National Income and Related Aggregates | Chapter 1 Notes

National Income And Related Aggregates

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Basic Concepts of Macroeconomics

Macroeconomics deals with the overall economy of the market and other systems on a large scale. 

Macroeconomics studies about the performance, structure, and behavior of the entire economy. It focuses on the way the economy performs as a whole.

It analyzes how different sectors of the economy relate to one another. This includes unemployment, GDP, inflation, aggregate consumption, aggregate investment, saving, energy, international trade, international finance, etc. Its main instruments are  demand and supply.

Macroeconomists study topics such as GDP, unemployment rates, national income, price indices, output, consumption, unemployment, inflation, saving, investment, energy, international trade, and international finance.

There are three main topics for macroeconomic theories which are related  to the phenomena of output, unemployment, and inflation.

? Output: It is the total amount of everything a country produces and sold in a given which generates an equal amount of income. The total output of the economy is measured GDP per person.

? Unemployment: It refers to people who are employable but are unable to find a job. It also Includes people in the workforce who are working but do not have an appropriate job. 

Unemployment is measured by the unemployment rate, which is dividing the number of unemployed and employed people in the workforce, unemployment is one of the indicators of a country’s economic status.

? Inflation: When a general price increase across the entire economy is called inflation and when prices decrease, that is deflation. These changes in prices are measured with price indexes. Inflation can occur when an economy grows too quickly. Similarly, a declining economy can lead to deflation.

Types of Goods

national income

Consumer Goods:

Consumer goods are products made for consumption by the average consumer. It is the end result of production and manufacturing. Consumer goods are purchased to fulfill personal consumption needs

Examples of consumer goods are clothing, food, furniture, jewelry etc. Basic materials, such as copper, are not considered consumer goods because they must be transformed into usable products.

These goods can be classified as durable (longer than 3 years), nondurable (less than 3 years), or pure services (consumed instantaneously).

Capital Goods:

Capital goods are the goods that can be used to increase production. These goods are fixed, durable or tangible assets that are purchased by a business in order to produce finished products or consumer goods.

Examples of capital goods are equipment, machinery, buildings, computers, vehicles, and more. The concept of capital goods is used in macroeconomic terms where it is used in determining the capital formation and the production capacity.

For purchasing capital goods, a considerable amount of investment is required. This purchase of a capital good is referred to as a capital expense in accountancy.

Final Goods:

A final good is a product that are used by the final consumer which does not require any additional processing. It is for the direct use of the final consumer.

Final goods are also purchased by the firms for investment purposes or for capital formation.

Classification of Final Goods

Convenience goods

Convenience goods are those goods that are regularly consumed, e.g milk, bread, pulses, and more.

Specialty goods

Speciality goods that provide luxury and are expensive. These goods are not a necessity. Examples of such goods are antique cars, jewellery, and more.

Shopping goods

These goods are durable and, more expensive than the convenience goods. e.g. refrigerators, televisions, laptops, and more.

Unsought goods

These types of goods are not purchased often by the consumers, e.g. fire extinguishers, snow jackets, etc.

Intermediate Goods

Intermediate goods are partially finished goods that are used for the production of other goods or services, that become final goods.

Intermediate goods are an integral part of the production process, they are also known as producer goods, because they are used in the production process.

These goods are transformed into another product, which is either another intermediate good or a final good for end user.

Intermediate goods are of three main categories:

  • They are produced and immediately used by the manufacturer to produce final goods  
  • They are produced and sold in its partially completed form to other companies to produce final goods   
  • They are sold to another company to produce another intermediate good.

Stocks and Flows

Any quantity that is measured at a particular point in time is known as Stock, and the quantity that can be measured over a period of time is called Flow

Both stocks and flow are dependent on each other. The concept of stock and flow is very important in Economics, it helps to understand the development of economic variables.

In a small period of time, flows will be close to zero, whereas stocks could have some value. Stocks are accumulated over time by flows, whereas flows represent the rate of movement of items in and out of stocks. 

Flows can be divided into two parts: inflows (that add to stocks), and outflows (that deplete the stocks). The difference between these two is called net inflows.

If the inflow is more, than net inflow is positive and the stock will be rising, but if the inflow is less, than net inflow is negative, and the stock will be falling.

Example of stocks and flow is a bucket. The level of water in the bucket is a stock, the water coming from the tap is an inflow, and the draining of the water through the drain is an outflow. 

If we plug the drain and turn on the tap, the net inflow will be positive, and the stock of water in the bucket will be rising. If, instead, we close the tap and open the drain, the net inflow of water will be negative, and the stock of water in the bucket will fall.

Economic development can be well described with the knowledge of which variables represent stock and which variables represent flows. Most of the macroeconomic variables reported by statistical agencies are flow variables. 

Gross Investment and Depreciation

Gross investment refers to the total expenditure on new capital goods over a specific period of time without considering depreciation. The investment which considers depreciations is known as Net investment 

Net investment is calculated by subtracting depreciation from gross investment. 

Some gross investment is required each year just to replace technologically, obsolete or worn-out plant and machinery.

Investment is done to obtain a good target return over a specified period of term. The target returns may be of any forms like an increase in the value of assets or securities. 

There are different types of investments like autonomous, financial, real, planned, unplanned, gross and net. 

If gross investment is greater than depreciation over any period of time then the net investment is positive and the capital stock has increased.

This indicates that businesses will have a higher productive capacity and can meet rising demand in the future.

But, if gross investment is less than depreciation, then the net investment tends to be negative and the capital stock declines. 

Circular Flow of Income (two sector model)

Circular flow of income.

It refers to flow of money, income, goods and services across different sectors of the economy in a circular form.

This flow shows the redistribution of income in a circular manner between the production unit and households

These flows include land (rent), labour (wages), capita (interest), and entrepreneurship (profit).

national income

There are two types of Circular flow:

  • Real/Product/Physical Flow
  • Money/Monetary/Nominal Flow

Real flow

This is the flow of factor services from the household sector to the producing sector and in return flow of goods and services from the producing sector to the household sector

Money Flow

This flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services 

Circular Flow Of Income In Two Sector Model:

It is the flow of payments and receipts for goods, services, and factor services between the households and the firm sectors of the economy. 

Household supply factor services to firms and firms hire factor services from Households. Households spend their income on consumption and firms sell all its products to the households.

Methods of calculating National Income

There are three known methods by which national income is determined. These are:

  • Value added method
  • Expenditure method
  • Income method

Value Added Method

The value added method is also known as the product method. Its main objective is to calculate national income by taking the value added to a product during the various stages of production into account.

The formula for calculating the national income by the value added method can be expressed as:

National income (NI) = (NDPfc) + Net factor income from abroad

Expenditure Method

The expenditure method of national income calculation is based on the expenditures taking place in the economy. This expenditure is done by individuals, households, business enterprises, and the government.

The formula for calculating the national income by the expenditure method can be expressed as:

National income (NI) = C + G + I + (X – M) Or, National income (NI) = C + G + I + NX

Income Method

This method is based on the income generated by the individuals by providing services to the other people in the country either individually or by using the assets at disposal.

The income generated from land, capital in the form of rent, interest, wages and profit is taken into consideration.

In this method the national income is calculated by adding up the wages, interest earned on capital, profits earned, rent obtained from land, and income generated by the self-employed people in an economy. It is known as net domestic product at factor cost or NDPfc.

The formula for income method is:

NNPfc = (NDPfc) + Net factor income from abroad

Aggregate Of National Income

In an economy, various types of goods and services are produced by different productive units during a period of one year. Such goods and services cannot be added together in terms of quantity. Therefore, these are expressed in terms of money.

There are many aggregates in national income to measure the value of goods and services in terms of money. 

  • Gross Domestic Product at Market Price (GDPMP ): It is the gross market value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units.

GDPMP

  • G stands for ‘Gross’ signifies that depreciation is included, i.e., no provision has been made for depreciation.  
  • D stands for ‘Domestic’ which signifies that it includes all the final goods and services produced by all the production units located within the economic territory (irrespective of the fact whether produced by residents or non-residents).  
  • M stands for ‘Market Price’ ; it signifies that indirect taxes are included and subsidies are excluded, i.e., it shows that Net Indirect Taxes (NIT) have been included.  
  • P stands for ‘Product’ it signifies that only final goods and services have to be included and intermediate goods should not be included to avoid the double counting.
  • Gross Domestic Product at Factor Cost ( GDPFC): It is the gross factor value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units excluding Net Indirect Tax.

GDPFC = GDPMP  – Net Indirect Taxes

  • Net Domestic Product at Market Price (NDPMP ).

It is defined as the net market value of all the final goods and services produced within the domestic territory of a country by its normal residents and non-residents during an accounting year.

NDPMP =GDPMP – Depreciation

  • Net Domestic Product at Factor Cost (NDPFC ).

It refers to a total factor income earned by the factor of production within the domestic territory of a country during an accounting year.

NDPFC = GDPMP – Depreciation – Net Indirect Taxes NDPFC is also known as Domestic Income or Domestic factor income.

  • Gross National Product at Market Price (GNPMP).

It refers to market value of all the final goods and services produced by the normal residents of a country during an accounting year.

GNPMP = GDPMP + Net factor income from abroad (NIFA)

GNPMP is less than GDPMP when NFIA is negative. However, GNPMP will be more than GDPMP  when NFIA is positive.

  • Gross National Product at Factor Cost (GDPFC ). It refers to gross factor value of all the final goods and services produced by the normal residents of a country during an accounting year.

GDPFC  = GNPMP  – Net Indirect Taxes

  • Net National Product at Market Price (NNPMP ).

It refers to net market value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNPMP = GNPMP – Depreciation

  • Net National Product at Factor Cost (NNPFC ).

It refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNPFC = GNPMP  – Depreciation – Net Indirect Taxes It must be noted that NNPFC  is also known as National Income.

Gross National Product (GNP)

Gross National Product (GNP) is Gross Domestic Product (GDP) plus net factor income from abroad.

It measures the monetary value of all the finished goods and services, which are produced by the nation’s economy during a specific period of time irrespective of their location. 

Only the finished goods are considered as factoring intermediate goods used for manufacturing would amount to double counting. It only includes taxes not including subsidies.

The GNP is identical to gross domestic product (GDP) only difference is that the latter does not include the income accruing to a nation’s residents from investments abroad.

Gross national product is an indicator of the level of a nation’s economic activity. 

Net National Product (NNP)

Net national product (NNP) is the monetary value of finished goods and services, which are produced by a country’s citizens, both overseas and domestically, in a given period of time minus depreciation.

NNP is generally examined on an annual basis as a way to measure a nation’s success in continuing minimum production standards.

It is a very useful method to keep track of an economy as it takes into account all its citizens, regardless of where they make their money. It acknowledges the fact that capital must be spent to keep production standards high.

Gross Domestic Product (GDP) is the most popular method to measure national income and economic prosperity, although NNP is prominently used in environmental economics.

Gross Domestic Product (GDP) and Net Domestic Product (NDP) – at market price, at factor cost; 

Real and Nominal GDP

Real gross domestic product (Real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year

It is a macroeconomic measure of the value of the economy’s output adjusted for price changes (inflation or deflation). 

Real GDP compares GDP from year to year which shows comparisons for both the quantity and value of goods and services.

Real GDP is calculated by dividing nominal GDP over a GDP deflator

Nominal GDP is a macroeconomic measure of the value of the economy’s output that is not adjusted for inflation.

Nominal gross domestic evaluated at current market prices. Nominal GDP includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

GDP is measured as the monetary value of goods and services produced.

Since nominal GDP doesn’t remove the pace of rising prices when comparing one period to other.

GDP Deflator

GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.

The GDP deflator measures the changes in prices for all of the goods and services produced in an economy. It helps to identify how much prices have inflated over a specific time period.

GDP deflator helps economists to compare the levels of real economic activity from one year to another.

It is a more comprehensive inflation measure than the CPI index because it isn’t based on a fixed basket of goods.

Formula to calculate the GDP price deflator:

GDP Price Deflator = (Nominal GDP÷Real GDP)×100

Short Answer (SA) Type Questions

1. Domestic services (household services) performed by a woman are not considered as an economic activity. Defend or refute the given statement with valid reason. (CBSE 2020)

Ans. The given statement is refuted on the basis of the following reasons

(i) Domestic services are performed by women out of love and affection.

(ii) Such services do not add to the flow of goods and services in the economy.

(iii) These services are for self-consumption, not for economy.

2. ‘Subsidies to the producers should be treated as transfer payments’. Defend or refute the given statement with valid reason. (CBSE 2020)

Ans. This statement is refuted because subsidies given to the producers should not be treated as transfer payments. Subsidies are given to reduce the market price of socially desirable goods such as fertilisers, LPG gas, etc. So that they can be afforded by the poor section of society.

Transfer payments, on the other hand, are given to fulfill social objectives. Examples of transfer payments are old age pension, unemployment allowance, etc.

Also, transfer payments are not taken into account while computing the GDP of the country, but subsidies are considered in the computation of GDP

3. Suppose the GDP at market price of a country in a particular year was 1,100 crore. Net factor income from abroad was 100 crore. The value of Indirect taxes — Subsidies was 150 crore and national income was 850 crore. Calculate the aggregate value of depreciation. (NCERT)

Ans. NNPmp = NNPfc  + NIT

= 850 + 150 = 1,000 crore 

GNPmp = NFIA + GDPmp

= 100 + 1,100 

= 1,200 crore 

Depreciation = GNPmp — NNPmp

= 1,200 – 1,000 = 200 crore

Therefore, depreciation = 200 crore 

4. GNP is the estimated value of the total worth of production and services earned by the normal residents of a country. But to find out NNP, GNP deducts depreciation, why should we deduct depreciation from GNP?

Ans. The productive power of physical capital stock of a country diminishes gradually because of the wear and tear in the process of production. When the machine becomes totally unproductive, it has to be replaced by a new machine. 

So, a sum of money is set aside every year into a depreciation account and new machines can be purchased by utilizing this accumulated sum.

So, depreciation is deducted from GNP in order to get a more accurate measure of the sustainable production of goods and services in a country in a given year.

5. Compute the values of xa and xb on the basis of given data pertaining to an economy.

National Income Notes And Questions

Ans. Computing the value of xa

Gross Fixed Capital Formation

= GDPmp – (Final Consumption Expenditure + Change in Stocks + Net Exports)

= 5050345 – 3353748 – 255126 – (1018907 – 1219109)

= 1641673

Computing the value of xb

Gross Domestic Product at Market Price

    = Final Consumption Expenditure + Gross Fixed Capital Formation + Change in Stock + Net Exports (Exports — Imports)

= 3846417 + 1821099 + 179004 + (1328765 + 1614040)

= 5561245

6. Calculate net domestic product at factor cost.

S.No.    Contents                  (in crores)

(i)        Interest                              700

(ii)       Compensation of

           employees                        3000

(iii)    Net Indirect Taxes          500

(iv)    Rent and Profit          700

(v)    Transfer Payments by 

            Government                      10

(CBSE 2020)

Ans. Net Domestic Product at Factor Cost

(NDPfc) = Compensation of Employees + Interest + Rent and Profit

= 3,000 + 700 + 700 

= 4,400 crore

7. In a single day Raju, the barber, collects 500 from haircuts; over this day, his equipment depreciates in value by 50. Of the remaining 450, Raju pays sales tax worth 30, takes home 200 and retains 220 for improvement and buying of new equipment. He further pays 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income

(i) Gross domestic product, 

(ii) NNP at market price and 

(iii) NNP at factor cost.

Ans. Assuming intermediate consumption= 0 and Change in stock = 0

(i) GVAmp = 500 (Raju’s contribution to GDP)

(ii) NVA mp = GVAmp – Depreciation

= 500 – 50

= 450 (Raju’s contribution to NNPmp )

(iii) NVAfc = NVA mp    – Net Indirect Taxes

= 450 – 30

= 420 (Raju’s contribution to NNPfc)

8. Calculate Net Value Added at Factor Cost (NVAfc) from the following data.

S.No.     Contents              (in crores)

(i)     Value of Output        800                          

(ii)    Intermediate Consumption       200

(iii)    Indirect Taxes                          30

(iv)    Depreciation                          20

(v)    Subsidies                                 50

(vi)    Purchase of Machinery              50

(CBSE 2020)

Ans. GVAmp = Value of Output — Intermediate Consumption

= 800 — 200 = 600 crores

NVAfc = GVAmp – Depreciation – Indirect Tax + Subsidies

NVAfc = 600 – 20 – 30 + 50 =    600 crores

9. How will the following be treated while estimating national income of India? Give reasons.

(i) Value of bonus shares received by shareholders of a company.

(ii) Capital gains to Indian residents from sale of shares of a foreign company

(iii) Fees received from students,

Ans. (i) Value of bonus shares received by shareholders of a company is not included in the estimation of national income of India because these are just financial transactions (leading to change of ownership of financial assets), not contributing to the flow of goods and services in the economy.

(ii) Capital gains to Indian residents from sale of shares of a foreign company is not included in the national income of India because it is a part of financial transactions corresponding to which there is no flow of goods and services in the economy.

(iii) From the students’ point of view, expenditure on fees is to be treated as part of private final consumption expenditure. 

Accordingly, it is to be included in the estimation of national income of India when expenditure method is used to estimate it. However; from the schools’ point of fee received is just a revenue from the sale of services.

10. Which of the following factor incomes be included in domestic factor income of India? Give reasons for your answer.

(i) Compensation of employees to the residents ofJapan working in the Indian embassy in Japan.

(ii) Rent received by an Indian resident from the Russian embassy in India.

(iii) Profits earned by a branch of state Bank of India in

Ans. (i) Compensaåon of employees to the residents ofJapan working in the Indian embassy in Japan is a part of factor income of India because the Indian embassy in Japan is a part of the domestic territory of India.

(ii) Rent received by an Indian resident from the Russian embassy in India is not a part of the domestic factor income of India because the Russian embassy in India is not a part of the domestic territory of India.

(iii) Profits earned by a branch of the State Bank of India in England are not a part of the domestic factor income of India because the branch of SBI in England is not a part of the domestic territory of India.

11. Calculate Gross Value Added at Market Price (GVAmp) from the following data.

S.No.      Contents                  (in crores)

(i)        Depreciation                         20

(ii)     Domestic Sales                       200

(iii)    Change in Stock                      – 10

(iv)     Export                                      10

(v)     Single use Producer 

          Goods                                      120

(vi)   Net Indirect Taxes                  20

(CBSE 2020)

Ans. Gross Value Added at Market Price (GVAmp )

 = Value of Output — Intermediate Consumption

Value of Output = Sales + Change in Stock

Value of Output = (200 + 10) + (—) 10

    = 210 – 10 = 200

GVAmp = 200 – 120

GVA mp = 80 lakhs

12. Calculate intermediate consumption from the following data.    (CBSE 2019)

S.No.    Contents                  (in crores)

(i)      Gross Value output             300                    

(ii)    Net Value Added 

        at Factor Cost                          100     

(iii)    Subsidies                                 15

(iv)    Depreciation                             30

Ans. NVAfc = 100 crores (given)

GVAmp = NVAfc + Depreciation- Subsidy

GVAmp = (100 + 30 – 15) = 115 crores

GVAmp = Value of Output — Intermediate Consumption 115 = 300 – Intermediate Consumption

Intermediate Consumption = 300 – 115 crores   = 185 crores

13. Giving reason states how the following are treated in estimation of national income.

(i) Payment of interest by banks to its depositors.

(ii) Expenditure on old age pensions by the government.

(iii) Expenditure on engine oil by car service station. (CBSE (C) 2017)

Ans. (i) Payment of interest by the bank to its depositors should be included in the estimation of national income as it will be treated as factor income.

(ii) Expenditure on old age pensions by the government is not a part of the national economy as it is a transfer payment.

(iii) Expenditure on engine oil by car service stations is not a part of national income as it is an intermediate cost.

14. Find net value added at factor cost.

S.No.    Contents                  (in crores)

(i)     Durable use Producer 

       Goods with a Life Span

       of 10 years                                 10

(ii)    Single useProducerGoods         5

(iii)    Sales                                        20

(iv)   Unsold Output

        Produced during theYear           2

(v)    Taxes and Production                1

Ans. Net Value Added at Factor Cost (NVAfc)

= Sales + Unsold Output Produced during the Year — Single use Producer Goods —

Depreciation on Durable use Producer Goods — Taxes on Production 

 = 20+2-5 -1-1

= 15 lakhs

Depreciation = Value of Durable Goods / Life Span = 10 / 10

15. Calculate the value of change in Stock from the following data:

S.No.    Contents                  (in crores)

(i)     Sales                                400

(ii)   Net Value Added at 

       Factor Cost                           200

(iii)    Subsidies                            100

(iv)   Change in Stock                    ?

(v)    Depreciation                          40

(vi)   Intermediate Consumption     100

Ans. (i) Net value Added at Factor cost (NVAfc)

= Sales + Change in Stock Intermediate

Consumption – Depreciation – Net Indirect Taxes

200 = 400 + (Change in Stock) -100-40-(0-100)

200 = 360 + Change in Stock – Change in Stock

= 360 – 200

Change in Stock = 160 crores

Decrease in Stock = 160 crores

(ii) Real gross domestic product is the sum total of the money value of all final goods and services produced in an economy during the year estimated at same given base year prices.

16. Social welfare may not increase even when real GDP increases. Explain.

Ans. Increase in GDP tnay not cause an increase in welfare in a situation when distribution of income becorncs skewed (unequal). 

If, along with an increase in GDP, the percentage of population below poverty line happens to increase, it implies a situation of deprivation on one hand and concentration of economic power on the other. 

It is a situation when a rising percentage of GDP is being pocketed by a smaller percentage of the population. The bulk of the population suffers poverty, while only a small segment of the society enjoys prosperity owing to a rise in GDP. The rise in GDP is achieved at the cost of social welfare.

17. “Management of a water polluting oil refinery says that it (oil refinery) ensures welfare through its contribution to gross domestic product.” Defend or refute the argument of management with respect to GDP as a welfare measure of the economy.

(CBSE 2020)

Ans. The above argument is refuted with respect to GDP as a welfare measure of the economy. It is because GDP is not a good measure of welfare as it fails to take into the effect of externalities. 

Externality means good or bad impact of an activity without paying the price or penalty for that impact of externalities is not accounted in the index of social welfare in terms of GDP.

For example, an oil refinery may pollute the nearby source of water. 

Such harmful effects to people and marine life should not be penalized. Thus it is not ensuring the welfare of the economy through GDP.

18. Sales of petrol and diesel cars are rising particularly in big cities. Analyze its impact on gross domestic product and welfare. (CBSE 2016)

Ans. As the sale of petrol and diesel cars rises, it implies that the private consumption expenditure is also rising. A rise in private consumption expenditure leads to a rise in the gross domestic product.

So, an increase in the sale of petrol and diesel cars will lead to an increase in the gross domestic product of the country.

However, it will not lead to an increase in the welfare of the people because of the below mentioned reasons

(i) As the sale of petrol and diesel cars rises, then the level of pollution will also rise in the big cities,

(ii) With a rise in the number of cars, the traffic congestion on the roads will worsen.

(iii) A rise in the number of cars will increase the demand for petrol and diesel. This will lead to a rise in the prices of petrol and diesel.

(iv) The already depleted reserves of petrol and diesel will be subjected to further depletion.

19, Explain how ‘non-monetary exchanges’ act as a limitation in taking GDP as an index of welfare. (CBSE 2017)

Ans. It can be understood with the help of following points

(i) GDP Measures only economic value of the current productive activity of a country.

(ii) There are many activities which are not evaluated in monetary terms. In India, non-monetary transactions are present in rural areas where payments for farm laborers are Inade in kind rather than cash. But such transactions are not recorded.

(iii) Even while producing goods and services, a lot of human cost is also involved. For example, sacrificing leisure hours by working but this is never included in total cost. Therefore, GDP remains underestimated and hence loses its appropriateness as an index of welfare.

20. “Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a country. Defend or refute the given statement with valid reasons.    (CBSE 2020)

Ans. “Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a counåy.” This statement is defended because of the following reasons

(i) Distribution of GDP If the GDP of the country is rising, it is not necessary that the welfare will also rise. This is because with every increase in the level of GDP, it is not necessary that distribution of income is also equalable.

(ii) Non-Monetary Exchanges. In the rural economy, the barter system of exchange still prevails to some extent. Payments for farm labor are often made in kind rather than in cash. All such transactions remain unrecorded which causes underestimation of GDP.

(iii) Externalities It refers to the good and bad impact of an activity without paying the price or penalty for that activity. Impact of external entities are not accounted for in the index of social welfare in terms of GDP.

21. Government incurs expenditure to popularize yoga among the masses. Analyze its impact on Gross Domestic Product and welfare of the people. (Delhi 2016) 

Ans. The expenditure incurred by the government to popularize yoga among the masses will increase the government’s final consumption expenditure. 

With a rise in this component, the domestic income of the country will also rise. So, the expenditure incurred by the government to popularize yoga will lead to an increase in the Gross Domestic Product of the country.

This expenditure will also increase the welfare of the people, as is enumerated below

(i) As more and more people practise yoga, their health and immunity will improve. This will help in increasing their working capacity.

(ii) As people’s health improve, so government’s expenditure on the curative aspect of health issues will decrease.

(iii) People will develop a positive outlook and their eing will increase in general.

22, Find net value added at market price. 

S.No.    Contents                  (in crores)

(i)     Fixed Capital Good 

        with a Life Span of 5 years     15                   

(ii)    Raw material                               6

(iii)   Sale                                            25

(iv)    Net changes in Stock                – 2

(v)     Taxes on Production                  1

Ans. Net Value Added at Market Price (NVAmp)

= Sales + Net Change in Stock — Raw Materials – Depreciation on Fixed Capital Good

= 25 + (-2) – 6 – 3= 14 lakh

Note.  Depreciation on Fixed Capital Good

= Value of Fixed Capital Good / Life Span

= 15 / 3 

 = 5 lakh

23. Calculate net national product at market price from the following data:

S.No.    Contents                  (in crores)

(i)    Net factor income 

       from abroad                                – 5

(ii)   Private Final Consumption 

       Expenditure                               100

(iii)   Personal Tax                              20

(iv)   Gross National 

        Disposable Income                    170

(v)    Government Final 

        Consumption Expenditure           20

(vi)    Corporation Tax 50                  

(vii)    Gross Domestic 

  Capital Formation        30                                  

(viii)   Personal Disposable Income     70          

(ix)     Net Exports                            -10

(x)    Saving of private 

       Corporation sector                         5

(xi)    Net National Disposable 

          Income                                           145

Ans. Here,

NNPmp = Private Final Consumption Expenditure + Government Final Consumption

Expenditure + Gross Domestic Capital Formation + Net Export – Depreciation

+ NFIA

= 100 + 20 + 30 + (-10) – 25 + (-5)

= 110 crore

Depreciation = Gross National Disposable Income –  Net National Disposable Income

= 170 – 145 = 25 crore

24. Find net value added at market price.

(Delhi 2012)

S.No.    Contents                  (in crores)

(i)      Output Sold                        800      

(ii)     Price Per Unit of Output          20

(iii)     Exercise                                 1600

(iv)     Import Duty                          400

(v)     Net Change in Stock             – 500

(vi)    Depreciation                           1000

(vii)   Intermediate Cost                8000                              

Ans. Sales = Output Sold × Price Per Unit

= 800 x 20 = 16,000 crore

Now, Value of Output = Sales + Change in Stock

=  [16000 + (-500)] = 15,500 crore

Now, GVAmp = Value of Output — Intermediate Cost

= (15,500-8000) = 7,500 crore

Hence, NVAmp = GVAmp — Depreciation

= (7,500 – 1,000)     

= 6,500 crore

25. From the following data, calculate net value added at factor cost    (All India 2011)

S.No.    Contents                  (in crores)

(i)          Sales                                      500

(ii)      Purchase of Intermediate 

           Goods                                    350

(iii)      Opening Stock                         60

(iv)       Indirect Taxes                         50

(v)       Consumption of Fixed 

           Capital                                      90

(vi)      Import of Raw Materials        85                           

(vii)      Closing Stock         80                                               

Ans. Here,

Net Value Added at Factor Cost (NVAfc)

= Sales + Change in Stock (Closing Stock — Opening Stock) — Purchase of Intermediate Goods — Consumption of Fixed Capital — Indirect Taxes

= 500 + (80 – 60) – 350 – 90 – 50

= 520 – 490 = 30 crore

  Long Answer (LA) Type Questions

1. Explain the treatment assigned to the following while estimating national income. Give reasons.

(i) Family members working free on the farm owned by the family.

(ii) Rent free house from an employer.

(iii) Expenditure on free services provided by the government.

Ans. (i) Family members working free on the farm owned by the family are engaged in the value addition process. Imputed value of their farm output is included in the estimation of national income. 

Accordingly, income generated by the farming family     would be treated as Mixed income of self-employed, Which includes compensation of labor.

(ii) Rent free house from nn employer ig included in estimation of national income because, it is a kind of wages in kind and therefore, a part of compensation of employees.

(iii) Expenditure on free services provided by the government should be included in the estimation of national income because expenditure on these services is a part of government final consumption expenditure.

2. Define the problem of double counting in the estimation of national income. Discuss two approaches to correct the problem of double counting.    (CBSE 2020)

Ans. The counting of the value of a commodity more than once is called double counting. This leads to overestimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding overestimating the value of domestic products.

For example, a farmer produces one ton of wheat and sells it for 400 in the market to a flour mill. The flour mill sells it for 600 to the baker. The baker sells the bread to a shopkeeper for 800. The shopkeeper sells the entire bread to the final consumers for 900. 

Thus, Value of output = 400 + 600 + 800 + 900 = 2,700

In Fact, the value of the wheat is counted four times, the value of services of the miller thrice and the value of services by the baker twice. In other words, the value of wheat and value of services of the miller and of the baker have been counted more than once. 

The counting of the value of the commodity more than once is called double counting.

To avoid the problem of double counting, two methods are used

(i) Final Output Method. According to this method, the value of intermediate goods is not considered.  the value of final goods and services are eonsiclerecl. In the above example, the value of final goods i.e., bread is 

(ii) Value Added Method. Another to avoid the problem of double counting is to estimate the total value added at each stage of production. In the above example) the value at each stage of production is 400 + 200 + 200 + 100 = 900

3. How will the following be treated while estimating national income of India? Give reasons.

(i) Dividend received by a foreigner from investment in shares of an Indian company.

(ii) Expenditure on education of children by a family in Uttar Pradesh

(iii) Remittances from non-resident Indians to their families in India.    (CBSE, 2018)

Ans. (i) Dividend received by a foreigner from investment in shares of an Indian company is included in national income of India as a negative component because it is a part of net factor income to     rest of the world 

(ii) Expenditure on education of children by a family in Uttar Pradesh is included in the estimation of national income of India since it is a part of private final consumption expenditure.

(iii) Remittances from non-resident Indians to their families in India are to be treated as transfer payments. Accordingly, these are not to be included in the estimation of national income of India.

4. Given the following data, find the missing value of ‘government final consumption expenditure’ and ‘mixed income of self-employed’,

S.No.    Contents                  (in crores)

(i) National Income                        71,000

(ii) Gross Domestic 

     Capital Formation                       10,000

(iii) Government Final 

      Consumption Expenditure           ?

(iv) Mixed Income of Self-employed    ?

(v) Net Factor Income from Abroad    1,000

(vi) Net Indirect Taxes                     2,000

(vii) Profits                                        1,200

(viii) Wages and Salaries              15,000

(ix) Net Exports                            5,000

(x) Private Final Consumption 

      Expenditure                            40,000

(xi) Consumption of Fixed Capital    3,000

(xij) Operating Surplus                30,000

(CBSE 2019)

Ans. NNPfc = 71000 (given) crores

GDPfc = NNPfc – Net Factor Income from Abroad + Depreciation + Net Indirect Taxes

= 71,000 – 1,000 + 3,000 + 2000

= 75,000 crores

Now,

Let government final consumption expenditure = x

GDPmp = Private Final Consumption Expenditure + Government final Consumption Expenditure +

Gross Domestic Capital Formation + Net Exports

75,000 (40,000 + x + 10,000 + 5,000) 

 x = 20,000 crores

Also,

Let mixed income = y

NDPpc = Wages and Salaries + Operating Surplus + Mixed Income 

70,000 = (15,000 + 30,000 + y)

so, y =    25,000

Note.  NDPpc = NNPmp – NFIA    

  = 71000 – 1,000

  = 70000 crores

So, Government final consumption expenditure

= 20000 crores

Mixed income = 25,000 crores

5. Given the following data, find the missing values of ‘private final consumption expenditure’ and ‘operating surplus’

S.No.      Content                          in crores

(i)    National Income                    50000

(ii)    Net Indirect Taxes (NIT)    1,000

(iii)    Private Final Consumption    Expenditure                                           ?

(iv)      Gross Domestic Capital 

           Formation                                 17000

(v)     Profits                                        1,000

(vi)     Government Final 

         Consumption    Expenditure      12,500

(vii)      Wages and Salaries                20000

(viii)     Consumption of Fixed income   700

(ix)      Mixed income of self-employed 13000

(x)      Operating Surplus                          ?

(xi)      Net factor income from abroad     500

(xii)     Net Exports                                 2000

Ans. Private final consumption expenditure=y

Operating surplus = x

We know,

NDPfc = CoE + Operating Surplus + Mixed Income

Also, NDPfc = NNPfc – NFIA

 50,000 – 500 = 49,500 crores

49,500 = Wages and Salaries + x +13, 000

49500 = 20,000 + 13,000 + x

49,500 = 33,000 + x 

x = 49,500 – 33,000 = 16,500 crore

Also, GDPmp =  PFCE + GFCE + Gross Domestic Capital Formation + Net Exports

GDPmp  = NPPfc + Depreciation + NIT

= 49,500 + 700 + 1,000

 51,200 crores

51,200 = y + 12500 + 17,000 + 2000

y = 19700 crores 

So, private final consumption expenditure

  = 16500 crores 

Operating surplus = = 19,700 crores 

6. Given the following data, find the values of ‘operating surplus’ and ‘gross domestic capital formation’

S. No.        Contents                      (in crores)

(i)  Government Final Consumption

Expenditure                                           2000

(ii)   Mixed income of Self-employed     1500

(iii) National Income,                            12,000

(iv)  Net Factor Income from Abroad         200

(v)   Operating Surplus                              ?

(vi)  Profits                                            500

(vii) Private Final Consumption 

       Expenditure                              6,000

(viii) Net Indirect Taxes                            700

(ix)   Net Exports                              1,800

(x) Consumption of Fixed Capital        600

(xi) Gross Domestic Capital Formation     ?

(xii)  Wages and Salaries                  6,000

 (CBSE 2019)

Ans. NNPFc = 12,000 (Given)

Let Gross domestic capital formation = x

And Operating surplus = y

GDPmp = NNPfc + Depreciation – NFIA + NIT

GDPmp = 12000 + 600 – 200 + 700 = 13100 crores

GDPmp= Private Final Consumption Expenditure +

Government Final Consumption Expenditure + Gross Domestic Capital Förmation + Net   Exports

13,100 = 6,000 + 2000 + x + 1,800 

x = 13,100 – 9,800 = 3,300 crores

Gross domestic capital formation = 3,300 crores

NDPfc = NNPfc – NFIA

NDPfc = 12000 – 200 = 11,800 crores 

NDPfc = Compensation of Employees + Operating Surplus + Mixed Income

11,800 = 6,000 + y + 1,500 

     y = 11,800 – 7,500 = 4,300 crores Operating surplus = 4,300 crores 

7. Calculate

(i) Net National Product at Market Price

(ii) Gross Domestic Product at Factor Cost

S.N0.            Contents                (in crores)

(a)       Rent and Interest          6,000

(b)    Wages and Salaries          1,800

(c)    Undistributed Profit            400

(d)    Net Indirect Taxes                100

(e)       Subsidies                              20

(f)       Corporation Tax                   120

(g)      Net factor income to abroad    70

(h)      Dividend                                  80

(i)     Consumption of Fixed Capital   50

(j)   Social Security Contribution by      employees                                         200

(k)       Mixed Income                        1000

Ans. 

NDPfc = Compensation of Employees + Operating Surplus + Mixed Income 

NDPfc = Wages and Salaries + Social Security Contribution by employees + Rent and Interest + Undistributed Profit + Corporation Tax + Dividends + Mixed Income

NDPfc  =  1,800 + 200 + 6,000 + 400 + 120 + 80 + 1,000

NDPfc = 2, 000 + 6,600 + 1,000 = 9,600 crores

NNPmp  = NDPfc + Net factor income from abroad + Net Indirect Taxes 

NNPmp = 9,600 + (-) 70 + 100

NNPmp = 9,600 – 70 + 100 =  9,630 crores

(ii) GDPfc = NDPfc + Depreciation

GDPfc =  9,600 + 50 = 9,650 crores

8. (i) Define ‘net factor income from abroad’. How is it different from ‘net exports’?

(ii) Calculate the value of “Rent” from the following data.    (CBSE 2019)

S.N0.            Contents          (in crores)

(a)   Gross Domestic Product 

       at Market Price                      18,000

(b)   Mixed Income 

       of Self-employed                      7,000

(c)    Subsidies                          250

(d)    Interest                          800

(e)    Rent                                        ?

(f)    Profit                                    975

(g)  Compensation of Employees   6,000

(h)  Consumption of Fixed Capital  1,000

(i)    Indirect Tax                        2,000

Ans. (i) Difference between Net Export and Net Factor Income from Abroad (NFIA).

Net Factor Income from Abroad (NFIA) refers to the difference between factor income received from and paid to abroad.

National Income Notes And Questions

(ii) By income method    

NDPfc     = COE + Operating Surplus  + Mixed Income        …… (i)

*Operating Still)lus Rent + Interest + Profits and NDOfc =  GDPmp –  Depreciation –  NIT

    = 18000 – 1,000 – (2000 250)

    = 15,250 crores

Now, putting values in eq. (i)

15,250 = 6,000 + Rent + 800 + 975 + 7,000

15,250 = 14,775 + Rent 

Rent = 475 crores

9. Explain the precautions that are taken while estimaång national income by value added method. (CBSE 2017)

Ans. While using value added method for compuång national income, the following precautions should be taken

(i) The value of intermediate goods should not be included.

(ii) Purchase and sale of second hand goods should be excluded.

(iii) Imputed value of self-consumed goods should be included.

(iv) Own account production of goods should be included.

(v) Value of self-consumed services should not be included in the estimation of national income.

(vi) Imputed rent on the owner occupied house is also taken into account.

10. (i) Giving valid reasons, state how the services of a ‘school teacher’ will be undertaken in estimation of national income.

(ii) Distinguish between ‘Real Gross Domestic Product’ and ‘Nominal Gross Domestic Product (CBSE 2020)

Ans. (i) The services of a school teacher will be taken in the estimation of national income of the country as they provide services in consideration of some payment and adds to the current flow of services.

(ii) Difference between Real GDP and Nominal GDP

National Income Notes And Questions
National Income Notes And Questions

11.  Calculate (i) Gross Domestic Product at Market Price and (ii) Factor income from abroad from the following data.

S,N0.          Contents                    (in crore)

(a)       Gross National Product 

            at Factor Cost                            6,150

(b)        Net Exports                            (-) 50

(c)    Compensation of Employees    3,000

(d)    Rent                                          800

(e)    Interest                               900

(f)    Profit                                        1,300

(g)    Net Indirect Taxes                  300

(h)   Net domestic capital formation   800

(i)     Gross Fixed Capital Formation   850

(j)    Change in Stock                           50

(k)       Dividend                                       300

(l)        Factor income to abroad              80

Ans 

(i) GDPmp = Compensation of Employees + Rent + Interest + Profit + Net Indirect Taxes

+ Consumption of Fixed Capital

= 3,000+ (800+ 900+ 1,300) + 300

+ (850 +50 – 800)

= 6,400 crore

Note.  Depreciation = Gross Domestic Fixed Capital Formation + Change in Stock — Net

Domestic Capital Formation

(ii) GNPfc = GDPmp — Net Indirect Taxes + Factor Income from Abroad — Factor Income to Abroad

6,150 = 6,400 – 300 + Factor Income from    Abroad — 80

6,150 = 6, 020 + Factor Income from Abroad

Factor Income from Abroad

= 6,150 – 6,020 = 130 crore


Frequently Asked Questions

Q1: What is Macroeconomics?

Answer: Macroeconomics deals with the overall economy of the market and other systems on a large scale. 
Macroeconomics studies about the performance, structure, and behavior of the entire economy. It focuses on the way the economy performs as a whole.

Q2: What is the difference between consumer goods and capital goods?

Answer:
Consumer goods are products made for consumption by the average consumer. It is the end result of production and manufacturing. Consumer goods are purchased to fulfill personal consumption needs
Capital goods are the goods that can be used to increase production. These goods are fixed, durable or tangible assets that are purchased by a business in order to produce finished products or consumer goods

Final Words

From the above article, you have practiced Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions. We hope that the above-mentioned notes and Q & A for term 2 will surely help you in your exam. 

If you have any doubts or queries regarding Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions feel free to reach us and we will get back to you as early as possible.

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