Question-1

Explain with the help of an appropriate example the difference between

GDP and GNP. (5)

GDP stands for Gross Domestic Product of a particular country. GDPis the
value of all final goods and services produced within the geographical boundary
of a country, within a particular period of time (normally a year). By this
national income of a country is measured. Now defining a particular country’s
GDP is generally divided into two parts.
1. GDP by value of final goods and services produced in a country.
2. GDP by value added method.
Now, as far as these two types of GDP definitions are concerned, the first
definition is-
 GDP by value (either through income or expenditure method) of final
goods & services: It’s the value of all final goods and services produced
in a particular geographical area with in a particular period of time-
normally 1 year.
 GDP by value added method:Remove
For a country GDP by value added is defined as a value of the output – the
value of intermediate goods the firm used to produce that output.
Example: A farmer grows a bushel and sells to A for Rs. 1 and then A turns it
into wheat and sells at Rs. 3 to B. B, again make it bread and sells to C at Rs. 6.
By this method the GDP will be,
1st stage- 1 Rupee at the first stage.
2nd stage- (3-1) = 2 rupees value added
3rd stage- (6-3) = 3 rupees value added.
So, by value added method GDP= (3+2+1) = Rs. 6Why are you explaining the
value added method here?

GNP
GNP stands for Gross National Product.
Value of all final goods and services producedIt’s defined as the total income
earned by a nation’s factors of production, regardless of where located, within a
particular period o time(normally a year).
Or, it’s the value of all final goods and services produced by nations factor of
production within a particular period of time (normally 1 year)
Ex= Suppose in case of GDP it’s the value of all goods and services produced in
the country but in GNP if a country’s firm has a branch I another country too, it
will take that income of that branch which is situated in other country to
calculate GNP. Like all the multinational companies in IT sectors.
GNP – GDP= Factors of payments from abroad – Factors of payments to
abroad.
GNP= GDP + factors earning from abroad – factors payments to abroad.
GNP= GDP ± Net factors earnings from abroad.
We always want GDP to be higher than GNP because GDP is Gross domestic
product and it stands for value of final goods and services in an area.

Examples of GNP vs. GDP

The output of a Toyota plant in Kentucky isn't included in GNP, although it's
counted in GDP, because the revenue from the sales of Toyota vehicles goes
to Japan, even though the products are made and sold in the United States. It is
included in GDP because it adds to the health of the U.S. economy by creating
jobs for Kentucky residents, who use their wages to buy local goods and
services.

Similarly, the shoes made in a Nike plant in Korea will be counted in U.S. GNP,
but not GDP, because the profits from those shoes will boost Nike's earnings
and stock prices, contributing to higher national income. It doesn't stimulate
economic growth in the United States because the manufacturing jobs were
outsourced. It's Korean workers who will boost their country's economy and
GDP by buying local goods and services.

These examples show why GNP is not as commonly used as GDP as a measure
of a country's economy. It gives a slightly inaccurate picture of how domestic
resources are used. For instance, if there were a severe drought in the United
States, GNP would be higher than GDP because the foreign holdings of U.S.
residents would be unaffected by the drought, unlike the U.S. investments of
foreign workers.
Question-2

According to you, which out of the two (GDP/GNP) is a better indicator of

economic growth and why? (5)

GDP (Gross Domestic Product) is a measure of (national income = national

output = national expenditure) produced in a particular country.
The Value of all final goods and services produced within a particular
geographical boundary within particular period of time
GDP = C + I + G + (X – M) or consumption + gross investment + government
investment + government spending + (exports – imports)

GNP (Gross National Product) = GDP + net property income from abroad. This
net income from abroad includes dividends, interest and profit.
Or in other words, total income earned by nation factor production regardless
the place where situated. It is the value of all final goods and services produced
by nation factor of production within a particular period of time.

GNP includes production abroad by a country's factors of production. GDP only

includes countries that create value added within the country, and consequently the
consumption and expenditure pertaining to it produced within a particular
a boundary. Therefore, GDP better measure of production within the borders.
GDP of a country is a better measurement tool to judge one’s country
situation because as we know it tells the level of production and its price
consequently its consumption and expenditure pertaining to it produced
within a particular a boundary.

Question-3
What is inflation? Do you think inflation is equivalent to GDP deflator? Why?
(2+3)
 Inflation is the rise in the average price level of a basket of selected goods
and services in an economy. It is the rise in the general level of prices where a
unit of currency purchases less than it did previously. Inflation indicates a
decrease in the purchasing power of a Nations currency. In order to know rate
of inflation several weighted price indices are constructed-

(a) Wholesale price index(WPI)

(b) Consumer price index (CPI)

Inflation rate is the percentage increase in the overall level of prices that
varies greatly over time and across countries. GDP deflator named so because
it is used to “deflate” that is it remove the effect of inflation from GDP and
other economic variables. GDP deflator can be denoted as

Nominal GDP
GDP Deflator= Real GDP ×100

Even though both Inflation and GDP deflator captures increase in price level
but both somewhat gives different information regarding what’s happening to
the overall prices in the economy and calculation wise there is a difference.
As we know GDP captures the value of domestically produced goods &
services, same goes for GDP deflator which also takes into account only
prices of domestically produced goods & services. However, in case of
inflation it includes prices of imported goods & services as well. From
example, if a consumer purchases an imported car from say Toyota made in
Japan, the increases in price will and sold in India will show its affects in
Inflation, because it is bought by the consumer but it won’t affect the GDP
deflator.

Question-4
What is the difference between personal income and disposable personal
income? Which out of the two will significantly affect the consumption and
why? (3+3)
Ans: Personal income or “before-tax income” refers to all income collectively
received by all individuals or households in a country.
It is calculated by subtracting personal tax and nontax payments from
personal income.

Disposable personal income (DPI) refers to the total amount someone has
after taxes to spend on necessities, like housing and food. Economists use DPI
to look at how much money is actually available to spend in a specific area.
For Example, if someone is self-employed, his or her DPI is their available
money after subtracting self-employment tax and income tax. Self-employment
tax goes towards Social Security and Medicare taxes.
It is calculated as DPI = Gross wages - Taxes or Personal Income – Person
tax liability (E.g. – Wages, Commission, etc)

Differences between Personal Income and Disposal Personal Income are as

follows –
i. Personal income refers to an individual’s total earnings in the form of
wages, salaries, and other investments whereas Disposable personal
income is referred to as the amount of net income available to an
individual to spend, invest and save after income taxes are paid.

ii. Personal income is the gross income before adjusting for income tax and
Disposable personal income is arrived at after deducting the income tax.

iii. Personal income is the aggregation of all active and passive incomes
whereas disposal personal income is dependent on the personal income.

iv. Personal income includes personal income taxes and indirect business
taxes, which are not included in disposable personal income.

v. Personal Income taxes are not included in personal disposable income.

vi. Personal Income does not include transfer payments, such a Social
security payments or welfare payments whereas personal disposable
income includes all of them.

Consumption is the value of goods and services bought by people.

Consumption is normally the largest GDP component.
Personal income has a large effect on consumer consumption. As consumer
spending drives much of the economy, national statistical organizations,
economists, and analysts track personal income on a quarterly or annual basis.
Now again when disposable income increases, households have more money to
either save or spend, which naturally leads to a growth in consumption.
Consumer spending is one of the most important determinants of demand; it
creates the demand that keeps companies profitable and hiring new workers.
Thereby if Personal Income rises, there is a possibility to increase consumption,
however it depends upon the prevailing income tax level of the country.
However, if Disposable Personal Income increases, it will surely increase the
consumption.

Question-5
What is the relationship between Inflation and Unemployment? (2)

Inflation and Unemployment have an inversely related relationship. The

Phillips curve relates the rate of inflation with the rate of unemployment. The
Phillips curve argues that unemployment and inflation are inversely related: as
levels of unemployment decrease, inflation increases. As with increase in
unemployment, people have less money to spend this will fall the aggregate
demand in the economy. With fall in demand, the price of goods and services
will gradually fall and creates deflation in the economy. The relationship,
however, is not linear.

Question-6

Explain the circular flow of income and expenditure. Consider 2 countries

A & B, suppose A has more population compared to that of B, while all
other components remain the same. With the help of circular flow explain
in which country GDP will be high and in which country PCI will be high?
Answer-
Circular flow of income and expenditure has 2 key components-
 Households
 Firms

Households are the end customers which consume goods by spending

money and also provide factors of production.

Firms are the producers who manufacture goods and services and end
products for the people and sell it for a price.

Source: http://2knomics.com/

At first, Households provide the firms with Factor services like Land,
Labour, Capital and Entrepreneur, without which the firms cannot start
production. Once the factors are received, the firms manufacture goods
and provide services to the households by converting raw materials to
finished goods.
Now we see that there is both income and expenditure on the part of
both households and firms.
Households-
Income for factor services provided.
Expenditure to purchase goods and services.

Firms-
Expenditure as factor payments.
Income as sale of goods and services.

Coming to concept of GDP, is the value of all final goods and services
produced within a geographical boundary within a particular period of
time.

We have 2 perspectives of this concept. One is through the household

concept, which states that, the total income earned by households as
factor income is equivalent to the entire nation’s income, i.e, national
income.
Similarly all the income generated by the firms from goods and services
constitutes to the national income of the country.

Income from households = Income from firms = National Income of the

Nation (GDP)

HOUSEHOLDS (Y) = CONSUMPTION + SAVINGS + TAXES

FIRMS (Y) = CONSUMPTION + INVESTMENT + GOVERNMENT

EXPENDITURE

Before we get into the question, it is important to establish a

relationship between Population and GDP rate of a country. If the
population of a country increases, for example migration of adults, this
will increase the number of workers and thus increase productivity of
the country which will in turn, will increase the GDP of the nation.
We see that per capita income is inversely related to the population of the
country.
Country A with a higher population would have a higher GDP compared to
Country B
Country B will have a higher PCI than Country A
For example, If the GDP for both Country A & B is Rs. 10000, and Country A
having a population of 200 and Country B having a population of 150,
PCI for A would be Rs.50
PCI for B would be Rs. 66.67

Question-7

Do you think sale of used good is considered while computing GDP?

Justify(5)

No, sale of used goods is not considered while computing GDP.

Gross Domestic Product (GDP) represents the value of all the final goods &
services which are produced within a geographical boundary of a country with
in a particular period of time.

Formula of GDP is that:

Gross Domestic Product = Consumption + Investment + Government
purchases + (exports - imports). However, there are some transactions that
take place every day that don't get counted in the GDP. Only goods and services
produced domestically are included within the GDP.

No, sale or purchase of used goods are not included while computing GDP
because nothing new is produced in the current year. Such sales do not reflect
any current production whereas national income related to current production
only.

For example, when Jennifer purchases a Honda City car from her father, or
Ronita resells a book she received from her brother, or Rohan purchase a second
hand I PHONE X from his friend, these transactions are not counted in the GDP
because no current production is involved. Only newly produced goods are
counted in GDP. That's why the sale of used goods is excluded.

Question-8

Explain the concept of inclusive growth. What are the components of

inclusive growth?

Inclusive growth means economic growth that creates employment

opportunities and helps in reducing poverty. It means having access to essential
services in health and education by the poor. It includes providing equality of
opportunity, empowering people through education and skill development.

The goal of such growth is to strike a balance between economic and

sustainable development. In other words, instead of only focusing on the
economic outcomes as in traditional models, inclusive growth focuses more on
equity. Inclusive growth perfectly facilitates the stability and development of
the global economy.

Components of inclusive growth are :-

 Poverty Reduction.

 Employment generation and Increase in quantity & quality of

employment.
 Agriculture Development.

 Industrial Development.

 Social Sector Development.

 Reduction in regional disparities.

 Protecting the environment.

 Equal distribution of income.

Question-9
Explain the concept of inflation rate and GDP deflator and the relationship
among them. With the help of an appropriate example (at least three years)
calculate the GDP deflator and inflation rate for a country. (10)

Inflation Rate

Inflation is a quantitative measure of the rate at which the average price level of

a basket of selected goods and services in an economy increases over some
period of time. It is the rise in the general level of prices where a unit of
currency effectively buys less than it did in prior periods. Often expressed as a
percentage, inflation thus indicates a decrease in the purchasing power of a
nation’s currency.
The inflation rate attempts to measure the change in the currency value over
time by comparing a list of standard products called the consumer price index.
The most well-known indicator of inflation is the Consumer Price Index (CPI),
which measures the percentage change in the price of a basket of goods and
services consumed by households.
CPI as an indicator of inflation rate can be calculated:

Price year2 - Price year1/ Price year1 x 100

GDP Deflator

The GDP deflator, also known as the implicit price deflator, measures the
impact of inflation on the gross domestic product during a specified period,
usually a year.

The GDP price deflator takes into consideration both the nominal GDP and the
real GDP of an economy. The nominal GDP represents the value of the finished
goods and services that an economy has produced, unadjusted for inflation,
whereas the real GDP represents the value of the finished goods and services
that an economy has produced, adjusted for inflation.

Therefore, if there was no inflation involved, the nominal GDP would equal

the real GDP.

GDP price deflator = Nominal GDP / Real GDP x 100

Example:
Given in the table is the Nominal GDP Real GDP for country X. We need to
calculate the GDP deflator for each year and the rate of inflation from 2009 to
2011.
Year Nominal GDP (billions) Real GDP (billions)
2008 864.5 864.5
2009 882.6 851.9
2010 923.4 875.1
2011 965.8 909.6

GDP price deflator = Nominal GDP / Real GDP x 100

Assuming 2008 as our base year,
2008: 864.5/864.5 x 100 = 100
2009: 882.6/851.9 x 100 = 103.6
2010: 923.4/875.1 x 100 = 105.5
2011: 965.8/909.6 x 100 = 106.2

Year Nominal GDP (billions) Real GDP (billions) GDP Deflator

2008 864.5 864.5 100
2009 882.6 851.9 103.6
2010 923.4 875.1 105.5
2011 965.8 909.6 106.2

Inflation Rate of Country X from year 2009-2011:

2009: 103.6-100/100 x 100 = 3.6%
2010: 105.5-100/100 x 100 = 5.5%
2011: 106.2-100/100 x 100 = 6.2%

Question-10
Do you think imputation of the income of housewives can be incorporated
while computing GDP? Justify. (5)
Gross Domestic Product is defined as the monetary value of all final goods and
services produced within a particular geographical boundary of a country within
one year. GDP is calculated on the basis of –
 Valuation of final goods and services or
 Value added in each stage of production.

No, the income of housewives cannot be incorporated while computing

GDP because the GDP is an aggregate measure of the value of the goods and
services produced in an economy. So in essence, what’s being implied is that a
housewife is actually doing no productive work because there is no monetary
remuneration attached with it.
Proponents of including the services of housewives in the GDP argue that it will
raise the respect given to homemakers and also provide a more accurate picture
of GDP and growth.To empower women who are housewives, the Ministry of
Women and Child Development in India is considering drafting a bill for the
inclusion of household work in the GDP; doing this, however, is a daunting
task. So how can the government go about this? Considering the opportunity
cost of the housewife’s services is one way to calculate what she would earn if
she sought employment in the market. Another way is to calculate the market
value of the

The primary household activities like cooking, cleaning, child care, personal care, etc
are normally performed by women. The rationale for including goods that are consumed
within the same household where they are produced, but excluding intra-household services,
is a purely pragmatic one: goods production generates physical objects that can be observed,
measured, and priced; services provided within the privacy of the family are far more
difficult to measure and value - especially regarding the quality dimension. Therefore
because of this no imputation is done for the services provided by the housewives.

housework where one could value it in terms of what the prevailing market
price is to purchase the services of a nanny or the wages paid to workers for
cleaning, cooking and the like. However both the above stated measures are
extremely problematic. This is because in the first method, a housewife’s
alternative job could be anything (for instance a CEO and a receptionist have
very different wages) whereas while using the latter, the market values of
different services may be misleading for calculation. Although many renowned
economists all over the world are advocating the inclusion of a homemaker’s
services in computation of GDP, there is a long way to go before it can be put
into action.

Question-11
Explain under what circumstances, GDP of a country will be equivalent to
GNP? (2)
Gross National Product is defined as the total market value of all final
goods and services produced in a year including net income from abroad.
GNP includes four types of final goods and services.
Gross Domestic Product is the value of all final goods and services at
prices prevailing in the market produced in the domestic territory of a
country during a given year. Being gross, it is inclusive of depreciation. It
can be obtained by deducting net factor income from abroad from GNP at
market price.
Thus, GDPmp = GNPmp – Net factor income from abroad.
So, when Net factor income from abroad is 0 then GDP will be equivalent
to GNP and when the economy is closed and no VISA are permitted across
the world, GDP=GNP.

Question-12
What is base year? How it is selected for a country? (5)

If the price level of one time period is to be compared with that of another time
period, then the latter one, being the basis of comparison, is termed as the base
period. The other period under comparison is referred to as the
current period. The index for the base period is arbitrarily considered as 100.
The base period should be so chosen that it is a normal period. It means that the
prices of such a period should not be affected by any kind of abnormal or
irregular causes, namely, natural calamities like floods, earthquakes, etc. or
economic boom, depression, wars, strikes etc.-Moreover, the base period should
not be in the distant past relative to the current period, otherwise proper
comparable data may not be available.
Base Year acts as a key factor for determining Inflation.
Some important factors to be considered while deciding base -

1. Base year shouldn't have lot of business activity going on or the year in
which markets are not stabilized, is not considered a option for base year. 

2. Inflation at alarming rates. It is important to consider inflation rates of a

particular year while deciding Base year.

3. Base year which records no particular natural calamity, famines or draughts.

4. Base year with less monsoon deficit.

Deciding on such factors, Fiscal reports in a year are analysed by government

and a base year is selected for the country.
Question-13
Explain VAM(value added method)T with an appropriate example. (5)

Taxation refers to the process of an authority levying certain charges

on goods, services and

transactions. It is one of the foremost powers held by the government of

any country. Various types of taxes are applicable at various stages of
sale of goods and services; VAT is one such tax.

VAT is a kind of tax levied on sale of goods and services when

these commodities are ultimately sold to the consumer.VAT is an
integral part of the GDP of any country.

Features of Value Added Tax in India:

1. Similar goods and services are taxed equally. So a similar television

from all brands will be taxed the same.

2. VAT is levied at each stage of production and hence makes the

taxation process easier and more transparent.

3. VAT reduces chances of tax evasion.

 4. Encourages transparency in sale of goods and services at the tiniest
level.

Example:

Ram owns a restaurant and spends Rs.50,000 towards

obtaining raw materials.Input tax is 1  0%, so input tax becomes 10%of

Rs.50,000 = Rs.5,000

Now after selling the food made by using the purchased raw materials,Ram wa
s able to make Rs.1,00,000.Supposing 1 0% output tax, output tax
becomes Rs.10,000.

So, final VAT payable by Ram comes out to be Rs. 10,000 – Rs.5000 =
Rs.5000.

Q14) How inflow of FDI can affect a country’s GDP- Explain (5)

Ans: FDI refers to net inflows of investment in an economy of a country. It is

the sum of equity capital, reinvestment of earnings, long-term and short-term
capital. While making country wise analysis we find that FDI has a positive and
significant impact on GDP.

Growth of any country depends upon investments, increasing assets and

infrastructure. Foreign Direct Investment in an economy shows that there is a
good trend of investment, which ultimately results in increasing the GDP and
growth of the country.

Inflow of Foreign Direct Investment leads to higher employment. Higher FDI

leads to higher employment, which in turn leads to higher economic growth.