he Introductor ry Macroece Be Liab Rea ae * Three Methods of National Income: (1) Value Added Method; (2) Income Method; (3) Expenditure * Value Added Method measures the market value of all final goods and services, produced by each, enterprise, within the domestic territory of the country. Prodi (a) Value of Output refers to the market value of goods and services produced during a period of on, (b) Intermediate Consumption refers to the value of non-factor inputs, which are used in the ae process. nolo (©) Double Counting refers to the repeated inclusion of the same products at different stages of prod (d) Two Ways to Avoid Double Counting: i) Take the value of final output; (ii) Take value added of each, * Income Method measures national income in terms of payment made to the primary factors of product a The main components of factor incomes are: 2 {a) Compensation of Employees refers to the amount paid to the employees for rendering productive sence. (b) Rent isa factor income earned by the owners for lending their services such as land, building etc, Royaltyis the income earned by a person/institution for lending intellectual property rights andrighs of sub soil assets. Interest refers to the amount received for lending funds to a production unit. Profit is the reward to the entrepreneur for his contribution to the production of goods and services Mixed Income refers to the income generated by own account workers and unincorporated enterprises, ( @d) ) * Expenditure Method measures national income as the aggregate of all the final expenditure incunedin an economy, during a year. The main components of final expenditures are: (a) Private Final Consumption Expenditure refers to expenditure on the purchase of goods and services by households and private non-profit institutions serving households. (b) Government Final Consumption Expenditure is the expenditure incurred by general government on various administrative services. (0) Gross Domestic Capital Formation refers to the addition to the capita stock of the economy. (d)_ Net Exports the difference between exports and imports of a country, during the period of one yea + National Income at Current Price (or Nominal National Income) is the money value of final goods an services produced by normal residents of a country ina year, measured at the prices of the current yeat it Price (or Real National Income) is the money value of final goods and service ed at base year price. it shows the true ictur ‘output onl * National Income at Constan' produced by normal residents ofa country ‘of economic growth of a country as any in ry ina year, measur crease in real national income is due to increase in National Income at Current Price and instant Price = National Income at Constant A Nominal GDP refers to production of goods and services valued at current prices. betterthan Nominal? © Real GDP refers to production of goods and services valued at constant prices. Itis as it truly reflects the growth of an economy. Real cpp = Nominal GDP. 199 Price Index * GDP Deflator measures the average level of prices ofall the goods and National GDP GDP Deflator = "= x. 100 Real GDP services that make up GDPease oF National Income Per) ’ 4 wt Gor cannot be taken as a satisfactory measure of welfare of people due to following Ca eal Ll! + Product Method aded + Inventory Method . (7 ) + Net Output Method + Industrial Origin Method + Commodity Service Method . oo + Distributive Share Method rome Method + Factor Payment Method ‘on Employees Emoluments of Employees cones = + Profit Tax Corporate + Business Tax + Corporation Tax Distributed Profits Undistributed Profits petained Earnings c + Savings of Private Sector + Savings of Private Corporate Sector + Corporate Savings + Reserves and Surplus Gperating Surplus Income from Property and Entrepreneurship Med income + Income of Self-Employed + Income of Own-account Workers Expenditure Method Income Disposal Method Government Final Consumption Government Expenditure on Goods and Services Expenditure PrateFinal Consumption Expenditure _| Personal Consumption Expenditure ‘Gross Domestic Capital Formation + Gross Capital Formation + Gross Investment ‘ventory investment Change in Stock NéFactr Income from Abroad Net Earned income from Abroad onal income at Current Price Nominal National Income atonal income at Constant Price Real National Income ee Price Index(eZ Introductor Y Macro Kin, l] GUIDELINES TO NCERT QUESTIONS 1, Why should the aggregate final expenditure of an economy be equal to the aggregate f, Explain. actor Pan, Hint: Ina simplified economy, itis assumed that there are no savings, taxes, exports and in ; production process, four factors of production (land, labour, capital and enterprise) nee "ah, form of rent, wages, interest and profit for their factor services. The sum total of these incoy on "5, income received during a year. The entire factor income is spent by the factors on purchace oat services. The sum of these purchases isthe aggregate inal expenditure during the year so,in oH that aggregate final expenditure in ayearis equal to aggregate factor payments, Stim 2. The value ofthe nominal GNP of an economy was ¥ 2,500 crores in a particular year. The value of that country during the same year, evaluated at the prices of some base year, was ® 3,000 ces cane the value of the GNP deflator ofthe year in percentage terms. Has the price level risen betwees aut year and the year under consideration? ebay Nominal GNP 2,500 Hint: GNP Deflator = Nominal GNP iq _ r= RealGnp —* '0° = "399 GNP deflator of 0.83 or 83% indicates thatthe price level has reduced b y 17% between th year under consideration. oi a x 100 = 083 3. Write down some of the limitations of using GDP as an index of welfare of a country. Hint: Discuss “GDP and Welfare’. ‘4. What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm. Hint: Planned Inventory refers to desired inventory level maintained by producers to take advantage of potential demand for their product. On the other hand, unplanned inventory refers to undesired inventory ievel which arises because of unexpected fall in sales. Value Added of a Firm = Sales (Net of Intermediate Consumption) + Change in Inventories. 5. Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP. Hint: Three identities of calculating GDP of a country are: () Product Method or Value Added Method: This method measures National Income in terms of valu addition by each producing enterprise in the economy. GDP by Product Method = Value of Output - Intermediate Consumption (i) Income Method: This method measures National Income in terms of factor payments to the owners 0 factors of production. GOP by Income Method = Compensation of Employees + Operating Surplus + Mixed Income + Depreciation + Net Indirect Taxes (iil) Expenditure Method: This method measures National Income as sum total of final expenditures by households, business firms, government and foreigners. GDP by Expenditure Method = Private Final Consumption Expenditure + Government Final a 9s incurs Expenditure + Gross Domestic Capital Formation + Net Exports Each method gives the same value of GDP because: Production means addition of value to the inputs through com| So, value added is nothing but contribution made by different factors it result, value added is distributed as factor incomes among the owners of wages, interest and profit. Further, Income generated by factors of produ and investment expenditure on final foods and services produced by all t -— bined efforts of various factors of produ in the production process. factors of production 35" iction Is spent on he firms in the econor™*Jational Income peasant 8 fas ons in which following equations wil hold tre } enon the ae is equal to Value Added ao vale come at Current Price = National income at Constant Price al a” erent capital formation = Gross domestic fixed capital formation s (9) ng Surplus = Rent + Royalty + Profit wi pers ered consumption is zero, 0 inthe base year = Price in the current year, ock (or inventory Investment) Is zero, i ange in ste oe the form of interest. # when there i570 income in wing items will be included in National Income? Give reasons for your answer. electricity bill by a factory. : I the fll awe fi) Increase (i) Bus fare paid by a passenger. {v) Gains from sale ofshares. i Rent eared by Reliance from is building in USA. “4 Gifts from Abroad. (vi) Retained earnings of resident companies from abroad. (ix) Expenses of foreign visitors in India. (9) Gifts toa trust from Japan. (x) Purchase of books by a student. (x) Bonus to employees. (ai) Interest paid by an individual on loan taken. (xiv) Expenditure on repair of fixed capital asset. fav) Free medical facilities by the employer. (v) Financial help to flood victims. (avi) Payment of telephone bill. (vill) Employers’ contribution to Provident Fund. (xix) Rent received by an Indian from Building rented to Chinese Embassy. (1x) Free meals to employees. (ni) Free meals to beggars, (ut) Wages received by an Indian working in British Embassy. (wii) Medical facilities to government employees. (atv) Purchase of vegetables by a restaurant. boy) Government Expenditure on street light. (us) Purchase of a second hand machine from a domestic firm. (cx) Interest received on loans taken by government. avi) Leave travel allowance paid to employees by a company. Direct purchases made by resident households. - ps received on debentures by debenture-holders. itp, thly allowance received by a college student from home. ia Penditure incurred by a firm on sponsoring a Reality show. Expenditure incurred by normal residents on foreign travel.a Introductory Mactogg Cai noni, (bocxiv) Prize won in a lottery. (voxv) Expenditure by government in providing free education. (oxvi) Money received by people from their family members who are permanently Settled abro, ad (i) No, it isa part of intermediate consumption expenditure. (il) Yes, as itis a part of profits, (i No, as itis assumed that such goods are consumed, the moment they are purchased, Ans. iv) Yes, itis a part of private final consumption expenditure. (W) No, as itis a capital gain. (vi) Yes, itis a factor income from abroad. (vii) No, itis a transfer income. (vill) Yes, itis a factor income from abroad. (ix) Yes, itis a part of Net Exports. (%) No, itisa current transfer from rest of the world. (xi) Yes, itis a part of private final consumption expenditure. (xii) Yes, itis a part of COE, (xl) No, as itis a non-factor payment since the loan is not used for production but for consumption, (xiv) No, itis a part of intermediate consumption expenditure. (ov) Yes, it isa part of COE. (xvi) No, itis a transfer payment. (xvii) Yes, it is a part of private final consumption expenditure. (xvii) Yes, itis a part of COE. (xix) Yes, It is a factor income from abroad. box) Yes, it is a part of COE. (xi) No, itis a transfer payment. (xii) Yes, itis a factor income from abroad. (oxi) Yes, its a part of Government final consumption expenditure. (xxiv) No, it is a part of intermediate consumption expenditure. (box) Yes, itis a part of Government final consumption expenditure. (xxvi)_No, as it has already been included in the ‘year of its original purchase. (xvi) No, as such interest is treated as a transfer income because government generally borrows mone) to meet its consumption expenditure and no productive activity is linked with such loan. owill) Yes, as it sa part of COE. (oxxix)_ Yes, it is a part of private final consumption expenditure. ) Yes, Interest received is a factor income because debenture is a sort of loan taken by a production unt (Go0xi) No, it isa transfer income. (cori) No, it is a part of intermediate consumption expenditure, (oxi) Yes, itis a part of private final consumption expenditure. (oxxiv) No, as itis a windfall gain and there is no productive activity involved init. (ocx) Yes, it is a part of Government final consumption expenditure. (pocxvi) No, it isa transfer income, Q.3. Mention any three items that are excluded from GNP. ‘Ans. Three items excluded from GNP are: (i) Purely financial transactions, like sale and purchase of securities, bonds or transfer payments. (ii) Transfer of second-hand goods. (iil) Non-market transactions, like services of housewife, kitchen gardening, leisure time activitiesyrement of National Income eo a country’s’net domestic product at market price’? Explain, following ® peter i foase Delhi 8 pet E Delhi Comptt. 2008} “ a jrect taxes indirec aN s @ vec from abroad q@ net in ion of fixed capital. w oe Veirect taxes will be included because market price = Factor cost + Net indirect taxes. ne om exports (a component of expenditure method) will be included as it includes goods and Me Yes et Or ced within the domestic territory of a country. : ar be included as NDP yp is confined to domestic product only. i : vil fot be included because Net Product = Gross Product - Consumption of Fixed Capital Nat the following items is part of compensation of employees? Give reasons for your answer. as wie jinment allowance to an employee to entertain business guests, () eee contribution to gratuity fund ofthe employees. Fee's contribution to provident fund, » snecot an of insurance claim by LIC to the injured worker. . ty) Medical expenses of afi ta) Retfree accommodation t employees si) Free Ration to Defence Personnel {@) Travelling expenses paid to the salesman by the employer. fy tsnota part of compensation of employees (COE) sits pad forthe bene of business and not as the employee. In fact, itis intermediate consumption expenditure. 6) ttisapartof compensation of employees as such contribution forthe benefit of employees andis paid for his productive services. a) isnot part of compensation of employees as such contribution is made by the employee from Cot only. {a)Itisnota part of compensation of employees as LICis not the employer of injured worker. (v)itisnota part of compensation of employees as its paid to old people due to their old age and not because of any productive contribution, Moreover, itis paid by agency other than employer. In fact, itisa transfer payment. (i) itisa part of compensation of employees as such expenditure is incurred by the firm in return of 5 of a firm on treatment of employee's family. productive services of employee. (vi) Itisapart of compensation of employees because ts the expenditure of the employer for the benefit ofthe employees. {wil Itisa part of compensation of employees as it is the expenditure of the employer (government) for the benefit of the employees. {) Itis nota part of compensation of employees as it is paid for the benefit of business and not for the employee. in fact, itis intermediate consumption expenditure. Us, Howare the following treated while estimating private final consumption expenditure? Give reasons for ‘Your answer, (CBSE, All India 2002} {) Exports. i. . Pest Purchases made abroad by resident households. nal consumption expenditure of non-profit institutions serving households. Change in stocks, j ——ad Cri Introdu tory Mactoee Ans. (i) Exports will not be included in private final consumption expendity consumption expenditure by residents. Te 5 exports qo tflect (i) It will be included in private final consumption expenditure as such purch, urchases, are m, consumption. (ii) It will be included in private final consumption expenditure as non-profit Profi households are a component of household sector, (iv) Itwillnot be included in private inal consumption expenditure as tis a component of tof capita institutions formation, Q.7. Ananya makes the following transactions. Discuss the impact of each transaction on th 'e National Inco me of the country. (i) She sells her car for ® 80,000. (ii) She pays 5,000 as commission to the broker on sale of car. (iii). She imports an Apple i-pad for % 30,000 (iv) She buys a new car for ® 9,00,000. (v) She purchases an antique painting for & 4,50,000. (vi) She purchased shares of Reliance Industries for ® 12,000. (vii) She pays interest of % 20,000 on loan taken from ICICI to buy the new car, () No impact as transactions of second hand goods are not part of National Income. Ans. (ii) Yes, this amount will be included in National as it is the income of broker for his productive serv ices, (iii) National Income will be less by this amount of import. (iv) Yes, it will be included as it is a part of private final consumption expenditure. (v) No impacts it is not a transaction involving goods produced in the current year. (vi) No impact as it involves a change of title only and does not contribute to any productive activity, (vil) Noimpactasitisa non-factor payment because the loan is not used for production butfor consumption Q.8. Manish buysa second hand car from a car| broker for® 3,25,000. The broker receives 16,500.as commission for his services from Manish. How will tis transaction affect the national income of the country? Give reason for your answer. ‘Ans. The commission of @ 16,500 received by broker will be added in the national income of the country asitis the income of broker for his productive services to Manish. The amount paid for purchase of car ‘will not be included as it is the payment for purchase of an already existing object and there is no addition to current flow of goods and services. 9. Classify the following into gross fixed capital formation and change in stocks. () Expenditure on construction of Metro by DMRC. (ii) Rise in number of cattle in a poultry farm. (ili) New machines purchased by a sugar manufacturing company. (iv) Construction of a new house by a consumer. (v) Decrease in the level of stock of wheat in a year. ‘Ans. Items (i), (il) and (iv) are part of gross fixed capital formation as they ‘add to the capital stock: of theect Items (ii) and (v) are part of change in stock. iy Q. 10, Thevegetables grownin kitchen gardening are inal goods, yet their valueis not consideredinestin’ national income. Why? in % a a is fiona! Ans. Such transactions (termed as Non-Market Transactions) are not considered in estimating 20 ye because it i dificult to ascertain ther market value. Moreover, such transactions a "Ot purpose of earning income. ‘ono eterement of National Income sul 1g transactions affect the national income? se a ery ofold com s aac eaaaal ri een ational el a - a ee a © anew carby a fi ay Pal us to employees ent of DOM! : eT wwf orld age pension seca] 5000/3) rouse will ot be included asit has already been included in the year of National income will increase by = % 3,75,000 | 0 ssestot igi 5 onto broker wilbeincluded asitsthe income forhis productive services, 20,000 a amis _ i) on gprs wilnot be incudedsstis financial claim and doesnot contribute ze ia Pi yproductve atv a Pan national debt will not be included asthe interests paid on loans taken =a consumption PUrPOSES. “alry to Doctor of private hospital’ will be included as itis a part of compensation 25,000 uw __toemployees. nee Tq Parchaseofanew car will be includedas itis a part of gross domestic capital formation. 3,25,000 a Payment of Bonus to employees’ will be included as it is a part of compensation to 5,000 | | employees. | Ta aymentof old age pension’ will not be included as itis apart of transfer payment. a | 012. Howwillyou treat the following in the calculation of Gross Domestic Product of India? Give reasons for youranswer. (CBSE, All India Compt. 2012} (0. Profits earned by a branch of foreign bank in India. {i) Salaries of indian employees working in embassy of Japan in India. (il) Salary of residents of Japan working in Indian embassy in Japan. ‘as, {) Yes,itwill beincludedin the Gross Domestic Product of India as profits are earned within the domestic territory of india, (i) No, itwill not be included in the Gross Domestic Product of India as the embassy of Japan isnot a part ofthe domestic territory of India, i) Yes it will be included in the Gross Domestic Product of India as the Indian Embassy is a part of the domestic territory of india, Q13. Classi ee! following expenditures as intermediate consumption expenditure and final consumption (0 Expenditure on research and development by Tata. i) insurance (iy Tragahé® pemium paid by a firm to an insurance company. surance premium paid by households to an insurance company.“a Bei) Introductory Macy, : PMCs (iv) Expenditure on repairs and maintenance of plant and machinery. (v) Expenditure incurred by a firm on purchase of equipments, (vi) Advertising expenditure incurred by Airtel on promotion of its products, (vii) Business expenses of the employees on tour and entertainment. Ans. Intermediate Consumption Expenditure: (), (i), (iv), (wi), (vil Final Consumption Expenditure q i), Q.14, Increase in per capita real income means increase in per capita availability of goods a it necessarily mean rise in the welfare of the people of the country? Give any one ar a A Services Dyes of your answer and explain the same. (CBSE sot pon ‘Ans. increase in per capita avallability of goods and services does raise the standard of ving a Fee welfare. But it may not necessarily always be so. For example, manufacturing etc. does rane on Menty the same time also leads to water and air pollution which reduces welfare of the people Such ret tat in welfare may outweigh the increase in welfare and thus lead to overall reduction inwelfae “ut Q.15. Giving reason explain how should the following be treated in estimating gross domestic market price? ane () Fees to a mechanic paid by a firm. ere? (i) Interest paid by an individual on a car loan taken from a bank. (ii) Expenditure on purchasing a car for use by a firm. (i) Itisnot included because itis an intermediate cost of the firm. (ii) Itis not included because the loan is taken to meet consumption expenditure and therefore interest paid on such a loans not a factor payment. (ii) Itis included because itis an invest ment expenditure, a final expenditure. Ans. Q.16. What are non-monetary exchanges? Give an example. Explain their impact on use of gross domestic product as an index of welfare of the people. (CBSE, Foreign 2014) ‘Ans. Non-monetary exchanges refer to the goods and services produced but not exchanged through money, like the domestic services rendered by the members of a family to each other. The value of these services is many times difficult to estimate and so it escapes national income estimation. These exchanges however have positive effect on the welfare of the people. Q.17. Exports are not a part of ‘Net Factor Income from abroad’ Elaborate the reason behind the given {CBSE, 2022 (58/3/1) Tern-2} statement. Ans. Net Factor Income from Abroad is the difference between factor incomes paid to the rest of the world. Whereas, Exports refers to sale of goods and services by the country to are not a part of net factor income from abroad. factor incomes earned from rest of the world and the rest of the world. So, exports @.18. Using suitable example, distinguish between positive externalities and negative externalities {CBSE, 2022 (58/1, /1) Term-2! ‘Ans. Positive externalities refer to benefits caused by one entity to another, without being paid frit Wheres negative externalities refer to the harms caused by one entity to another, without being penalised’ er For example: A new park developed by the municipal corporation raises the welfare of the locality ss example of positive externalities. In case, the same park is used by people for anti-social activities" leads to insecurity among the residents, is an example of negative externalities. ‘ : impact on 9 Q.19. Government incurs expenditure to popularise yoga among the masses. Analyse its ie pein2016 domestic product and welfare of the people. rmtion [Ans. Government expenditure on popularising yoga raises GDP because it s government's final oo raise expenditure. It also raises welfare of the people because yogic exercises improve health an‘ efficiency of the people.sf National Income o measurement © roland diesel cars is rising particularly in big cities, Analyse its impact on gross domestic d welfare. ‘ (CBSE, All India 2016} uct and diesel cars will ead to increase in private consumption expenditure. It will raise ein te Pe product (GOP) ofthe county. However, it wil not lead to an increase inthe welfare of re ue to following reasons: ih peti palution wil increase with rise in sale of petrol and diesel cars, which has bad effects g neand Tes ath. twill reduce the welfare of people. | Ps Rc congestion onthe road will worsen. heady depeted reserves petoland desl wlfurther deplete, cay THe’ -nimaginary economy, GDP at Market Price in a particular fiscal year was & 4,000 crores, an Pe was € 2,500 crores, Net Factor Income paid by the economy to Rest of the World was nation? ms and the value of Net Indirect Taxes is € 450 Crores. Estimate the value of consumption of 400 a forthe economy from the given data, {CBSE, Sample Paper 2016) Colas Consumption of Fixed Capital (CFC) - Net factor income to abroad - Net indirect taxes ms. ae 4000-CFC 400-450 2500 = 3,150 CFC rc =%650.Crores. Thefactorincome earned by an economy amounted to 5,000 crores during a year. The economy suffers capital loss of € 300 crores due to an earthquake. The resident producers pay indirect taxes of € 70 ‘ores and they were aso offered subsidies of 30 crores. Calculate NNPyp of the economy. lational Income + Net Indirect Taxes 5,000" + (70 - 30) = % 5,040 Crores. ns. NAP *Factor income earned by an economy = National Income (0.23 Suppose a ban is imposed on consumption of tobacco. Examine its likely effects on: (a) gross domestic product; and (b) welfare. {CBSE, Delhi Comptt. 2017} ‘Ans. (a) Ban on consumption of tobacco will bring down production of tobacco. Since it is counted in GDP, GDP will fall. (b) The ban will improve the health in general. It will thus increase welfare. (024, How does increase in inequalities in distribution of income affect welfare of the society? Explain. {CBSE, Delhi Comptt. 2017} ‘ns Increase in inequalities means that rich become richer and poor become poorer, Since utility of money ishigher among poor and lower among the rich, any increase in inequalities may not lead to increase in welfare, {25 Deine Gross Domestic Product (GDP) Deflator and discuss its importance, (CBSE, Sample Paper 2022-23) ‘mt. GDP Defiator is the ratio of Nominal to Real GDP. It is a tool which is used to eliminate the effect of rice fluctuations in the economy and to determine the real change in physical output of current year, SOP Deflator helps in comparison of growth rate of the economy. 026, y i Se following information of an imaginary country: PU EEL y PU El re 2014-2015Mtrodue toy which year is real GDP. and nominal GDP same and why? (0 Forwhicl s ars, Is there any year { r the given years, y year for which Re, (ii) Calculate Real GDP for fe N Re -15, real GOP and nominal GDP are san the year 2014-15, real Ans. (a) Fort ‘al Gp E SOMPIe Pane, DF 2014 5 Me aS itis the bana Dewy, ”” Year, {b) Calculation of Real GDP: Nominal GOP a eae { GDP Deflator = 140 ee : Fp SP. 100 65 - GDP Deflator The Real GOP declined in the year 2015-2016. It could be due to high rate of jean Q.27. How will you treat the following items in the calculation of ‘Domestic Incom, India? Give reasons for your answer, (0 Profits earned by a branch of Foreign Company in india, (i) Salaries of Indian employees working in Chinese Embassy in India (iii) Retained Earnings of Foreign Companies from India. (iv) Salary of residents of France working in Indian Embassy in France, (v) Profits of Tata Industries from its business in Australia. Ans. (i) ttwill beincluded in the Domestic Income as profits are earned within the domesti However, it will not be included in the national incot Me as itis a part of factor incoy is subtracted from domestic income to get national income. e' and’, (ii) It will not be included in the Domestic Income as territory of India. However, it will be included in th 1 ION oF pg Price, ts ‘ational ot IC tertitory oftngia ME Paid abroad i Chinese Embassy is not a Part of the domestic 'e national income as it is a Part of factor income from abroad, (iii) It will be included in the Domestic Income as retained earnings have accrued wit territory of India. However, it will Not be included in the national income asitis a par tic income to get national income. However, it will not be included in the is subtracted from domestic income t ( Iwill not be included in the Domes territory of india, However, National income as itis a part of factor inco (0 get national income. tic Income as Tata Industries is located out: ithin the domestic rt of factor income me paid abroad. sside the domeste i factor income itwill be included in the national income as itis a part of fa from abroad, 28. How are the following items in cluded in Domestic Income and National Income? }- Profits earned by a branch of State Bank of India in New York. 2. Salary to Indian residents working in Russian Embassy in India. 3. Rent received by an indian tesident from Japanese Embassy in India. 4. Profits earned by a branch of foreign bank in India. 5. Salary paid to the Chinese resident working in Indian Embassy in Japan. 6. Old Age Pension, 7. Profits earned by Microsoft in India. | | |of National Income apoacurerent No. it will not be included in domestic income as State Bank of Indias located outside the domestic territory of India No. it will not be included in domestic income as the Russian Embassy is not a part of the domestic territory of india No, it will not be included in domestic Income as Japanese Embassy is not a part of the domestic territory of the country. Yes twill be included in domestic income as profits are earned within the domestic territory of India | Yes, it will be included in national | Income as it is a part of factor income | from abroad | Yes, it will be included in national | Income as it isa part of factor income from abroad Yes, it will be included in national | income as it is a part of factor income | from abroad. No, it will not be included in nationat income as it is a part of factor income | paid abroad. It is subtracted from domestic income to get national | income. Embassy in Japan. Yes, it will be included in domestic income as the Indian Embassy is a part ofthe domestic territory of India. No, it will not be included in national income as it is a part of factor income paid abroad. It is subtracted from domestic income to get national income. 6 id Age Pension. ‘No, it will not be included in domestic income as it is a transfer income (and not an earned income). No, it will not be included in national income as it is a transfer income. 1. Profits eared by Miosoh in India, Yes, it will be included in domestic income 4s profits are earned within the domestic territory of india. No, it will not be included in national income as it is a part of factor income paid abroad. It is subtracted from domestic income to get national income. 2. Discuss the effect of sale of firecrackers on GDP and welfare of the economy. es. Sale of any goods and services increases the GDP of economy. So, sale of firecrackers will increase the GDP ‘However, increase in GDP does not always mean increase in welfare also. Firecrackers have negative effect On health because of negative externalities as they cause a lot of environmental pollution, The cost of air Palution o society is not paid by either the producers or users. So, sale of firecrackers will reduce welfare: ofthe economy, 030 tg '#$ GDP is expected to expand 7.5% in 2019-20: World Bank® ~ The Economic Times Does tenn senstaternent mean that welfare of people of India increase atthe same rate? Comment with (CBSE, Sample Paper 20201 General tis thi of ‘he prime reasons for the same are: ae ee Considered that an increase in the Gross Domestic Product (GDP) of any economy (india in ‘sures increase in welfare of the people of the country. However, this may’ ‘Intro, uct, 84 ‘or - y Macros £0, distribution and composition of GDP, ransactions in the economy which are not accoun Occurrence off ‘externalities in the economy (both positive and negatives ic) ‘answer can be reframed by changing GDP to National pore re Notes. se National Income ofan economy rose (say, by 7%) during the ae {sn Keuies ; every person of that’ economy? Discuss. 2 1 Gross Domestic Product is a better indicator of economic growth a My, product Doyouagree with the given statement? Support your answer ae er 3 ce (a) Unequal (@) Non-monetary ted for i NGDp * ang ‘like ty, resent y a3. Meri om mentis correct. Real Gross Domestic Product (GDP) is a better ieee sa ie Or of ecg. Per. 2 ‘evel, ven state Ans. Asean inal Gross Domestic Product (GDP) as it is not affected by chan ‘Numerical Example: etal bee Quantity of ea Year (P,) | Current Year eo (in?) (Q,) (in units) 5 | c { 30 20 50 | =P,Q, =5,500 | In the above example, the difference between Real GDP (ZP,Q,) and Nominal GDP gp | 23,000 = % 2,500. 12) is® 5,509 | Thisis only the monetary difference as the quantity sold in the market remains Unchanged and th. | in the value of GDP is merely due to the change in the prices in the economy. variation | | Q.32. Suppose output produced during the year 2019 and 2021 was 500 and 650 units respectively. if mark | price ofthe output produced was € 150 and € 200 per unit, then calculate percentage cen GDP and Nominal GDP, taking year 2019 as Base Year. Ans. Year Units Market Price (2) Lok Aen cecal 2019 500 150 75,000 | 75,000 2021 | 650 200 97,500 | 130000 Change i 75,000 % Change in Real Gpp = —wangeimRealGDP_ | |, __97,500- 75,000 149 _ 39% Base Year GDP 75,000 in Nomi ,000 - 75,000 : %Changein Nominal Gpp = PengeinNominal GDP |, _ 130,000 75,000 19973398 Base Year GDP 75,000 5 A a ers Patt Q 33. Covid vaccine to be free for‘most prioritised’ beneficiaries: Vardhan. 3 Cr Frontline & Health Wor 2 of List. "4 January —The Times of india; 3" J ascii Does the given statement mean that welfare of such beneficiaries will increase along with nc® GDP? Comment, 1 cons symatior Ans. Government expenditure on Covid vaccine will raise GDP because it is Government's Fins Expenditure. tt will also raise welfare of the people because it will increase immunity of Covid, which will improve health and thus, raise efficiency of the people. _asurement of National Income ree M minal Gross National Product (GNP) of an economy was 2,500 crores ina particular ened if MP ofthat county during the same yea, evalated a the price of base year was i ne pn crores: lye of GNP Deflator of the year in percentage terms, Has the price level risen between a cute the ta the year under consideration? (CBSE, 2020 (58/3/1)) pee cece GNP = 2,500 crores and Real GNP = 3,000 crores that ‘ Nominal GNP_ 199 uepetater =~ Real GNP _ 2500 x 100 = 83.33% 3 ce level has. reduced from base year to current year by 16.67%. pt Joe ices (Household services) performed by a woman are not considered as an economic a ‘pomeste or refute the given statement with valid reason. (CBSE, 2020 (58/4/1), Sample Paper 2021} an tis defended. As the activities which are performed by awoman (homemaker) cannot i Benet Mr monetary terms Therefore these activites ae not considered as an economic activity peel vent of a water polluting oil refinery says that it (oil refinery) ensures welfare through its 0% Vonto Gross Domestic Product’ Defend or refute the argument of management with respect ‘gppasa welfare measure ‘of the economy. {CBSE, 2020 (58/4/2)} oe statement is not true. The value added by ol efnery to the Gross Domestic Product (GDP) sas. No a polluting the nearby source of water. Such harmful effects that the refinery is causing to people nae ifeisnot penalized for the same. Thus these negative externalities are not ensuring the welfare ofthe economy through Gross Domestic Product (Gor). the Gross Domestic Product (GDP) of Nation X was 2,000crores in 2018-19, whereas the Gross Nation Y in the same year was & 1,20,000 crotes. Ifthe Gross Domestic Product of 10 crores in 2019-20 and the Gross Domestic Product of Nation Y rises to® 2,00,000 (9.37. suppose Domestic Product of Nation X rises to% 4,00 cores in 2019-20. Compare the rate of change of GDP of Nations X and Y, taking 2018-19 as base year. {CBSE, Sample Paper 2021} mas. Nations /Years | 2018-19 | 2019-20 | Pern enc eee uncaat ere hee ERED) %2,000 crores} % 4,000 crores ~ 100 = 100% 100 Y %1,20,000 %2,00,000 crores crores 0 20,000 x 100 = 66.67% Nation X has registered a GDP growth rate of 100% and has performed better on the front of GDP rise as “ompared to Nation Y, that has registered a GDP growth rate of 66.67%. 38, Sale of pri le Of private vehicles is increasing day by day. Discuss its impact on GDP and Welfare. Increase tina ntl ofprivate vehicles indicates that production of these vehicles has increased, which will lead crease in GDP of the economy. inthe "increase in vehicles on road will increase the pollution in the environment, which will lead to fall Welfare ofthe people, mens ——Cet) Q.39. inthedetermination of welfare of people in the economy, quantum of. ee of output. Defend or refute. oe Ans. The given statementis refuted. Welfare of people in the economy depends on of output. Higher GDP (due to increase any quantum of output) will Promote y, Bent, me comprises of goods of mass consumption and essential goods. increase, OP oF : / | ier cppisbetter than ——_—__—- | | | | _ GDP as it truly reflects the growth of an Economy. React ___ Capital /Consumption) goods promote welfare of people in the ict aa produ oO e pecan tar « rents given under A with the correct options given under B . rhe state want at | a. Domestic Concept | bd. National Concept NATEAPOTTS ® : get FOCtOLMHCOTIE © om aprons pated the statemen as é Method | a, Undistributed Profits = ip Nowe Acie M eee ts given under A with the correct options given under B 4 b._Employers'contribution to social security schemes _ c, GDP, Q.6. Match the statements given under A with the correct options given under B. @ Valve Added a._ Sales + Change in Stock {@ income Method b. Corporate Tax f fe Business Tax ©_ National Income at Constant Price = Saar “im! Value of Output d._ Value of Output - Intermediate Consumption WW RealNational income | e. Distributive Share Method _ 2 @7. Match the statements given under A with the correct options given under B. a. Income generated by own-account workers b. Household Final Consumption Expenditure + Private Non-Profit Institutions. Serving Households Final Consumption Ex ©. Price Index Nominal National Income Income Disposal Method¥ 8. 10. 11, 12. 13. 14, 15, Mtroducty : 7 Ar, Multiple Choice Questions (McQs) Nomi of the following [s included in compensation of employees? which ss Allowance S eee to employees to be used during work iS Payment by insurance company to an injured employee (d) Contribution by employee to provident fund GDPyp = 1,000 and Subsidies = & 50, then GDP, will be: ap = 8M %950 (2 %1,000 (a) &1,050 (b) a Which of the following is not a part of profits? ividends (Q) Retained Earn; (a) Corporate Tax (b) amings i oe “Income Method’ is also known as: {a) Distributive Share Method (c) Industrial Origin Method Which of the following is a synonym of Undistributed Profits”? {a) Savings of private corporate sector (b) Reserves and Surplus f {c) Retained Earnings (d) All of these The value of intermediate consumption will be if purchase of Faw material is Z12 are of & 600 and imports are of Z 200. 200, export (a) %1,200 (b) F800 (c) 1,800 (A) & 1,400 b Which one is included in National Income? {a) Winning from Lottery (c) National Debt interest ‘Gross Investment’ is also known as: (i) Gross Domestic Capital Formation, (ii) Gross Capital Formation iil) Gross Fixed Capital Formation, (iv) Gross Domestic Fixed Capital Formation, (b) Income Disposal Method (d) None of these (b) Milk purchase bya dairy shop (d) None of these {a) Both (i) and (ii) (b) (i) (co) (ii) (4) (i, (i) and (ivy Which of the following method can be used to calculate National Income? (a) Income Method (b) Expenditure Method (c) Value Added Method (d) All of the above ‘Commodity Service Method'is another name for: (a) Expenditure Method (b) Income Method ‘Distributed Profits' is also known as: (a) Corporate Tax (b) Dividend (c) Retained Earnings Ifa farmer sells wheat to miller for Z 500 and miller sells flour to baker for & 700 and baker sells bread consumers for 1,000, then total value added by ‘miller’ and baker’ is: (c) Value Added Method (d) None of these (d) None of these 2: (@) %500 (b) %300 (2 %1,700 Oe Which of the following isa part of Expenditure Method? ie (a) Rentand Royalty (b) Mixeq Income (c) Net Exports (ioe IENDP yc =8 1,500 and Net Factor income to Abroad = 500, then NNP;< will be: d) ©2500 (2) % 2,000 (b) % 1,500 (©) & 1,000 oe Net Exports is calculated as; (a) None of thes? (a) Exports + imports (b) Exports ~ Imports (c) Imports - Exportsrement of National Income ‘ i ? angi included in domestic income: a aitetolo sbroed (b) Windfall Gains wie incor (d) Bonus to employees included in compensation of employees? vwnict and salaries im cash a) Was ries in kind . ee pation to social security schemes (2 FH contribtion to socal security schemes @ tire output iS sold in an accounting year, then value of output is equal to: th Er ein stock (b) Sales @ Be ce instock (d) None of these 11 rls eer: rer property (b) Income from entrepreneurship @ and (0) (d) None of these cg sane income method, domestic incomes equa to: 0 ia royalty + Interest + Profit + Compensation of employees + Mixed Income | 4 Fee surplus + Compensation of employees + Income of self-employed | (¢) Both (a) and (0) -—4qy Neither (@) nor (b) Gs Domestic Capital Formation can be calculated as: 9) GrssFxed Capital Formation + Inventory Investment (b)GrossBusiness Fixed Investment + Gross Residential Construction Investment + Gross PublicInvestment +Inventory Investment (@|NetCapital Formation + Consumption of Fixed Capital {@) Allofthese 7. Broker's commission on sale and purchase of second hand goods is included in national income because: {a) Itisa part of compensation of employees (b) Itis apart of gross domestic capital formation (q Itisan income earned for rendering productive services {d) None of these 23, National Income can be calculated by 3 methods. By which method, we get the maximum value of National Income? (2) Expenditure method (b) Income method (Value Added method (d) All3methodsgive same value of national income Push mother isa teacher. She also teaches Piyush. How would you treat this while calculating national ‘come and domestic income? Z {tile included in the national income, but not in the domestic income. ae pees in the domestic income, but not in the national income. (8 evan ee in domestic income as well as national income. 1 be included in the domestic income nor in the national income. 2, Which ta a following will be included in National Income? ii (8 aston cotParY (b) Transport expenses bya firm onloan paid by households to banks _(d) None of these aIMtrocuctory toe, 26. National income includes: = {a) Transfer income (b) Factor income (©) Both (a) and () i 27. Agrowing country is one with: {a) Rising GNP at constant prices {€) Rising GNP at current prices Normal residents of India working in an American company in England add to, ) Netthe, i; n (b) Constant GNp a ory t (d) None ofthese "2" "Prices 28. fa) Domestic product of India (b) Domestic product FE: {) National product of England (@)iNoneotthese nglang 29. Change in stock is negative when: fa) Closing stock > Opening stock (b) Closing stock < Openin, {€) Closing stock = 0 (d) Opening stock=g 9 0k The net value added at factor cost of a producing unit is equal to: (a) Sum of factor payments (b) Sum of intermedi ate consy MPtion {@) Sum of final consumption (d) Sum of intermediate ang cei 31. Thesum of net value added at factor cost ofall the producing units of an economy gi, =I Consumpign {a) Gross domestic product at market price (b) Net domestic product at aoe (c) Net domestic product at factor cost (a) Gross domestic product at ae t price 32. Measurement of national income at constant prices constitute its: OF cost (a) Nominal value (b) Real value (©) Both (a) and (b) (2) Nee 33. Netfactorincome from abroadis taken into account when national income i calculated by $0 Mebeeeeited method (b) income method {c) Expenditure method (d) Any of the three methods 34. Gross domestic capital formation is equal to: (a) Gross fixed capital formation plus closing stock (b) Gross fixed capital formation plus opening stock (C) Net fixed capital formation plus consumption of fixed capital plus change in stock (d) Net fixed capital formation plus consumption of fixed capital 35. Gross domestic product at market price is equal to: (2) Compensation of employees + operating surplus + mixed income of self-employed. (b) Compensation of employees + operating surplus + mixed income of self-employed + consumption® fixed capital + net indirect taxes (¢) Compensation of employees + net current transfers from abroad (d) Compensation of employees + net factor income from abroad ’ National product at current prices is higher than national product at constant prices during 2 oe {a) Rising prices (b) Falling prices (c) Constant prices (a) Both (e)nd 37. Which of the following sector comes under the category of tertiary sector"? None of thes? (a) Primary sector (b) Secondary sector —_(c) Service sector (a) No 38. Which one of the following items is excluded in calculating national income? (a) Services of a rental TV set (b) Rupees 10,000 won in a lottery () imputed value of owner occupied house (a) Salary of a house maid 39. Value added means value of (a) Output at market prices (c) Output less Intermediate Cost jation (b) Output less deprecite! (d) Output plus Intermsf National Income . Me surement of following statement is correct? the echo _price Index_ 199 O) den Gop= oe 160° jlomninal GDP Price Index ta) Rea _RealGDP_ 199 (d) Nominal cop = Picelndex. 199 nominal GOP = price Index Real GDP | @ method focuses on measurement of National Income at: A roduction of goods and services (b) Phase of Income Distribution ) Be come Disposition (d) All of the above phase " a firm is equal to: vate Added BY (b) Profits @ = _ intermediate Consumption (d) Sales + Intermediate Consumption a agthefaliowing isnot a component of domestic income? is ee income from abroad (b) Operating Surplus ¢a) Net facto (d) Compensation of Employees ied Income 2 Ps ploy a Which of the following flowchart is incorrect? Income { Domestic Income } { Domestic Income } ( Domestic Income + ite yi % c = Rent and Royal =n Operating Surplus Operating Surplus iat) National Income + Ee Interest + Profit aa a Compensation of Employees oe Factor Income to Abroad | | Compensation of Employees pe Compensation of Employees es + + ; Mixed Income Mixed Income Income of Self-employed Factor Income from Abroad (a) (b) (c) (d) 45. Which of the following flowchart is incorrect? g ‘Gross Domestic Gross Domestic Gross Domestic Gross Domestic Gpital Formation Capital Formation Capital Formation Capital Formation | I a * loventory Net + Consumption _Net_ + Depreciation sea Investment — Domestic of Fixed Domestic = = Capital Capital Fixed Capital Depreciation Formation Formation + ( Change in Stock a ? (b) © (d) Which of ey fa ee following is not an economic activity and not included in national income? (0 Alawyes snes tendered by a dispensary _—_(b). Ahousewife doing household work ° Nationa, doing his practice (d) A maid working full time with a family 2 Bore is the sum of factor incomes accruing to: 9 Residents (b) Economic territory (d) Both residents and ———