NATIONAL INCOME AND RELATED AGGREGATES
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)
Q.1. When is the national income less than domestic income?
Ans. When NFIA is negative.
Q.2. When is the national income larger than domestic factor income?
Ans. When NFIA is positive.
Q.3. What is the effect of an indirect tax and a subsidy, on the price of the commodity?
Ans. The effect of an indirect tax on a commodity is to increase the price and the effect of subsidy is to reduce the price in the market.
Q.4. Are the wages and salaries received by Indians working in American Embassy in India a part of Domestic Product of India?
Ans. No, because American embassy is not a part of domestic territory of India.
Q.5. Why is the study of the problem of unemployment in India considered a macro economic study?
Ans. The problem of unemployment in India is an economic issue at level of economy as a whole, hence considered as macroeconomic study.
Q.6. When is gross domestic product of an economy equal to gross national product?
Ans. When NFIA is zero.
Q.7 Name a product whose value is included in GDP but its consumption reduce welfare?
Ans. Liquor.
Q.8 Why is interest paid by consumers not a factor payment?
Ans. Because consumer borrow money for consumption purpose.
Q.9 If compensation of employees in a firm constitutes 55 % of net value added at factor cost of the firm , find the proportion of operating surplus.
Ans. 100 % - 55 % = 45 % ( assuming mixed income is Zero)
SHORT ANSWER TYPE QUESTIONS: (3/4 Marks Each)
Q.1. Will the following be included in gross domestic product / Domestic Income of India? Give reasons for each answer.
(i) Consultation fee received by a doctor.
(ii) Purchase of new shares of a domestic firm.
(iii) Services charges paid to a dealer (broker) in exchange of second hand goods.
Ans. (i) Yes, It is a factor income. It is his salary.
(ii) No, It is not included in GDP, because it is a merely financial transaction which does not help directly in production.
(iii) It is included because it is his factor income (salary).
Q.2. State whether the following is a stock or flow:
(a) Wealth, (b) Cement production, (c) Saving of a household, and (d) Income of household.(e)profit
Ans. Stock – (a) & (b), since these are variables measurable at a point of time.
Flow – (c) , (d)& (e), since these are variables measurable over period of time.
Q.3. State whether the following is a stock or flow:
(a) National capital,
(b) Exports,
(c) Capital formation, and
(d) Expenditure on food by households.
Ans. Stock – (a), since national capital is a variable measurable at a point of time.
Flow – (b), (c) & (d), since these are variables measurable over period of time.
Q.4. Are the following included in the estimation of National Income a country? Give reasons.
(i) Bonus received by employees.
(ii) Government expenditure on defence.
(iii) Money sent by a worker working abroad to his family.
(iv) Profit earned by a branch of Indian Bank in London.
(V) Expenditure by government in providing free education.
Ans. (i) It should be included in NI because it is a part of the compensation of employees (salary in cash).
(ii) It should be included in NI because defence service is considered final service so far as it provides peaceful and secure environment to the citizens.
(iii) It is included in NI because it is a part of NFIA.
(iv) It is included in NI of India because it is a part of NFIA.
(v) yes , it is a part of government final consumption expenditure.
Q.5. Are the following included in the estimation of National Income a country? Give reasons.
(i) Rent free house to an employee by an employer.
(ii) Purchases by foreign tourists.
(iii) Purchase of a truck to carry goods by a production unit.
(iv) Payment of wealth tax by a household.
Ans. (i) It should be included in NI because it is a part of the compensation of employees (salary in kind).
(ii) It is included in NI because it is a part of the final consumption expenditure on domestic product.
(iii) It should be included in NI because it is an addition to the capital stock of the production unit.
(iv) It should not be included in NI because it is a compulsory transfer payment and paid from past savings of the tax payers.
Q.6. Is net export a part of NFIA? Explain.
Ans. No, it is not.Net export, the difference between export and import (X- M), is a part of expenditure on domestic product. While NFIA is the difference between income earned from abroad by the normal residents of a country and income earned by non-residents in the domestic territory of that country. It is not included in the domestic product rather it is a component of NI. Therefore both are different concepts.
Q.7 Should we treat subsidy as transfer payment?
Ans. No, value addition has already accrued. In fact, subsidies tend to lower the market value of the good produced .Accordingly, these are added to the market price to make it equal to the factor cost . Subsidies are a part of NNP FC which is why these are deducted from factor cost to equate it with market price.
LONG ANSWER TYPE QUESTIONS: (6 Marks Each)
Q. 1. Will the following be included in gross domestic product / Domestic Factor Income of India? Give reasons for each answer.
(i) interest free loan to bank employees from bank
(ii) Factor income from abroad.
(iii) Compensation of employees given to residents of china working in Indian embassy in China.
(iv) Profit earned by a company in India, which is owned by a nonresident.
Ans. (i) no, it is to be repayed.
(ii) No, because factor income is earned not within the domestic territory of a country but from abroad.
(iii) Yes, because Indian embassy in China is a part of domestic territory of India.
(iv) Yes, because the company within India‟s domestic territory earns profit.
Q.2. Why are exports included in the estimation of domestic product by the expenditure method? Can gross domestic product be greater than gross national product? Explain.
Ans. Expenditure method estimates expenditure on domestic product, i.e. expenditure on final goods and services produced within the economic territory of the country. It includes expenditure by residents and non- residents both. Exports, though purchased by non- residents, are produced within the economic territory, and therefore, a part of domestic product. Domestic product can be greater than national product if factor income paid to the rest of the world is greater than the factor income received from the rest of the world is i.e. when net-factor income received from abroad is negative.
Q.3. Are the following included in the estimation of National Income of India? Give reasons for each answer.
(i) profits earned by Dabur India in U.K.
(ii) Money received from sale of shares.
(iii) Salary paid to Americans working in Indian embassy in America.
(iv) payment of electricity bill by a factory
(v) direct purchases of government in a foreign country.
(vi) Remittances from aboard.
Ans. (i) Yes , it is a part of factor income earned from abroad.
(ii) No, it is only a transfer of paper claims.
(iii) No, this factor income belongs to non-residents.
(iv) No. it is intermediate consumption.
(v) Yes , it is government final consumption expenditure.
(vi) No, it is only a transfer payment. No commodity is sent or services rendered return for this.
Q.4. Will the following be included National Income? Give reasons for each answer.
(i) Services of owner occupied houses.
(ii) Purchase of new shares of a domestic firm.
(iii) Purchase of second-hand machine from a domestic firm.
(iv) Consultancy fee paid to a foreign expert.
(v) Commission paid to agent for the sale and purchase of shares.
(vi) Dividend received on shares.
Q.5. Will the following be included National Income? Give reasons for each answer.
(i) Free Medical facility to employees by the employer.
(ii) Money received from sale of old house.
(iii) Government expenditure on street lighting.
(iv) Interest received by a household from a commercial bank.
(v) Receipts from sale of land.
(vi) Interest on public debt.
Ans. (i) Yes, as it is a supplementary income paid in kind and hence a part of compensation of employees.
(ii) No, as it has already been taken into account when the house was constructed.
(iii) Yes, It is a part of Government final consumption expenditure and it adds to flow of services.
(iv) Yes, as it is payment for use of capital.
(v) No, as it does not add to flow of goods & services.
(vi) It should not be included in NI because public debt is a loan taken on to meet consumption expenditure by the government.
Q.6. Are the following included in the estimation of National Income a country? Give reasons.
(i) Services rendered by family members to each other.
(ii) Wheat grown by a farmer but used entirely for family‟s consumption.
(iii) Expenditure government on providing free education.
(iv) Payment of fees to a lawyer engaged by a firm.
(v) Man of the match award to a player of the Indian cricket team.
(vi) Payment of the match fee to players of Indian cricket team.
Ans. (i) Services rendered by family members to each other should not be included in NI because these are not rendered for the purpose of earning income.
(ii) Imputed value of self-consumed wheat grown by a farmer must be included in NI, because it adds in the flow of goods.
(iii) It should be included in NI because the government expenditure on the free services is considered as a part of government final consumption expenditure.
(iv) Yes, as it is factor income against the service of lawyer. (v) It should not be included in NI because it is a windfall gain and it does not add in the flow of goods and services.
(vi) It should be included in NI of India because they render productive services as professionals.
Q.7. Are the following included in the estimation of National Income acountry? Give reasons
(i) Unemployment allowance under NREGA.
(ii) Indirect tax (Sale tax/excise duty).
(iii) Salary received by the workers under NREGA.
(iv) Income tax.
(v) Corporation tax.
(vi) Travelling expenses paid to salesman by the employer.
Ans. (i) It is transfer payment received by those persons who are not employed; therefore it should not be included in NI.
(ii) It is not included in NI because it does not add in the flow of goods and services.
(iii) It is included in NI because it is a factor income.
(iv) It is a part of compensation of an employee (income). While calculating NI by income method, compensation of employees is to be included while doing so, income tax to be paid by them should not be included separately.
(v) It is a part of profit of corporate sector. While calculating NI by income method, profit is to be included while doing so, Corporation tax should not be included separately.
(vi) Travel expenses incurred by employees for business purpose which are reimbursed by the employers are excluded because these are a part of intermediate consumption of the employers
NUMERICAL PROBLEMS WITH SOLUTIONS:
Q.1. Calculate private income, personal income, personal disposable income and National disposable income from the following data:
(Rs. in Crores)
(i) National income 3000
(ii) Savings of private corporate sector 30
(iii) Corporate tax 80
(iv) Current transfer from government 60
(v) Income from property and entrepreneurship to government 150
(vi) Current transfers from rest of the world 50
(vii) Savings of non-departmental government sector 40
(Viii) Net indirect taxes 250
(ix) Direct taxes paid by household 100
(x) Net factor income from abroad (-) 10
Solution: -
Private income = (i) - (iv + vii) + (iv + vi)
= 3000 - (150 + 40) + (60 + 50)
= 2920 Crores.
Personal income = 2920 - (ii) - (iii)
= 2920-30-80
= Rs 2810 Crores.
Personal Disposable Income = 2810- (ix)
= 2810-100
= Rs 2710 Crores.
National Disposable Income = (i) + (vi) + (viii)
= 3000 + 50 + 250
=Rs 3300 Crores.
Q2. Calculate NI by income and expenditure method:
(Rs. in Crores)
(i) Subsidies 5
(ii) Private final consumption expenditure 100
(iii) NFIA (-) 10
(iv) Indirect Tax 25
(v) Rent 5
(vi) Government final consumption expenditure 20
(vii) Net domestic fixed capital formation 30
(viii) Operating surplus 20
(ix) Wages 50
(x) Net export (-) 5
(xi) Addition to stock (-) 5
(xii) Social security contribution by employers 10
(xiii) Mixed income 40
Solution: -
Income method
NI= (ix) + (xii) + (viii) + (xiii) – (iii)
= 50 +10 + 20 + 40 -10
=Rs 110 Crores.
Expenditure method
NI = (ii) + (vi) + (vii) + (xi) + (x) - (iv) + (i) + (iii)
=100 + 20 + 30 + (-) 5 + (-) 5 – 25 + 5 +10
=Rs 110 Crores.
Q.3. Calculate the value added by Firm A and Firm B from the following data: -
(Rs. in Lakhs)
(i) Purchase by Firm A from the rest of the world 40
(ii) Sales by Firm B 100
(iii) Purchases by Firm A from Firm B 60
(iv) Sales by Firm A 120
(v) Exports by Firm A 40
(vi) Opening stock of Firm A 45
(vii) Closing stock of Firm A 30
(viii) Opening stock of Firm B 40
(ix) Closing stock of Firm B 30
(x) Purchases by Firm B from Firm A 60
Solution: -
Value Added by Firm A = (iv) + [(vii) – (vi)] – (i) – (iii)
= 120 + [30 – 45] – 40 – 60
= Rs 5 Lakhs.
Value Added by Firm B = (ii) + [(ix) – (viii)] - (x)
= 100 + [30 – 40] - 60
= Rs 30 Lakhs.
Q.4. Estimate (i) Personal Income, (ii) Private Income and (iii) Personal Disposable Income with the help of the following data.
(Rs. in Crores)
(i) National income 1300
(ii) Corporate tax 15
(iii) Direct personal taxes 40
(iv) Savings of private corporate sector 25
(v) Income from property and entrepreneurship accruing to Government
Administrative Departments 35
(vi) Current transfer from government administrative departments 30
(vii) National Debt Interest 10
(viii) Savings of non departmental government enterprises 5
(ix) Current transfers from rest of the world 15
Solution: -
Private Income = (i) - (v) – (viii) + (vii) + (vi) + (ix)
= 1300 – 35 – 5 +10 + 30 + 15
= Rs. 1315 crores.
Personal Income = Private Income – (ii) – (iv)
= 1315 -15 -25
= Rs 1275 crores.
Personal Disposable Income = Personal Income – (iii)
= 1275 – 40
= Rs 1235 Crores.
Q.5. Estimate (i) Personal Disposable Income, (ii) Private Income and (iii) National Income from the following data:
(Rs. in Crores)
(i) Personal income 1225
(ii) Saving of private corporate sector 12
(iii) Corporate tax 23
(iv) Current transfer from government administrative departments 30
(v) Current transfer from rest of the world 25
(vi) Income from property and entrepreneurship accruing to Government
Administrative Departments 25
(vii) Savings of non departmental government enterprises 20
(viii) Net indirect tax 195
(ix) Direct tax paid by the households 25
Solution: -
Personal Disposable Income = Personal income - Direct tax
= 1225 - 25
= 1200 Crores
Private Income = Personal income + Saving of private corporate sector + Corporate tax
= 1225 +12 + 23
= 1260 Crores
National Income = Private Income – (iv) – (v) + (vi) + (vii)
= 1260 – 30 - 25 + 25 + 20
= 1260 Crores
Q.6. Estimate the following with the help of given data:
(i) GDPMP ,
(ii) Net Value Added at factor cost; and (iii) prove that it is equal to the income generated.
(Rs. in Crores)
(i) Increase in the stock of unsold goods 1000
(ii) Sales 10,000
(iii) Net indirect tax 800
(iv) Purchase of raw materials from other firms 1650
(v) Purchase of fuel and power 850
(vi) Consumption of fixed capital 500
(vii) Rent 700
(viii) Wages and salaries 3500
(ix) Interest payment 1000
(x) Dividend 1500
(xi) Corporate gain tax 300
(xii) Undistributed profit 200
Solution: -
GDPMP = Sales + Increase in the stock - Purchase of raw materials - Purchase of fuel and power.
= 10,000 + 1000 -1650 -850
= 11,000 -2500
= 8500 Crores.
Net Value Added at factor cost = Sales + Increase in the stock - Purchase of raw materials –
Purchase of fuel and power - Consumption of fixed capital - Net indirect tax.
= 10,000 + 1000 - 1650 - 850 - 500 – 800
= 11,000 – 3800
= 7200 Crores.
Income generated = Rent + Wages and salaries + Interest + Dividend + Corporate gain tax + Undistributed profit.
= 700 + 3500 + 1000 + 1500 + 300 + 200
= 7200 Crores.
Hence it is proved that Net Value Added at factor cost = Income Generated
More Questions......
Q.1 Answer the following:
(a) Giving valid reasons, state how the services of a ‘School Teacher’ will be undertaken in estimation of National Income.
(b) Gross investment is always greater than net investment.” Defend or refute the given statement with valid argument.
(c) Net factor income from abroad can never be negative.” Defend or refute the given statement with valid argument.
(d) Discuss briefly how the money received from the sale of a second-hand car will be undertaken in estimation of National Income.
Ans.
(a) The services of a school teacher will be included in the national income of the country as it contributes to the current flow of services in the economy.
(b) The given statement is refuted. Gross investment includes addition to capital stock which also includes replacement for the normal wear and tear (depreciation). Whereas, addition to capital stock in an economy is measured by net investment. So, in an accounting sense, if the value of depreciation becomes zero, only then gross investment will be
equal to net investment.
(c) The given statement is refuted. Net factor income from abroad is the difference between factor income earned from rest of the world and factor income paid to rest of the world. If the value of factor income paid to rest of the world is greater than the factor income earned from rest of the world, the resulting value (net factor income from abroad) can be negative.
(d) The money received from the sale of a second hand car will not be included in the national income of the country as it does not contribute to the current flow of goods in the economy.
Q.2 Final goods are those goods which are consumed only by the households.” Defend or refute the given statement with a valid argument.
Ans. The given statement is not correct and is thus refuted. Final goods are those goods which are purchased/consumed either by households or by the producers for investment purpose, i.e., these are the goods which have crossed the production boundary.
Q.3 State with valid reason, which of the following statement is true or false:
(a) Gross Value Added at market price and Gross Domestic Product at market price are one and the same thing.
(b) Intermediate goods are always durable in nature.
Ans.
(a) The given statement is false as Gross Domestic Product is the result of sum of Gross Value Added by all the producing units/firms in an economy, during an accounting year.
(b) The given statement is false as intermediate goods are generally non-durable in nature. They are the goods used as raw material and they lose their identity in the production process for the creation of a new commodity, during an accounting year.
Q.4 (a) ‘Domestic/household services performed by a woman may not be considered as an economic activity’. Defend or refute the given statement with valid reason.
(b) ‘Compensation to the victims of a cyclone is an example of a welfare measure taken by the government’. State with valid reason, should it be included/not included in the estimation of national income of India.
Ans.
(a) The given statement is defended; as it is difficult to measure the monetary value of the services performed by a woman (homemaker). Therefore, these activities may not be considered as an economic activity.
(b) Compensation given to the victims of a cyclone is an example of a social welfare measure taken by the government. However, it is not included in estimation of national income as it is a transfer payment which does not lead to corresponding flow of goods and services.
Q.5 “India’s GDP is expected to expand 7.5% in 2019-20: World Bank” — The Economic Times. Does the given statement mean that welfare of people of India increase at the same rate? Comment with reason.
Ans. Generally it is considered that an increase in the Gross Domestic Product (GDP) of any economy (India in this case) ensures increase in welfare of the people of the country. However, this may not always be correct. GDP is not the best indicator of the economic welfare of a country. Some of the prime reasons for the same are:
(a) unequal distribution and composition of GDP,
(b) non-monetary transactions in the economy which are not accounted for in GDP, and
(c) occurrence of externalities in the economy (both positive and negative).
Q.6 ‘Real Gross Domestic Product is a better indicator of economic growth than Nominal Gross Domestic Product’.
Do you agree with the given statement? Support your answer with a suitable numerical example.
Ans.The given statement is correct. Real Gross Domestic Product (GDP) is a better indicator of economic growth than Nominal Gross Domestic Product (GDP) as it is not affected by changes in general price level.(Give numerical example on Page No. 5)
Q.7 ‘Circular flow of income in a two sector economy is based on the axiom that one’s expenditure is other’s income’. Do you agree with the given statement? Support your answer with valid reasons.
Ans. Yes, the given statement is correct. In a two sector economy, the firms produce goods and services and make factors payments to the households. The factor income earned by the households will be used to buy the goods and services which would be equal to income of firms. The aggregate consumption expenditure by the households in the economy is equal to the aggregate expenditure on goods and services produced by the firms in the economy (Income of the producers).
Q.8 “Management of a water polluting oil refinery says that it (oil refinery) ensures welfare through its contribution to Gross Domestic product.” Defend or refute the argument of management with respect to GDP as a welfare measure of the economy.
Ans. No, the given statement is not true. The value added by oil refinery to the Gross Domestic Product (GDP) may also be polluting the nearby source of water. Such harmful effects that the refinery is causing to people and marine life is not penalized for the same. Thus, these negative externalities are not ensuring the welfare of the economy through Gross Domestic Product (GDP).
Q.9 'Subsides to the producers, should be treated as transfer payments.' Defend or refute the given statement with valid reason.
Ans. The given statement is defended, as subsidy is a transfer payment. Subsidy is the financial assistance provided by the government to producers to fulfill its social welfare objectives.
Government does not get anything in consideration for the same. It does not contribute to the current flow of goods and services and hence do not contribute to any value addition.
Q.10 State giving reasons whether the following statements are True or False:
(a) Capital goods are used up to produce other goods.
(b) Machine purchased is always a final good.
Ans.
(a) False: Capital goods like machines make production of other goods feasible, but they themselves don’t get transformed in the production process, i.e., they are
not used up to produce other goods.
(b) False: Whether ‘machine’ is a final good or not depends on how it is being used.
• If the machine is bought by a household, then it is a final good because it is used for final consumption.
• If the machine is bought by a firm for its own use, then also it is a final good because it is used for investment.
• If the machine is bought by a firm for re-sale, then it is an intermediate good.
Q.11 Suppose a ban is imposed on consumption of tobacco. Examine its likely effects on gross domestic product and welfare.
Ans. Ban on consumption of tobacco will bring down production of tobacco. Since it is counted in GDP, GDP will fall. The ban will improve the health in general. It will thus increase welfare.
Q.12 Government incurs expenditure to popularise yoga among the masses. Analyse its impact on gross domestic product and welfare of the people.
Ans. Government expenditure on popularising yoga raises GDP because it is government’s final consumption expenditure. It also raises welfare of the people because yogic exercises improve health and thus, raise efficiency of the people.
Q.13 Sale of petrol and diesel cars is rising particularly in big cities. Analyse its impact on gross domestic product and welfare.
Ans.Sale of cars raises GDP, because sales are of final products. Cars provide convenience in transportation but at the same time, it causes traffic jams, air pollution and noise
pollution, which reduces the welfare of the people. Pollution has bad effects on the health of the people.
Q.14 “Higher Gross Domestic Product (GDP) means greater per capita availability of goods in the economy.” Do you agree with the given statement? Give valid reasons in support of your answer.
Ans. “Higher Gross Domestic Product (GDP) means greater per capita availability of goods in the economy.” This statement is not true.
(i) If the rate of population growth is more than the rate of growth of GDP, the per capita availability of goods and services will fall.
(ii) GDP doesn’t account for changes in inequalities in distribution of Income. If the rising GDP is concentrated in a few hands, per capita availability of goods in the economy might not increase.
Q.15 If in a locality, a new park is developed by the municipal corporation, it will have externalities, both positive and negative. State on example each of both types of externalities with reason.
Ans. The park in neighbourhood can be a source of positive externality as it helps in reducing pollution and thereby improving health and efficiency.
The park in neighbourhood can be a source of negative externality if it is used by anti-social elements. This can increase crime and lead to insecurity.
Q.16 Which of the following items will be included/not included while estimating Gross Domestic Product? Give valid reasons in support of your answer.
(a) Wages received by an Indian working in the British Embassy in India.
(b) Financial aids received from abroad after 'Fani cyclone'.
(c) Purchase of second hand machinery from abroad.\
Ans.
(a) Wages received by an Indian working in British embassy in India is not a part of economic territory of India, as British Embassy is a part of Economic territory of Britain.
(b) Financial aid is a transfer income as no factor service is provided in return. Hence, it is not included while estimating the value of GDP.
(c) Purchase of second hand machinery from abroad is not included as the value of imports are deducted while estimation GDP of a country.
UNIT VI
NATIONAL INCOME AND RELATED AGGREGATES
QUESTIONS BASED ON HOTS WITH MODEL ANSWERS:
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)
Q.1. When is the national income less than domestic income?
Ans. When NFIA is negative.
Q.2. When is the national income larger than domestic factor income?
Ans. When NFIA is positive.
Q.3. What is the effect of an indirect tax and a subsidy, on the price of the commodity?
Ans. The effect of an indirect tax on a commodity is to increase the price and the effect of subsidy is to reduce the price in the market.
Q.4. Are the wages and salaries received by Indians working in American Embassy in India a part of Domestic Product of India?
Ans. No, because American embassy is not a part of domestic territory of India.
Q.5. Why is the study of the problem of unemployment in India considered a macro economic study?
Ans. The problem of unemployment in India is an economic issue at level of economy as a whole, hence considered as macroeconomic study.
Q.6. When is gross domestic product of an economy equal to gross national product?
Ans. When NFIA is zero.
SHORT ANSWER TYPE QUESTIONS: (3/4 Marks Each)
Q.1. Will the following be included in gross domestic product / Domestic Income of India? Give reasons for each answer.
(i) Consultation fee received by a doctor.
(ii) Purchase of new shares of a domestic firm.
(iii) Profits earned by a foreign bank from its branches in India.
(iv) Services charges paid to a dealer (broker) in exchange of second hand goods.
Ans. (i) Yes, It is a factor income. It is his salary.
(ii) No, It is not included in GDP, because it is a merely financial transaction which does not help directly in production.
(iii) Yes, It is a factor income in domestic territory.
(iv) It is included because it is his factor income (salary).
Q.2. How will you treat the following while estimating domestic product of India? Give reasons.
(i) Rent received by a resident Indian from his property in Singapore.
(ii) Profits earned by a branch of an American Bank in India.
(iii) Salaries paid to Koreans working in Indian embassy in Korea.
Ans. (i) It will not be included in domestic product of India as this income is earned outside the domestic (economic) territory of India.
(ii) It will be included in domestic product of India as the branch of American bank is located within the domestic territory of India.
(iii) It will be a part of domestic product of India because this income is earned within the domestic territory of India. Indian embassy in Korea is treated as located within the domestic territory of India.
Q.3. State whether the following is a stock or flow:
(a) Wealth, (b) Cement production, (c) Saving of a household, and (d) Income of household.
Ans. Stock – (a) & (b), since these are variables measurable at a point of time.
Flow – (c) & (d), since these are variables measurable over period of time.
Q.4. State whether the following is a stock or flow:
(a) National capital, (b) Exports, (c) Capital formation, and (d) Expenditure on foodby households.
Ans. Stock – (a), since national capital is a variable measurable at a point of time. Flow – (b), (c) & (d), since these are variables measurable over period of time.
Q.5. Are the following included in the estimation of National Income a country? Give reasons.
(i) Bonus received by employees..
ii) Government expenditure on defence.
(iii) Money sent by a worker working abroad to his family.
(iv) Profit earned by a branch of Indian Bank in London.
ANS. (i) It should be included in NI because it is a part of the compensation of employees (salary cash).
(ii) It should be included in NI because defence service is considered final service so far as it provides peaceful and secure environment to the citizens.
(iii) It is included in NI because it is a part of NFIA.
(iv) It is included in NI of India because it is a part of NFIA.
Q.6. Are the following included in the estimation of National Income a country? Give reasons.
(i) Rent free house to an employee by an employer.
(ii) Purchases by foreign tourists.
(iii) Purchase of a truck to carry goods by a production unit.
(iv) Payment of wealth tax by a household.
Ans. (i) It should be included in NI because it is a part of the compensation of employees (salary in kind).
(ii) It is included in NI because it is a part of the final consumption expenditure on domestic product.
(iii) It should be included in NI because it is an addition to the capital stock of the production unit.
(iv) It should not be included in NI because it is a compulsory transfer payment and paid from past savings of the tax payers.
Q.7. Is net export a part of NFIA? Explain.
Ans. No, it is not.Net export, the difference between export and import (X- M), is a part of expenditure on domestic product. While NFIA is the difference between income earned from abroad by the normal residents of a country and income earned by non-residents in the domestic territory of that country. It is not included in the domestic product rather it is a component of NI. Therefore both are different concepts.
LONG ANSWER TYPE QUESTIONS: (6 Marks Each)
Q.1. Will the following be included in gross domestic product / Domestic Factor Income of India? Give reasons for each answer.
(i) Old age pension given by govt.
(ii) Factor income from abroad.
(iii) Salaries to Indian residents working in American embassy in India.
(iv) Compensation of employees given to residents of china working in Indian embassy in China.
(v) Profit earned by a company in India, which is owned by a non-resident.
(vi) Profit earned by an Indian company from its branch in Singapore.
Ans. (i) No, because pension is paid on account of old age of a pensioner and not for his rendering productive services.
(ii) No, because factor income is earned not within the domestic territory of a country but from abroad.
(iii) No, because American embassy is not a part of domestic territory of India.
(iv) Yes, because Indian embassy in China is a part of domestic territory of India.
(v) Yes, because the company within India’s domestic territory earns profit.
(vi) No, because the branch is located outside the domestic territory of India.
Q.2. Why are exports included in the estimation of domestic product by the expenditure method? Can gross domestic product be greater than gross national product? Explain.(4+2)
Ans. Expenditure method estimates expenditure on domestic product, i.e. expenditure on final goods and services produced within the economic territory of the country. It includes expenditure by residents and non- residents both. Exports, though purchased by nonresidents, are produced within the economic territory, and therefore, a part of domestic product.
Domestic product can be greater than national product if factor income paid to the rest of the world is greater than the factor income received from the rest of the world is i.e. when net-factor income received from abroad is negative.
Q.3. Are the following included in the estimation of National Income of India? Give reasons for each answer.
(i) Profit earned by a foreign company/bank in India.
(ii) Money received from sale of shares.
(iii) Salary paid to Americans working in Indian embassy in America.
(iv) Salary paid to Indians working in Indian embassy in America.
(v) Scholarship received by a student.
(vi) Remittances from aboard.
Ans. (i) No, as it is a factor income paid abroad (it is earned by non-residents).
(ii) No, it is only a transfer of paper claims.
(iii) No, this factor income belongs to non-residents.
(iv) Yes, as it is a factor income paid to normal resident of India.
(v) No, it is only a transfer payment.
(vi) No, it is only a transfer payment. No commodity is sent or services rendered return for this.
Q.4. Will the following be included National Income? Give reasons for each answer.
(i) Services of owner occupied houses.
(ii) Purchase of new shares of a domestic firm.
(iii) Purchase of second-hand machine from a domestic firm.
(iv) Consultancy fee paid to a foreign expert.
(v) Commission paid to agent for the sale and purchase of shares.
(vi) Dividend received on shares.
Ans. (i) Yes, Imputed rent of owner occupied houses will be included in NI.
(ii) No, because it is a financial transaction which does not help directly in production.
(iii) No, because it is not related with current flow of goods and services.
(iv) No, as it is a factor income paid abroad (it is earned by non-residents).
(v) Yes, It is included in NI since it is paid for rendering productive services.
(vi) Yes, dividends are a part of corporate profit and therefore, include in NI.
Q.5. Will the following be included National Income? Give reasons for each answer.
(i) Free Medical facility to employees by the employer.
(ii) Money received from sale of old house.
(iii) Government expenditure on street lighting.
(iv) Interest received by a household from a commercial bank.
(v) Receipts from sale of land.
(vi) Interest on public debt.
Ans. (i) Yes, as it is a supplementary income paid in kind and hence a part of compensation of employees.
(ii) No, as it has already been taken into account when the house was constructed.
(iii) Yes, It is a part of Government final consumption expenditure and it adds to flow of services.
(iv) Yes, as it is payment for use of capital.
(v) No, as it does not add to flow of goods & services.
(vi) It should not be included in NI because public debt is a loan taken on to meet consumption expenditure by the government.
Q.6. Are the following included in the estimation of National Income a country? Give reasons.
(i) Services rendered by family members to each other.
(ii) Wheat grown by a farmer but used entirely for family’s consumption.
(iii) Expenditure government on providing free education.
(iv) Payment of fees to a lawyer engaged by a firm.
(v) Man of the match award to a player of the Indian cricket team.
(vi) Payment of the match fee to players of Indian cricket team.
Ans. (i) Services rendered by family members to each other should not be included in NI because these are not rendered for the purpose of earning income.
(ii) Imputed value of self-consumed wheat grown by a farmer must be included in NI, because it adds in the flow of goods.
(iii) It should be included in NI because the government expenditure on the free services is considered as a part of government final consumption expenditure.
(iv) Yes, as it is factor income against the service of lawyer.
(v) It should not be included in NI because it is a windfall gain and it does not add in the flow of goods and services.
(vi) It should be included in NI of India because they render productive services as professionals.
Q.7. Are the following included in the estimation of National Income a country? Give reasons.
(i) Unemployment allowance under NREGA.
(ii) Indirect tax (Sale tax/excise duty).
(iii) Salary received by the workers under NREGA.
(iv) Income tax.
(v) Corporation tax.
(vi) Travelling expenses paid to salesman by the employer.
Ans. (i) It is transfer payment received by those persons who are not employed; therefore it should not be included in NI.
(ii) It is not included in NI because it does not add in the flow of goods and services.
(iii) It is included in NI because it is a factor income.
(iv) It is a part of compensation of an employee (income). While calculating NI by income method, compensation of employees is to be included while doing so, income tax to be paid by them should not be included separately.
(v) It is a part of profit of corporate sector. While calculating NI by income method, profit is to be included while doing so, Corporation tax should not be included separately.
(vi) Travel expenses incurred by employees for business purpose which are reimbursed by the employers are excluded because these are a part of intermediate consumption of the employers
NUMERICAL PROBLEMS WITH SOLUTIONS:
Q.1. Calculate private income, personal income, personal disposable income and National disposable income from the following data: (Rs. in Crores)
(i) National income 3000
(ii) Savings of private corporate sector 30
(iii) Corporate tax 80
(iv) Current transfer from government 60
(v) Income from property and entrepreneurship to government 150
(vi) Current transfers from rest of the world 50
(vii) Savings of non-departmental government sector 40
(Viii) Net indirect taxes 250
(ix) Direct taxes paid by household 100
(x) Net factor income from abroad (-) 10
Solution: -
Private income = (i) - (iv + vii) + (iv + vi)
= 3000 - (150 + 40) + (60 + 50)
= 2920 Crores.
Personal income = 2920 - (ii) - (iii)
= 2920-30-80
= Rs 2810 Crores.
Personal Disposable Income = 2810- (ix)
= 2810-100
= Rs 2710 Crores.
National Disposable Income = (i) + (vi) + (viii)
= 3000 + 50 + 250
=Rs 3300 Crores.
Q2. Calculate NI by income and expenditure method:
(Rs. in Crores)
(i) Subsidies 5
(ii) Private final consumption expenditure 100
(iii) NFIA (-) 10
(iv) Indirect Tax 25
(v) Rent 5
(vi) Government final consumption expenditure 20
(vii) Net domestic fixed capital formation 30
(viii) Operating surplus 20
(ix) Wages 50
(x) Net export (-) 5
(xi) Addition to stock (-) 5
(xii) Social security contribution by employers 10
(xiii) Mixed income 40
Solution: -
Income method
NI= (ix) + (xii) + (viii) + (xiii) – (iii)
= 50 +10 + 20 + 40 -10
=Rs 110 Crores.
Expenditure method
NI = (ii) + (vi) + (vii) + (xi) + (x) - (iv) + (i) + (iii)
=100 + 20 + 30 + (-) 5 + (-) 5 – 25 + 5 +10
=Rs 110 Crores.
Q.3. Calculate the value added by Firm A and Firm B from the following data:
(Rs. in Lakhs)
(i) Purchase by Firm A from the rest of the world 40
(ii) Sales by Firm B 100
(iii) Purchases by Firm A from Firm B 60
(iv) Sales by Firm A 120
(v) Exports by Firm A 40
(vi) Opening stock of Firm A 45
(vii) Closing stock of Firm A 30
(viii) Opening stock of Firm B 40
(ix) Closing stock of Firm B 30
(x) Purchases by Firm B from Firm A 60
Solution: -
Value Added by Firm A = (iv) + [(vii) – (vi)] – (i) – (iii)
= 120 + [30 – 45] – 40 – 60
= Rs 5 Lakhs.
Value Added by Firm B = (ii) + [(ix) – (viii)] - (x)
= 100 + [30 – 40] - 60
= Rs 30 Lakhs.
Q.4. Estimate (i) Personal Income, (ii) Private Income and (iii) Personal Disposable Income with the help of the following data.
(Rs. in Crores)
(i) National income 1300
(ii) Corporate tax 15
(iii) Direct personal taxes 40
(iv) Savings of private corporate sector 25
(v) Income from property and entrepreneurship accruing to Government Administrative Departments 35
(vi) Current transfer from government administrative departments 30
(vii) National Debt Interest 10
(viii) Savings of non departmental government enterprises 5
(ix) Current transfers from rest of the world 15
Solution: -
Private Income = (i) - (v) – (viii) + (vii) + (vi) + (ix)
= 1300 – 35 – 5 +10 + 30 + 15
= Rs. 1315 crores.
Personal Income = Private Income – (ii) – (iv)
= 1315 -15 -25
= Rs 1275 crores.
Personal Disposable Income = Personal Income – (iii)
= 1275 – 40
= Rs 1235 Crores.
Q.5. Estimate (i) Personal Disposable Income, (ii) Private Income and (iii) National Income from the following data:
(Rs. in Crores)
(i) Personal income 1225
(ii) Saving of private corporate sector 12
(iii) Corporate tax 23
(iv) Current transfer from government administrative departments 30
(v) Current transfer from rest of the world 25
(vi) Income from property and entrepreneurship accruing to Government Administrative Departments 25
(vii) Savings of non departmental government enterprises 20
(viii) Net indirect tax 195
(ix) Direct tax paid by the households 25
Solution: -
Personal Disposable Income = Personal income - Direct tax
= 1225 - 25
= 1200 Crores
Private Income = Personal income + Saving of private corporate sector + Corporate tax
= 1225 +12 + 23
= 1260 Crores
National Income = Private Income – (iv) – (v) + (vi) + (vii)
= 1260 – 30 - 25 + 25 + 20
= 1260 Crores
Q.6. Estimate the following with the help of given data:
(i) GDPMP ,
(ii) Net Value Added at factor cost; and (iii) prove that it is equal to the income generated.
(Rs. in Crores)
(i) Increase in the stock of unsold goods 1000
(ii) Sales 10,000
(iii) Net indirect tax 800
(iv) Purchase of raw materials from other firms 1650
(v) Purchase of fuel and power 850
(vi) Consumption of fixed capital 500
(vii) Rent 700
(viii) Wages and salaries 3500
(ix) Interest payment 1000
(x) Dividend 1500
(xi) Corporate gain tax 300
(xii) Undistributed profit 200
Solution: -
GDPMP = Sales + Increase in the stock - Purchase of raw materials - Purchase of fuel and power.
= 10,000 + 1000 -1650 -850
= 11,000 -2500
= 8500 Crores.
Net Value Added at factor cost = Sales + Increase in the stock - Purchase of raw materials – Purchase of fuel and power - Consumption of fixed capital - Net indirect tax.
= 10,000 + 1000 - 1650 - 850 - 500 – 800
= 11,000 – 3800
= 7200 Crores.
Income generated = Rent + Wages and salaries + Interest + Dividend + Corporate gain tax + Undistributed profit.
= 700 + 3500 + 1000 + 1500 + 300 + 200
= 7200 Crores.
Hence it is proved that Net Value Added at factor cost = Income Generated
1 Mark Questions with Answer
1. Define stock variable.
Ans. A variable whose value is measured at a point of time.
2. Define capital goods.
Ans. Goods used is producing other goods are called capital goods.
3. What is nominal gross domestic product ?
Ans. When GDP of a given year is estimated on the basis of price of the same year, it is called nominal GDP.
4. Define flow variables.
Ans. Any variable whose magnitude is measured over a period of time is called a glow variable.
5. Define ‘real’ gross domestic product.
Ans. When GDP of a given year is estimated on the basis of base year prices it is called real gross domestic product.
6. Define capital formation.
Ans. Increase in the stock of capital in the given period is called capital formation
3/4 Marks Questions with Answers
1. Calculate gross value added of factor cost :
(i) Units of output gold (units) 1000
(ii) Price per unit of output (Rs.) 30
(iii) Depreciation (Rs.) 1000
(iv) Intermediate cost (Rs.) 12000
(v) Closing stock (Rs.) 3000
(vi) Opening stockf (Rs.) 2000
(vii) Exise (Rs.) 2500
(viii) Sales Tax 3500
Ans. GVAFC = (ixii) + v – vi – iv – vii – viii
= (1000X30) + 3000 – 2000 – 12000 – 2500 – 35000 = Rs. 13000
2. Calculate Net Value added at factor cost :
(i) Consumption of Fixed capital (Rs.) 600
(ii) Import duty (Rs.) 400
(iii) Output sold (units) 2000
(iv) Price per unit of output (Rs.) 10
(v) Net change in stock (Rs.) (–) 50
(vi) Intermediate cost (Rs.) 10000
(vii) Subsidy (Rs.) 500
Ans. NVA FC = (iii x iv) + v – vi – ii + vii – i
= (2000x10) + (–50) – 10000 – 400 + 500 – 600
= Rs. 9450
3. Find Net Value added at market price :
(i) Output sold (units) 800
(ii) Price per unit of output (Rs.) 20
(iii)Execisde (Rfsr.) 1600
(iv) Import duty (Rs.) 400
(v) Net change in stock (Rs.) (–) 500
(vi) Defniciation (Rs.) 1000
(vii) Intermediate cost (Rs.) 8000
Ans. NVAmp = (i x ii) + v – vii – vi
= (800x20) + (–500) – 8000 – 1000
= Rs. 6500
4. Giving reasons classify the following into intermediate products and final products
(i) Furniture purchased by a school.
(ii) Chalk, duster, etc, purchsed by a school.
Ans. (i) It is final product because it is purchased for final investment.
(ii) These are intermediate products because these are taken to be used up completely during the same year.
5. Giving reasons, explain the treatment assigned to the following which estimating national income.
(i) Family members working free on the farm owned by the family.
(ii) Payment of interest on borrowings by general government.
Ans. (i) Imputed salaries of these members will be included in national income.
(ii) It will not be included in national income because it is non-factor payment as general government borrows only for consumption purpose.
6. Giving reasons, explain the treatment assigned to the following which estimating national income.
(i) Payment of income tax by a firm
(ii) Festival gifts to employes.
Ans. (i) Not included, as it is transfer payment from firm to government.
(ii) Not included.as it is transfer payment.
7. Explain the basic of classifying goods into intermediate and final goods.Give suitable examples.
Ans. Goods which are purchased by a production unit from other production units and meant for resale or for usingup completely during the same year are called intermediate goods for example : raw material.
Goods which are purchased for consumption and investment are called final goods for example : Purchase of machinery for instalation in factory.
8. Giving reason classify the following into intermediate and final goods.
(i) Machine purchased by a dealer of machine.
(ii) A car purchased by a house hold.
Ans. (i) It is an intermediate good because it is meant for resale in the market.
(ii) It is a final good because it is meant for final consumption.
9. How will you treat the following in estimating rational income of India? Give reasons for your answer.
(i) Value of bonus shares received by shareholders of a company.
(ii) Interest received on loan given to a foreign company in India.
Ans. (i) It is not included in national income because it is the return of financial capital and not of the goods & services.
(ii) It is included in the national income as interest is a factor income and a part of domestic income.
6 Mark Questions
1. How will you treat the following which estimating national income of India? Give reasons.
(a) Divident received by an Indian from his investment in shares of a foreign company.
(b) Money received by a family in India from relatives working abroad.
(c) Interest received on loans given to a friend for purchasing a car.
(d) Dividend received by a foreigner from investment in shares of an Indian company.
(e) Profit earned by a branch of an indian bank in Canada
(f) Scholership given to indian students in india by a foregin company.
(g) Fees received from students.
(h) Profits earned by branch of a foreign bank.
(i) Interest paid by an individual on a loan taken to buy a car.
(j) Expenditure on machines for installation in a factory.
(k) Profit earned by a branch of foreign bank in India.
(l) Payment of salaries to its staff by an embassy located in New Delhi.
(m) Interest received by an Indian resident from firms abroad.
(n) Salaries received by Indians working in branches of foreign banks in India
(o) Profits earned by an Indian bank from its branches abroad.
(p) Rent paid by embassy of Japan in India to an Indian resident. (q) Imputed rent of self occupied house.
(r) Interest received on debentures
(s) Financial help received for flood victims.
2. How will you treat the following which estimating domestic factor income of India? Give reasons.
(i) Remittances from non-resident Indian to their families in India
(ii) Rent paid by the embassy of Japan in India to a resident Indian.
(iii) Profit earned by branches of foreign bank in India.
(iv) Payment of salaries to its staff by embassay located in India.
(v) Interest received by an Indian resident from firms abroad.
3. Are the following part of a country’s net domestic product at market price? Explain
(a) Net indirect tax
(b) Net export
(c) NFIA
(d) Consumption of fixed capital.
Ans. (a) It is factor income from abroad so will be included in national income.
(b) It is transfer receipts, so it is not included in national income.
(c) Not included in national income, because it is a non-factor receipt as loan is not used for production for consumption
(d) Included as it is a factor income to abroad.
(e) It is a part of NFIA and will be included in national income.
(f) It is transfer receipts, so it is not included in national income.
(g) It is included in national income becuase it is a part of the private final consumption expenditure of the house hold.
(h) Included in national income because it is part of domestic factor income of India.
(i) Not included because it is a non-factor income as loan is not used for production but for onsumption.
(j) Included because it results in flow of income throught productive activities
(k) Included, because it is a part of domestic product of India.
(l) Not included because it is not a part of domestic product of India
(m) Included as it is the part of NFIA.
(n) Included because it is earned in domestic territory of India.
(o) Included because it is aprt of NFIA
(p) Included as it is paid to an Indian resident out side the domestic territory of a country. It will be included in NFIA.
(q) Included as a part of rent as it is payment to self for housing services.
(r) Included because it is a factor earning
(s) Not included as it is a transfer payment.
Ans. 2 (i) Not included as it is a transfer payment
(ii) Not included because Japanese embassy in India does not fall with it the domestic territor of india.
(iii) Included because it falls with in the domestic territory of India
(iv) Not included as an embassy located in India is not fall with in the domestic territory of India
(v) Not included in domestic product but it is the part of NFIA.
Ans. 3 (a) Yes, because market price = factor cost + Net Indirect tax
(b) Yes, because NDPMP includes net exports
(c) No, because domestic means it excludes NFIA
(d) No, net means consumption of fixed capital is excluded.
