National Income and Related Aggregates NCERT SOLUTION CLASS 12TH MACRO ECONOMICS | EDUGROWN NOTES

Textbook Question And Answer:

Q.1 Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
ANSWER: The sum of final expenditures in an economy must be equal to the income received by all the factors of production taken together (final spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interests earning and rents.

Q.2 What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
ANSWER:  Planned Inventory. It refers to changes in the stock inventories that have occurred in a planned way. In a situation of planned inventory accumulation, firm will plan to raise its inventories. Unplanned Inventory. It refers to changes in the stock of inventories that have occurred in an unexpected way. In a situation of unplanned inventory accumulation, due to unexpected fall in sales, the firm will have unsold stock of goods.
Value added of a firm (GVA) = Gross value of output produced by the firm – Value of intermediate goods used by the firm.
OR
GVA = Value of sales by the firm + Value of change in inventories – Value of intermediate goods used by the firm

Q.3 Write down the three identities of calculating the GDP of a country by the three methods. Also, briefly explain why each of these should give us the same value of GDP.
ANSWER:  National Income = National Product = National Expenditure. Each one will give the same result. The only difference is that with product methods, NI is calculated at production or creation level with income Method NI is measured at distribution level, and with expenditure method NI is measured at disposal level.

Q.4 Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (-) Rs 1,500 crores. What was the volume of trade deficit of that country?
ANSWER:  Budget deficit. It measures the amount by which the government expenditure exceeds the tax revenue earned by it. Budget Deficit = G – T.
Trade deficit: It measures the amount of excess expenditure over the export revenue earned by the country.
Trade Deficit = M – X
Given G – T = (-) Rs 1500 crore
Investment – Saving = Rs 2000 crore Trade deficit = [I – S] + [G – T]
= [2000]+ [-1500] = Rs 500 crore.

Q.5 Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.
ANSWER:  National Income (or NNPFC) = GDPmp- Depreciation + Net factor income from abroad – [Indirect Taxes-Subsides] 850 = 1100 – Depreciation +100- 150
Depreciation = 1100+ 100- 150-850 Depreciation = Rs 200 Crore

Q.6 Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms / government, or by the firms / government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
ANSWER:  Personal disposable income = Personal income – Personal tax – miscellaneous receipts of government 1200 = Personal Income – 600 – 0 Personal Income = 1800 Crore Private Income = Personal income + retained earnings + corporate tax = 1800 + 200 + 0 = 2000 Crore Private income = NNPFC (National income) – NDPFC of government sector + Value of transfer payment 2000 = 1900 – 0 + Value of transfer payment
Value of transfer payment =100 Crore

Q.7 From the following data, calculate Personal Income and Personal Disposable Income.

ANSWER:  Private Income = NDPFC – NDPFC of government sector + NFIA + Transfer Income + net interest receive from household (Interest Received by Households – Interest Paid by Households) = (i) – 0 + (ii) + (vii) + [(v) – (vi)]
= 8000 + 200 + 300 + (1500 – 1200)
= 8800 Crore
Personal Income = Private income – Undistributed profit – Corporation tax = 8800 – (iii) – (ii)
= 8800 – 1000 – 500 = 7300 Crore
Personal Disposable Income =
Personal income – Personal tax = 7300 – (viii)
= 7300 – 500 = 6800 Crore

Q.8 In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income

1. Gross Domestic Product
2. NNP at market price
3.  NNP at factor cost
4.  Personal income
5. Personal disposable income.

ANSWER:

1.  GDP contribution by Raju = Rs 500
2.  NNPMP (Raju’s contribution) = GDP – Depreciation = 500 – 50 = Rs 450.
3.  NNPrr (Raju’s contribution) = NNPMP -Indirect tax =450-30 = Rs 420
4.  Personal Income = NNPFC-Retained Earnings = 420 – 220 = Rs 200
5.  Personal Disposable Income = Personal Income – Income Tax = 200 – 20 = Rs 180 Crore

Q.9 The value of the nominal GNP of an economy was Rs 2,500 crores in aparticular year. The value of GNP of that countiy during the same year evaluated at the prices of the same base year was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Did the price level rise between the base year and the year under consideration?
ANSWER: GNP deflator = Nominal GNP/Real GNP x 100 = 83.3%
No, the price level did not rise between the base year and the year under consideration. In fact, it fell.

Q.10 Write down some of the limitations of using GDP as an index of welfare of a : countiy.
OR
Explain how distribution of gross domestic product is its limitation as a measure of economic welfare.

OR
Explain how ‘distribution of gross domestic product’ is a limitation in taking domestic product as an index of welfare. [CBSE Delhi 2011]
OR
Can gross domestic product be used as an index of welfare of the people? Give two reasons.
OR
Explain Per Capita Real GDP as Indicator of Economic Welfare.
OR
Explain any four limitations of using GDP as a measure/index of welfare of a country.
ANSWER:  Per Capita Real GDP can be taken as indicator for economy. But by itself is not an adequate indicator. There are many reasons behind this. These are:

1. Many goods and services contributing economic welfare are not included in GDP Or Non-Monetary exchanges.
   (a)There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
   (b)These are left on account of non availability of data and problem in valuation.
   (c)It is generally agreed that these items contribute to economic welfare.
   (d)So, if we depend only on GDP, we would be underestimating economic welfare.
2. Though externalities are not taken into account in GDP, they affect welfare.
   (a)When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
   (b)Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
   (c)GDP does not take into account these externalities.
   (d)For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
   (e)Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare In this case, welfare is much less than indicated by GDP.
3. Change in the distribution of income (GDP) may affect welfare.
   (a)All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
   (b)At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
   (c)It means that the inequality in the distribution of income may increase or decrease.
   (d)If it increase it implies that rich become more rich and the poor become more poor.
   (e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
   (f) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
4. All products may not contribute equally to economic welfare.
   (a)GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc.
   (b)Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products like police services, military services etc. may comparatively contribute less and may not directly affect the standard of living of the people.
   (c)Therefore, how much is the economic welfare would depend more on. the types of goods and services produced, and not simply how much is produced.
   (d) It means that if GDP rises, the increase in welfare may not be in the same proportion.
5. Contribution of some products may be negative
   (a)GDP includes all final products whether it is milk or liquor.
   (b)Milk may provide both immediate and ultimate satisfaction to consumers On the other hand, liquor may provide some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare.
   (c)GDP include only the monetary values of the products and not their contribution to welfare.
   (d)Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and services consumed.

Very short answer type:

Q.1 Define ‘depreciation’.
ANSWER: Depreciation is an expected decrease in the value of fixed capital assets due to its general use.

Q.2 When is the net domestic product at market price less than the net domestic product at factor cost?
ANSWER: When net indirect taxes are negative i.e., subsidies are more than indirect taxes

Q.3Why does gross domestic product at factor cost more than the net domestic product at factor cost?
ANSWER: Gross domestic product at factor cost includes depreciation while net domestic product at factor cost does not include depreciation.

Q.4 When will GDP of an economy be equal to GNP?
ANSWER: GDP and GNP will be equal when the ‘net factor income from abroad’ is zero.

Q.5 When will the domestic income exceed the national income?
ANSWER: When the net factor income from abroad is negative.

Q.6If NDPFC is Rs 1,0000 crores and NFIA is (-) Rs 500 crores, how much will be the national income?
ANSWER: National Income = 10000 + (-500)
= Rs 9500 Crore

Q.7 If the domestic factor income is Rs 50,000 crores and the national income is Rs 45,000 crores, how much will be the net factor income from abroad?
ANSWER:  Net factor income from abroad = 45,000 – 50,000 = (-) Rs 5000 Crore

Q.8 Mention the three methods of measuring national income.
ANSWER:  

1. Value added method
2. Income method
3. Expenditure method.

Q.9 Calculate the disposable income, if personal income is Rs 30,000 and the rate of income tax is 10%.
ANSWER:  Disposable Income = 30,000 – (10% of 30,000) = ?27,000

Q.10 In which type of economy, domestic income will be equal to national income?
ANSWER:  Closed economy.

Q.11What is the value added method of measuring national income?
ANSWER: Value added method is the method that measures the national income by estimating the value added by each producing enterprises within the domestic territory of the country in an accounting year.

Q.12 When is value of output equal to value added?
ANSWER: Value of output is equal to value added if there are no intermediate costs.

Q.13What aggregate do we get when we add up the gross value added of all the producing sectors of an economy?
ANSWER:  Gross domestic product at market price.

Q.14What is the rationale for not taking into account the value of intermediate goods in the measure of GDP?
ANSWER:  To avoid the problem of double counting.

Q.15 If compensation of employees in a firm constitutes 65% of net value added at factor cost of a firm, find the proportion of operating surplus.
ANSWER: 100% – 65% = 35% (assuming mixed income is zero).

Q.16What is nominal gross domestic product? [CBSE Delhi 2011]
ANSWER: When gross domestic product (GDP) of a given year is estimated on the basis of price of the same year, it is called nominal GDP.

Q.17Define primary sector.[CBSE AI2013,]
ANSWER:  It is the sector that produces goods by exploiting natural resources like land, water, forests, mines, etc. This sector includes agricultural and allied activities, fishing, mining and quarrying.

Q.18Define secondary sector.
ANSWER:  It is called manufacturing sector also. Enterprises in this sector transform one type of commodity into another type of commodity. For example: leather goods from leather, flour from wheat, sugar from sugarcane, etc.

Q.19 Define tertiary sector.
ANSWER:  It is known as service sector also. Enterprises in this sector produce services only. Examples are banking, transport, communications etc.

Short Answer Type Question:

Q.1 Distinguish between domestic product and national product. When can domestic product be more than national product?
OR
Differentiate between Domestic Income (NDPFC) Vs National Income (NNPFC).
ANSWER:

Domestic product will be greater than national product when net factor income from abroad is negative.

Q.2 Differentiate between Gross Domestic Product at Market Price Vs National Income.
ANSWER:

Q.3 Differentiate between National Income at constant price and national income at current price?
ANSWER:

Q.4 Distinguish between real and nominal gross domestic product.
Or
Discuss any two differences between GDP at constant prices and GDP at current Prices.[CBSE Sample Paper 2016]
ANSWER:

Q.5 Explain how ‘externalities’ are a limitation of taking gross domestic product as an index of welfare.
ANSWER:

1. When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
2. Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
3. GDP does not take into account these externalities.
4.  For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
5.  Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare. In this case, welfare is much less than indicated by GDP.

Q.6 Explain how “Non-Monetaiy exchanges’ are a limitation in taking gross domestic product as an index of welfare.
ANSWER:

1. There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
2.  These are left on account of non¬’ availability of data and problem in valuation.
3. It is generally agreed that these items contribute to economic welfare.
4. So, if we depend only on GDP, we would be underestimating economic welfare.

Q.7 Explain how distribution of ‘Gross Domestic Product’ is a limitation in taking gross domestic product as an index of welfare.
ANSWER:

1. All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
2. At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
3. It means that the inequality in the distribution of income may increase or decrease.
4. If it increase it implies that rich become more rich and the poor become more poor.
5. Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
6.  Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).

Q.8 State the various components of the income method that are used to calculate national income.
ANSWER:

1. Compensation of employees: The amount earned by employees from their employer, whether in cash or in kind or through any other social security scheme is known as compensation of employees.
2. Operating Surplus: It is the sum of income from property and income from entrepreneurship.
3. Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income.
   Note: (i) To estimate amount of factor payments made by each producing unit.
   (ii) To add all factor incomes/payments within domestic territory to get domestic income, i.e., NDPFC.
   NDPFC = Compensation of employees + Operating Surplus + Mixed Income
4.  Net factor income from Abroad(NFIA): NFIA is the difference between income earned by normal residents from rest of the world and similar payments made to Non residents within the domestic territory. Addition of NFIA to NDPFC to get NY, i.e., NNPpc.
   NNPFC = NDPFC + NFIA

Q.9 Define double counting. How can the problem of double counting be avoided?
ANSWER: If a single transaction is recorded twice or more than twice in the calculation of national income, then it is known as double counting.
The problem of double counting is solved by value added method. Theoretically to avoid double counting there may be two alternative ways:

1. Final Product Approach
2.  Value Added Approach

1. Final Product Approach: According to this, value of only final products, i.e. which go for final consumption or capital formation should be included. But in practical application of this approach double counting still creeps in as every producer treats the product he sells as final whereas the same might have been used as intermediate product by the buyer.
2.  Value Added Approach: Value added method is most effective in avoiding double counting. According to this, instead of taking value of final goods, only value added at each stage of production by a producing unit is taken. Value added of a firm by subtracting intermediate consumption from value of output.

Long Answer Type Question:

Q.1Calculate GNP at FC from the following data by

1. income method, and
2. expenditure method. [CBSE 2002]

ANSWER:

1. NDPFC = Compensation of employees (Wages and salaries + Employer’s contribution towards social security scheme) + Operating Surplus + Mixed Income
   = [(i) + (viii)] + (iii) + (ii)
   = [800 + 100] + 600 + 160 = 900 + 600 + 160 = 1660 Crore GNPFC = NDPFC + Depriciation (Gross capital formation – Net capital Formation) + Net Factor Income from abroad = 1660 + [(H) – (nil) + (6c)]
   = 1660 + [330-300] + (-20)]
   = 1660 + 30 – 20 = 1670 Crore
2.  GDPMP = Government final consumption expenditure (Public final consumption expenditure) + Private final consumption expenditure + Gross domestic Capital formation + Net export (Export – Import)
   = (xiii) + (xii) + (v) + [(x) – (xi)]
   = 450 + 1000 + 330 + [30 – 60]
   = 1750 Crore .
   GNPFC = GDPMP + Net factor income from abroad – Net Indirect Tax = 1750 + (be) – (xiv)
   = 1750 + (- 20) – 60 = 1750 – 20 – 60 = 1670 Crore

Q.2 Calculate “Gross National Product at Factor Cost” from the following data by (a) Income method, and (b) Expenditure method

ANSWER:  NDPFC = Compensation of Employees + Operating Surplus( profit + Rent + Interest + Mixed Income
= (iv) +[(iii) + (v) + (viii)] + 0 = 800 + [400 + 250 + 150]
= 800 + 800 = 1600 Crore GNPFC = NDPFC + Depreciation (Consumption of fixed Capital) + Net factor Income from abroad = 1600 + (vii) + (x)
= 1600 + 60 + (-10) = 1650 Crore GDPMP = Government final consumption expenditure + Private final consumption expenditure + Gross domestic capital formation (Net domestic capital formation + consumption of fixed capital) + Net export = (x) + (i) + [(ii) + (vii)] + (xi)
= 500 + 1000 + [200 + 60] + (- 20)
= 500 + 1000 + 260 – 20 = 1740 Crore GNPFC = GDPMP + Net factor income from abroad – Net Indirect Tax
= 1740 + (x) – (xii)
= 1740 + (-10] – 80 = 1650 Crore

Q.3 From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor Income To Abroad:

ANSWER:   (a) NDPFC = Compensation of employees + Operating surplus (Profit + Rent + Interest) + Mixed income
= (i) + P) + (v) + M] + 0 = 800 + [200 + 150 + 100]
= 800 + 450 = 1250 Crore Note: Gross domestic capital formation = Net fixed capital formation + Depreciation + Change in stock (vii) = (viii) + Depreciation + (ix)
300 = 200 + Depreciation + 50 Depreciation = 300 – 250 = 50 GDPFC = NDPFC + Depriciation = 1250 + 50 = 1300 Crore (b) GNPMP = GDPFC + NFIA (Factor income from abroad – Factor income paid to abroad) + Net indirect tax (iv) = 1300 + [(x) – Factor income paid to abroad] + (xi)
1400 = 1300 + (60 – Factor income paid to abroad) + 120 1400 = 1480 – Factor income paid to abroad Factor income paid to abroad = 1480 – 1400 = 80 Crore

Q.4 Calculate (a) Private Income and (b) Gross Domestic Product at Factor Cost:

ANSWER: Personal Disposable Income = Personal income – Direct taxes paid by households – Miscellaneous receipts of government
(xi) = Personal Income – (iv) – (i)
200 = Personal income – 30 – 5 Personal Income = 235 Arab Private Income = Personal Income + Retained profits (Savings of private corporate sector) + Corporate Tax = 235 + (iii) + (ii)
= 235 + 10 + 20 = 265 Arab „ Private income = NNPFC – Income from Domestic Product Accruing to Public Sector (Income from Property and Entrepreneurship accruing to government Administrative Departments + Saving of Non Departmental Enterprises) + National Debt interest + Current transfers from Government + Net Current transfers from rest of the world ,
265 = NNPFC – [(x) + (ii)] + (viii) + (ix) + (vii) ]
265 = NNPFC – (12 + 3) + 15 + 8 + 4
NNPFC = 265 + 15 – 27 = 253 Arab
GDPFC = NNPFC + Consumption of fixed capital – Net factor income from abroad
= 253 + (xii) – [-(v)]
= 253 + 11 + 6 = 270 Arab

Q.5 Calculate (a) Private Income and (b) National Income:

ANSWER:  Personal Disposable Income =Personal Income – Direct Taxes paid by households – Miscellaneous receipts of Government
(i) = Personal Income -(v)- (iii)
120 = Personal income – 15 – 4 Personal Income =139 Arab (Billion) Private Income = Personal Income + Undistributed profits of private sector + Corporate Tax = 139 + (vii) + (vi)
= 139 + 3 + 6 = 148 Arab Private income = NNPFC – Income from Domestic Product Accruing to Public Sector (Income from Property and Entrepreneurship accruing to Government Administrative Departments + Saving of Non-Departmental Enterprises) + National Debt interest + Current transfers from government + Net Current transfers from rest of the world
148 = NNPFC – [(ii) + (ix)] + (viii) + (xi) + (iv) ,
148 = NNPFC-(5+ 15) + 16 + 2+ 10
NNPFC = 148 + 20 – 28 = 140 Arab

Q.6 Find out Gross National Product at Market price and Net National Disposable Income from the following:
ANSWER:  GDPMP = Government final consumption expenditure+Private final consumption expenditure + Gross domestic Capital formation (Net domestic Fixed capital formation + consumption of fixed capital + Change in stocks (closing stock – opening Stock) + Net Export = (vi) + (ii) + {(ix) + (vii) + [(iv) – (i)]} + (-viii) = 300+ 1000+ {150+ 30 + [40-50]}+ (-20) = 300 + 1000 + 170 – 20 = 1450 Arab GNPMP = GDPMP + Net factor income from abroad = 1450 + (-v)
= 1450 +[- (-10)] = 1460 Arab NNPFC = GNPMP – consumption of fixed capital – net indirect tax = 1460 – (vii) – 0 = 1460 – 30 = 1430 Arab
NNDI = NNPFC + NIT + Net current transfer from rest of the world (abroad) = 1430 + 0 + (-iii)
= 1430 + (-5) = 1425 Arab