CHAPTER 1

CHAPTER:- NATIONAL INCOME

CIRCULAR FLOW OF INCOME

Meaning of Circular Flow of Income:- All the sectors of economy depends on each. Circular flow of
income refers to the flow of factors, goods and money from one sector to other sectors.
Sectors of economy: - In an economy there are five sectors:-
1. House hold sector
2. Business sector
3. Government sector
4. Finance sector [saving and investment sector]
5. External sector [ Foreign sector]
Assumptions:-
 In economy only two sectors exist [household sector and business sector].
 Both sectors are not saving anything.

Explanation:- Different sectors of economy depends on each other for different purposes.
Household sector is the owner of all factors of the production and it provides factors to the
business sector.
Business sector is the producer of different goods and services and it provides produced goods to
household sector.

Real Flow:- It refers to the flow of goods and factors form one sector to other sector.
Business sector is giving payment to factors for factor services and household sector is paying to
business sector for goods and services.

Nominal Flow:- it refers to the flow of money from one sector to other sector.
 Both nominal and real flows are opposite of each other. It means one flows opposite side of other.

Goods and

 In the above diagram you can see that house hold sector is providing factors of production to
business sector and in return of that business sector is giving payment of factor services.
 Business sector is producing goods and services and providing it to household sector and in return
of this household sector is paying for goods and services.
 This model has 3 phases.
1. Production phase
2. Distribution phase
3. Expenditure phase
 Production phase:- by utilising factors of production provided by household sector, business sector
produces different goods and services. The value of all final goods and services produced in a
specific time period is called gross domestic product.
 Distribution phase:- in second phase entire value of production is distributed among the factors of
production [ given to household sector]. It means sum of factor income is equal to value of
production.
 Expenditure phase:- in third phase the entire income received by household sector is disposed on
different goods and services. It means
Final expenditure=sum of factor income=value of production
Importance of circular flow of income model:-
 It tells about dependence of different sectors on each other.
 It gives information about methods of measurement of national income.
[Three phases are basically 3 methods of measurement of national income]
 It tells about leakages and injections
Injections:- it refers to those factors which can increase the flow of money in economy. Like
exports, investment, consumption, government expenditure etc.
Leakages:- it refers to those factors which reduces the flow of money in economy. Like imports,
savings, tax etc.
 BASIC CONCEPTS OF NATIONAL INCOME

To understand the concept of National Income some basic things we have to learn. These are
foundations of the National Income. These are followings:-
1. Normal Resident
2. Domestic Territory
3. Classification of Goods
4. Factor Income and Transfer Income
5. Domestic Income and National Income [Net Factor Income from Abroad]
6. Gross Product and Net Product [ Depreciation]
7. Market Price and Factor Cost [Net Indirect Tax]
8. Stock and Flow

1. Normal Resident:- it refers to a person whose economic interest lies in a territory and perform
economic activities [consumption, production, investment] with in territory.
Here the important thing is that a person must live with in domestic territory for at least 1 year or
more.
The concept of normal resident is important to calculate National Income.
Who are considered as Normal Resident:-
 Foreigners working in India for more than 1 year.
 Indians working in international organisations located in India.
 Indians working in foreign embassies located in India.
 People who cross the border on regular basis, they are considered as normal resident of their own
country.
 Indians working in abroad for less than 1year.
 Indian ambassadors working in Indian embassies situated in different countries.
Who are not considered as Normal Residents:-
 Indians who are working in abroad for more than 1 year.
 Foreigner who are working in India for less than 1 year.
 Foreign ambassadors who are working in India.
 Foreigners working in Indian embassies.
 Crew members of aircrafts, ships, foreign travellers, professionals etc. who resides for less than 1
year.
 Staff members of international organisations located in our country.
 Important:-
S. no. Resident Ship Citizenship
1. Legal concept Economic concept
2. Attained on the basis of birth or marriage Attained on the basis of place where
economic activities are performed
Examples:-
 Indian officials working in Indian embassy in China. [normal resident]
 Indians working in USA embassy in India. [Normal resident]
 Students going for higher studies to UK. [Normal resident]
 American engineer working in India for 6 month. [ Non-resident]
2. Domestic Territory:- it refers to an area which is governed by domestic government and in this
area the flow of goods, factors and capital is completely free.
The concept of Domestic Territory is Important for understanding the concept of Domestic income.
Here the important thing is the concept of domestic / economic territory is different from
geographical territory.
Some areas of geographical territory are not included in domestic territory and some areas of
outside of geographical territory are included in domestic territory.

Domestic Territory includes:-

 Indian embassies in the different countries are included in our domestic territory.
 Military establishment of our military in the different countries are included in our domestic
territory.
 Fishing vessels, ships, aircrafts, floating platforms etc. operated by Indian residents.
Domestic Territory does not include:-
 Foreign embassies situated in our country are not included in our domestic territory.
 Foreign military establishment in our country is not included in our domestic territory.
Examples:-
 Indian embassy in Australia. [Domestic Territory]
 Indian consulate in Japan. [ Domestic Territory]
 Branch of Indian bank in UK. [ not included in domestic territory]
 Microsoft office in India. [ Domestic Territory]
 German embassy in India. [ not included in domestic territory]

3. Classification of Goods:-
Goods can be classified on various bases. Here goods we are classifying goods on two bases:
a) Consumer Good and Capital Good:-
Consumer goods are those goods are those goods which can satisfy human needs directly.
For example:- Milk, furniture, electronic appliances etc. used by consumers.
Capital Goods are those goods which can be used to produce consumer goods. These are the fixed
assets of producers. Like machinery, plant etc. [all machine are not capital good. It depends on use
of good.]
 S. no. Consumer goods Capital goods
1. Directly satisfy wants Not satisfy wants directly
2. The expenditure on these goods called The expenditure of these goods called
consumption expenditure investment expenditure
3. They are used by households or These are used by produces
consumers
b) Final Goods and Capital Goods:-
Final goods are those goods which are used for consumption purpose or investment purpose.
These goods have crossed the production boundary.
Intermediate goods are those goods which are used for resale purpose or converting into another
good.
These goods have not crossed the production boundary.
[Basically which good is final and which is intermediate it is decided on the basis of final use of
good. For example ‘Milk’, if milk is final good for household but same milk is intermediate good for
a dairy or sweat maker.]

S.no. Final Goods Intermediate Goods

1. Used for consumption or Used for resale or producing other goods
investment
2. Crossed the production boundary Within production boundary
3. Included in national income Not included in national income
4. No further value addition Value Yet to be added
4. Factor Income and Transfer Income:-
Factor income refers to the income which is received by rendering services or producing goods.
Factor income is included in measurement of National Income.
Transfer income refers to the income which is received without rendering services or producing
goods.
Transfer income is not included in measurement of national income.

5. The concept of Domestic product and National product:-

The concepts of Domestic and National product are related with normal resident and domestic
territory.
Domestic product / income focus on where good is produced or income is generated. It must be
produced or generated within Domestic Territory. No matter who has produced?
National product / income focus on who is producing the good or generating the income. It must be
produced or generated by a Normal Resident. No matter where is produced?

How to convert Domestic and National into each other:-

For this we have to find out the difference of both of them and it is “Factor income received from
abroad” and “Factor income paid to abroad”.
The difference of Factor income received from abroad and Factor income paid to abroad is NFIA
[Net Factor Income from Abroad]
NFIA = Factor income received from abroad - Factor income paid to abroad
National = Domestic + NFI from Abroad from abroad
Domestic = National - NFI from Abroad from abroad
 6.The concept of Gross and Net product:-
This concept is related with Gross and Net Investment.
Gross Investment includes expenditure on new capital assets [addition to capital stock] as well as
on old capital assets [replacement cost]. Expenditure on old capital assets can be called
‘Depreciation’.
Net Investment includes only addition to capital stock or expenditure on capital assets.
The difference of Gross and Net investment is Depreciation.
Depreciation refers to loss in value of a capital asset due to normal wear and tear and foreseen
obsolescence in production process.
How to convert Gross and Net into each other:-
Gross = Net + Depreciation
Net = Gross – depreciation

Important:-
Depreciation Capital loss
It includes normal wear and tear and It includes unexpected obsolescence.
expected obsolescence
Ex. Loss due to Competition, change in Ex. Loss due to Natural calamities.
demand pattern, change in technology

7.The concepts of Market Price and Factor Cost:-

The concept of Market Price and Factor Cost are generated because of Government policies of
taxation and subsidies.
Factor cost is the cost at which a commodity is produced by a firm. It does not include tax and
subsidy.
Market price refers to the price at which commodity is sold in market. It includes tax and subsidy.
[Taxes which are imposed on goods and services is called indirect tax.]
Difference of MP and FC is NIT [Net Indirect Tax]
NIT = Indirect Tax – Subsidy
How to convert Factor Cost and Market Price into each other:-
Market Price = Factor Cost + NIT
Factor Cost = Market price - NIT
8.Stock variables and Flow variables:-
Stock variable refers to value of any variable which is measured ‘at a point of time’.
Flow variable refers to the value of any variable which is measured in ‘duration of time’ or ‘in
between two points of time’.
S. no. Stock Flow
1. measured ‘at a point of time’ measured in ‘duration of time’
2. Wealth Income
Capital GDP
Population Change in population
Supply of money Change in supply of money
Foreign debt

AGGREGATES OF NATIONAL INCOME

Main Aggregates of National Income are: -
1. Gross Domestic Product at Market Price
2. Gross National Product at Market Price
3. Net National Product at Market Price
4. Net Domestic Product at Market Price
5. Net Domestic Product at Factor Cost [Domestic Income]
6. Net National Product at Factor Cost [National Income]
7. Gross Domestic Product at Factor Cost
8. Gross National Product at Factor Cost
These concepts can be converted on each other by using following:-
 Depreciation:- it is used to convert Gross and Net product on each other. By subtracting
depreciation from gross product we can find Net product. By adding depreciation in net product we
can find gross product.
Gross Product = Net Product + Depreciation
Net Product = Gross Product - Depreciation
 NFIA:- it is used to convert Domestic product and National product on each other. When we add
NFIA in Domestic product then it converts into National product and when NFIA is subtracted from
National product then it converts into Domestic Product.
National Product = Domestic Product + NFIA
Domestic Product = National Product - NFIA
 NIT:- it is used to convert Market Price and Factor Cost into each other. When NIT is added to
Factor Cost then it converts into Market Price and when NIT is subtracted from Market Price then it
converts into Factor Cost.
Market Price = Factor Cost +NIT
Factor Cost = Market Price – NIT

Definitions:- for Definitions following components must be included

 Time Period:- a Financial year or a Year [common for all definition]
 Resident:- for definition of domestic- all resident included
For national- only normal resident included
 Territory:- for definition of domestic- only domestic territory included and for national – domestic
territory and all over the world
 MP or FC:- for market price definition - value of all final goods and services and for Factor cost
definition – sum of factor income earned or generated.
 Depreciation:- for the definition of gross – depreciation included
and for definition of net – depreciation is not included

1. Gross Domestic Product at Market Price:- it refers to the sum of the value of all the final goods and
services which are produced within domestic territory by all the residents in a financial year
including depreciation.
GDPMP = Gross value of output – intermediate cost [production method]
Or
GDPMP = C +I +G + (X-M) [expenditure method]
2. Gross National Product at Market Price:- it refers to the sum of the value of all the final goods and
services which are produced within domestic territory and outside of domestic territory by normal
residents only in a financial year including depreciation.
GNPMP = GDPMP + NFIA
[here above GDPMP is different from GNPMP on the basis of domestic and national. So by using NFIA
both can be balanced.
3. Net National Product at Market Price: - it refers to the sum of the value of all the final goods and
services which are produced within domestic territory and outside of domestic territory by normal
residents only in a financial year excluding depreciation.
NNPMP = GNPMP – Depreciation
[both are different on the basis of gross and net. So by utilizing depreciation both are balanced.]
4. Net Domestic Product at Market Price: - it refers to the sum of the value of all the final goods and
services which are produced within domestic territory by all residents in a financial year excluding
depreciation.
NDPMP = NNPMP – NFIA
5. Net Domestic Product at Factor Cost: - it refers to the sum of the factor income earned or
generated within domestic territory by all residents in a financial year excluding depreciation. It is
also called ‘Domestic Income’.
NDPFC = NDPMP – NIT
[both are different on the basis of market price and factor cost. So by utilising NIT both are
balanced.]
6. Net National Product at Factor Cost: - it refers to the sum of the factor income earned or generated
within domestic territory and outside of domestic territory by normal residents only in a financial
year excluding depreciation. It is also called ‘National Income’.
NNPFC = NDPFC + NFIA
7. Gross National Product at Factor Cost: - it refers to the sum of the factor income earned or
generated within domestic territory and outside of domestic territory by normal residents only in a
financial year including depreciation.
GNPFC = NNPFC + Depreciation
8. Gross Domestic Product at Factor Cost: - it refers to the sum of the factor income earned or
generated within domestic territory by all residents in a financial year including depreciation.
GDPFC = GNPFC - NFIA
[the formula varies from aggregate to aggregate. It can be balanced by using NFIA, NIT and
Depreciation.]

MEASUREMENT OF NATIONAL INCOME (PRODUCTION METHOD)

For the measurement of National Income we have 3 methods:
1. Production method (Value added method)
2. Income method (distribution method)
3. Expenditure method (disposal method)
In this article we are going to discussing only Production method of measurement of National
Income.
(Income method and Expenditure method are explained in previous articles.)
Production Method:- this method is also known as “Value added method”.
According to this method for the calculation of National Income and other aggregates first we have
to “Gross Value Added” with in domestic territory. This is equal to GDPMP.
What is Value Addition Process:- at every stage of production price is increased. This increase is
price is known as value added. This can be explained through an example: -
We are taking an example of production of a shirt: -
Step Intermediate Cost Value of Output Value Added
Cotton producer 100 300 200
Thread mill 300 500 300
Fabric mill 500 900 400
Garment factory 900 1500 600
Shopkeeper 1500 1800 300

In this example a cotton producer produces cotton at cost of 100 rupees on raw material and other.
He sales it at price of 300 rupees to a thread mill. In this process cotton producer added 200 rupees.
Similar process is going further in above table.
How do we calculate value added: - for this we can use the below formula: -
Value Added = Value of Output – Intermediate Cost
Value of Output = Sales
[ when entire output is sold out.]
Value of Output = Sales + change in Stock
[ when entire output is not sold out.]

Sales = Domestic Sales + Exports

 Domestic Sales = Sales to Households
+ Sales to Business
+ Sales to Government
Intermediate Cost is the cost which occurred on intermediate goods.
Important: -
 When ‘Sales’ is given then ‘Exports’ are not included separately.
 When ‘Intermediate Cost’ is given then ‘Imports’ are not included separately.
How to calculate National Income through Production method: -when we calculate National income
through Production then first, we find GDPMP then we can calculate National Income or any other
aggregate through GDPMP.

GDPMP = GVAMP = Sales + Change in Stock – intermediate Cost

Or
GDPMP = GVAMP = Value added by Primary Sector
+ Value added by Secondary Sector
+ Value added by Territory Sector
National Income / NNPFC = GDPMP
- Depreciation
+ NFIA
- NIT
Precautions of Production Method: -
 Only the value of Final good is included. Value of intermediate good is not included. It will remove
the problem of ‘Double counting’.
 Imputed value of production for self-consumption is included in National income.
 People who live in their own home, their imputed value of rent are included in National Income.
 Services provided by family members to each other cannot be included in measurement of National
Income.
 Capital gains are not included in National income.
 Illegal activities will not be included in National income.

Income Method: - this method is also known as ‘Distribution method’ or ‘Factor Payment method’.
According to this method national income is calculated by making sum of entire factor income
generated within domestic territory plus NFIA.
Through this method first we get NDPFC (Net Domestic Product at factor cost) and then through
NDPFC, National Income (NNPFC) can be calculated.
How does income method work? For this we have to understand first about “Classification of Factor
Income”.
Classification of Factor Income: - “Factor income is the income which is generated by rendering
factor services”.
Or
“Income generated because of producing any good or service”.
Factor income can be classified into 3 parts: -
1. Compensation of Employees: - it refers to income received by a labour when he renders his
services to any other.
Compensation of Employees is the sum of followings:
 Wages or Salaries
 Allowances [ like house rent allowance, dearness allowance, travelling allowance etc.]
 Payments in kinds [ free education to children of employee, free transportation, rent free
house etc.]
 Bonus to employees
 Social Security Contribution by Employer
 [ remember if compensation of employees is given in numerical then any one of above is not
included separately.]
2. Operating Surplus: - it refers to the income which is generated due to property and
entrepreneurship.
It has 4 components:
 Rent [ it is the income earned by land due to contribution in process of
production.]
 Interest [ it is the income received by capital due to contribution in process of
production.]
 Royalty
 Profit [ it is the income received through entrepreneurship.]
Profit has 3 components: -
→Dividends [part of profit which is distributed among workers]
→Corporation Tax [part of profit which is paid to govt. in the form of Tax]
→Undistributed Profit [corporate saving, which is kept by corporate for future expansion]
[ remember that if Operating Surplus is given then rent, profit, interest, royalty will be including
separately]
[ similarly if profit is given then Dividend, undistributed profit, corporation tax will not be included
separately.]
3. Mixed Income: - it refers to the income of self-employed people.
A self-employed person invests his capital, uses his own land / building, works as a labour /
manager, and bears all the risk involve in production process. So he gains anything that includes
some part of salary /wage, rent, profit, interest. So that it is called mixed income.

The sum of above 3 is Domestic Income or NDPFC.

NDPFC = Compensation of Employees
+Operating Surplus
+Mixed Income
Now after this when NFIA is added in NDPFC then it converts into National Income [NNPFC].
NNPFC = NDPFC + NFIA
Precautions of Income method: -
 Transfer income is not included in National Income.
 Income earned by selling second hand goods is not included.
 Income earned by selling Shares, Bonds is not included.
 Capital Gain is not included in National Income.
 Income Tax is not included separately because it is the part of income.
 When Operating Surplus is given then profit, rent, royalty, interest are not included separately.
 When compensation of employees is given then wages, bonus, SSC by employer are not included.

Expenditure method: - According to expenditure method, when we make sum total of entire final
expenditure with in domestic territory then we find GDPMP and through this we can calculate
National Income (NNPFC).
How does expenditure method work? For this we have to understand first about “Classification of
Final Expenditure”.

Classification of Final Expenditure: - expenditure occurred on final goods is called Final Expenditure.
Final expenditure can be classified in 4 categories: -
 Private Final Consumption Expenditure [PFCE]: - it refers to the consumption expenditure occurred
on final goods and services by consumers. Like expenditure on food items, furniture, electronic
equipment etc. by households.
 Government Final Consumption Expenditure [GFCE]:-it refers to the consumption expenditure
occurred on final goods and services by government. Like stationary for government offices, grains
purchased for military etc.
 Gross Domestic Capital Formation [GDCF]:- it refers to the investment made with in domestic
territory. It can be classified into 2 parts
a. Inventory Investment
b. Gross Domestic Fixed Capital Formation [GDFCF]
i. Depreciation
ii. Net Domestic Fixed Capital Formation [NDFCF]
→ Investment made by Business sector [ machinery, plant etc.]
→ Investment made by government sector [ Road, hospital, school buildings, power
houses, etc.]
→ Investment made by households on construction of residential houses.
 Net Exports [ X-M]:-it refers to the difference between exports and imports. Here always the
difference of export and import is taken.
Important: - exports are the part of Domestic product because goods which are exported, produce
with in domestic territory.
How to calculate National Income: - according to expenditure method when we make sum total of
final expenditure then we find GDPMP.
GDPMP = PFCE
+GFCE
+GDCF
+Net Exports
Now after calculating GDPMP it can be converted into any other aggregate. For calculating National
Income following process will be adopted: -
NNPFC = GDPMP
- Depreciation
+ NFIA
- NIT

Precautions of Expenditure method: - main precautions of this method are following: -

 Only the expenditure on Final goods is included. Expenditure on intermediate goods is not included.
 Expenditure on second hand goods is not included.
 Expenditure on shares, bonds is not included.
 Expenditure on Transfer payments is not included.

NOMINAL AND REAL GDP

Concepts of Nominal and Real GDP are used to recognise changes in price level.
Nominal GDP: -it is also known as “GDP at current prices”. To calculate Nominal GDP current year’s
Quantity of final goods and services multiplies with Current Prices of corresponding goods and
services and then sum total of all. Through that GDP we find is called Nominal GDP.
Calculation of GDP for 2018 [Nominal GDP]
Item Quantity Price P.Q = GDP
A 100 10 1000
B 150 50 7500
C 50 100 5000
D 200 10 2000
E 500 20 10000
Total 25500
 Calculation of GDP for 2019 [Nominal GDP]
Item Quantity Price P.Q = GDP
A 110 15 1650
B 150 60 9000
C 60 110 6600
D 210 15 3150
E 520 25 13000
Total 33400

The above calculations are “Nominal GDP”.

Because current prices of goods are multiplied by their current quantity.

Real GDP:- it is also known as “GDP at Constant Prices”. When Current year’s Quantity is multiplied
by Base year’s Price and then GDP is calculated. Then it is called “Real GDP”.
Now for the calculation of Real GDP we will use Quantity of 2019 and Price of 2018.

Calculation of GDP for 2019 [Real GDP]

Item Quantity Price P.Q = GDP
A 110 10 1100
B 150 50 7500
C 60 100 6000
D 210 10 2100
E 520 20 10400
Total 27100

In the above schedule quantity of 2019 and price of 2018 are used. So that it is showing real change
in GDP.
Nominal GDP for 2019 = 33400
Real GDP for 2019 = 27100
When we calculate real GDP that time, we keep constant the price of goods. So that actual change
in GDP can be calculated.
Why Real GDP is used: - the concept of Real GDP is useful to recognise the change in price level.
GDP can increase because of 2 causes: -
First due to change in “Quantity”
Second due to change in “Price”
Real GDP tells the actual change in Quantity. [ because base year’s prices are used.]
Only actual change in price can tell the actual growth of country.
GDP Deflator: - it is the ratio of Real and Nominal GDP.
The concept of real GDP Deflator is use to convert Real GDP and Nominal GDP into each other. It
can be used as a measure of inflation rate.
Nominal GDP
GDP Deflator =----------------------------------------- X 100
Real GDP
Or
GDP at Current Prices
GDP Deflator =---------------------------------------------------- X 100
GDP at Constant Prices
According to above schedule: -
33400
GDP Deflator = -------------------------------- X 100
 27100
=123.30
Ex: - if Nominal GDP is 600 and price index is 120. Calculate Real GDP.
[ CBSE 2015]
Nominal GDP
Real GDP =------------------------------------------------ X 100
GDP Deflator / Price index

600
Real GDP = -------------------------------- X 100
120
Real GDP = 500

Difference between Nominal and Real GDP: -

Nominal GDP Real GDP
It uses prices of Current year It uses prices of Base year

It is known as GDP at current year’s It is known as GDP at base year’s

price price
It is not showing actual growth It is showing actual growth

GDP and WELFARE [ EFFECT OF EXTERNALITIES]

Do you ever think about how welfare is measured? How can we say welfare of society is increasing
or decreasing?
Normally Government emphasizes very much on GDP growth. So it is assumed that GDP is a good
measure of growth. Real GDP may be a measure of welfare but Nominal GDP cannot be considered
as index of welfare because just because of increase in prices nominal GDP can fluctuate.
With increases in Real GDP, availability of goods increases. People can consume more goods. Higher
GDP growth brings higher availability of goods. So welfare would increase.

But it has certain limitations. These are followings: -

1. Population: - if population growth rate is more than growth rate of GDP then all the benefits of
increasing GDP would be absorbed by increasing population. In this situation welfare would not
increase.
So welfare will increase only when population growth rate is constant or reducing.
2. Composition of Goods: - composition of goods means what type of goods are producing in
economy. It may be consumer goods or producer goods, luxury goods or war items etc.
In an economy if luxury goods [like expensive jewellery, expensive watches, luxury cars etc.] are
produced more then it will not increase welfare of society because these cannot be consumed by
most of the people. Similarly if war items [like guns, fighter planes etc.] are produced more than
welfare will not increase directly.
Welfare will increase only when consumer goods or producers goods are produced more because it
will increase availability of goods in economy. People can consume more good and economy can
produce more goods.
3. Working conditions: -working conditions includes environment of working place, work pressure,
working hours etc.
If working conditions are not good [like more working hours, very high targets etc.] then welfare
not increase.
Welfare will increase only when working conditions improves.
4. Distribution of Income: - distribution of income is also a very important aspect which can affect
welfare. If in an economy distribution of income is not equal then with increase in GDP, welfare will
 not increase. Because most of the part of increased GDP is captured by rich people or business
families. It will not put any effect on middle class people or poor.
Welfare will increase only when distribution of income becomes equal with increase in GDP.
5. Non-monetary Transactions: - non-monetary transactions refers to the transactions which are done
without money. It means goods are used to buy or sale goods.
In an economy where non-monetary transactions are more, GDP of that country is underestimated
because these transactions cannot be recorded.
6. Externalities: - externalities refers to “all those external factors which are generated because of an
economic activity without any payment”.
There are 2 types of externalities:
a) Positive Externalities:- it refers to all those positive external effects which are generated due
to an economic activities.
Like:-upgradation of environment, development of park in a residential area, establishment
of a school in a remote area etc.
b) Negative Externalities:- it refers to all those negative external effects which are generated
due to an economic activities.
Like:- establishment of a factory near any residential area, environment degradation etc.
Positive externalities increase the welfare of people and negative externalities reduces the
welfare of people.
 QUESTION SHEET
CHAPTER- NATIONAL INCOME
Topic:-

 Basic concepts related to NI

 Aggregates of NI
 Methods of measurement of NI
 NI and welfare

Basic concepts related to NI:-

1. What are the main sectors of Economy? Name all of them.
2. What is CIRCULAR FLOW of income? Explain with diagram in TWO SECTOR ECONOMY.
3. What are the main significances of circular flow of income?
4. What is the difference between NORMAL RESIDENTSHIP and CITIZENSHIP?
5. What do you mean by DOMESTIC TERRITORY?
6. What is NFIA? Explain how it is used to convert DOMESTIC INCOME into NATIONAL INCOME?
7. What is INVESTMENT? What are the main components of INVESTMEMT?
8. What is NIT? How it is used to convert MP into FC?
9. What is DEPRECIATION? How it is used to convert GROSS INCOME into NET INCOME?
10. What are the differences between DEPRECIATION and CAPITAL LOSS?
11. What is DEPRECIATION RESERVE FUND?
12. Explain the concept of REPLACEMENT COST.
13. Distinguish between FINAL and INTERMEDIATE GOOD.
14. Distinguish between CONSUMER and PRODUCER GOOD.
15. All producer goods are not considered capital goods? Why?
16. All machine are not capital goods. Explain.
17. What are FACTOR INCOME and TRANSFER INCOME?
18. Who is NORMAL RESIDENT of a country?
19. Distinguish between STOCK and FLOW.

Aggregates of NI:-
20. What do you mean by GDPmp?
21. What do you mean by GDPfc?
22. What do you mean by NDPmp?
23. What do you mean by NDPfc?
24. What do you mean by NNPmp?
25. What do you mean by NNPfc?
26. What do you mean by GNPmp?
27. What do you mean by GNPfc?

Methods of Measurement of NI:-

28. How NI is calculated through VALUE ADDED method? Explain.
29. How NI is calculated through INCOME METHOD? Explain.
30. Explain the EXPENDITURE METHOD of measurement of NI.
31. What is REAL GDP? How it is calculated?
32. What is NOMINAL GDP?
33. What is GDP DEFLATOR?
34. Why REAL GDP is a better measure of welfare? Explain through an example.
35. What are the precautions of VALUE-ADDED METHOD?
36. What are the main precautions of INCOME METHOD?
37. What are the main precautions of EXPENDITURE METHOD?
 Welfare and NI:-
38. What do you mean by EXTERNALITIES?
39. How does externality affect welfare?
40. Why does GDP not consider a good measure of Welfare? Explain.