Question Bank SERIES
1. Distinguish between Intermediate good and final good.
Final goods: Final goods are those that are meant for final use by the consumers or firms. These goods are not required to enter into further stages of production or resale to change their form and content. They are finished goods meant only for consumption and investment. E.G milk, butter, TV etc used by household
Intermediate goods: Those goods that are used to produce other goods and therefore they always move from one stage of production to another in the manufacture of a final product. E.g. raw material, electricity etc used by a firm.
2. Explain the Concept and measurement of value added:
Value added is defined as the difference between total value of output of a firm and the value of inputs bought from other firm.
Most of the goods go through multiple stages of production. This means that a goods value increases at each stage until its final value is obtained in the last stage. Therefore the value of final good will have to be equal to the sum of value added at each stage of production.
3. Precautions to be taken while estimating GNP using Value added method.
a. Avoid double counting by excluding value of intermediate goods. The value of Intermediate goods is already included in the value of final goods so that national income includes only the value of final goods.
b. Do not include sale of second hand goods because nation income include only currently produced goods and services. Commission paid to the broker dealing in second hand good is included.
c. Self-consumed output should be included because these are currently produced goods. Services of owner occupied houses are included as imputed rent.
4. What are the components of Gross Domestic Expenditure?
(Components of Aggregate Demand) GDP can be measured by taking into account all final expenditures in the economy. There are three distinct types of expenditure as Households, Firms and Government commit them respectively. These expenditures are classified into four types.
1. Private Final Consumption Expenditure (C )
2. Investment Expenditure ( I )
3. Government Purchase of Goods and Services (G)
4. Net Export (X – X)
Based on this expenditure flow we can conclude that
GDPmp = C+I+G+(X-M) OR AD= C+I+G+(X—M)
5. WHAT PRECAUTIONS ARE TO BE TAKEN WHILE USING EXPENDITURE METHOD:-
a. Avoid expenditure on all transfers because national income include only factor payments. No services are rendered or no production activity happens in the case of transfers.
a. Avoid intermediate good expenditure:- Domestic expenditure include only expenditure on final goods.
b. Do not include expenditure on secondhand goods and buying of financial assets.
c. Include self use of own produced final goods. Implicit cost of self owned and self supplied factors by the owner is included.
6. What are the components of GDP as measure of income: In this method GDP is considered as the addition of all factor incomes generated in the production of goods and services. We must include only those income flows that originate with the production of goods and services within the given period of time.
The components of factor incomes are:
1. Employee’s compensation: Compensation to employees in the form of wages, salaries and benefits makes up the largest single components of the income generated with production of GDP. Wages and salaries are payable in cash, kind or both.
2. Profits: Profits are the reward the owners of firm receive for being in business. It consist of three components such as corporate profit tax, undistributed profits, and dividends.
3. Rent: It means income earned by owners of rental housing. The meaning of rent in the national income accounts is that it is a charge for the temporary use of some capital asset.
4. Interest: Households both receive and pay interest. We include only the net interest. Net interest is the difference between the interest amount paid and the interest income received by the household.
5. Mixed income: It income of own account workers and profits and dividends of unincorporated enterprises. It may be called mixed income of self-employed. GDP measured by the aggregation of factor incomes is also called Domestic Income. Gross National Product: After aggregating GDP we can add net factor income to estimate the value of Gross National Product.
GNP = GDP + Net Factor Income from abroad.
7. What Precautions are to be taken while using income method?
a. Avoid all transfers because national income include on factor incomes. Transfers are receipts with any services rendered to production process.
b. Avoid capital gains because capital gains are incomes from sale of secondhand assets. No new goods are produced.
c. Include income from self consumed goods because these are currently produced goods.
d. Include the free services rendered by owners of the production units. The implied value of self owned factors services provided by the producer is included.
8.How are priduction units classified into various Industrial sectors in order to facilitate national income accoumnts?
a. Primary sector:- It includes the production units that exploit natural resources like land water and subsoil assets. Agriculture fisheries, forestry mining etc.
b. Secondary sector:- Manufacturing sector that transform one good to another goods.Construction, manufacturing etc.
c. Tertiary sector: The production units that produce services. Transport, communication, banking etc.
9. Distinguish between Nominal GDP (GDP at current prices)and Real GDP (GDP at constant prices)
Nominal GDP: Value of current output of final goods and services in as economy at current year prices-It is influenced by price changes so that is not a good indicator of economic growth-Not considered as a good measure for comparison
10.Real GDP: Value of current year’s output of final goods and services in an economy at base year price.-It is influenced only change in output- Not influenced by price change- A good measure for comparison and a better indicator of economic growth.
11. Define Net Factor Income from abroad. What asre its components?
It is the difference between factor income received from rest of the world for rendering factor services and income paid for factor services rendered by non-residents inside the domestic territory of the country. Its components are:-
a. Net compensation of employees from abroad
b. Net income from property and entrepreneurship from rest of the world, which include Rent, interest dividends etc.
c. Net retained earning of resident companies abroad.
12. Distinguish between Stocks and flows
Stocks are economic variables measured at appoint of time. It has no time dimension. These are static concept. Eg. Wealth, population, capital etc
Flows are economic variables measured over a period of time. They a have a time dimension. These are dynamic concepts. Investment, income, birth rate etc
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