CBSE Class 12 Economics National Income Accounting Worksheet Set A

Multiple Choice Questions

Question. In the production of sugar, sugarcane is
(a) a final good
(b) a capital good
(c) an intermediate good
(d) none of these
Answer : C

Question. A quantity measured per unit of time period is known as
(a) Stock variable
(b) flow variable
(c) inventory
(d) none of these
Answer : B

Question. Capital goods are those goods
(a) which are used in the production process for several years;
(b) which are used in the production process for few years;
(c) which involve depreciation losses;
(d) both (a) and (b)
Answer : D

Question. GNP at Market Price is measured as:
(a) GDP at Market Price – Depreciation;
(b) GDP at Market Price + Net Factor Income from Abroad
(c) GDP at Market Price + Subsidies;
(d) NDP at Factor Cost + Net Factor Income from Abroad
Answer : B

Question. Which of the following leads to depreciation?
(a) Normal wear and tear
(b) Damages due to floods
(c) Damages due to market-crash
(d) None of these
Answer : A

Question. Which one of the following is a flow variable?
(a) Consumption
(b) Wealth
(c) Quantity of money
(d) None of these
Answer : A

Question. ‘Income of the family’ is the example of which variable?
(a) Stock
(b) Flow
(c) Both stock and flow
(d) Neither stock nor flow
Answer : B

TRUE & FALSE

Question. Increase in stock of goods held by a consumer will contribute to capital formation.
Answer : FALSE: any increase in goods of stock held by consumers does not contribute to capital formation as it is assumed that such goods are consumed, the moment are purchased.

Question. Productions of services for self-consumption are not included in national income.
Answer : TRUE: Such services are not included in national income as it is difficult to ascertain their market value and they are not rendered for earning income.

Question. Nominal GDP can never be less than real GDP.
Answer : FALSE: nominal GDP can be less than the real GDP, if price in the current year are less than the price in the base year.

Question. Gross domestic capital formation is always greater than gross fixed capital formation.
Answer : FALSE: gross domestic capital formation can be less than gross fixed capital formation if change in stock is negative.

Question. Good produced for self-consumption will be included in national income.
Answer : TRUE: such goods contribute to the current output and their imputed value will be included in national income.

Very Short  Answer type Questions

Question. What do you mean by inventory investment?
Answer : Change in inventory stock during the year is called inventory investment of the producer.

Question. Define the term National Income.
Answer : It can be defined as the net value of all final goods & services produced by the normal residents in the domestic territory of a country in an accounting year (NVAFC), and adding net factor income from abroad (NFIA).NI= NVAFC + NFIA

Question. What is meant by transfer payment?
Answer : Transfer payment (or transfer expenditure) are all those unilateral payment corresponding to which there is no value addition in the economy.

Question. Define depreciation reserve fund?
Answer : Depreciation reserve fund is a provision of funds to cope with depreciation losses. These fund are used for the replacement of fixed assets when these are worm-out or when these become obsolete/outdated.

Question. Who are Normal Residents?
Answer : This refers to those individuals & institutions who normally reside in a country for more than one year, and whose centre of economic interest lies in that country.

Question. Define intermediate goods.
Answer : Intermediate goods are those goods which are within the boundary line of production and not ready for use by their final users. These goods are purchase for further sale or are to be use as raw material by the producers.

Question. What is meant by consumption of fixed capital?
Answer : Consumption of fixed capital or depreciation refers to loss of value of fixed assets in use on account of: 1. Normal wear and tear; 2. Normal rate of accidental damage, and 3. Expected or foreseen obsolescence.

Question. Explain the circular flow of Income & Product (two sector model).
Answer : Circular flow refers to the cyclical transactions of income & expenditure (money flow) & goods & services (real flow) among the economic sectors viz. household, enterprises, Govt. & foreign sector.

Question. What is meant by capital goods?
Answer : Capital goods are those goods which are used in the process of production for several years and which are of high value. These goods are fixed assets of the producers.

Question. Define the term Macro Economics.
Answer : It is that branch of economics which studies the aggregates of an economy or the larger units of an economy. The main objective of Macroeconomic study is 'how the income & employment of an economy is determined?' This branch of economics deals with the fuller utilization of resources.

Question. Define real flow.
Answer : Real flow refers to the flow of factor services from the household sector to the producing and the corresponding flow of goods and services from the producing sector to the household sector.

Question. Briefly explain the concept of Depreciation or Consumption of Fixed Capital (CFC).
Answer : It refers to the loss of value of fixed assets due to normal wear & tear.

Question. What is fixed investment?
Answer : Fixed investment refers to increase in the stock of fixed assets or capital goods (like plant and machinery) of the producers during an accounting year.

Question. What is meant by nominal GDP?
Answer : Nominal GDP refers to market value of the final goods and services produced

Question. What is meant by producer goods?
Answer : Producer goods are those goods which are used for further production. These may be used either as raw material(like wood used in making chair) or as fixed assets (like a tractor in farming).

Short Answer type Questions

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

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

Question. What is national debt interest?
Answer : National debt interest refers to the interest payment accruing to residents of the country on account of borrowings by the govt. The government borrows money from the people (by issuing bond like National Saving Certificates in India).

Question. Is brokerage paid to real estate agents only on the sale and purchase of new houses include in the
Answer : No, brokerage paid to real estate agent only on the sale and purchase of new as well as second – hand house should be included in the estimation of national income.

Question. How will you treat the following in the calculation of gross domestic product of India? Give reasons for your answers.
(i) Profit earned by a branch of foreign Bank in India.
(ii) Salaries of Indian employees working in embassy of Japan in India
(iii) Salaries of residents of Japan working in Indian embassy of Japan
Answer : (i) Yes, it will be included in the gross domestic product of India as profits are earned within the domestic territory of India.
(ii) No, it will be not included in the gross domestic product of the India as the embassy of japan is not the part of domestic territory of India.
(iii) Yes, it will be included in the gross domestic product of India as the India embassy is the part of domestic territory of India.

Question. Should purchase of wheat in the wholesale market be treated as the purchase of final goods?
Answer : Purchase of wheat in the wholesale market is often done by the trader. Wheat is a consumption goods and traders are not the final users of wheat. Therefore, purchase of wheat in the wholesale market is to be treated as the purchase of intermediate goods. However, sometimes the households buy wheat in bulk from wholesale market. In such situation, purchase of wheat should be treated as purchase of final good.

Question. Briefly explain the concept of Net Indirect Tax.
Answer : It refers to the difference between Indirect Tax paid by the enterprises to the Govt. & the Subsidies paid by the Govt. to some of the enterprises. This concept is used to obtain the national income at factor cost or factor prices. The NIT is deducted from market price (MP) to get factor cost (FC).Indirect Tax is the amount of burden whose impact falls on one person or a group and the incidence falls on other person or group. Subsidies refer to the financial assistance or aid provided by the state to the weak & sick units.

Question. Define money flow.
Answer : Money flow refers to the flow of money (in term of receipts and payment) across different sectors of the economy. It is called money flow because it involves the flow of money value from one sector to the other. Thus, producers make sector payment to the households and household make payment to the producers (for the purchase of goods and services) in term of money.

Question. Differentiate between stock & flow.
Answer : Stock refers to those variables which are measurable at a given point of time while flow refers to those variables which are measurable during a given a period of time. In this way, stock is static while flow is dynamic. Stock has no time dimension while flow has. For eg. Wealth is stock while income is flow, capital is stock while capital formation is flow.

Question. In the estimation of GDP (using expenditure method), we focus only on expenditure by the resident of a country. Is it true?
Answer : No, it is not true. In the estimation of GDP we include all expenditure on the domestically produce goods both by the resident as well nonresidents of a country.

Question. Define the term Net Factor Income from Abroad & explain its components.
Answer : It is defined as the difference between income earned by the resident households in abroad & the same earned by the foreign residents in a resident country in an accounting year. In other words, it is the income earned from work, property & entrepreneurship by the resident household of a particular country in the ROW 'less' the same earned by the residents of ROW in a resident country in an year.
Components of NFIA: It contains three elements viz:
i) Net Compensation of Employees: This refers to the income from work earned by the resident workers in the ROW 'less' the same earned by the resident workers of ROW in a resident country.
ii) Net Operating Surplus: This refers to the difference between the income from property & entrepreneurship earned by the residents in ROW & the same earned by the foreign residents in a resident country.
iii) Net Retained Earnings of Resident Companies in Abroad: It is the difference between the retained earnings of the resident companies abroad & the same of the foreign companies in a resident country.

Question. In the determination of social welfare what matter is the quantum of output rather than the composition of output? Defend or refute.
Answer : The above statement is incorrect. Social welfare depends both on the quantum of output as well as the composition of the output. If good are produce primarily for richer section of the society (ignoring the interest of poorer section of the society) social welfare is bound to remain low even when the quantum of output is rising.

Long Answer type Questions

Question. Explain the related aggregates of National Income.
Answer : There are six related aggregates of NI as mentioned above in the chart.
1. NDPfc accruing to private sector/Domestic product accruing to private sector/Share of private sector in domestic income refers to that part of total
domestic income which accrues to general public viz. household & firms. It is obtained by deducting the share of Govt. in national income also referred to as NDPfc accruing to public sector from the NDPfc.
NDPfc accruing to private sector= NDPfc – NDPfc accruing to Govt.
NDPfc accruing to Public sector = Profits & Dividend accrued to Departmental enterprises + Savings of Non Departmental enterprises.
2. Private income refers to that part of domestic income which is accrued to all the residents from all the sources in a year. Thus, Private income = NDPfc + NFIA + Net Current Transfers From Abroad + National Debt Interest + Current transfers from Govt.

Question. Define the following Concepts of Value of Output.
Answer : 1. Intermediate Cost / Consumption is defined as the expenditure incurred on raw materials, fuel, semi-finished goods & other inputs by the firms to produce final products. It is the sum of purchase of raw materials & fuel purchased in domestic market & abroad (Import of raw materials). This amount has to be deducted from GVO to obtain GDPMP, as the intermediate expenditure is not estimated in the estimation of NI to avoid the problem of double counting.
2. Final sales are the sum of domestic sales & sales made in abroad (Exports) & production for self-consumption.
3. Change in Stock is defined as the difference between Closing Stock & Opening Stock.
Closing stock is the stock of raw materials, semi-finished goods, unsold finished goods been held by the enterprises; strategic materials &food grains held by the govt. agencies; & the livestock held by the animal husbandry, been estimated in the end of an accounting year i.e. 31st of March of a year.
Opening stock is the same estimated in the beginning on an accounting year i.e. 1st of April of a year.

Question. How private income is different from National Income?
Answer : Private Income is the income generated from all sources ie it includes both factor & transfer incomes, while NI includes only factor incomes. Whereas, both includes NFIA.
1. Personal income refers to that part of private income which is accrued to only the household, & it can be obtained by deducting the income of firms ie corporation tax & retained earnings of private corporate sector. Personal Income = Private Income – Corporation Tax – Undistributed profits
2. Personal disposable income refers to that part of personal income which is actually received by the household for disposal in consumption & savings. It is also equal to Household final consumption expenditure & household savings. Thus, Disposable income= Personal Income – Personal Tax – Miscellaneous Receipts of the Govt. administrative departments.
3. Net National Disposable Income (NNDI) refers to that part of National Income which is available with the nation for disposal. Thus,
NNDI = NNPfc+Net Indirect Tax+Net current transfers from abroad
4. Gross National Disposable Income is the national disposable income including depreciation. Thus,
GNDI = GNPmp + NCTFA or NNPfc – depreciation + NIT + NCTFA

Question. Differentiate between Real & Nominal GDP.
Answer : Nominal GDP is estimated at current price ie the market values of the prevailing year, while Real GDP is estimated at constant(base)price. Nominal GDP is helpful to measure the price fluctuations while Real GDP helps to measure & compare the economic growth & performance. The nominal GDP is so called because it reflects the growth of output in monetary terms as it includes price effect, whereas real GDP reflect the growth of output in real/physical terms & does not include the price effect.

Question. What is meant by economic welfare? What is its indicator?
Answer : The term welfare means the sense of wellbeing. The economic welfare means the sense of wellbeing which are affected by the non-economic factors viz. NI, consumption expenditure etc. which can be expressed in monetary terms. Wellbeing of the people is also affected by various non-economic factors viz. pollution, liberty etc. The economic welfare is indicated by Per Capita Real GDP.

Question. Explain the limitations of Per Capita Real GDP as Indicator of Economic Welfare.
                                                                          OR
“The economic growth of a country is rising but most of the people are still poor & there is a huge environmental pollution.” Explain.
Answer : It has been found in many economies that despite of a faster growth in GDP, there are many such problems still exist in those countries like starvation, corruption, environmental degradation & ecological imbalance etc. This reflects the fact that Real Per Capita GDP has certain limitations as a good indicator of economic welfare. These are:
1. The growth in GDP does not reflect the fact about the distribution of income among the people. It may so happen that few of the individuals are becoming richer while the rest are remaining poorers. This leads to widening of gap between the rich & poors. This finally hampers the economic growth & development.
2. The composition of goods & services is not reflected in the growth of GDP. There may be rise in GDP but it is not certain that what kind of products have shown rise in production, whether war time goods or peace time goods, harmful products like liquor & tobacco or useful products like food grains etc. The economic welfare do not depends upon only the volume of production but also its composition. But the irony is that GDP reflects only the money value of volume but not the composition.
3. Non-monetary transactions: viz services of housewives & other members rendered to the other members of the family etc. are not estimated in GDP due to lack of adequate data & difficulty in their valuation. Whereas, these services contribute to economic welfare in many ways, & thus it remains underestimated.
4. The Externalities are not taken into account while estimating GDP. The economic activities leads to various kinds of benefits as well as harms to human being. The benefits are referred to as positive externalities while the harms are referred to as negative externalities. For example, construction of a highway or flyover reduces transport costs & journey time to those who have not contributed towards the cost of construction. This is not reflected in GDP, & thus welfare is underestimated. Similarly, the negative externality is also associated viz. pollution & global warming etc. The construction of flyover & highways do not pay anything for this harm caused to the people of that vicinity. Here, welfare is less than what is indicated by GDP.

Please click on below link to download CBSE Class 12 Economics National Income Accounting Worksheet Set A