National Income Accounting - Class 12 Commerce Economics - Extra Questions

Explain the methods of calculating National income.

The National income of a Country can be calculated by the following three methods.
$$1$$. Product method: In product method, the total value of all  goods and services produced in a country is taken into account.
$$2$$. Income Method: In income method the income and payments received by all he people in the country are calculated.
$$3$$. Expenditure method: In expenditure method, we add up the expenditure of all people on consumer goods, investment and saving.


Explain with the help of an example, the basis of classifying goods into final goods and intermediate goods.

The underlying basis for classifying goods into final goods and intermediate goods is based on the fact whether the good has been purchased for 'ultimate consumption' or 'further processing'. If a goods has been purchased for ultimate consumption, say milk then it is regarded as a final good. While. if a good is purchased for 'further processing', say milk has been purchased for making curd by the firm, then it will be regarded as an intermediate good. 


Explain the concept of 'disposable income'.

Disposable income is that part of personal income which is left after the individual has paid various taxes, such as, income tax, personal property tax, etc. This is the income, which is available to the person and can be either spent on consumption or be saved.


Which among the following are final goods and which are intermediate goods? Give reasons.
(a) Milk purchased by a tea stall
(b) Bus purchased by a school
(c) Juice purchased by a student from the school canteen.

(a) Milk purchased by a tea stall is intermediate good as it is used as input in the production process
(b) Bus purchased by a school is a final good as it is investment expenditure and is a capital good.
(c) Juice purchased by a student from school canteen is final good as it ends up in final consumption and this is an perfect example of a final good. 


Explain how the following are treated in estimating National Income:
Wheat grown by a farmer for self-consumption

 Wheat grown by farmer, but used entirely for family’s consumption will be included while estimating National Income, as the production is done for self-consumption purpose.


Discuss the following methods of debt redemption:
Debt conversion

 Conversion of debt:

Conversion of public debt implies changing the existing loans, before maturity, into new loans at an advantage in servicing charges. In fact, the process of conversion consists generally, in converting or altering a public debt from a higher to a lower rate of interest.

A government might have borrowed at a time when the rate of interest was high. Now, when the rate of interest falls, it may convert the old loans into new ones at a lower rate, in order to minimise the burden. Thus, the obvious advantage of such conversion is that it reduces the burden of interest on the tax­payers. Furthermore, lower interest rates on public loans would mean a less unequal distribution of income.



Write explanatory answer.
Explain the output method of measuring national income.

Output Method: In this method, national income is measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.



Mention the situation in which following equations will hold true:
(i) National Income $$=$$ Domestic Income
(ii) $$GDP_{FC} > GDP_{MP}$$
(iii) $$NNP_{FC} < NDP_{FC}$$
(iv) $$GDP_{FC} = GDP_{MP}$$
(v) Domestic Income is greater than National Income.

(i) National Income = Domestic Income: this situation will be seen when There will be no Net factor income from abroad.
(ii) GDP(at FC) >GDP(at MP) : This situation will be seen when Subsidies will be more than indirect tax.
(iii) NNP(at FC) <NDP(at FC): This situation will be seen when net factor income from abroad is negative.
(iv) GDP(at FC) =GDP(at MP) : This situation will be seen when net indirect tax is zero.
(v) Domestic Income is greater than National Income: This situation will be seen when net factor income from abroad is negative.


Explain the components of compensation of employees for calculation of National Income by Income method.

Compensation of employees refers to the factor income earned by labour in exchange of their factor services. Its components are Wages and Salaries, Employers’ contribution to social security and Retirement Pension.
1) Wages and salaries:
Factor payments received by employees in the form of bonus, commission,  perquisites, etc.
2) Employer's contribution:
Amount deposited by the employer in Provident Fund, insurance schemes, etc. of the employees.
3) Retirement Pension:
Amount deposited in pension and pension-linked schemes for the employees.


Answer briefly each of the following questions.
Explain with the help of an example, the problem of double counting while calculating national income.

While estimating the National income, the value of only final goods and services is included. However the problem of double counting arises when value of intermediate goods is also included along with the value of final goods. So, double counting means a counting of an output more than once in the process of various of stages of production.


From the following data, calculate National Income by Income method and Expenditure method:
ItemRs. in crores
(i)Compensation of employees700
(ii)Government final consumption expenditure750
(iii)Net factor income from abroad(-) 10
(iv)Net exports(-) 15
(v)Profits600
(vi)Net indirect taxes60
(vii)Mixed income of self-employed350
(viii)Rent200
(ix)Interest310
(x)Private final consumption expenditure1100
(xi)Net domestic capital formation385
(xii)Consumption of fixed capital65

National income (income method) = Compensation of employees + Profits + Rent + Interest + Mixed income of self employed - Net factor income to abroad = 700 + 600 + 200 + 310 + 350 - 10 = 2150 crores

National income (expenditure method) = Govt. final consumption expenditure+Net domestic capital formation+Net exports+Private final consumption expenditure-Net indirect taxes-Net factor income to abroad=750 + 385 - 15 + 1100 - 60 - 10 = 2150 crores.


Write explanatory answer:
Explain the various methods of measuring national income.

The main methods of calculating national income are:

1. Product Method:

In this method, national income is measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.

 

2. Income Method:

Under this method, national income is measured as a flow of factor incomes. There are generally four factors of production labour, capital, land and entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their remuneration.

 

3. Expenditure Method:

In this method, national income is measured as a flow of expenditure. GDP is sum-total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import).


Distinguish between 'output method and income method of measuring national income'.

Output method:
a) The Output Method is the most direct method of arriving at an estimate of a country’s national output or income.

b) It involves adding the output figures of all firms in the economy to get the total value of the nation’s output.

c) The outputs can be grouped into certain sectors such as the primary sector, secondary sector and the tertiary sector.

d) This method also has two sub-methods: The Final Goods Method and the Value Added Method.

Income Method -                   

a)     The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest and profit for their productive services in an accounting year.

b)    Thus, national income is calculated by adding up factor incomes generated by all the producing units located within the domestic economy during a period of account.

c)     In income method national income is measured at the stage when factor incomes are paid out by enterprises to owners of factors of production—land, labour, capital and enterprise.

d)    Since net value added by an enterprise is the result of services of factors of production, therefore, the same is distributed in the form of money income (rent, wages, interest, etc.) among factors of production.





Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? 

 Stock Flow
  Stock relates to a point of time  Flow relates to a period of time.
  Stock is not time dimensional. Flow is time dimensional as per hour, per month, per year.
 Stock influences the flow. Greater the glow of capital, greater is the flow of goods and services. Flow influences the stock. For example: monthly increase in the supply of money leads to an increase in the quantity of money.
  Example: Wealth, capital, etc.  Example: Income, capital formation.
Between net investment and capital, capital is a stock since it is measured over a point of time and net investment is a flow since it is measured over a specified period of time.


Describe the four major sectors in an economy according to the macroeconomic point of view.

Four major sectors in an economy according to the macroeconomic point of view are:
a) Household sector: It includes consumers of goods and services. Households are also the owners of the factors of production.
b) Producer sector: It includes all producing units in the economy. For the production of goods and services, the firms purchase factors of production.
c) Government sector: It includes government as a welfare agency and government as producer.
d) The external sector: It includes all such activities which are related to export and import of goods, and the flow of capital between the domestic economy and rest of the world.


Classify the following as Stock and Flow:
(i) Amount of bank deposits as on 31.03.2017
(ii) Losses
(iii) Production of cement in the year 2017
(iv) Profit
(v) Population of India as on 31st March, 2017
(vi) Number of literate people as on 31.03,2017
(vii) Savings
(viii) National income of a country
(ix) Capital
(x) Number of persons employed during December
(xi) Balance in a bank account
(xii) Raw material in a godown as on 31st Jan, 2018
(xiii) Production
(xiv) Wealth
(xv) Gross domestic product

(i) Stock as they are related to a point of time
(ii) Flow as losses are measured over a period of time
(iii) Flow as production is measured over a period of time
(iv) Flow as profit is measured over a period of time
(v) Stock as population is related to a point of time
(vi) Stock as it is related to a point of time
(vii) Flow as savings are related to a period of time
(viii) Flow as national income is related to a period of time
(ix) Stock as capital is related to a point of time
(x) Flow as ti is related to a period of time.
(xi) stock as it is related to a point of time
(xii) Stock as it is related to a point of time
(xiii) Flow as production is measured over a point of time
(xv) Flow as gross domestic product is measured over a period of time


How does real flow consist of factor flow and product flow?

Real flow consists of two kinds of flows:
(i) Factor flow: It is the flow of factor services from households to firms
(ii) Product Flow: It is the flow of goods and services from firms to households


Classify the following as factor income or transfer income:
(i) Unemployment allowances.
(ii) Salary received by Rakesh from a company.
(iii) Financial help to earthquake victims.
(iv) Compensation received from the employer.
(v) Claim received from Insurance company by an injured worker. 
(vi) Birthday gift received from a friend.
(vii) Bonus received on Diwali. 

The following are classified as:
Factor Income: (ii), (iv), (vii)
Transfer Income: (i), (v), (vi), (iii)


Very Short Answer Type Questions
What is meant by intermediate goods? 

Intermediate goods refer to those goods which are used either for resale or for further production In the same year.


Very Short Answer Type Questions
Define final goods. 

Final goods refer to those goods which are used either for consumption or for investment. 


Define capital goods. 

Capital Goods are those final goods which help in the production of other goods and services.


Define 'Depreciation'.

Depreciation refers to a fall in the value of fixed assets due to normal Wear and tear through the passage of time or expected obsolescence (change in technology).


What is meant by Net factor income from abroad?

Net factor income from abroad refers to the difference between the factor income received from the rest of the world and the factor Income paid to the rest of the world.


Very Short Answer Type Questions
Out of factor income and transfer income, which one is included in the national income? Give reason.

Out of factor income and transfer income, factor income is included in the national income.
Reason: Only factor incomes are included because transfer payments are unilateral payments, like, charity and grants. These are not related to any kind of work or services rendered by the owners of the factor of production.


Very Short Answer Type Questions
Can purchase of a new car be categorised as an intermediate good? 

Yes, purchase of a new car can be categorised as an intermediate good if it is purchased by a car dealer for resale. 


What are 'subsidies'? 

Subsidies are the 'economic assistance' given by the government to the firms and households, with a motive of general welfare. 


Give two examples of intermediate goods.

(i) Milk used in dairy shop for resale; (ii) Coal used In factory for further production.


Define flow variable.

Flow variable refers to that variable, which are measured at a particular point of time.


Is national income a stock concept or flow concept?

National income is a flow concept as it is measured over a period of time, usually a year.


What are stock variables?

Stock variables refer to the variables, which are measured at a particular point of time.


Define Gross Investment.

Gross Investment is addition to the stock of capital before making allowance for depreciation.


What is meant by the circular flow of income?
Distinguish between Real Flow and Money Flow.

 Real Flow
 Money flow
  It refers to the flow of goods and services across different sectors of the economy.It refers to the flow of money in terms of receipts and payments across different sectors of the economy.
Circular flow of income: It refers to unbroken circularity of real flows and money flows across different sectors of the economy


Calculate Indirect Taxes from the following data:
ParticularsRs. in crores
(i) NDP at FC
(ii) Subsidies
(iii) Factor income from abroad
(iv) Consumption of Fixed Capital
(v) Factor income to abroad
(vi) GNP at MP
55,915
1,540
635
1,625
865
58,350

Formula: Indirect tax =    NDP at FC - GNP at MP + Consumption of Fixed capital  + Factor income from abroad -  Factor income to abroad
                                        = 55915 - 58350 + 1625 + 635 - 865
                                       =( - ) 1040.


Distinguish between factor income and transfer receipt. 

 Factor incomes:
a) Factor incomes are bilateral(two sided)
b) Factor incomes are related to the factor of services or factor of production(land, labour, capital and entrepreneurship)
c) Example: Compensation of employees, rent, interest, profit.
Transfer payments:
a) Transfer payments are unilateral(one sided)
b) These are not related to any kind of work or services rendered by the owners of the factor of production
c) Example: Charity and grants.


Distinguish between stocks and flows. Given an example of each.

 Stocks
 Flows
 Stock relates to a point of time.
 Flow relates to a period of time.
 Stock is not time dimensional.
 Flow is time dimensional as per hour, per month, per year.
 Stock influences the flow. Greater the glow of capital, greater is the flow of goods and services.
 Flow influences the stock. For example: monthly increase in the supply of money leads to an increase in the quantity of money.
 Example: Wealth, capital, etc.
 Example: Income, capital formation.


Distinguish between:
Final goods and intermediate goods

 Final goods
 Intermediate goods
  These products may be used as raw material for the production of other goods during an accounting year.  These goods are not used as raw material for the production of other goods during an accounting year.
  These products may be resold by the firms for profit. These products are not resold by the firms for profit.
  Value is yet to be added to these good.  Value is not to be added to these good.
  These goods are not included in the estimation of national income.  These goods are included in the estimation of national income.
  Example: Wheat flour used to make the bread is an intermediate good.  Example: Bread used by consumers.


'Machine purchased is always a final good.' Do you agree with the statement? Give reasons for your answer.

'Machine purchased is always a final good'- this statement is not true. For example: A machine purchase by a manufacturing company is a capital good which is to be used in the process of production. In this case, machine is the fixed asset of the producer. While, the same machine is purchased by a consumer, it is considered as a final good(durable-use consumer good).


Distinguish between intermediate products and final products. Give examples.

  Intermediate Product  Final Product
  These products may be used as raw material for the production of other goods during an accounting year.  These goods are not used as raw material for the production of other goods during an accounting year.
  These products may be resold by the firms for profit.   These products are not resold by the firms for profit.
 Value is yet to be added to these good.   Value is not to be added to these good.
  These goods are not included in the estimation of national income.   These goods are included in the estimation of national income.
 Example: Wheat flour used to make the bread is an intermediate good.   Example: Bread used by consumers.


Whether the following items will be included in National Income? Give reasons for your answer.
(i) Payment of electricity bill by a factory.
(ii) Dividend on shares.
(iii) Increase in stock of consumer goods with households.
(iv) Bus fare paid by a passenger.
(v) Gains from sale of shares. 

(i) No, it is a part of intermediate consumption expenditure. 
(ii) Yes, as it Is a part of profits. 
(iii) No, as it is assumed that such goods are consumed, the moment they are purchased. 
(iv) Yes, it is a part of private final consumption expenditure. 
(v) No, as it is a capital gain. 


Whether the following items will be included in National Income?
(i) Rent earned by Reliance from its building in USA.
(ii) Gifts from Abroad.
(iii) Retained earnings of resident companies from abroad.
(iv) Expenses of foreign visitors in India.
(v) Gifts to a trust from Japan.

(i) Yes, it is a factor income from abroad. 
(ii) No, it is a transfer income. 
(iii) Yes, it is a factor income from abroad. 
(iv) Yes, it is a part of Net Exports. 
(v) No, it is a current transfer from rest of the world.


Which of the following expenditures incurred are on intermediate products and which are on final products? You must state reason for your answer: 
(i) Purchase of ticket for train journey by an individual.
(ii) Purchase of eatables by a firm.
(iii) Purchase of a car by an employer for office use by his employees. 

Intermediate Products: (ii)
Final Products: (i), (iii). 


Distinguish between consumer goods and capital goods. Give examples.

 Consumption goods Capital goods
 Consumption goods are those goods which are directly used for satisfaction of human wants. These are not used in the production of other goods.Consumption goods are meant for final consumption as final goods.
Capital goods are those goods which are used in the process of production for several years and are of higher value. These goods are fixed assets of the producers. Use of these goods leads to depreciation.
  Example: Bread and butter consumed by the consumers.
   Example: Plant and machinery.


Distinguish between intermediate product and final product. Give suitable examples in support of your answer.

 Intermediate Product
 Final Product
 These products may be used as raw material for the production of other goods during an accounting year.
 These goods are not used as raw material for the production of other goods during an accounting year.
 These products may be resold by the firms for profit.
  These products are not resold by the firms for profit.
 Value is yet to be added to these good.
  Value is not to be added to these good.
 These goods are not included in the estimation of national income.
  These goods are included in the estimation of national income.
 Example: Wheat flour used to make the bread is an intermediate good.
  Example: Bread used by consumers.


Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.

End-use of the goods is thee principle for classifying the goods as intermediate goods and final goods. If the good is used by the producers as a raw material or for resold, it is to be treated as an intermediate good and if the good is purchased by the consumer households, it is to be considered as a final good. For example: If milk is sold to the dairy farmers in a village, it is to be treated as intermediate goods and the part of milk sold to consumer households should be treated as a final good.


Which of the following items is part of compensation of employees? Give reasons for your answer.
(i) Entertainment allowance to an employee to entertain business guests.
(ii) Employers' contribution to gratuity fund of the employees.
(iii) Employee's contribution to provident fund.
(iv) Payment of claim of insurance claim by LIC to the injured worker.
(v) Old age pension.
(vi) Medical expenses of a firm on treatment of employee's family. 

(i) It is not a part of compensation of employees (COE) as it is paid for the benefit of the business and not for the employee. In fact, it is an intermediate consumption expenditure.  
(ii) It is a part of compensation of employees as such contribution is for the benefit of employees and is paid for his production services. 
(iii) It is not a part of compensation of employees as such contribution is made by the employee from COE only.
(iv) It is not a part of compensation of employees as LIC is not the employer of the injured workers.
(v) It is not a part of compensation of employees as it is paid to old people due to their old age and not because of any productive contribution. Moreover, it is paid by an agency other than an employer. In fact, it is a transfer payment. 
(vi) It is a part of compensation of employees as such expenditure is incurred by the firm in return for the productive services of the employee.


Manish buys a second hand car from a car broker for Rs. 3,25,The broker receives Rs. 16,500 as commission for his services from Manish. How will this transaction affect the national income of the country? Give reason for your answer. 

The commission of Rs. 16,500 received by broker will be added in the national income of the country as it is the income of broker for his productive services to Manish. The amount paid for purchase of car will not be included as it is the payment for purchase of an already existing object and there is no addition to current flow of goods and services.


Very Short Answer Type Questions:
When is value of output equal to value added? 

Value of output is equal to value added if there is no intermediate costs. 


Very Short Answer Type Questions:
What is the value added method of measuring national income? 

Value added method is that method which measures the national income by estimating the value added by each producing enterprises within the domestic territory of the country in an accounting year.


Very Short Answer Type Questions:
What is meant by mixed income? 

Mixed income refers to the income generated by own account workers (like farmers, barber etc.) and unincorporated enterprises (like retail traders, shopkeepers etc).


Very Short Answer Type Questions:
Mention the three methods of measuring national income. 

The three methods of measuring national income:
(i) Value Added method (ii) Income method (iii) Expenditure method. 


Very Short Answer Type Questions:
Income from property, royalty, entrepreneurial income, and interest is Rs. 150, Rs. 100, Rs.75 and Rs.How much is the operating surplus? 

Income from property, royalty and entrepreneurial income etc are regarded as operating surplus. 
Thus operating surplus is:
$$ Rs.100+ Rs. 150 + Rs. 50 + Rs 75 = Rs. 375$$.


Give meaning of 'deficient demand' in macroeconomics.

Deficient demand refers to the situation when aggregate demand is less than aggregate supply corresponding to the full employment level in the economy. 


Due to an increase in Investment, the national income increased by Rs. 10,000 crores. If 20% of additional income is saved, calculate the increase in investment. (Rs. 2,000 crores) 

If 20 % of the income is save then MPS =0.2.

Multiplier(k) => 10,000 / change ininvestment = 1/ MPS 

                     => 10,000 / change ininvestment  = 1/0.2

                     => 10,000 / change ininvestment  = 5

                     => change in investment = 10,000 / 5  = 2,000 crores. 



Very Short Answer Type Questions:
Under what circumstances, net export is negative? 

Net export is negative when imports exceed exports.


Very Short Answer Type Questions:
Will the commission given to a broker for sale of an old house be included in national income? 

Yes, it will be included in national income as it is a payment for productive service rendered.


Short Answer Type Questions: 
Giving reason identify whether the following are final expenditures or intermediate expenditure: 
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on improvement of a machine in a factory. 

(i) It is treated as intermediate expenditure because it involves expenditure on goods, which are single use producer goods.
(ii) It is treated as final expenditure because it is expenditure on investment. 


Explain the concept of 'excess demand' in macroeconomics. Also explain the role of 'open market operation' in correcting it.

Excess demand is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. It implies two things-
1) Planned aggregate demand in the economy happens to exceed its full employment level.
2) The level of aggregate demand surpasses the level of aggregate supply even when the available factors are fully utilized.
Open market operation is the policy that focuses on increasing and decreasing the stock of liquidity with the people, through the sale and purchase of securities by the central bank. During excess demand or inflation, the central bank tries to sale securities. The sale of securities reduces purchasing power from the market. Consequently, aggregate demand is decreased and excess demand or inflationary gap gets combated.


What is meant by excess demand in Macroeconomics?

Excess demand refers to the situation when aggregate demand is more than the aggregate supply corresponding to the full employment level In the economy.


Very Short Answer Type Questions:
Why do exports form a part of national income? 

Exports include those goods that are produced within the country's domestic territory, therefore, they from a part of national income.


Very Short Answer Type Questions:
Give one example of "externality" which reduces welfare of the people.

An "externality" which reduces welfare of the people is environmental pollution caused by industrial plants. This is usually regarded as negative externality.


Short Answer Type Questions: 
Explain 'mixed income of self-employed' and give an example.

Mixed income of self-employed refers to the surplus or deficit amount which is earned from the production process by the enterprises which are not corporated. These types of enterprises are generally owned by the members of the household sector of the economy. Mixed income is also known as operating surplus. For example, the amount earned by the members of the household other than paid wages or salaries is known as mixed income of self-employed.


In an economy S = -50 + 0.5 Y is the saving function (where S = saving and Y = national income) and investment expenditure is Rs. 7,Calculate: (I) Equilibrium level of national Income. (II) Consumption expenditure at equilibrium level of national income.

S= -50+0.5 Y

C+S=Y

=> C = Y-S 

        = Y - (-50+0.5 Y)

        = Y + 50 - 0.5 Y

        = 50 + 0.5 Y

Hence, C = 50 + 0.5 Y

At equilibrium level of output,

 AS=AD

Y= C+I 

=> Y= 50+ 0.5 Y + I 

=> Y - 0.5 Y = 50+ 7000

=> 0.5 Y = 7,050 

=> Y = 7,050/ 0.5 = 14,100 rupees

At equilibrium level of Income, consumption expenditure is 

50 + 0.5 ( 14,100) 

= 50 + 7,050

= Rs. 7,100



In an economy, marginal propensity to save is 0.How much increase in investment is required so that national income rises by Rs. 400 crores?

If increase in National Income is 400 crores and MPS= 0.10 

Multiplier(k) => 400 / change in investment = 1/ MPS 

                     => 400 / change in investment  = 1/0.10

                     => 400 / change in investment  = 10

                     => change in investment  = 400 / 10  = 40 crores.



An increase in investment in a country leads to increase in national income by Rs. 200 crores. If marginal propensity to consume is 0.75, what is the increase in investment? Calculate.

Increase in National Income is Rs. 200 crores and MPC = 0.75 

Multiplier(k) => 200 / change in investment = 1/ (1- MPC)

                     => 200 / change in investment  = 1/0.25

                     => 200 / change in investment  = 4

                     => change in investment  = 200 / 4  = 50 crores. 



Explain national income determination through the two alternative approaches. Use diagram.

The national income determination can be better understood with the help of given diagram. The two alternative approaches of national income determination are: 

1. $$AD = AS$$
According to Keynes, the equilibrium is reached only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at E where AD intersects $$45^o$$ line. At this point, AD = AS. 
When AD is more than AS , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS. 
When AD is less than AS), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 
So, equilibrium takes place only at point E, when AD = AS.


2. $$S = I.$$

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at $$E_1$$  where savings intersects investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach $$E_1$$, S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point $$E_1$$, when S=I.


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Explain the methods of calculating National Income 

Method of calculating National income
The National Income of a country can be calculated by the following three
Methods.
1. Product Method
2. Income Method
3. Expenditure Method
(1) Product Method-  In this method, the total value of all goods and services produced in a country is taken into account.
(2)  Income method - In this method, the Income and Payments received by all the people in the country are calculated
(3)  Expenditure Method- In this method, we add up the expenditure of all people on consumer goods, investment, and saving. 


Define the following:
Income from property and entrepreneurship

Income from property and entrepreneurship in the form of rent, royalty, interest and profit is termed as operating surplus. 
(i) Income from Property: There are two principal forms of the income from property: 
(a) rent and royalty and
(b) interest. 
(ii) Income from Entrepreneurship (Profit): Profit is a residual factor payment to the owners of an enterprise. 



Define flows.

A variable is said to be a flow variable, if it is measured over (during) a period of time. They have an element of time attached to them. For example, income earned in the month of March is a flow variable.


What do you mean by circular flow of income in a simple economy?

Circular flow of income in a simple economy refers to the cycle of generation of income in the production process, its distribution among the factors of production and finally, its circulation from households to firms in the form of consumption expenditure on goods and services produced by them.


What is the generation phase?

Generation phase refers to that phase where firms produce goods and services with the help of factor services.


What is the advantage of per capita income ? Mention any one.

Per Capita Income helps to compare and analyse wealth of different population and different regions. It is used as a measure of a nation's standard of living and to ascertain its development.  
Per Capita Income is a measure of the average income a person earns, in a given region, during a specific period, normally a year. It is generally calculated by dividing the national income by the population.


NNP at FC is also known as _______________ income.

NNP at FC is also known as national income.


GNP at MP, _____ , NNP at MP and NNP at FC are four national concepts.

GNP at MP, GNP at FC, NNP at MP and NNP at FC are four national concepts.


What do you mean by Gross National Product at Factor Cost?

Gross National Product at factor cost refers to gross money value of all the final goods and services produced by the normal residents of a country during a period of one year.


What is the distribution phase?

Distribution phase refers to that phase which involves the flow of factor income (rent, wages, interest and profit) from firms to the households.


Determine the missing items in GNP at FC = GNP at MP - _________.

GNP at FC = GNP at MP - Net Indirect Taxes.


What is private income?

Private income refers to the income which accrues to private sector from all the sources within and outside the country.


NNP at FC = GNP at MP - ___________ - Depreciation.

NNP at FC = GNP at MP - Net Indirect Taxes - Depreciation.


What is the disposition phase?

Disposition phase refers to that phase in which the income received by factors of production, is spent on the goods and services produced by firms.


What is the formula for calculating private income?

Private Income = NDP at FC - Income from Property and Entrepreneurship accruing to Government Administrative Departments  - Savings of Non Departmental Enterprise + Net Factor Income from Abroad (NFIA) + National Debt Interest + Current Transfers from Government + Net Current Transfers from Rest of the World.


What is personal income?

Personal income is the sum total of all the incomes that are actually received by households from all the sources.


What is personal disposable income?

Personal disposable income refers to that part of personal income which is actually available at the disposal of households.


What does personal disposable income exclude?

Personal disposable income excludes personal taxes and miscellaneous receipts of government.


What are the components of compensation of employees under income method?

The following are the components of compensation of employees:
1. Wages and salaries- It includes all monetary benefits like wages, salaries, bonus, dearness allowance, etc.
2. Wages and salaries in kind- It includes all non monetary benefits like rent free home, free car, free medical and educational facilities. etc.
3. Employers' contribution to social security schemes- It includes contributions made by employer for the social security of employees. For example, contribution to provident fund, gratuity, labour welfare funds, etc.


What is the formula of gross national disposable income?

Gross National Disposable Income = Net National Disposable Income + Depreciation.
where, Net National Disposable Income = National Income + Net Indirect Taxes + Net Current Transfers from Rest of the World.


What is the formula of net national disposable income?

Net National Disposable Income = National Income + Net Indirect Taxes + Net Current Transfers from Rest of the World.


What is gross national disposable income?

Gross national disposable income refers to the gross income which is available to the whole country for disposal.


What is the compensation of employees under income method?

Compensation of employees refers to the amount paid to employees by the employer for rendering productive services. It includes all the payments and benefits, which the employees receive, directly or indirectly, from the employer.


What are the different formulae to calculate personal disposable income?

Personal Disposable Income = Personal Income - Personal taxes - Miscellaneous receipts of government.
Personal Disposable Income = Personal consumption expenditure + Personal savings.


What is net national disposable income?

Net national disposable income refers to the net income which is available to the whole country for disposal.


What is royalty?

Royalty refers to income received for granting leasing rights of sub-soil assets. For example, owners of mineral deposits like coal, iron ore, etc.


What excludes from wages and salaries in kind?

Wages and salaries in kind does not include any facility which is necessary for work and in which employees do not have any discretion. For example, uniforms to be worn during work only or vehicles to be used for work only.


What are the components of gross fixed capital formation?

Following are the components of gross fixed capital formation:
  1. Gross business fixed investment.
  2. Gross residential construction investment.
  3. Gross public investment.


What are the examples of royalty?

Examples of royalty are owners of mineral deposits like coal, iron ore, natural gas, etc.


State whether construction of a new house is included in national income.

The construction of a new house will be included in the national income because it is a part of capital formation and leads to production of goods and services in the economy.


National income is a ___________ (stock /flow) concept.

Flow relates to a period of time. Flow is time dimensional as per hour, per month, per year. Flow influences the stock. For example, national income, number of births during the year 2020.
Hence, national income is a flow concept.



Calculate Net National Product at Market price from the following data:
ItemsRupees
1Closing Stock10
2Consumption of fixed capital40
3Private final consumption expenditure600
4Export50
5Opening stock20
6Government final consumption expenditure100
7Imports60
8Net domestic fixed capital formation80
9Net current tranfer from abroad-10
10Net factor income from abroad30


2131994_2017661_ans_3c983f32bf414297b09d935c7ce8156a.png


State with valid reason, which of the following statement is true or false:
a. A kind of goods used as intermediary goods can never be final goods.
b. With money as a medium of exchange, only money flows prevail in the economy, not the real flows.

a. False. It depends on the use of the good. If a sweet seller uses sugar as intermediate goods in producing sweets but the same sugar is used by a household for consumption purpose then it will be final goods.
b. False. The primary function of money is that money serves as a common medium of exchange where money is considered as a mode of exchanging goods. Hence, to say that with money as medium of exchange, only money flows prevail in the economy, is incorrect to say as money is exchanged against goods.


Calculate (a) Domestic Income and (b) Operating Surplus.
Mixed Income = 400
Undistributed Profit = 100
Consumption of fixed capital = 100
Rent and interest = 700
Corporation tax = 600
Dividend = 860
NFIA = 150
Subsidies = 40
Indirect tax = 100
Compensation of employees = 1500

1. Operating surplus = Rent and interest + Corporation tax + Dividend + Undistributed profit.
= $$700+600+860+100$$
= $$2,260$$
2. Domestic income = Operating surplus + Compensation of employees + Mixed income 
= $$2,260+1,500+400$$ 
= $$4,160$$



Calculate NNP at MP by (i) Income Method and (ii) Expenditure Method
ItemsRupees in Cr
1Mixed income by the self-employed50
2Indirect tax30
3Wages and salaries400
4Exports15
5Imports45
6Operating Surplus300
7Profits130
8Employers Contribution to social security schemes80
9Net capital formation 150
10Private final consumption expenditure500
11Net factor income from abroad10
12Govt. final consumption expenditure230
13Consumption on fixed capital20
14Subsidies10

Income method
NDP $$f_c$$ = Wages and salaries + Operating surplus + mixed income + Employer contribution

             $$=50+400+300+80$$

             $$=850$$

$$NNPf_c=NDPmp+NFIA$$

             $$=850+10$$

             $$=860$$

Expenditure method

$$NNPf_c=NDpf_c+NFIA$$

             $$=830+10+(30-10)$$

             $$=860$$


Calculate Net National Product at factor cost.
No.Items( Rs. in Crore)
iPrivate final consumption expenditure8000
iiGovernment final consumption expenditure1000
iiiExports700
ivImports120
vAnnual allowance for wear and tear60
viFixed business investment300
viiResidential investment200
viiiChange in stock100
ixFactor income to abroad40
xFactor income from abroad90
xiNet product taxes400
xiiNet productionn taxes250


2135587_2019200_ans_955e6b43999446c5aa967c3a3421a455.png


From the following data calculate imports:
SR. No.Particulars( Rs. crores)
(i)Sales3500
(ii)Net fixed capital formation 150
(iii)Intermediate Consumption 1650
(iv)Consumption of fixed capital100
(v)Exports800
(vi)Change in stock 250
(vii) Household Consumption expenditure500
(viii)Expenditure incurred by non-profit institutions serving households.50
(ix)Purchase of goods by the government 250
(x)Compensation of employees paid by the government200
(xi)Net indirect taxes220


2143819_2023483_ans_f73ce6a21e6d4d83ab699a5bd745bba9.png


S.NO Items Rs. (In Crores)
 1 Wages and salaries 3065
 2 Interest  700
 3 Compensation of employees in kind 65
 4 Rent  400
 5 Undistributed profit 110
 6 Dividend 240
 7 Net Income From Abroad 110
 8 Social security contribution by employees 60
 9 Direct taxes of firms 150
 10 Private consumption 2000
 11 Public consumption 1200
 12 Gross domestic investment abroad 1500
 13 Net investment abroad 270
 14 Net indirect taxes 100
 15 Depreciation 80
 16 Transfer payment 130
 17 Direct personal taxes 75
Calculate: National Income by Expenditure Method.

Using Expenditure Method,GDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Gross domestic capital formation (Net domestic fixed capital formation + Change in stock) + Net exports = Rs.[2,000 + 1,200 + 1,500] crores = Rs.4,700 crores.
NNP at FC = GDP at MP - Depreciation + Net Income From Abroad - Net Indirect Taxes = Rs.[4,700 - 80 + 110 - 100] = Rs.4,630 crores.



Match the following by choosing the correct set from Column A and Column B:
Column AColumn B
a. Private Consumption Expenditurei. Market Rate of Interest
b. Private Investment Expenditureii. Total Expenditure
c. Autonomous Investmentiii. Level of personal disposable income
d. Aggregate Demandiv. Construction of Roads

a. Private Consumption Expenditure - iii. Level of personal disposable income
b. Private Investment Expenditure - i. Market Rate of Interest
c. Autonomous Investment - iv. Construction of Roads
d. Aggregate Demand - ii. Total Expenditure


Give two points of distinguished between private and public goods?

BasisPublic GoodsPrivate Goods
1. MeaningPublic goods are produced by the government or by nature for the welfare of the people without any cost.Private products are the ones manufactured and sold by private companies to earn a profit.
2. Objectives When nature or the government provides public goods. Private goods are produced by the businessmen or the entrepreneurs.


Find Wages and salaries from the following data:
Royalty50
Rent100
Interest400
Net Indirect Tax70
Net national product at market price1700
Profit300
Net Factor Income to abroad (-)20
Consumption of fixed capital 120
Social security contribution by the employers60
Social security Contribution by employees40

NDP at FC = NNP at MP - NFIA - NIT
= 1700 (0-(-20)) - 70
= 1650
NDP at FC = Wages and salaries + Rent + Royalty + Interest + Profit + Social security contribution by the employers
1650 = Wages and salaries + 50 + 100 + 400 + 300 + 120
Wages and salaries = 1650 - 970
Wages and salaries = 680


Calculate GNP at mp from the following information-
Items(Rs. in crore)
ICompensation of employees4000
IIRent800
IIIProfits1500
IVUndistributed profit400
VMixed-income of the self-employed1800
VINet imports30
VIINet Investment900
VIIIGross domestic fixed capital formation1000
IXInventory Investment50
XInterest900
XINet Indirect tax500
XIINet factor income to abroad(-80)


2143848_2023185_ans_e4f635a73d3647cd8863c702da1c03e3.png


 ComponentExpenditure (In thousand)
Social Security payments$250
 Depreciation$47 
 Private investment $630 
 Exports$260
 Imports$300
 Salaries earned by foreigners working in Magnolia$160
 Household consumption $850
 Purchase of raw materials$270 
 Government purchases$900
 Capital Income$290
 Salaries earned by Mangolian citizens working abroad$350 
Use the data to calculate GDP for this economy using the expenditure method.
Calculate the value of Magnolia's GNP.
Does Magnolia's GDP differ from its GNP? Why?

1. Using Expenditure Method,
GDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Gross domestic capital formation + Net exports (Exports - Imports) = $[850 + 900 + 630 + (260 - 300)] thousands = $2,340 thousands.
GNP at MP = GDP at MP + Net factor income from abroad (Salaries earned by Mangolian citizens working abroad -  Salaries earned by foreigners working in Magnolia) = $[2,340 + (350 - 160] thousands = $2,530 thousands.

2. Clearly, we can see that GDP as $2,340 thousands is differ from its GNP as $2,530 thousands.


 S.No Items Rs (In crores)
 1Compensation of employees paid by the Government 40
 2Mixed Income 50
 3Wages and Salaries 400
 4Employers Contribution to SSS 80
 5Operating Surplus 300
 6Indirect Taxes 30
 7Subsidies 10
 8Net Capital formation 150
 9NFIA 10
 10Government Final consumption Expenditure 230
 11Private Final Consumption Expenditure 500
 12Exports 15
 13Imports 45
 14Depreciation 20
 15Profits 130
Calculate NNP mp by Income Method & Expenditure Method.

Using Income Method,
NDP at FC = Compensation of employees (Wages and Salaries + Employers Contribution to SSS) + Operating Surplus + Mixed income of self employed = Rs.[(400 + 80) + 300 + 50] crores = Rs.830 crores.
NNP at MP = NDP at FC + NFIA + Net Indirect Taxes (Indirect Taxes - Subsidies) = Rs.[830 + 10 + (30 - 10)] crores = Rs.860 crores.

Using Expenditure Method,
NDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Net domestic capital formation + Net exports (Exports - Imports) = Rs.[500 + 230 + 150 + (15 - 45)] crores = Rs.850 crores.
NNP at MP = NDP at MP + NFIA = Rs.[850 + 10] crores = Rs.860 crores.


Calculate the missing values from the following information:
S. No.ItemsRs. in lakhs
1.National Income60000
2.Goods and services tax2000
3.Government final consumption expenditure?
4.gross domestic fixed capital formation18000
5.Subsidies 1000
6.Private final consumption expenditure11500
7.Wages and salaries10000
8.Consumption of fixed capital700
9.Mixed-income of self-employed?
10.Operating surplus 15000
11.Net factor income to abroad(-)800
12.Net imports(-) 2000
13.Opening stock1000

Using Income Method,
NDP at FC = Compensation of employees + Operating Surplus (Rent + Interest + Profit) + Mixed income of self employed = Rs.[10,000 + 15,000 + Mixed income of self employed] = Rs.25,000 + Mixed income of self employed.
National Income (NNP at FC) = NDP at FC - Net Factor Income To Abroad = Rs.[25,000 + Mixed Income - (-800)] = Rs.24,200 + Mixed Income.
Rs.60,000 = Rs.24,200 + Mixed income of self employed.
Mixed income of self employed = Rs.[60,000 - 24,200] = Rs.35,800.

Using Expenditure Method,
GDP at MP = NNP at FC - Net Factor Income To Abroad + Net Indirect Tax (Goods and Service Tax - Subsidies) + Consumption of fixed capital = Rs.[60,000 - (-800) + (2,000 - 1,000) + 200] = Rs.62,000.

GDP at MP = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation (Gross domestic fixed capital formation + Change in stock {Closing stock - Opening stock}) - Net imports = Rs.[11,500 + Government final consumption expenditure + 18,000 + (0 - 1,000) - (-2,000)] = Rs.30,500 + Government final consumption expenditure.
Rs.62,000 = Rs.30,500 + Government final consumption expenditure.
Government final consumption expenditure = Rs.[62,000 - 30,500] = Rs.31,500.


 S.NO PARTICULARS AMOUNTS
 A Compensation of employees4,000
 B Rent on land3,500
 C Dividend800
 D Undistributed profit500
 E Royalty700
 F Change in stock900
 G Interest5,000
 H Mixed-income of self-employed500
 I Consumption of fixed capital800
 J Indirect tax500
 K Subsidies300
 L Net factor income to abroad-350
 M Employees contribution to social security800
Find GDPmp and NNPfc:

Using Income Method,
NDP at FC = Compensation of employees + Operating Surplus (Rent + Royalty + Interest + Profit {Dividend + Undistributed profits}) + Mixed income of self employed = Rs.[4,000 + (3,500 + 700 + 5,000 + {800 + 500} + 500)] = Rs.15,000.
GDP at MP = NDP at FC + Consumption of fixed capital + Net Indirect taxes (Indirect tax - Subsidies) = Rs.[15,000 + 800 + (500 - 300)] = Rs.16,000.
NNP at FC = NDP at FC - Net factor income to abroad = Rs.[15,000 - (-)350] = Rs.15,350.


Calculate Value of output at market price from the following data.
a) Subsidies = 40
b) Intermediate Consumption = 200
c) Compensation of employees = 400
d) Depreciation = 50
e) Royalty = 5
f) Interest = 25
g) Indirect Taxes = 100
h) Rent = 10
i) Profits = 60
j) Net change in stocks = 20

Using Income Method,
NDP at FC = Compensation of employees + Operating Surplus (Rent + Royalty + Interest + Profits) + Mixed Income of Self Employed = Rs.[400 + (10 + 5 + 25 + 60) + Nil] = Rs.104.
Net Value Added at Factor Cost (NVA at FC) = NDP at FC = Rs.104.
GVA at MP = NVA at FC + Depreciation + Net indirect tax (Indirect tax - Subsidies) = Rs.[104 + 50 + (100 - 40)] = Rs.214.
GVA at MP = Value of output - Intermediate consumption.
Rs.214 = Value of output - 200.
Vale of output at market price = Rs.[214 + 200] = Rs.414.


Define circular flow of income.

In a simple economy, there are firms and household sector’s economic activity. People from households render factor services to firms and firms hire factor services from households. Households spend their earned income completely on consumption. Products which are produced by firms are sold to consumers; assuming that there is no external trade and no government in the economy.
2158986_2032873_ans_2413b9913ab34f638003bdd593bc4b1c.PNG


Give meaning of durable goods and perishable goods.

Perishable or non-durable goods refer to the goods that have a single use. For example, milk and eatables. On the other hand, durable goods refer to goods that can be used repeatedly over a considerable period of time. For example, clothes, shoes, machines, and buildings.


 S.NO PARTICULARS RS. IN CRORES
iTransfer payments by government7
iiGovernment final consumption expenditure50
iiiNet imports-10
ivNet domestic fixed capital formation60
vPrivate final consumption expenditure300
viNet factor income from abroad 5
viiDepreciation12
viii Closing stock8
ixOpening stock8
xDirect tax60
xiNet indirect taxes5
Calculate Gross National Product at Market Price.

Using Expenditure Method,
NDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Net domestic capital formation (Net domestic fixed capital formation + Change in stock) - Net imports = Rs.[300 + 50 + 60 + (8 - 8) - (-)10] crores = Rs.420 crores.
GNP at MP = NDP at MP + Depreciation + Net factor income from abroad = Rs.[420 + 12 + 5] crores = Rs.437 crores.


 S.NO Items Rs. (In Crores)
 1 Wages and salaries 3065
 2 Interest  700
 3 Compensation of employees in kind 65
 4 Rent  400
 5 Undistributed profit 110
 6 Dividend 240
 7 Net Income From Abroad 110
 8 Social security contribution by employees 60
 9 Direct taxes of firms 150
 10 Private consumption 2000
 11 Public consumption 1200
 12 Gross domestic investment abroad 1500
 13 Net investment abroad 270
 14 Net indirect taxes 100
 15 Depreciation 80
 16 Transfer payment 130
 17 Direct personal taxes 75
Calculate: National Income by income method.

Using Income Method,
NNP at FC = Compensation of employees + Operating Surplus (Rent + Interest + Profit) + Mixed income of self employed + Net Factor Income from Abroad = Rs.[(3,065 + 65) + (400 + 700 + 110 + 240 + 150) + 110] = Rs.4,840 crores.


 S.no Items Rs (In crores)
 1Private final consumption expenditure 85
 2Net domestic fixed capital formation 25
 3Consumption of fixed capital 02
 4Closing stock 10
 5Opening stock
 05
 6Govt final consumption expenditure 10
 7Net exports -5
 8Wages & Salaries 80
 9Contribution of employers towards SSS 10
 10Operating surplus 20
 11NFIA -5
 12NIT 10
Calculate National Income by Income Method & Expenditure Method.

Using Income Method,
NNP at FC = Compensation of employees (wages & salaries + Contribution of employers towards SSS) + Operating Surplus + Mixed income of self employed - NFIA = Rs.[(80 + 10) + 20 + Nil - (-)5] crores = Rs.105 crores.

Using Expenditure Method,
NDP at MP = Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation (Net domestic fixed capital formation + Change in stock {Closing stock - Opening stock}) + Net exports Rs.[85 + 10 + 25 +{10 - 5} + (-)5] crores = Rs.120 crores.
NNP at FC = NDP at MP + NFIA - NIT = Rs.[120 + (-)5 - 10] crores = Rs.105 crores.


Identify and explain the concepts: Anand made ice cream, paneer and curd form milk.

Concept identified: Intermediate goods.
Explanation: An intermediate good is a product utilized to produce a final good or finished product. These goods are sold between industries for resale or for the production of other goods. For example of an intermediate good is Anand made ice cream, paneer and curd form milk.


Identify and explain the concepts from the given illustration: Mr. Prasad purchased Air Conditioner for his house in the summer season.

Concept identified: Final good.
Explanation: A final goods or consumer goods is a commodity that is used by the consumer to satisfy current wants or needs, unlike intermediate goods which is utilized to produce other goods. Here, Mr. Prasad purchased an Air Conditioner for his house in the summer season is a final good.


Explain the precautions that should be taken while estimating national income by expenditure method.

Precautions Regarding Calculation of National Income by Expenditure Method 
1. Expenditure on only final goods and services should be included in the national income estimation while intermediate consumption expenditure should not be included. 
2. Similarly, expenditure on the purchase of second hand goods should not be included in the national income estimation of the current accounting year. This is because they have already been included in the national income of the accounting year in which they were originally purchased. 
3. Expenditure on shares and bonds is not included. This is because these are mere financial assets and do not reflect any production activity of the goods or services. 
4. Imputed value of the goods and services produced for self consumption are included. 
5. Expenditure on transfer payments by the government should not be included. This because such payments are not related to any production activity in an economy.


Find national income and private income:
Sr.No Particle Rs Crores
i.Wages and Salaries$$1,000$$
ii.Net current transfers to abroad$$20$$
iii.Net factor income paid to abroad$$10$$
iv.Profit $$400$$
vNational 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$$50$$

$$NNP_{FC} =$$ Compensation of Employees $$+$$ Operating Surplus $$+$$ Mixed income of self-employed $$-$$ Net Factor Income paid to Abroad
$$\Rightarrow \,NNP_{FC } =$$ Wages and Salaries $$+$$ Social security contributions by employers $$+$$ Rent $$+$$ Interest $$+$$ Profit $$+$$ Royalty $$-$$ Net Factor Income paid to Abroad 
$$\therefore \,\,NNP_{FC} = 1,000 + 100 + 200 + 300 + 400 + 50 -10 = Rs. \,2,040$$ 
Private Income $$=$$ National Income $$-$$ National income accruing to government $$-$$ Net Current Transfers to Abroad $$+$$ National Debt Interest $$+$$ Transfers from Government 
$$\Rightarrow$$ Private Income $$= 2,040 - 150 - 20 + 120 + 60$$
$$\therefore$$ Private Income $$= Rs 2,050$$. 


What is the difference between National Income and domestic Income?

National income is defined as the sum total of factor incomes viz. rent, wages, interest and profit accruing to the normal residents of a country for their productive services during a definite period of time. Income is a flow. As such it is related to a particular period of time. Normally this period is of one year duration. Thus, National Income is the earned income by the normal residents of a country during one year.
Whereas domestic income is the sum total of factor incomes generated by all the production units located within domestic territory of a country during an accounting year.The point to be noted is that factor incomes should be generated within the domestic territory of a country irrespective of the fact whether producers are normal residents (citizens) or non-residents (i.e., foreigners).Example: When depreciation is included in the national income of a country it is known as gross national income. Conversely when depreciation is deducted, it is known as net national income. When net factor income earned from abroad is deducted from the national income then the remaining income will be called as the domestic income. Therefore,
Net National Income = Gross National Income – Depreciation 


What is 'excess demand' in macroeconomics? Show the same in a diagram. Explain the role of 'open market operations' in reducing it.

In the above diagram, EF is termed as excess demand. Excess demand is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. It implies two things-
1) Planned aggregate demand in the economy happens to exceed its full employment level. 
2) The level of aggregate demand surpasses the level of aggregate supply even when the available factors are fully utilized.
Open market operation is the policy that focuses on increasing and decreasing the stock of liquidity with the people, through sale and purchase of securities by the central bank. During excess demand or inflation, the central bank tries to sale securities. Sale of securities reduces purchasing power from the market. Consequently, aggregate demand is decreased and excess demand or inflationary gap gets combated.


Given the following data, find the value of 'Operating Surplus' and 'Net Exports'.
S.No.ParticularsAmount in crores
1.Net factor income from abroad300
2.Gross domestic capital formation1,300
3.Mixed income of self employed400
4.Private final consumption expenditure1,000
5.Net indirect taxes150
6.Operating Surplus?
7.Net Exports?
8.Wages and salary3,000
9.Government final consumption expenditure1,500
10.Consumption of fixed capital100
11.Profit300
12.National Income4,600

Using Income Method,
NNP at FC = Compensation of employees (Wages and salary) + Operating Surplus (Rent + Interest +
Profit) + Mixed income of self employed + Net Factor Income From Abroad.
Rs.4,600 = Rs.3,000 + Operating Surplus + 400 + 300.
Rs.4,600 = Rs.3,700 + Operating Surplus.
Operating Surplus = Rs.4,600 - Rs.3,700 = Rs.900 crores.

GDP at MP = NNP at FC + Consumption of fixed capital - Net factor from abroad + Net indirect tax.
GDP at MP = Rs.(4,600 + 100 - 300 + 150) crores = Rs.4,550 crores.
Using Expenditure Method,

GDP at MP = Private final consumption expenditure + Government final
consumption expenditure + Gross domestic capital formation (Gross domestic fixed
capital formation + Change in stock) + Net exports.
Rs.4,550 crores = Rs.1,000 + Rs.1,500 + Rs.1,300 + Net Exports.
Rs.4,550 crores = Rs.3,800 crores + Net Exports.
Net Exports = Rs.4,550 crores - Rs.3,800 crores = Rs.750 crores.


Write four limitations in estimating the national income of India.

Four limitations in estimating the national income of India. are :
1)  Lack of reliable statistical data creates difficulty in estimating national income.
2) There is a chance of calculating the money value of goods and services more than once (double counting)
3) Services of housewives is not included in national income.
4) Ignorance and illiteracy of the people create problems in collecting statistical data.


Write short notes.
CSO

The Central Statistical Office (CSO) is the official agency that estimates the national income of India. The estimation is done mainly for the purpose of planning and development activities of the government. It also helps to understand the nature of the employment sectors and the types of employment the people are engaged in.


 S.No  Items Rs (In crores)
 1
 Wages and salaries 500
 2 Government final consumption expenditure 120
 3 Royalty 20
 4 Interest 40
 5 Households final consumption expenditure 600
 6 Change in stocks 10
 7 Indirect taxes 100
 8 Rent 50
 9 Final consumption expenditure of private non-profit institution serving households 30
 10 Net domestic fixed capital formation 60
 11 Profit after tax 100
 12 Corporation tax 20
 13 Net exports -20
 14 Subsidies 30
 15 Net factor income from abroad -5
Calculate National Income by (a) Expenditure Method and (b) Income Method

Using Income Method,
NNP at FC = Compensation of employees (Wages and salaries) + Operating Surplus (Rent + Royalty + Interest +
Profit after tax + Corporation tax) + Mixed income of self employed + Net factor income from abroad = Rs.[500 + (50 + 20 + 40 + 100 + 20) + Nil + (-)5] crores = Rs.725 crores.

Using Expenditure Method,
NDP at MP = Private final consumption expenditure (Households final consumption expenditure + Final consumption expenditure of private non-profit institution serving households) + Government final consumption expenditure + Net domestic capital formation (Net domestic fixed capital formation + Change in stock) + Net exports = Rs.[(600 + 30) + 120 + (60 + 10) + (-)20] crores = Rs.800 crores.
NNP at FC = NDP at MP + Net factor income from abroad - Net indirect taxes (Indirect taxes - Subsidies) = Rs.[800 + (-)5 - (100 - 30)] crores = Rs.725 crores.


 S.No Items Rs (in crores)
 1Value of output of a primary sector 10,000
 2Value of output of other sectors 4,000
 3Raw materials used by the primary sector 5,000
 4Raw materials used by other sectors 3,000
 5Factor income received from abroad 100
 6Factor income paid to abroad 150
 7Depreciation 550
 8NIT 800
 9Mixed income 2,000
 10Wages and salaries 1,000
 11Rent 400
 12Social security contribution by employers 700
 13Dividend 100
 14Corporation tax 50
 15Corporate savings 100
 16 Interest 300
Calculate National Income by income and output method.

Using Income Method,
NNP at FC = Compensation of employees (wages and salaries + Social security contribution by employers) + Operating Surplus (Rent + Interest + Profit {Dividend + Corporation tax + Corporate savings}) + Mixed income of self employed + (Factor income received from abroad - Factor income paid to abroad) = Rs.[(1,000 + 700) + (400 + 300 + {100 + 50 + 100}) + 2,000 + (100 - 150)] crores = Rs.4,600 crores

Using Value Added (Output) Method,
Net Value Added at Market Price (NVA at MP) = Value of Output (Value of output of a primary sector + Value of output of other sectors) - Intermediate Cost (Raw materials used by the primary sector + Raw materials used by other sectors) - Depreciation = Rs.[(10,000 + 4,000) - (5,000 + 3,000) - 550] crores = Rs.5,450 crores.
NNP at FC = NDP at MP (NVA at MP) + (Factor income received from abroad - Factor income paid to abroad) - NIT = Rs.[5,450 + (100 - 150) - 800] crores = Rs.4,600 crores.


Write short notes
Main concepts of national income

Main concepts of national income:

1) Gross National Product (GNP):
Gross National Product is an important concept of national income. It is calculated on the basis of the final goods and services produced in a country.

2) Gross Domestic Product (GDP):
 Gross Domestic Product is the most suitable concept of national income to analyse the contribution of sectors in an economy. The GDP of a country is the total money value of the final goods and services produced within the domestic territory during a financial year.

3) Net National Product (NNP):
The depreciation charges are taken into consideration while calculating the national income. When we deduct depreciation charges from the Gross National Product we get the Net National Product.

4) Per capita income:
When we divide the national income by population, we get per capita income. It helps to know the economic position of a country and to compare it with other countries.


Calculate National income by Expenditure Method.
  1. Final Consumption Expenditure Private Sector = 350
  2. Government Sector = 100
  3. Mixed income of self-employed = 35
  4. Gross domestic fixed capital formation = 70
  5. Opening stock = 15
  6. Compensation of employees = 250
  7. Closing stock = 25
  8. Imports = 20
  9. Rent = 75
  10. Consumption of fixed capital = 10
  11. Net indirect taxes = 25
  12. Interest = 25
  13. Net factor income from abroad = -5
  14. Exports = 10
  15. Profit = 100.

Using Expenditure Method,
GDP at MP = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation (Gross domestic fixed capital formation + Change in stock {Closing stock - Opening stock}) + Net exports (Exports - Imports) = Rs.[350 + 100 + 70 + {25 - 15} + (10 - 20)] = Rs.520.
NNP at FC = GDP at MP - Consumption of fixed capital - Net indirect taxes  + Net Factor Income From Income= Rs.[520 - 10 - 25 + (-)5] = Rs.480.


The above table shows the national incomes of a few countries during three years.
Find out the countries which have the highest and the lowest national income in 2014.
Compared to 2013, which countries have achieved economic growth in 2014?
Compared to 2013, which countries have failed in achieving economic growth in 2014?
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1. Country with highest national income-USA , Country with lowest national income-Brazil.
2. USA, China, and India achieved economic growth in 2014.
3. Japan, UK, Italy, France, Germany, Brazil have failed in achieving economic growth in 2014


Class 12 Commerce Economics Extra Questions