exports                                                      200
11. Co-operation                                                    100
12. Net indirect tax                                                 160
13. Direct taxes paid by houses hold’s                    120
14. Employers contribution to social security scheme.  60

Ans: NNP FC (N. I) = (5) + (9) + (4) + (1) + (2)
1000 + 250+ 800 + 500 + 200
NDP FC = 2750 crores
NNP FC = NDP FC + (7)
= 2750 + (-50)
NNP Fc = 2700 crores
PDI = (3) – (8) – (11) – (13)
2000 – 150 – 100 -120
PDI = 2000 – 370 = 1630 crores

8. CALCULATE NATIONAL INCOME AND GROSS NATIONAL DISPOSABLE
INCOME FROM THE FOLLOWING DATA.
Net indirect tax                                          05
Net domestic fixed capital formation        100
Net exports                                           (-) 20
Gov.: final consumption expenditure        200
Net current transfer from abroad              15
Private final consumption expenditure     600
Change in stock                                       10
Net factor from abroad                              05
Gross domestic fixed capital formation     125

Ans: National Income (NNP FC)
= (4) + (6) + (2) + (7) + (3) = NDP MP
= 200 + 600 + 100 + 10 + (-20)
= 910 -20 = 890
NDP MP = 890 crores
NNP FC = NDP MP + (8) – (1)
= 890 + 5 -5
NNP FC = 890
Depreciation = (9) – (2)
125 – 100 = 25 crores
GNDI = NNP FC + Net Indirect Tax + Net Current transfers from abroad + depreciation
= 890 = 05+ 15 + 25
GNDI = 935 crores

9. CALCULATE NNP AT MARKET PRICE BY PRODUCTION METHOD AND
INCOME METHOD Crores
1. Inter mediate consumption
(a) primary sector                                        500
(b) Secondary sector                                   400
(c) tertiary sector                                         300
2. Value of output of
(a) primary sector                                       1,000
(b) Secondary sector                                   900
(c) tertiary sector                                          700
3. Rent                                                         10
4. Emoluments of employers                       400
5. Mixed income                                          650
6. Operating surplus                                    300
7. Net factor income from abroad               -20
8. Interest                                                     05
9. Consumptive of fixed capital                    40
10. Net indirect tax                                       10

Ans: NNP MP by production method
(2) Value of output – (1) Intermediate conspn = value added at MP
(2) a + b+ c – (1) a + b + c
1000 + 900 + 700 – 500 + 400 + 300
2600 – 1200
1400 = GDP MP
NNP MP = GDP MP – (9) + (7)
= 1400 – 40 + (-20)
NNP MP = 1340
Income Method:
NNP MP = (4) + (5) + (6) + (10) + (7)
= 400 + 650 + 300 + 10 + (-20)
NNP MP = 1350 + 10 – 20

10. CALCULATE GNP at FACTOR COST BY INCOME METHOD AND
EXPENDITURE METHOD. Rupees in crores
1. Private final consumption expenditure                            1000
2. Net domestic capital formation                                         200
3. Profit                                                                                 400
4. Compensation of employers                                            800
5. Rent                                                                                 250
6. Gov.: final consumption expenditure                               500
7. Consumption of fixed capital                                            60
8. Interest                                                                            150
9. Net current transfer from row                                          (-)80
10. Net factor income from abroad                                     (-)10
11. Net exports                                                                   (-)20
12. Net indirect taxes                                                            80

Ans: GNP FC by Income method
GNP FC = 4 + 3 + 5 + 8 + 10 + 7
800 + 400 +250 + 150 + (-10) + 60
GNP FC = 1650 crores
GNP FC by Expenditure Method
GNP FC = 1 + 2 + 6 + 10 + 11 -12 + 7
= 1000 + 200 + 500 + (-10) + (-20) -80 + 60
= 1700 -110 + 60
GNP FC = 1650 crores

11. CALCULATE PRIVATE INCOME AND PERSONAL DISPOSABLE INCOME
FROM THE FOLLOWING DATA
. Rupees in crores
1. National income                                                                           5050
2. Income from property and entrepreneurship to gov.
administrative department                                                               500
3. Saving of non-department public enterprises                             100
4. Corporation tax                                                                            80
5. Current transfer from govt: administrative depart                       200
6. Net factor income from abroad                                                  -50
7. Direct personal tax                                                                     150
8. Indirect taxes                                                                              220
9. Current transfer from Raw                                                          80
10. Saving of private corporate sector                                            500

Ans: Private Income = 1 – 2- 3 + 5 + 9
5050 – 500 – 100 + 200 + 80
5430 – 500
Private Income = 4930 crores
PDI = Private Income – 4 -10 -7
4930 -80 -500 -150
PDI = 4200 crores

12. Calculate private income
1. Income from domestic product accruing to private sector 250
2. Net current transfer from raw 40
3Net current transfer from govt: administrative dept 10
4. National debt interest 20
5. Net factor income from abroad 05

Ans: Private Income = 1 + 2+ 3 + 4 + 5
250 + 40 + 10 + 20 + 5
= 325 crores

13. CALCULATE NET NATIONAL DISPOSABLE INCOME AND PERSONAL
INCOME FROM THE FOLLOWING DATA
Rs. In crores
1. Net indirect taxes                                          90
2. Compensation of employers                         400
3. Personal taxes                                             100
4. Operating surplus                                         200
5. Corporation profit tax                                    80
6. Mixed income of self-employed                    500
7. National debt interest                                    70
8. Saving of non-departmental enterprises       40
9. Current transfer from govt                             60
10. Income from property and entrepreneurship to govt administrative Department 30
11. Net current transfer from RAW                    20
12. Net factor income from abroad                  -50
13. saving of private corporate sector               20

Ans: NDPfc = (2) + (4) + (6)
400 + 200 + 500 = 1100 crores
NNDI = NDP fc + (12) + (1) + (11)
=1100 + (-50) + 90 + 20
NNDI = 1210 – 50
= 1160 crores

Personal Income
Ans:
Private Income = NDP FC –(8) – (10)
1160 -40 – 30=1090 crores
1090 + 7 + 9 +11 +12
1090 + 70 + 60 + 20 + (-50) = 1190 crores
Personal income = Private Income – Corporation Profit Tax – Savings of private corporate
sectors
1190 – 80 – 20= 1090 crores

14. CALCULATE FROM THE FOLLOWING DATA (A) PRIVATE INCOME (B)
PERSONAL INCOME (C) PERSONAL DISPOSABLE INCOME.
RS IN CRORES
1. Factor income from NDP accruing to private sector 300
2. Income from entrepreneurship and property
3. Accruing to govt administrative departmental 70
4. Savings of non-departmental enterprises 60
5. Factor income from abroad 20
6. Consumption of fixed capital 35
7. Current transfer from rest of the world 15
8. Corporation taxes 25
9. Factor income to abroad 30
10. Current transfer from govt governmental admi depart 40
11. Direct taxes paid by house hold 20
12. National dept interest 05
13. saving of private corporate sector 80

Ans: Private Income = 1 + 5 + 7 -9 + 10 + 12
300 + 20 + 15 -30 + 40 + 05
Private Income = 350 crores
Personal Income = Private income – 8 – 13
= 350 – 25 – 80
Personal Income = 245 crores
PDI = Personal Income - 11
245 – 20
PDI = 225 crores

15. From the following data, calculate:
(a) Gross national Disposable Income
(b) Private Income
(c) Personal Disposable Income
(Rs. In Crores)
(1) Net national product at factor cost 700
(2) Indirect taxes 60
(3) Subsidies 10
(4) Consumption of fixed capital 40
(5) Income from property and entrepreneurship Accruing to government administrative departments 50
(6) Current transfers from rest of the world 45
(7) Profits 100
(8) Direct tax paid by households 50
(9) Savings of private corporate sector 60
(10) Saving of non-departmental enterprises 25
(11) Current transfer from govt: administrative departments 70
(12) A factor income abroad 20
(13) Factor income to abroad 30
(14) Corporation tax 35

Ans: GNDI = 1 + 2 -3 + 6 + 4
700 + 60 – 10 + 45 + 40= 805 -10 + 40 GNDI = 835 crores
b) Private Income = 1 – 5 -10 + 6 +11
700 – 50 -25 + 45 +70
Private Income = 740 crores
c) PDI = Private Income – 14 – 9 – 8
740 – 35 – 60 – 50
PDI = 594 crores

16. Calculate Gross National Disposable Income from the following data:
(Rs. In Crores)
(1) National income 2000
(2) Net current transfer from rest of the world 200
(3) Consumption of fixed capital 100
(4) Net factor income from abroad (-)50
(5) Net indirect taxes 250

Ans: GNDI = 1 + 5 + 2 + 3
2000 + 250 + 200 + 100
GNDI = 2550 crores

17. Calculate Net National Disposable Income from the Following Data:
(Rs. In Crores)
(1) Gross national product at factor cost 800
(2) Net current transfer from rest of the world 50
(3) Net indirect taxes 70
(4) Consumption of fixed capital 60
(5) Net factor income from abroad (-)10

Ans: NNDI = 1 + 2 + 3 -4
800 + 50 + 70 -60
= 860 crores

Important Questions...........

Question. Inventory is a ___________ concept whereas the change in inventory is a ___________ concept.
(a) stock, flow 
(b) flow, stock
(c) stock, stock
(d) flow, flow
Answer. (a) stock, flow.

Question. If in an economy the value of Net Factor Income from Abroad is `200 crores and the value of Factor Income to Abroad is ` 40 crores. Identify the value of Factor Income from Abroad.
(a) ₹200 crore
(b) ₹160 crore
(c) ₹240 crore
(d) ₹180 crore
Answer. (c) ₹240 crores

Question. GNP defiator is represented by which of the following formula?
(a) Nominal GNP/Real GNP × 100
(b) Real GNP/Nominal GNP ×100
(c) Real GNP/ Change in rate of inflation × 100
(d) Change in rate of inflation/ Real GNP × 100
Answer. (a) Nominal GNP/Real GNP × 100

Question. A car purchased by a household is a __________.
(a) Single use capital good
(b) Single use consumer good
(c) Durable consumer good
(d) Semi-durable consumer good
Answer. (c) Durable consumer good

Question. The sum of factor payments is equal to ___________.
(a) Domestic Income
(b) National Income
(c) Per Capital Real Income
(d) Per Capital Nominal Income
Answer. (a) and (b)

Question. When Nominal Gross Domestic Product (GDP) is `840 crores and price Index is 120, then the Real Gross Domestic product (GDP) will be _______.
(a) ₹700 crores
(b) ₹900 crores
(c) ₹800 crores
(d) ₹500 crores
Answer. (a) ₹700 crores

Question. Which of the following statement is incorrect
(a) Gross Domestic Product (GDP) at Market price = GDP at factor cost plus Net Indirect taxes.
(b) Net National Product (NNP) at Market price = NNP at factor cost.
(c) Gross National Product (GNP) at Market price = GDP at Market price plus Net factor income from abroad.
(d) Net National Product (NNP) at factor cost = National Income
Answer. (b) Net National Product (NNP) at Market price = NNP at factor cost.

Question. Which of the following is not a factor payment?
(a) Free uniform to defence personnel
(b) Rent paid to the owner of a building
(c) Salaries to the Members of Parliament
(d) Scholarship given to the students
Answer. (d) Scholarship given to the students

Question. If tea leaves are used in a restaurant for tea brewing , and the drinkable tea is sold to the customers, then the tea leaves will be__
_____________.
(a) Final goods
(b) Intermediate good
(c) Consumption goods
(d) Capital goods
Answer. Intermediate good

Question. Which of the following does not explain the concept of depreciation?
(a) An annual allowance for wear and tear of a capital good.
(b) Cost of the capital good (minus scrap value) divided by number of years of its useful life.
(c) Unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities etc.
(d) Maintenance and replacement cost of existing capital goods.
Answer. (c) Unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities etc.

Question. A firm produces `100 worth of goods per year, `20 is the value of intermediate goods used by it during the year UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 13 and `10 is the value of capital consumption. The net value added will be:
(a) ₹100
(b) ₹ 80
(c) ₹ 70
(d) ₹130
Answer. (c) ₹70

Question. Market prices include:
(a) Subsidies
(b) Indirect taxes
(c) Intermediate consumption
(d) Depreciation
Answer. (b) Indirect taxes

Question. Suppose a country produces bread only. In the year 2018‑ 19 it had produced 1,000 units of bread, price was `10 per bread. In 2019-20, it produced 1100 units of breadat price of `12 per bread. In 2019-20, the nominal and real GDP are:
(a) ₹10,000 and ₹10,000
(b) ₹10,000 and ₹11,000
(c) ₹13, 200 and ₹10,000
(d) ₹13,200 and ₹11,000
Answer. (d) `13,200 and ` 11,000

Question. If the GDP deflator is 150% and real GDP is `1,100 the nominal GDP will be:
(a) ₹733
(b) ₹1,650
(c) ₹1,100
(d) ₹2,750 
Answer. (b) `1,650

Question. A representative consumer had to spend `1,400 on purchase of a given basket of commodities in the year 2015-16. Due to inflation, CPI of the year 2019-20 (taking 2015-16 as base year) was 120. How much amount the consumer had to spend on purchase of the same basket of commodities in the year 2019-20?
(a) ₹1,167
(b) ₹1,680
(c) ₹1,520
(d) ₹1,280
Answer. (b) `1,680

Question. Which of the following is a flow concept?
(a) Foreign exchange reserves
(b) Inventory
(c) Capital
(d) Exports
Answer. (d) Exports

Question. Which of the following will be included in gross national product of India?
(a) Profits earned by a foreign company in India
(b) Salary paid to Americans working in Indian Embassy in America
(c) Earnings from sale of bonds to the investors
(d) None of the above
Answer. (d) None of the above

Question. Which of the following will be included in national income?
(a) Money receipt from sale of old car
(b) Scholarships received by students
(c) Remittances from abroad
(d) Free services of owner occupied building
Answer. (d) Free services of owner occupied building

Question. Losses are classified as:
(a) Stock variable
(b) Flow variable
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer. (b) Flow variable

Question. Unforeseen obsolescence of fixed capital assets during production is:
(a) Consumption of fixed capital
(b) Capital loss
(c) Income loss
(d) None of the above
Answer. (b) Capital loss

Question. According to a report forwarded by the Reserve Bank ofIndia, there was a fall in rate of inflation as measured by Consumer Price Index (CPI) on year-on-year basis to 5% from 8% in the previous year. Which of the following statements represents the situation?
(a) CPI has fallen.
(b) CPI has risen at a rate lower than the preceding year.
(c) CPI is constant.
(d) None of the above
Answer. (b) CPI has risen at a rate lower than the preceding year.

Question. Foreign embassies in India are a part of India’s :
(a) Economic territory
(b) Geographical territory
(c) Both (a) and (b)
(d) None of the above
Answer. (b) Geographical territory

Question. Goods purchased for the following purpose are final goods:
(a) For satisfaction of wants
(b) For investment in firm
(c) Both (a) and (b)
(d) None of the above
Answer. (c) Both (a) and (b)

Question. Which of the following transactions is not included in national income?
(a) Payment of interest by a private firm
(b) Payment of interest by banks on deposits
(c) Interest paid by an individual on a car loan taken from a bank
(d) None of the above
Answer. (c) Interest paid by an individual on a car loan taken from a bank

Question. Which of the following transactions is not included in national income?
(a) Brokerage paid to broker for facilitating sale of second hand goods 
(b) Payment of corporation tax by firms to the government
(c) Interest paid by productions units to households
(d) Interest paid by banks on deposits by individuals
Answer. (b) Payment of corporation tax by firms to the government

Question. National income at current prices is higher than national income at constant prices during a period of:
(a) Rising prices
(b) Falling prices
(c) Constant prices
(d) Both (a) and (b)
Answer. (a) Rising prices

Question. Net value added at factor cost = `100 crores, Depreciation = `30 crores, Subsidies = `15 crores and Intermediate Consumption = `185 crores, then “Gross value of output” is:
(a) `300 crores
(b) `330 crores
(c) `130 crores
(d) `230 crores
Answer. (a) `300 crores
Explanation: NVAFC = Gross Value of Output – Intermediate
consumption – Depreciation + Subsidies
100 = Gross Value of Output – 185 – 30 + 15
Gross Value of Output = 100 + 185 + 30 – 15 = 300

Question. Construction of a school building by the government will be part of:
(a) Domestic fixed capital formation
(b) Change in stock
(c) Government final consumption expenditure
(d) Residential construction investment
Answer. (c) Government final consumption expenditure

Question. Depreciation is also known as:
(a) Capital loss
(b) Unforeseen obsolescence
(c) Capital allowance
(d) Both (a) and (b)
Answer. (c) Capital allowance

Question. If Net factor income to abroad is (–) `120 crores, factor income from abroad is `150 crores and domestic income is `4,500 crores, National Income will be:
(a) `4,380 crores
(b) `4,620 crores
(c) `4,700 crores
(d) `4,300 crores
Answer. (b) `4,620 crores

Question. If GDPmp is `5,000 crores, intermediate consumption is `2,500 and the ratio of sales to change in stock is 2 : 1, then sales will be:
(a) `4,000
(b) `5,000
(c) `3,000
(d) `2,000
Answer. (b) `5,000

Question. While calculating gross domestic capital formation, exports are included because:
(a) Exporters are paid for it.
(b) It is an expenditure on domestic product.
(c) It is a final expenditure by the buyers.
(d) Exports result in expenditure.
Answer. (b) It is an expenditure on domestic product.

Question. Which one of the following is not a part of a country’s Net Domestic Product at market price’?
(a) Depreciation
(b) Indirect tax
(c) Net exports
(d) Net change in stocks
Answer. (a) Depreciation

Question. Which one of the following is an intermediate expenditure?
(a) Expenditure on purchase of furniture by a firm for its own use
(b) Expenditure on maintenance by a firm
(c) Expenditure on purchase of tractor by a firm for its own use
(d) Machine bought by a household
Answer. (b) Expenditure on maintenance by a firm

Question. National income is the sum of factor incomes accruing to:
(a) Nationals
(b) Economic territory
(c) Residents
(d) Both residents and non-residents
Answer. (c) Residents

Question. State giving reason whether the following statement is True or False: Purchase of car by a household is a part of gross domestic capital formation.
Answer. False: It is a private final consumption expenditure.

Question. State giving reason whether the following statement is True or False: Free services provided by the government will not be included in national income.
Answer. False: It will be included in national income as it is government final consumption expenditure.

Question. Market price is less than factor cost if ___________.
Answer. Net indirect tax is negative, i.e. subsidy is more than indirect taxes.

Question. Gross domestic capital formation is less than gross fixedcapital formation when ________________ .
Answer. Net change in stock is negative, i.e., when opening stock exceeds closing stock.

Question. GDP can be greater than GNP when ___________.
Answer. Factor income paid to abroad is greater than factor income received from abroad, i.e., when net factor income from abroad (NFIA) is negative.

Question. NDPmp is the sum up of operating surplus, compensation of employees, mixed income and Net Indirect Tax. (True/False)
Answer. True

Question. GDPmp includes market value of all final goods and services produced by the normal residents or the nonresidents in a country. True/False?
Answer. True

Question. State whether the following statement is true or false “Industrial waste driven into rivers is an example of positive externality.”
Answer. False

Question. Salary of an Indian working in Russian embassy in India is included in National Income of India. (True/False)
Answer. True

Question. If NDPfc = `80 crore, Net indirect tax = `10 crore, Net factor income from abroad = (–)`10 crore, then NNPmp = `70 crore. (True/False)
Answer. False
NNPmp = NDPfc + NFIA + Net Indirect Tax
= –80 + (–10) + 10 = `80 crore

Question. Indirect taxes are deducted from NNP at market prices to calculate national income because _____________ .
Answer. Indirect taxes accrue to the government. It is a transfer payment, not a factor payment .

Question. That part of NNP which actually accrues to the owners of factors of production is called ___________ .
Answer. Net National Product at factor cost or National Income.

Question. Prizes received by the household from government and firms are included in National Income. True/False?
Answer. False (It is a transfer payment.)

Question. Nominal GDP can be less than Real GDP when ______.
Answer. Prices in the current year are less than the prices in the base year.

Question. _____________ is the income earned by the factors of production in the form of wages, profits, rent, interest, etc, within the domestic territory of a country.
Answer. Net Domestic Product at factor cost (NDPfc)

Question. State giving reason whether the following statement is True or False: " National income is always more than the domestic income."
Answer. False: National income can be less than domestic income when net factor income from abroad (NFIA) is negative. National income can also be equal to domestic income if NFIA is zero.

Question. Market price and factor cost will be equal when ______.
Answer. Net indirect tax (indirect tax – subsidy) is zero.

Question. ______ is the value of all the final goods and services that are produced by the normal residents of India and is measured at the market prices, in a year, regardless of whatever they are located within the economic territory or abroad.
Answer. GNP at market prices

Question. Production of a firm during a year – Sale of the firm during the year = ___________ ?
Answer. Change in inventories of the firm during a year.

Question. Wages earned by a citizen of India working is Saudi Arabia will be included in GDP of India. True/ False ?
Answer. False

Question. The profits earned by the Korean-owned Hyundai car factory in India will be included in the National income of India. True/False?
Answer. False

Question. Depreciation is deducted from GDP while calculating national income because ______________.
Answer. depreciation does not become part of anybody’s income

Question. If the nominal GDP of the current year is double the nominal GDP of the base year, the volume of production of the country must have doubled. True/False?
Answer. False

Question. State, whether the following statement is true or false: ‘Inventory is a stock variable.’
Answer. True

Question. State whether the following statement is true or false: “Expected obsolescence is included in depreciation”.
Answer. True

Question. State, whether the following statement is true or false: ‘Purchase of machinery by a producer is an intermediate good.’
Answer. False

Question. Combined factor income, which can’t be separated into various factor income components is known as __________.
Answer. Mixed income of self employed.

Question. The ratio of nominal to real GDP is a well-known index of prices, called______________.
Answer. GDP deflator

Question. State, whether the given statement is true or false :‘Unexpected obsolescence is a component of depreciation.’
Answer. False

Question. `2,000 note lying in wallet of Rohini, a student is an example of ____________ (stock/flow) variable.
Answer. Stock

Question. Net Domestic Fixed Capital Formation + Change in stock = _________.
Answer. Net Domestic Capital Formation

Question. Rent + Interest + Profit = _________.
Answer. ‘Operating surplus

Question. All the capital goods produced in a year do not constitute net addition to the capital stock already existing. True / False?
Answer. True

Question. ___________ is the market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated at the current year prices.
Answer. Nominal GDP

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