ce 1 aged to and subtracted fromm agl domestic product at mucke dlomostic prxluct at factor cost ? When would GDP of « country be smaller than its GNP 7 Under what circumstances NNPyp,48 less than NDP, ? | Under what cireufhstances NNPyp i8 less than NNP,, ? How is NNPyp obtained from NNPy ? IP GDP is Re” 20,000 and depreciation is Rs. 500, what will be NDP ? Ate NNP,. and national ineome the same thing ? Give answer in yee or no ? Define the term net indirect taxes ? 5. What are subsidies ? 5 Whateare direeb-taxes 2 Give two example’, . ‘What are indirect taxes ? Give two examples. What 1s natiotial disposable income ? 9 ANSWERS (VERY SHORT ANSWER TYPE QUESTIONS} 1. National income means income earned by he normal residents of @ country in an accounting year. 2. National income when measured at market prices is called as national income at current prices. 4. Natio inzome when estimated at sorg® base year’s prices is termed as national income at con- stant prices - é NI at Current "Prices, G80 e Price Index 5. Green National sno Aon icra ~ Depreciation of natural resources. 6. Incomes received by of production in lieu of their productive services. 7. Incomes received without doing anything or service. ~ A. Activities which de not involve-sale and purchase of goods and services through exchange in the market 9, GNP deflator implies a price index used to find out whether there has been a real rise or fall in truss national income between two periods. 10. Tocome earned within the domestic territory is called domestic income “EN APLA. - : wee 8 . 12, Net factor income from abroad. 7 it price to get net 4. National income at constant prices * 13, JLUGDP) refers to the money value.cf all the final goods and services produced by all the enter- prises within the domestic territory of a country in an accounting year. 14. It ““19P) -afers to uet income generated within the domestic territory of a country in a year. 15. Wh net factor income from abroad is zero. (36. Consumption of fixed capital. 17. Indirect taxes to be subtracted und subsidies to be added. 18. When net factor income from abroad is positive. 19. When NFIA is negative. « 20. When net indirect taxe ‘are pegelive. Le NNPy, = NP, + Ne taxes 22. Rs. 19,500, 23. Yes, 24. Net Indirect Taxes ='Indirect Taxes - subsidies. 25. Subsidies refer to all grants and toncessions provided by the government to the producers to enable _ then to sell their gi alow: price. 78. Dinet tayes refer to rc burden of which’ cannot be shifted on to others ¢g., Income tax, Corporation tas. bi iit os ‘are those taxes which are imposed ch production/ sale of commodities e.g., Sales tax, Excise duty 26 Nutiona incom® refers to the income that a natiod can dispose of as it likes. It can be oF lower than national income depending upoa net current transfer from rest of the world. ° : agCuarter | MEASUREMENT OF NATIONAL INCOME (“Syn | 1 of Measuring National Inconw 6 ‘Added’Methed . | {Introduction ' 4.1.2 Steps involved : 413 Precautions \ 1.2 Income Method , : 4.2.1 Introduction | 1.22 Steps Involved Z . | 1123 Precautions to be Taken while Estimating Factor Incomes 7 a 1.3 Expenditure Method 4.3.1 Introduction 132 Steps Involved — . 133 Measurement of Final Expenditure 1.3.4 Precautions 2. Reconciliation of the Three Methods. {_& Ihe Heat Method s we know, production of goods and ‘services is the scsult Afanery factors of production. And, in the process of production, income is generated or we can say that the output emerging from production processis distrib- uted among factors of production in the form of money incomeJeg., rent, wages, interest, and profits). Thus, production generates income. This generated income gives rise to demand for produced goods and services. In other wards, the households (-e., suppliers of factor services) apend their income on goods and services to satisly their wants. Hence, incomecreates expenditure. \hich ultimately.leads to further production. - In short, Production generates income, income gives, rise to demand (or expenditure) and expens ure; in turn, leads to more production. In this way, the three flows-productiin, income, and expendilure-becume cireylar. ‘They have been shown in figure 13.1. ‘a Measurement; BL INGOME, acct sressioymssininsae — 1, Methods of Measuring National Income : noted above, there are three flows, ie, production, flow of income, and flow of expen- other words, National income of a country can be monaured at three different level 1 \£. Schumpeter first who suggested the menaur three levels. M.C- Mitchel and Kuznets estimated national income at these lev leade an: Stone did it in UK in 1941, In. India, Central Statistical Organisation meu- ‘sures national incéme at all these thrée stages, i.e. Gate Seen! Orpunention mew ture level. Accordingly, there are three methods of measuring national income, They are : 1. Value Added Method / fas Yon me Wod TI. Income Method, and ~» TH: Expenditure Method. total value of output of a firm and value of value, which the firm concerned has added " production of moe! ofthe goods goes through multiple stages of production. Until a good comes out to be @ final commodity, some value is added at every stage of production by different produc- ing writs. The value ens crestediat diferent stages is called value edad. For example, suppose ‘in the prod stages faction, Witiely, raw cotton, cotton yan, ‘and Enally cotton cloth. Further,goppose Fiime A. B and.C are involved at these three stages of production respectively. First Stage. Suppose, firm A produces raw cotton of worth Rs. 100 and sells it to firm B which produces cotton yarn. aman fg ha to barn cota of roucion, Us, tho aed vane Rs, 100. Second Stage. Finn B, manufacturer of cotton yarn buys raw cotton of Ra, 100 from firm A ‘Third Stage. Firm C which is adbiciog cottan cloth, a final commodity, buys cotton yarn for Rs, 250 from finn B. It converts it into cotton clothi whose market value is Rs. 400. It means firm Chas added value of Rs. 150 (Rs. 400 ~ 250). ‘Thus, value addéd by a particular firm can be calculated by deducting intermediate consump- tion from its value of outputias shown under : be ff Value added ='Value of output ~ Intermediate consumption ‘We may now distinguish between the concepts of gross value added and net value added. In fact, value sdded when we subtract intermediate consumption from value of output. Th anne tae eat when ae 10 subtract consumption. of fixed capital (or ‘To arrive at net val by fi will be depreciation) from gr added ‘Thus, : > Ne value added = Gross Value added (by a firm) - = Se Consumption of fixed capital added at i ther deduct net indirect taxes we get value added at factor cost r ‘the contr bution made by Gferent factors of production in the process res , viz, Tand, Tabour capital and entrepreneurship. So, it (NNA,,) to them. The - producer tithes as NYA tong the me owners of factors of production as wages, rent, interest and profitSo, NVA, must necessarily be equal to factor payment. 262... sve en mint nn Macroeconomics1. Value Added Method , 1.1.1. Introduction, Thia method inalao known ax Net Quipue Method or Industrial case NS ~*, estimation of national ino [ . saSret tnt ga rete TE INVOLYED IN v a correct picture. It is because of the problem VALUE ADDED METHOD of double counting’. The problem of double Step counting leads to overestimation of national Tdontification and olnsaification of roductive enterpri income. Moreover, another problem a when the producers themselves retain a pa i | exolnple, suppose an Indian farmer produces Talouluilon of net 7!" Iarome 100 quintals of wheat whose market price is | 3 [trom nhroed. Rs. 400 per quintel. Further, suppose he 20 quintals of wheat for meeting hie eee Chart Stoning Step Involved in Valve food requirements. Therefore, he sells only 80 quintals of wheat. It means that our national income has been underestimated by Rs. 8,000 (20 x 400). To avoid the pro yunting and of underestimation, value added method proves to be Very fader val od nal ‘estimated by taking os jue added) made by each producing enterprise to production in the do- mestic territory of a country in an . 112 Steps Involved. The folowing steps are involved while measuring national income by using value added method : A_-Bitep 1. First of all, productive enterprises are identified and classified into primary, secondary and tertiary sectors. (@ Primary Sector. It includes all agricultural and allied activities, e.g., forestry, fishing, mining, quarrying, ete. It produces goods by exploiting natural resources such as land, water, forests, mines, ete. (ii) Secondary Sector. This sector is also called as “Manufaciuriig sec e of commodity into another. For example, manufacturing of cotton cloth from cotton yarn, i . sugar from sugarcane and furniture from wood, etc. iii) Tertiary Sector. This sector (which is also called service sector) provides useful services a to the primary and secondary sectors of the economy. It consists of services such as bank- ing, insurance, transport, trade, communications, etc. : 1 Problem of Dounle Counting. While estimating national income, we take only the value of final goods and services produced. This is for the simple reason that the value of goods should be counted only once. But to establish whether a particular commodity is a final commodity or an intermediate commodity is sometimes not an easy task As far as an individual enterprise is concerned, its sales are final, For example, producer A produces raw cotton and sells it to producer B for Rs. 500. For Producer A, sale of cotton for Bs, 600 is final. But for producer B who converts raw cotton into cotton yarn, raw cotton is an intermediate commodity. Similarly, suppose producer B sells catton yarn to producer C (who converts cotton yarn into cotton cloth) for Rs. 900, it (cotton yarn) beenmes an intermediate commodity in the hands of producer C. But producer B treats the commodity {cotton yarn) as final, because he is not concerned at all with it after sale. But we know that value of cotton yarn ineludes value of raw cotton and, similarly, value of cotton cloth includes the value of cotton, ‘yarn. If we take the money value of all these three goods—raw cotton, cotton coton yarn : ‘cloth while estimating national income, it-means the value of raw cotton hax been coun' and the value of cotton yarn twice. The counting of the value of commodity more than once is termed as ‘double counting’. . o.,rtC—~S—— ba. ob 263 2,saw, varue of tPUL, VlUe Of intermediate consum pees . u id ° tion are calculated. eee and cost of deprecia Value of output is wo multiplying the amount of goods and servi. ae i rices. Ve ii " ind services by each ¥ enterprise with their market prices ‘alue of intermediate consumption is calculated Af! hesrties paid by the enterpris®. Consumption of fixed capital is also estimated a3 por rus and regulations. To arrive at the net value sdded by the enterprise, we have to deduct from the value of output : to deduc (a) Value of intermediate (0) Consumption of fixed following items onsumption (c) Net indirect taxes, : oe < [Value Added = Value of output - Intermediate Consumption Consumption of fixed capital - Net Indirect Taxes. By adding the net value added of all the producing enterprises in an industrial secion we obtain net value added of that industrial sector. The sum total of net Values udded by all the industrial sectors in the domestic territory of the country, gives us the Net Domestic Product at Factor Cost. Net Value Added = Valued added by Primary Sector + Value added by Secondary Sector + Value added by Tertiary Sector w Sep 3. To estimate Net Factor Income from Abroad. The third and final step in the “Gstimation of national income is to estimate the net factor income earned from abroad an¢ ‘add it to the net domestic product at factor cost. This gives us the national income. In short, — vy [NNP,, = NDP, + NFIA \24G. Precautions. The following precautions are required to be taken while measuring national income by product method : cei sale and purchase of sezansand foods should not be included in national income. But edeamission, I any, earned by brokers of such goods should be included. ———~ (ii) The Value of retained goods for self-consumption should be included. (iii) Imputed value of owner-occupied houses should be included. (iv) Own account productiorr of fixed capital by households, firms and the government should Deindaded (wv Domestic services are not included in national income. However, production of services by paid-émployees will be included. (vi) Atthough Teisure is one of the important determinants of economic welfare but it is not included in rational income. Because its valuation is not possible. ») SatamLatyoy Peniteeuus coe 7)! Example 1. Calculated value added by firm X from the following data : ae Rs. (in lakhs) (a) Sales 600 (0) Purchase of raw material 200 264 wy fy- lms}t {o Import of raw material 400 (d) Import of machines 200 (e) Closing stock 40 () Opening stock 10 : {CBSE Sample Poper 2" solution. Value added by firm X ee a Intermediate consumption ‘Value of Output = Ra, (in lakh) Re. (in lakh) (b) Purchase of raw material 200 (a) Salgs 600 (c) Import of raw material 100 (6) 4+) Change in stock 30 40 - 10) a : L 60 Total ‘Value Added = Value of output - Intermediate Consusnption = Rs. 630 ~ Rs. 300 = Rs. 330 lakhs. Any. ‘2, Answer the following questions. Given below is an economy hy faving the following trans Example action only : be 77 ister A sells to B for Re. 60. 4 x : Industry B sells to C for Rs. 80. bp 7e& Industry C sells to private consumption for Rs. 125. c a (i) What is the value added in each industry ? 64,20 49 (ii) What is the GNP? 125 (iii) What is the value added in ‘each industry, if A imports for Rs. 10 and B also impts - ‘or RB.10? A+ 50,6 O,¢-4y iu) Whatis the GNP by industry of origin and by category of final demand, if imports for = 29 and C sells in addition of private consumption indicated above to exports for Rs, 40. CALCULATION OF VALUE ADDED > 19, A= “0, ‘Transactions TV Gost Price | Sale Price | Value added | 4 Re - Re, Bs. : Asells to B 0 60 60 - B sells to C 60 80 3 26 “= C cells to private consumer 80 125 45 ‘Total 140 265 125 (i) Value added by industries A, B and C respectively Rs. 60, Rs. 20 and Rs 45 (i) Gross national produet = Rs. 125. (iii) Value added by A = Rs. 60 (60 - 10) Value added by B = Rs. 10 (20 - 10) Value added by C= Rs. 45 (iv) Value added by A = Rs. (60 - 20) =-Rs. 40 ’ ‘Value added by B = Rs. (80 - 60) : hs > 10 Value added by C = Rs. (125 + 40) 80.= Rs. 85 . D Note : Imports are an intermediate consumption. = Q jo -Maaeucement of Nation Osetra inSRT eee xara me Example 3. Calculate (i) Gross value added at market prices, and (ii) National income by using the following da (a) Value of output : Re, (crores) (i) Primary sector 1,000 (ii) Secondary sector 400 (iit) Tertiary sector 600 A (b) Value of intermediate consumption : ae ( Primary sector 500 one 4: - (ii) Setdndary sector 200 a 2124 a (iii) Tertiary sector egy _ (c) Indirect taxes paid by all sectors 80 « ¢ (d) Consumption of fixed capital of all 8 ie iD (e) Net factor income from abroad 20 pre) a (P Subsidies received by all sectors 60 & + Solution. . ( Gross value added at market price = Value of output of all sectors ~ Value of intermediate consumption = 1,000 + 400 + 600 - 500 - 200 - 100 = Rs, 1,200 crore. Ans. ii) National income = GDP,, ~ Consumption of fixed capital ~ Indirect taxes + Subsidies + NFIA = 1,200 ~ 80 - 80 + 60 + 20 = Rs. 1,120 crore. Ans. .2. Income Method a 4. fiteodueti sd earlier, net domestic product at factor cost is equal to domestic factor income. It is for the simple reason that for every rupee worth of goods and services produced, a rupee’s income is generated. So, national income can be expressed as the, sum of factor payments made by the producers. And this method (ce, income method) should j give us the same estimate of national income as the product method has given. eae According to the income method, national income is measured in terms of payments made lo the primary factors of production (viz,, land, labour, capital, and entrepreneurship) for their productive servives.So, national income here can be defined as “the sum total of factor in raed by the normal residents of Peountry during a year by working bot STEPS INVOLVED IN INCOME ‘Within or oulside the country.” Since, factor METHOD incomes are the costs to their employers.(or pro- ducers», so factor income and factor cost mean eee classification of the same thing. ee | enterprises 7 lucome method is also called as Factor Classification of factor incomes Paymi hod or Distributed Share... Meta 3 Estimation of factor incomes or Steps Involved. Like the value added payment method, income method also involves the fellow- Gnart Showing Slaps Involved in income Method ing steps while computing national income : PBB ncuassait sas m sistas is Macceeconomics,rF F t oan ncarareneeeeesaas f oceteennt ae om) COMPENSATION OPERATING MIXED INCOME OF OF EMPLOYEES SURPLUS THE SELF-EMPLOYED T J. Wages and Salaries in Cash Income from Property () Basic pay (i) Rent G) Dearn (i) Interest House rent allowance (iti) Royalty 4 (iv) Over-time allowance “| | 2. income from (v) Gost of travel Entreprencurship Sy) CCA (e) Profita (it) Bonus and commissi WA iit) Leave travel concessions (éx) Sick leave allowance 2 Compensation in Kind @ Free bousing (ii) Medical facilities (ii) Free uniforms iv) Free food (v) Free education (oi), Conveyance facilities Sui) Creches for children of employees (viii) Value of interest foregone on Joans to employees 3. Employers’ Contribution to Sucial Security Schemes such as (@ Provident fund ~ mete ii) Life insurance i) Casualty insurance 4. Private Pension ae Chart Showing Components of Domestic Factor Income CAM producing enterprises employing various factors of production are identified and eho into three categories : primary sector, secondary sector and tertiary sector. Step-2/Factor incomes are grouped into the following heads : (a) Compensation of employees (b) Rent . (©) Interest @ Profits {e) Mixed income top &7All factor payments as mentioned above are estimated. By adding all the incomes paid out by all the sectors (.., primary, secondary and ter- tiary), we obtain domestic factor income. And national income can be measured by adding net factor income from abroad to domestic factor income. “National Income of a country can be calculated either by taking the sums of incomes paid. by the producing units or by the income received by the factors.” “Paul Studenski oh 267 Messurament el Metona! Bere acenntaatinarnst “tarsi a EiIn short TT Oo + (i) Domestic Factor Income (oF NDP,,) = Compensation of employees + Rent + Interest + Profits + Mixed in (i) National income (or NNP,q) come = NDP, let factor income from abroad 2.3, Precautions to be taken while estimating factor incomes. We {Olseing precautions while estimating factor incomes : ce oe (i) Trapsfér Payments (or incomes). Transfer payments should not be included i national ‘These payments (such oa tps, ems amtowamgeseete) oe @ aw of goods and services do not lake place fn the economy with these payments. We may, here, distinguish between old age pension ancl retirement pension. Old age pension is simply a welfare measure and hence, fall under the category of eansfer payment. eo jent pension on the other hand is the payment for services rendered in the past. Therefore retirement pension (also known as private pension) isa par, = = , while old age pension is simply a transfer payment. is 5 ‘legal ac nugelin marketing, thef, dacoty, ete, is zt included in the national income. Income earned only by way of legal activtics is indluded. = (iii) Income from th€Gale of Second-hand Goods. Income or money received by way af selling secondhand“goods (e., old car, old house, old TV sets, etc.) is not included in the national income. It is because of the fact that the value of their original sale has already been in the year of their ive sales. Now there is only a change in the ownership of the secondhand goods. Their transactions do not contribute anyth-ing to the current flow of goods and services. However, brokerage ot commission paid to the brokers or commission agents on the sale and purchase of such goods if any, is includ-ed, because new factor income is generated. (iv) Sale of Sharep( ands, etc. Money received by selling shares and bonds (both old and new) in the market is not treated as inenine, hecause here j onding production In the national income, windfall gains (like income from lotteries) are not included. Because itis an effortless jncomne. No inputs are used'andno pains are Taka here, dvi) Indirect Tye€6. Indirect taxes (Le,, tax on production or sale of the commodities) tend to raise the market price of goods and services. Hence, these are included in the national income at market price ee (wit) Corporatio x and Income Tax. Since, corphraion tax sa pert of profs ithould not be separatély included in the national income: Instead, profits (before deduetion of cor- poration tax) has to be included. Likewise, compensation of employees includes incomegax. Henee, income tax paid by the erfployees should not be included separately (viii) Death Dye Gift Tax, Wealth Tax, etc, Death duties, gift tax, wealth tax, etc, are paid out of thé wealth or past savings of the tax-payers. Hence, they should not be included in the national ingote, (i Productigh for Self-consumption. It should be included. Domestic services for self consumption are not included. But if the same are produced by the paid employed staff such fas cooks, gardengr& guards, etc., will be included in the national income. (4) Impute nt of Owner-occupied Houses. Rent of owner-occupied houses (., housing-services) should be imputed on the basié of prevailing market price and included in the national income.a se ald dd 1. Calculate (i) Gross domestic product at market prices, and (1i) Net national product t factor sxample from the following data “ ¢ Rs, (in crores) = (i) Consumption of fixed capital + He ) Employer's contribution to Social Security Schemes ~ +0 (i) Rent. . : a (jv) Interest, wy (v) Profits: =F (vi) Royalty : 2 3 5 (ei) Wages and salaries. Ms iti) Net indirect taxes» : : i {e) Net factor income from abroad ie Solution. {G) GDP,,= Rent +Anterest + Profits + Royalty + Wages and salaries + Consumption of fixed capital + Employers’ contribution to Social Security Schemes + Net indirect taxes = 10 +20 + 25 +5 + 170+ 34 + 30 + 38 = Rs, 332 crore. Ans. (ii) NNP,c = GDPyp - Consumption of fixed capital + Net fuetor income from abroad = Net indirect taxes = 932 - 34 + (-3) - 38 = Rs. 257 crore. Ans. ‘Example 2 From the following data, eplculate national income by value added method and income method : Rs. lin crores W Sales : 15,000 i) Depreciation - ‘ 200 —_—_—— —— 2,000 Gii) Increase in stocks &— iv) Wages and (o) Rent =— (i) Interest. ii) Profits - : : Value of intermediate goods ‘ : (ix) Indirect taxes Solution. Calculation of National Income : (By Value Added Method : NNP,, = Sales + Increase in stock ~ Value of intermediate goods ~ Depreciation = 15,000 + 2,000 - 7,000 ~ 200 = Rs. 9,800 crore. ICNNP at factor cost is to be estimated, then we will have to deduct indirect taxes trom NNY nt market prices. ‘Thus, NNP at factor cost or NNP, = NNPy, ~ Indirect taxes = 9,800 ~ 400 = Rs. 9,400 crore, Ans. (ii) By Income Method : NNP,, = Wages and salaries + Rent + Interest + Profits = 3,500 + 1,600 + 1,300 + 3,000 = Rs. 9,400 crure. Ans. Example 3, From the following available data,galculate national income by income method and value 3,500 ( t added method : | Rs. (in crores (i) Sales 40,000 (i) Increase in stocks 5,000 Maszucementot Nathgn ad ICOMe, acento oe ob 269eo RecN — (ii) Wages and salaries wor Ren iano (v) Interest. 4,000 (wi) Dividends 6.000 (wii) Retained Profits (viii) Corporate taxes (ix) Indirect taxes (x) Depreciation tion. Calculation of National Income : (i) By Value Added Method : NNP,,, = Sales + Incrense in stock - Deprecia 40,000-+ 5,000 ~ 2,000 = Rs. 43,000 crore 2 NNP,. = NNPy— indirect taxes = 43,000 -'800 = Re, 42, (ii) By Income Method : ee NNP,,. = Wages and Salaries + Rent + Interest + Dividend Cea lend + Retained profits = 20,000 + 10,000 + 4,000 + 6,000 + 1,000 + 1,200 = Rs. 42,200 crore. Ans. Example 4. Find out national income from the following data : di Rs. ( (i) Rent and royalty OF ee (Gi) Wages and salaries a hd 4iii) Net factor inconie from abroad 7 os tiv) Contributions to Social Security Schemes by employees — (\- 60 (v) Operating surplus 120 Wethi 1985) Solution. National income = Wages and salaries + Net factor income from abroad + Operating surplus c = 500 + (-) 5 + 120 = Rs. 615 crore. Ans. Imports - Consumption of fixed capital — Indirect taxes less Subsidies -= 25,000 + 3,000 + 6,000 + 1,500 + 1,000 - 2,000 - 2,200 3,500 = 35,500 - 7,700 = Rs. 27,800 crore. Ans. Example 2. From the information given below, calculate net domestic Product at factor cost : Rs. (in hundred crores) (i) Private final consumption expenditure. 298 (ii) Govt, final consumption expenditure 36 (wii) Gross domestic fixed capital formation 62 Gv) Export of goods and services 20 (v) Imports of goods and services 22 (vi) Net addition to utocks of goods 20 (vii) Net indirect taxes 35 (viii) Consumption of fixed capital Solution : NDP, 22 ia = (8) + Gi) + GD + Gu) ~ (v) + (WD (uit) ~ (itt) 298 + 36 + 82+ 20-22 + 20-35 - 22 = 426-79 = Rs. 347 hundred exore. Ans. BU ce ttacntdiinsasetetein cis dAMLoduetory MacroaconomicsFF ceample 3: On the basis of information givan below, caleulate-iay GDP,,, (b) GNP,,,. Imaginary figures Rs, (lakhs) (i) Personal final consumption expenditure 55,000 (ii) Govt. final consumption expenditure 6,000 (iii) Gross domestic fixed capital formation 000 (jv) Decrease in stocks——————--- - ~~ —-- "600 (v) Exports of goods and services 900 (vi) Imports of goods and services 1,000 ) Subsidies 500 (viii) Depreciation - 2,000 {ix) Net factor income from abroad (500 2,000 . (x) Net indirect taxes solution - : (a) GDPy, = Personal final expenditure + Government final consumption expenciture + Gross domestic fixed enpital formation ~ Decrease in, stocks + Exports — Imports = 55,000 + 6,000 + 5,000 - 600 + 900 ~ 1,000 = Rs. 65,300 lakh. Ans. (b) GNP,, = GDP,, + Net factor income from abroad = Rs, 65,300 + (~ 500) = Rs. 64,800 lakh. Ans. Example 4. Calculate gross domestic product at mitrkcet prices by income method and by expenditure method from the following data Rs: (in crores) (a) Compensation of employees (©) Govt. final consumption expenditure (c) Indirect taxes: —— (d) Gross fixed capital formatiom——————— 6,305 (€) Mixed income of the self-employed 16,12 (A Interest, rent and profit 044 @) Change in stocks 1.039 (h) Exports of goods and services "771 (@) Imports of goods and services 1,816 29,163 G) Private final consumption expenditure Gy Net fatise’iticdiite fiom wbtded —————___ ©) 284 () Subsidie: 337 (m) Consumption of fixed capital — 2,217 Solution : Calculation of Domestic Product at Market Prices (@) Income Method GDPyy = (a) +(e) + + im) +) -O = 13,363 + 16,112 + 5,044 + 2,217 + 3,864 - 337 = Rs. 40,263 crore. Ans. (i) Expenditure Method GDP,, = (0) +) +@) +) - +) = 3,801 + 6,305 + 1,039 + 1,771 ~ 1,816 + 29,163 = Rs. 40,263 crore. Exampie 6, Calculate National Income by (a) Expenditure method, and (6) Income methe Rs. (in ervres) (@ Subsidies 5 Vit) Private final consumption expenditure . 100 (ii) Net factor income from abroad (10 Gio) Indirect tax ———_________-- 25 (v) Rent 5 — 20 (i) Government final consumption expenditure doit) Net domestic fixed capital formation —————___ - 30 (oil) Operating surplus ———=———_—_____— 20 (Gx) Wages and salaries 50 ‘def Net exports Os 5 a Gi) Addition to stockseee eee ee TT 10 (uit) Society security contributions by employers ar 19991 (ait) Mixed income 40 Solution. Expenditure Method + National Income = (ii) + (vi) +(vid) + (x) + (iii) + (xi) - (liv) 40) = 100 + 20 + 30 + (-5) + (~ 10) + (-5) ~ (26 ~ 6) 160 - 40 crore = Rs. 110 crore. Ans. Income Metho —. National Income viii) + (ix) + (xii) + (xiii) + (iii) = 20 +50 + 10 + 40 + (-10) = Rs, 110 crore. Ans. Example 6. Calculate national income from the following data : Rs, (in crores), (i) Private final consumption expenditure 800 ui) Conypensation of employees by general government... 400 (ui) Net purchases of goods and services by general government 300 (iv) Exports 100 {w) Imports : 150 ted) Net factor income from stroad ———————_——__————— 120 (vii) Gross fixed capital formation — 7 (oiiiy Consumption of fixed capital (Gx) Change in stacks: = (2) Indirect taxes 120 (ai) Subsidies 40 {Foreign 19981 Solution, National Income : (By Expenditure Method) = (i) + (id) + (il) + (iv) — (0) + (vi) + (vii) ~ (vitt) + (ex) ~ G2) + (ad = 800 + 400 + 300 + 100 — 150 + (~ 20) + 120 - 30 + 60 ~ 120 + 40 = Rs, 1,500 erore. Ans. «7, Calculate Gross Domestic Product at Market Price by (a) Product Method, and (b) Income Method : Rs, (in crores) (i) Intermediate consumption of 5. swt ze (a) Primary sector 500 (b) Secondary sector 400 300 (c) Tertiary sector (ii) Value of output of : (a) Primary sector (b) Secondary sector (c) Tertiary sector (ai) Rent (iv) Endowment of employees -—~ (v) Mixed income (vi) Operating surplus (vit) Net factor income from abroad ) Own-account production of fixed capital should be inctaded. 3, Income Method. Under this method, we take sum total of factor incomes earned by the normal residents of a country during a year. Steps involved. The following steps are involved in the estimation of national income by using income method : (@ Ideatification and classification of producing enterprises. i) Classification of factor income. (ii) Estimation of factor income. (iv) Estimation of domestic factor income. (v) Estimation of national income (i.e., NNP,,) Precautions : oe (®) Transfer incomes should not be included. «Gi Income from iMlegal activities should also not be included. of 285(ai) Income from sale of secondhand goods should not be included. (iv) Money received by way of sale of shares/bonds, ete., should not be included. (v) Windfall gains do not form part of national income, ci) Corporation tax should not be recorded separately as it is a part of profit. ‘vit) Desth duties, wenlth tax, gift tax, ete, are not included in the national income. (viti) Production for self-consumption should be included. téx) Imputed rent is a part of rental income. 4. Expenditure Method : (a) For estimating national income according to expenditure method, we take final expenditures. ~Final expenditure can be estimated by adding the following : ( Final consumption expenditure o Gi) Final investment expendit (iii) Net exports - 7 (b) The major components of the final consumption expenditure are as {ollows : () Private final consumption expenditure Gi) Government final consumption expenditure (c) The major components of final investment expenditure are : (@ Gross domestic fixed capital formation (ii) Change in stocks (d) By adding final consumption expenditure, final investment expenditure and change in stocks, we obtain GDP, Precautions i) Expenditure on secondhand goods are excluded. ii) Expenditure on shares bonds ete. should also be excluded. (iii) Government expenditure on transfer payments should not be included. (iv) Expenditure on intermediate goods should not be taken into account. 5. The Ideal Method. The choice of ideal method is determined by several factors. Théy are men- tioned below (2) Difference in ecanomie activities. (ii) Difference in the structure of economies. (iii) Availability of data. “ Value added method is generally suitable for generally make use of income method. ‘underdeveloped economies while developed countries Important Formulae : At a Glance 1. National Income according to Value Added Method : (i NDP,, = Net value added by primary soctor at FC + Net value added by secondary sector at FC + Net value added by tertiary sector at FC ) NNP,. = NDP,, + Net factor income from abroad 2. National Income according to Income Method : () NDP, = Compensation of employees (wages and salaries + social security contribution made by employers + private pension) + Operating surplus (Rent + Interest + Profit) + Mixed income. Gi) NNP,, = NDP,,, + NFIA 3. National Income according to Expenditure Method () GDP, = Private final consumption expenditure + Govt. final consumption expenditure + Gross fixed capital formation + Net acquisition of valuables ¢ Change in od exports. = Final consumption expenditure + Final investment expenditure ii) NP, = GDPMP - Depreciaton + NFIA (ii) NNPFC= NNPMP - Net indirect taxes4, Other Related Formulae : (i) Gross capital formation = Gross fixed capital £0 ables + change in stock Net Exports ‘= Exports of par non-factor services : = Imports of goods and non-factor serv! icon Gi) Change in stocks = Closing stock - Opening stock LONG ANSWER TYPE QUESTIONS. : 1 How is national income measured avvcrding to value added method ? 2. Give an outline ofthe steps involved inthe estimation of national product by value aged method a (Foreign 2000 ; Delhi 2000, 2001) ‘3. Give an outline of ostimating national income by expenditure method. Seer eee ‘4. What precautions have tobe taken while enlenlating domestic factor ineome in the income method? [Delhi 1995, 20001 method ? [AJ 20001 mation + Net acquisition of valu ( 5. What precautions are tobe taken while estimating national income by expenditure &. Explain components of GDP in its expenditure phase. 11, Which method in your opinion is the most suitable for estimating national income of a country ? 8. How would you treat any four of th following items in estimating «country’s national product ? Give reasons. - @ Sale of ap old car Purchase of shares in the stock market. Government’ services for maintenance of law and order. (iv) Winning of a lottery prize. (0) Services of housewives. (vi) Profits earned by a foreign company in India. 9. How would you treat the following items in estimating a country's national income ? Give reasons in support of year 'aaswee $=" ~ (i) Interest on national debt. (i) Services of an owner occupied house. Gif) Salaries of defence personnel. (iv) Indirect taxes net of subsidies. (v) Government transfers. : (vi) Money received from sale of shares. 10. Are the following included in the estimation of national income ? Give reasons (i) Commodities used in basic scientific research. (i) Construction of new residential building. (iii) Purchase of secondhand scooter (iv) Allowance of a member of a parliament. (v) Income. from gambling. (vi) Salary paid to ‘Americans working in Indian embassy in America. 11. How are the following treated in the estimation of national income ? (i) Interest on national debt. (ii) Expenses on electricity by a factory. Gi) Expenditare on improvement of fixed capital assets (iv) Expenses of foreign visitors in Indi (v) Payment of pension at the time of retirement, (vi) Scholarship received by a student. | of 287 Aasemsementctstaton- See lat nnoune 1 Live i) Salary received by an Indinn employee in a foreign embassy in Indi (ii) Change in stocks, iit Direct purchase made abroad by government on current account. (b) Person A sold a secondhand scooter to person B through a commission agent C. What is the effect of this transaction on the national income ? Will the following be a part of domestic factor income of India ? Give reasons for yoor answer (i) Old age pension given by the Government, Gi) Factor income from abroad. iii) Salaries to Indian residents working in Russian Embussy in India. {iv) Profits earned by a company in India, which is owned by a non-resident. (Delhi 2004 SHORT ANSWER TYPE QUESTIONS, }, Explain briefly the production, income and expenditure flows that arise in the process of produc- tion. : : 2. Explain briefly the main activities of the primary sector. 3, Outline briefly the major activities of the secondary sector 4, Point out the main activities of the tertiary sector. 5. Show how the sum of value added is equal to the sum of factor incomes. (NCERT) 6. Explain any three precautions required in estimating national income by the income method. 7, Explain briefly any three precautions which are to be taken while estimating national income by value added method. 8. Explain any chree precautions to be taken while estimating national income through the expendi- ture method. IAI 2001 ; Dethi 1999} 9. What items are included in the estimation of natiorial income by expenditure method ? 10, How is expenditure on gross fixed capital formation estimated ? 11. How is governinent final expenditure estimated ? (ar 20011 12. Are transfer payments included in the national income ? Give reasons to justify your answer. 13, Why should the income from death duties, wealth tax, gift tax not to be included in the national ‘income ? * }4. Dv you include the sale of secondhand goods in the prod period and why ? 15, Are services rendered by government included in national income ? Give reasons. VERY SHORT ANSWER TYPE QUESTIONS 1. Name the different methods of measuring national income. 2. Define the concept of value added. UCERT) 3. What is primary sector ? 4, What is secondary sector of an economy ? ‘5. What is tertiary sector ? 6. Define the term ‘double counting’. ‘7. Mention the method that can be used to avoid double couating ? Bf goods and services ia the & oR How is double counting avoided ? 8, What is final consumption expenditure ? (Al 2007} 9. Nume the components of final expenditure. 10. Give two examples of income that are excluded from the income method: LL. Give two examples of expenditure that are excluded from the expenditure method. 12, Why is the income from sinugeling not included in the national income ? 13, Do you include the value of retained goods for self-consumption in the national income ? 14, Why is change in stock is considered a part of final expenditure ? 288.15. What do you mean by net exports ? XE why are exports included in the estimation of national income ” (Wethi 20001 16 What are imports are not included in the estimation of nations! income? [Dethi 2080) Vy ts government expenditure included in the national income ” Xe It eountry A gives a donation to country 2, how will their national produats be affected ? 38 Miny is imputed rent included in national income ? ANSWERS: {VERY SHORT ANSWER TYPE QUESTIONS) +. «a Product method, (i) Income method and (ii) Expenditure method 1 Nalve added refers to the diflerence between total value of output ofa firm and value of parehesed from other firms. eee a. fuis the sector which produces goods by expleting natural resources like land, water, mines, for- vests, ete. " 4, Asector that manofactures goods by transferring one type of commodity into another £ Tye sear which produces services like banking insurance, transport, trade, ete, i cled tertiary sector. ¢. Counting of value of a commodity more than once while estimating national income, is termed os double counting. 7, Value added method. . 3 Expenditures incurred on final goods and services is called final expenditure. 9, Components of Final Expenditure = . (i) Final.consumption expenditure (ii) Gross domestic capital formation (iii) Net Exports. 10, () Income from sale of old goods, (i?) Income from transfer payments. 11, () Expenditure on intermediate goods, (ii) Expenditure on financial assets. 12. Because it is an illegal income. 13. Yes. 14, Unsold stocks left with producers are assumed as purchased by the producers themselves. That is why it is treated as investment expenditure by the producers. 15. The difference between exports and imports of a country is called net exports. Te. Because they are a part of domestic product, Fxperts means expenditure inearred an domestic product. - 17, Because they are not a part of country’s gross domestic product. 18 Yes. 19, It is transfer payment. Hence, it will not alfect national product. 20, Housing services are productive. Therefore, imputed rent of owner-occupied houses forms a part of national income. NUMERICAL QUESTIONS 4 Caleulate the value added by firm A and firm B from the following data : Rs. (in lakhs) (@ Purchase by firm A from the rest of the world — 30 ii) Sales by firm B 90 (iii) Purehase by firm A from firm B ————_—___— 50 (iv) Sales by firm A 110 (0) Exports by firm A 30 (vi) Opening stock of firm A as (vii) Closing stock of firm A 0 (viii) Opening stock of firm B30 (ix) Closing stock of firm B_____—_———_——_—_ 0 (2) Purchases by firm B from firm A = 50 INCERT| (Ans. Value added by Firm X = Rs. 35 lakh ; Value added by Firm Y = Rs. 30 lakh! ae the 289.Oe eee ee ee eee ee RE ATR 2. Calculate value added by firm X and firm Y from the following data : Re. (in lakhs) ta) Sales by firm X 100 (ii) Sales by firm ¥ 500 iii) Purchases by households from firm Y 300 wv) Exports by firm Y 60 (v) Change in stock of firm X a 20 (vi) Change in stock of firm ¥ fee eed (vii) Imports by firm X 10 (viii) Sales by Firm 2 to firm Y 260 (ix) Purchases by firm ¥* fom X:’ gd 200 .. (NCERT) tans, Value added by Firm A = Rs. 5 lakh ; Value added by Firm B = Rs. 110 lakh] in the basis of following data, calculate—(a) Gross’ valué added: at markel price for primary, 2 secondary and tertiary sectors, and (b) National income. Rs. (in crores) (i) Value of output of : (a) Primary sector 800 (B) Secondary sector 200 (c) Tertiary sector 300 Gi) Value of intermediate inputs purchased by = (a) Primary sector 400 (8) Secondary sector 100 (c) Tertiary sector 50 (iti) Indirect taxes paid by all the sectors 50 (iv) Consumption of fixed capital of all sectors 80 (w) Factor income received by residents from rest of world 10 (wi) Factor income paid to non-residents 20 (vii) Subsidies received by all the sectors 20 [Ans. (a) Primary sector*= Rs. 400 crore ; Secondary sector = Rs. 100 crore ; Tertiary sector = Rs. 250 erore (368-620 inéra] 4. Calculate national income by income method : Rs. (in crores) (i) Wages and salaries 32,000 (ii) Social security contributions 3,000 ~~ liii) Pensions 2,000 iv) Flood relief 1,000 (w) Rent ———_____—__ 3,500 (wi) Interest 1,500 ._--~ rid) Loterest paid by the. government 400 iii) Dividends 2,500 (ix) Undistributed profits 1,500 1) Mixed income 9,000 [Ans. Rs. 33,000 crore} {Hint : Ttem no. (ii), (v) and (vii) are transfer payments. Hence, not to be included in na- D tional j 5. Calculate national income by incame method = income.) Rs. (in crores) (iy Wages and salaries 2,000 Gi) Profit ~ 2,000 (iit) Rent "700" {iv) Interest 600 ev) Consumption 2,800EEL PLET RET id Grom domestic investrhent Lae <- « vit) Depreciation - (witi) Net foreign investment ‘ 300 fAnn Ra. 6,800 crore’ 6. Estimate national income by income method : ™e ¢ Rs. (in lakhs) (i) Wages and salaries ae (ii) Rent 4000 (iii) Interest oom (iv) Profit , oo (v) Unemployment allowance ey (ui) Scholarships oon 400 (vii) Wages in kmds (viii) Mixed income 7, Calculate national income from ‘the fullowiag date: «~~ 3,000 “[Ans. Ks. 41,400 tahhi) Rs. (in erores) (i) Dividends 100 (ii) Rent 150 (iii) Wages and salaries 350 (iv) Corporation tax 50 (v) Consumption of fixed! capital 40 (vi) Net indirect taxes 60 (oii) Undistributed profits 90 (viii) Mixed income of the self-employed 200 x) Interest : 10 (x) Employer's contribution to social security schemes 140 (Detai 2000 Gi) Net factor income from abroad (10 (Ans. Rs. 1,040 crore) 8. Calculate national income from the following data = - o Rs. (in crores) |. @ Rent 80 Gi) Interest a (iii) Profits 210 (iv) Tax on profits -—€£- —————————— —s30 (v) Employees contribution to social schemes 25 (vi) Mixed income of self-employed 250 (vii) Net indirect taxes 60 (viii) Employers contribution to social schemes 50 (if Compensation of employees 500 tar 2000) (2) Net factor ineome from abroad (-)20. fAns. Rs. 1,170 crore} 9. On the basis of the information given below, calculate net national product at factor cast. Rs. (in crores) (i) Consumption of fixed capital 2217 (diy Indirect taxes less subsidies 3527 (iii) Imports - ie16 (iv) Exports aa (0) Change in stock 1,039 (vi) Gross fixed capital formation 6,305 (vii) Government final consumption expenditure 3,801 (viii) Private final consumption expenditure aan (ix) Net factor income from abroad ey Gea tana ua auase crorel i ae Paribas einen iSO BPAEA BE ROMEO RIS OE wesmssictacue paguresy Rs. tin crores) i) Gross domestic fixed investment ine (ut) Increase in inventories : . (ui) Government consumption expenditure is (uv) Exports of goods and services . {v) Imports of goods and services i. (vi) Personal disposable income ite (oti) Personal saving a Find out gross national product. eee [Hint : Personal consumption expend. ire can be obtained by dedueting item no. (vii) from stern no (vi)} 11. With the help af information given below estimate gross national product at market price Rs. (in crores) W) Private consumption.expenditure 50,000 (ii) Government cohsumption expenditure 15,000 (iii) Gross fixed capital form: 10,000 (iv) Increase in stocks. — 2,000 (v) Exports of goods and services 5,000 (vi) Imports of goods and services 77,000 (vii) Capital consumption allowance 6500 « (viii) Net indirect taxes 5,000 (Ans. Rs. 75,000 crore] (ep culate GNP by income method and expenditure method from the following data : Rs. (in crores) poy tf) Rent ‘ 40 (ii) Private final consumption expenditure 800 iit) Net exports 20 iv) Interest 60 to) Profit 120 (vi) Govt. final consumption expenditure 200 (vii) Net domestic capital forme 100 {yti) Conmpensation of rxexiosven 800 (ix) Consumption of fixed capital 20 Ge) Net indirect taxes 100 (xi) Net factor income from abroad 20 [CBSE Sample Paper 2003) {Ans. (a) Income Method — Rs. 1,020 crore (b) Expenditure Method — Rs. 1,020 crores} 43. From the followirig data calculate national income by income and expenditure method : Rs, (in crores) (i) Government final consumption expenditure 7,000 Gi) Indirect taxes 9,000 (iii) Subsidies 1,800 (iv) Mixed income of self-employed 28,000 (v) Gross fixed cupital formation ——_____— 13,000 (vi) Net addition to stocks 3,000 (ti) Operating surplus 10,000 (vili) Consumptian of fixed capital 4,000 (ix) Private final consumption expenditure 51,000 (x) Exports of goods and services 4,800 (21) Tuports of goods and services 5,600 (aii) Net factor income feom abroad () 300 iii) Compensation to employees 24,000 (Ans. Rs. 61,700 crore!eee 4, Caverns 107 We he following dats {iy Domestic capital formation = (ii), Net exports 18 {iiiy'Private final consumption expenditure sou ») Value of output : = (a) Primary sector 900 (b) Secondary sector 800 (c) Tertiary sector 400 (p) Valve of intermediate consumption (a) Primiary sector 400 (b) Secondary sector 300 (c) Tertiary sector 100 (vi) Consumption of fixed capital BO wii) Indirect taxes 100. (viii) Government final consumption expenditure 100 (ix) Subsidies 10 (@) Net factor income from abroad (20 Re, (in crores (Ans. (a) Rs. 1,030 crore ; (b) Rs. 1,110 erorel 15, Calculate national income by income method and expenditure method from the following data : «Re, (in crores) (i) Compensation of employees 13,300 (i) Government final consumption expenditure 3,800 (iiiy Indirect taxes —-———-~--—~ ~ 3,800 (jv) Gross domestic fixed capital formation 6,300 (v) Mixed income of self-employed 16,000 ——3,000 (oi) Operating surplus a attest ecaieior— (oii) Net addition to stock——__________ 1,000 (viii) Export of goods and services 1,700 (Gz) Import of goods and services 1,800 (a) Privats rsimplen expendibne 29,000 gi) Net factor income from abrogd 300 (xii) Subsidies 300 Gait) Consumption of fixed capital 4m 34, S00 2,200 Ans. Income Method : Rs. 34,600-erore ; Expenditure Method : Rs. 34,600 crucel 16. Find out national income from the following data Rs. (in crores) (@ Operating surplus 200 (Gi) Wages and salaries a (ii) Net factor income from abroad 10 {iv) Contribution to social security schemes by employees 100 (w) Rent and royalty 50 [Hint : Item no. (iv) is a part of item no. (ii) and item no. (v) is a part of i (Dela 1995) fAns. Ks, 890 creel no. ur Henee, these items (iv) and (v) should not be added sepurately: 17 Find out ~ (a) net domestic product at factor cost by expenditure method, and (b) gross domestic product at market price by income method from the following data Rs. (in crores) { Government final consumption expenditure 150 (i) Private final consumption expenditure __ 41,020 Gi) Coonpensation of emplayees 490 (ioy Rent, interest and profits 190tv Exports 100 (or) Imports 110 (uti) Indirect taxes 180 (witi) Net fixed capital formation 180 (ix) Net factor income from abroad (5 (x) Mixed income of the self-employed 560 (x1) Government current transfers to hougeholds 20 (xia) Change in stocks 60 {aité) Consumption of fixed capital 80 (xiv) Subsidies 20 {Al 1996} : (Ans. (a) Rs. 1,240 crore; (b) Rs, 1,480 crore) method (6) Income Method Rs. (in crores) (i) Personal consumption expenditure 700 (ai) Wages and salaries 700 iti) Employers contribution to social security schemes 100 Sic) Gross Business fixed investment. ——~—~ - 60 40) Gross Residential construction investment 60 Sei) Gross public investment 40 (ii) Inventory investment 20 teiti) Profits 100 (ix) Government purchases of goods and services 200 () Rent 50 (xii Exports tO (xii) Imports —-——— 0 (xiii) Interest 40 (vin) Mixed income 100 (xv) Net factor income from abroad. . -10 (xur) Depreciation a. 20 (xvii) Subsidies 10 (viii) Indirect taxes ay . From the following data calculate the Net National Product at Market Prices by (a) Expenditure INCERT] {Ans. (a) Rs. 1,070 crore ; (6) Rs. 1,090 erore] (Hint, Item Nos (iv), (v), (yi) and (ori) taken together cons itutes gross capital formation] 19, From the following data calculate the Gross Domestic Product at Factor Cost by (a) Expenditure Method (b) Income Methud : Rs (in crores) {i> Personal Consumption Expenditure 700 ‘fs Wages and salaries 700 (iit) Employers’ contnbution to social security schemes 100 iv) Gross business fixed investment 60 (v) Profits 100 (vi) Gross residential construction investment 60 (uit) Government purchases of goods and services 200» viii) Gross public investment , 40 tix) Rent 50 ix) Inventory investment 20 = (xi) Exports 40 (xii) Interest 50 Arti) Imports 20 (xiv) Net factor income from abroad -10(av) Mixed income 1m (ni) Depreciation os s (wii) Subsidies 0 (INCERY (xviii) Indirect taxes ey 10 crore ; (b) Rs. 1,120 crore) Cans. (@) Ba Het price by (i) income method 20/From the following data calculate Gross National Product At Market and (ii) expenditure method. (Ra, in crores) (@) Net domestic capital formation ano Gi) Compensation of employees (iii) Net indirect taxes rs Gv) Profits = a 5 (v) Rent 4.300 wit Private Final consumption expenditure (vii) Consumption of fixed capital 2B . itt} Government finsl consumption expenditure me we, ‘) loterest 500 (x) Mixed income of self employed (zi) Net factor income trom abroad I He a tDethi 2004} Gi) Net exports -) Tans. (i) Rs. 2,250 crore ; (ii) Re. 2,250 crore) oo i)