Q1. Define National Income.

National income is referred to as the total monetary value of all services and goods that are
produced by a nation during a period of time. In other words, it is the sum of all the factor
income that is generated during a production year.

Q2. What are the methods of accounting /calculating national income?

Expenditure approach

The expenditure approach calculates the GDP by calculating the sum of all the services and
goods produced in an economy.

The formula is mathematically represented as:

Y = C + I + G + (X − M)

Where,

Y = Gross domestic product

C = Consumption

I = Investment

G = Government spending

X = Exports

M = Imports

The components are described in brief here.

1. Consumption is denoted by C. It stands for all the private spending, which includes
services, non-durable and durable goods.

2. Government expenditure is denoted by G and includes employee salaries, construction of

roads and railways, airports, schools, and expenditures in the military.
3. Investment is denoted by I and refers to all the investments that are spent on housing and
equipment.

4. Net export is denoted by (X – M), which is the difference between the total imports and
exports.

Income approach

The income approach is based on the total output of a nation with the total factor of income
received by the residents or citizens of a nation.

The formula for calculating by the income approach is:

NY = Compensation of employees + Rental and royalty income + Business cash flow +

Net interest

We can also say that:

NY = Rent+ Wages+ Interest + Profit + Mixed Income

Output approach

The output approach emphasizes the total output of a nation by finding the value of the total
value of goods and services produced in a country.

The formula for calculating GDP by the output approach is:

GDP = GDPmp of primary sector + GDPmp of secondary sector + GDPmp of tertiary

sector

GDPmp (for all the sectors is calculated as) = Sales + Change in stock – Intermediate
consumption

Only the value added at every stage is taken is consideration for the prupose of
calculating NY.
 Q3. What difficulties are encountered by researchers while accounting for national income?

1. Prevalence of Non-Monetized Transactions:

There are certain transactions in India in which a considerable part of output does not come
into the market at all.
Agriculture in which a major part of output is consumed at the farm level itself. The national
income statistician, therefore, has to face the problem of finding a suitable measure for this
part of output.

2. Illiteracy:
The majority of people in India are illiterate and they do not keep any accounts about the
production and sales of their products. Under the circumstances the estimates of production
and earned incomes are simply guess work.

3. Occupational Specialisation is Still Incomplete and Lacking:

There is the lack of occupational specialisation in our country which makes the calculation of
national income by product method difficult. Besides the crop, farmers are also engaged is
supplementary occupations like—dairying, poultry, cloth-making etc. But income from such
productive activities is not included in the national income estimates.

4. Lack of Availability of Adequate Statistical Data:

Adequate and correct production and cost data are not available in our country. For estimating
national income data on unearned incomes and on persons employed in the service are not
available. Moreover data on consumption and investment expenditures of the rural and urban
population are not available for the estimation of national income. Moreover, there is no
machinery for the collection of data in the country.

5. The Calculation of Depreciation:

The calculation of depreciation on capital consumption presents another formidable difficulty.
There are no accepted standard rates of depreciation applicable to the various categories of
machine. Unless from the gross national income correct deductions are made for depreciation
the estimate of net national income is bound to go wrong.

6. Difficulty of Avoiding the Double Counting System:

The very important difficulty which a calculator has to face in measurement is the difficulty
of avoiding double counting.

For example:
If the value of the output of sugar and sugar cane are counted separately, the value of the
sugarcane utilized in the manufacture of sugar will have been counted twice, which is not
proper. This must be avoided for a correct measurement.
 Q4. Discuss the related terms of national income.
 Simon Kuznets defines national income as “the net output of commodities and services flowing
during the year from the country’s productive system in the hands of the ultimate consumers.”
National income is the total value of all final goods and services produced in an economy in one
financial year. National income is referred to as the total monetary value of all services and
goods that are produced by a nation during a period of time. In other words, it is the sum
of all the factor income that is generated during a production year. National income serves as
an indicator of the nation's economic activity.

National income = C + G + I + X + F – D

Where,

C denote the consumption

G denote the government expenditure

I denote the investments

X denote the net exports (Exports subtracted by imports)

F denote the national resident’s foreign production

D denote the non-national resident’s domestic production

 GDP is the total value of all final goods and services produced in the domestic boundary of a
country in one financial year.
While calculating GDP, the proceeds of following are included in the calculation even
though they are outside the domestic boundary of the country:
i. Embassies functioning in other countries
ii. Military establishment
iii. Oil rigs
iv. Vessels and aircrafts of the country

 GNP is the total value of all final goods and services produced by nationals of a country in
one financial year. gross national product (GNP) is the value of all finished goods and
 services owned by a country's citizens, whether or not those goods are produced in that
country.

 GDP deflator: GDP deflator, also known as the implicit price deflator, is used to measure
inflation. It is used to determine the levels of prices of the new domestically produced final
goods and services in a country in a year.GDP deflector shows the changes in the average
price levels in an economy, and therefore, it is used in conjunction with the Consumer Price
Index (CPI) for measuring inflation.GDP deflator consists of two important components,
which are the nominal GDP and real GDP.

Nominal GDP is the monetary value of all the goods and services produced in an economy and is
valued at current prices, while the real GDP shows the monetary value of all the finished goods
and services in an economy calculated at constant prices.

For calculating GDP deflator, the following steps are necessary.

1. Determine the nominal GDP.

2. Determine the real GDP.
3. Find the GDP Deflator.

GDP deflator formula can be represented as:

GDP deflator = Nominal GDP/Real GDP * 100

Other price indices such as CPI and GDP deflector are not formed on a fixed basket of goods and
services. The basket is altered every year depending on people’s investment and consumption
patterns for that year.

The change in prices is calculated by an index of prices called the GDP deflator, which is
nothing but the ratio of the nominal GDP to the real GDP. i.e., GDP Deflator = Nominal GDP/
Real GDP .Suppose an economy produces only one good X, such that in the year 2008, there
were 200 units of X produced at the price of Rs 10 per unit. Hence, the GDP at current prices
was Rs 2000 (= 200 x 10). In 2013 the economy produced 220 units of good X at the price of Rs
15 per unit. Therefore nominal GDP in the year 2013 is Rs 3300 (= 220 x 15). Now suppose we
fix 2008 as the base year. The real GDP in the year 2013 calculated at the price of the base year
2008 will be Rs 2200 (= 220 x 10). In the calculation of real and nominal GDP in the current
year 2013, we have kept the quantity of production constant. Therefore if there is any difference
in the two figures, it must be on account of a change in price from the base year to the current
year. According to the formula mentioned above, we know the GDP deflator, ratio of the
nominal GDP (Rs 3300) to the real GDP (Rs 2200), is 1.5. Hence, the prices have increased by
1.5 times from the base year to the current year. In percentage terms this is 150.

 Green GDP: The Green Gross Domestic Product, or Green GDP for short, is an indicator of
economic growth with environmental factors taken into consideration along with the standard
GDP of a country. Green GDP factors biodiversity losses and costs attributed to climate
change. Physical indicators like “carbon dioxide per year or “waste per capita” may be
aggregated to indices like the “Sustainable Development Index”
Green GDP is calculated by subtracting net natural capital consumption from the standard
GDP. This includes resource depletion, environmental degradation and protective
environmental initiatives. These calculations can alternatively be applied to the net domestic
product (NDP), which subtracts the depreciation of capital from GDP. In every case, it is
required to convert any resource extraction activity into a monetary value since they are
expressed in this manner through national accounts. On the whole, the following steps are
used in the calculation of green gdp:
Step 1: Physical Counting of the natural resources
Step 2: Assigning monetary value to the natural resources
Step 3: Computing cost of depleted resources/consumed resources
Step 4: GGDP = GDP – Cost of natural capital consumed.
 Q5. What is HDI?

The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development:

i. a long and healthy life,

ii. being knowledgeable and
iii. having a decent standard of living.

The HDI is the geometric mean of normalized indices for each of the three dimensions.

The health dimension is assessed by life expectancy at birth, the education dimension is
measured by mean of years of schooling for adults aged 25 years and more and expected years
of schooling for children of school entering age. The standard of living dimension is measured
by gross national income per capita. The HDI uses the logarithm of income, to reflectref the
diminishing importance of income with increasing GNI.
 Q6. Define Gender development index. How is it different from Gender Inequality Index?

GDI measures gender inequalities in achievement in three basic dimensions of human

development: health,
th, measured by female and male life expectancy at birth; education, measured
by female and male expected years of schooling for children and female and male mean years of
schooling for adults ages 25 years and older; and command over economic resources, measured
m
by female and male estimated earned income.

The gender inequality index (GII) provides insights into gender disparities in health,
empowerment and the labour market
market.. Unlike the human development index (HDI), however,
higher values in the GII indicate worse achievements.
 Q7. Explain Multidimensional Poverty Index.

The global Multidimensional Poverty Index (MPI) is an international measure of acute

multidimensional poverty covering over 100 developing countries. It complements traditional
monetary poverty measures
asures by capturing the acute deprivations in health, education, and
living standards that a person faces simultaneously.

Q8. What are the various characteristic features of Inflation?

Inflation is the rate of increase in prices over a given period of time

time. Inflation
ion is typically a broad
measure, such as the overall increase in prices or the increase in the cost of living in a country.

Coulbourn defines it as “too

too much money chasing too few goods
goods”

Inflation is characterized by the following:

 Persistent rise in prices

  Excessive supply of money in economy
 Results in fall in purchasing power of money
 Feeds on itself and creates a circle of inflationary spiral
 Inflation could be caused due to demand side or supply side factors.
 The RBI governor Shaktikanta Das expects inflation to remain above 4%. It is expected
to average 5.6% in Q4 of 2023-24

 Inflation rate is defined as the percentage increase in the price levels of the basket of
selected goods and services over a time period.
 The rise in inflation rate indicates that there is a decline in the purchasing power of the
currency, and as a result, there is an increase in the consumer price index (CPI).
 In other words, the inflation rate is said to be the rate at which the prices of goods
increase when the purchasing power of currency declines.
 Inflation rate serves as an indicator of the position of an economy and is keenly observed
by the government and central banks to help them make appropriate changes to their
monetary policies.
 Inflation rate is determined as the rate of change that takes place in the consumer price
index over a time period.
 The formula for calculating the inflation rate is as follows:
Inflation rate = (Current period CPI − Prior period CPI)/Prior period CPI