CBSE Class 12 Economics National Income Worksheet Set A

Short Answer Type Questions

Question. Explain the concepts of Real GDP and Nominal GDP, using a suitable numerical example.
Answer: (i) Real GDP : When GDP is measured at constant price or the base year’s prices, it is known as Real GDP. GDP at constant prices will only increase when there is an increase in the flow of goods and services in the economy. 
(ii) Nominal GDP : When GDP is measured at the prevailing or the current year’s price, it is known as Nominal GDP. GDP at current prices may increase even if there is no increase in flow of goods and services in the economy. 
Any suitable numerical example.

Question. How should the following be treated whilecalculating national income ? Give reasons for your answer.
(i) Interest received by households from banks.
(ii) Dividend received by shareholders.
Answer: (i) Bank is a production unit so this is a factor income and hence should be included. 
(ii) It is a part of the profits of production units which is distributed to the owners so it is included.

Question. Calculate Sales from the following data :
(Contents) (₹ in lakh)
(i) Net Value Added at Factor Cost 560
(ii) Depreciation 60
(iii) Change in Stock (–) 30
(iv) Intermediate Cost 1,000
(v) Exports 200
(vi) Indirect taxes 60
Answer: Sales = (i + ii + vi + iv) – iii 
= 560 + 60 + 60 + 1,000 – (–30) 
= ₹ 1,710 lakh

Question. How should the following be treated in the calculation of national income ? Give reasons for your answer.
(i) Government expenditure on street lighting.
(ii) Sale of an old house. 
Answer: (i) Included, because it is final expenditure of the government. 
(ii) Not included, because it does not result in any production. Its value was already included when it was newly constructed.

Question. Calculate “Net Value Added at Factor Cost” from the following data :
(Items) (₹ in lakh)
(i) Intermediate consumption 300
(ii) Change in stock 50
(iii) Net indirect taxes 70
(iv) Sales 500
(v) Consumption of fixed capital 20
(vi) Imports 40
Answer: NVAFC = (iv) + (ii) – (i) – (iii) – (v).
or = Sales + Change in stock – Intermediate
consumption – Net direct taxes – Consumption
of fixed capital 2
= 500 + 50 – 300 – 70 – 20 1½
= 550 – 390
NVAFC = ₹ 160 lakh.

Question. How should the following be treated while calculating national income ? Give reasons for your answer.
(i) Purchases by foreign tourists.
(ii) Purchase of shares by a domestic firm. 
Answer: (i) Included because such an expenditure is treated as exports. 
(ii) Not included, because it is merely a financial transaction not resulting in any production.

Question. What is meant by problem of Double Counting ?
How this problem can be avoided.
Answer: The problem of double counting arises when the value of certain goods and services are counted more than once while estimating National Income by Value Added Method. This happens when the value of intermediate goods is counted in the estimation of National Income along with the final value of goods and services. Two methods to avoid the problem of double counting :
(i) To consider only the final value of output produced.
(ii) To consider only the value added of the output produced.

Question. How should the following be treated in the calculation of national income ? Give reasons for your answer.
(i) Interest on public debt.
(ii) Bonus given to railway employees.
Answer: (i) Not included, because public debt interest is interest on loan taken by government to meet its day to day consumption expenditure, and not for investment. 
(ii) Included, because it is compensation of employees.

Question. How will you treat the following while calculating domestic product of India ? Give reasons for your
Answer:
(i) Profits earned by a foreign company in India.
(ii) Salary of Indian residents working in Russian Embassy in India. 
is a part of domestic product of India because the company is within the domestic territory of India.
Hence, it is included in domestic product of India.
(ii) Salary of Indian residents working in Russian Embassy in India is not included in domestic
product of India because Russian Embassy is not a part of domestic territory of India.

Question. In a single day Raju, the barber, collects ₹ 500 from haircuts; over this day, his equipment depreciates in value by ₹ 50. Of the remaining ₹450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹ 220 for improvement and buying of new equipment. Raju’s contribution to the following measures of income:
(i) Gross Domestic Product,
(ii) NNP at market price, (iii) NNP at factor cost. 
Answer: Assuming intermediate consumption = 0 and
change in stock (A Stock) = 0.
(i) GVAMP = ₹ 500 (Raju’s contribution to GDP)
(ii) NVAMP = GVAMP – Depreciation
= ₹ 500 – ₹ 50
= ₹ 450(Raju’s contribution to NNPMP)
(iii) NVAFC = NVA_MP – Net indirect taxes
= ₹ 450 – ₹ 30
= ₹ 420 (Raju’s contribution to NNP_FC)

Question.. Calculate Gross Value Added at Factor Cost.
(Items) (₹ in crore)
(i) Domestic sales 3,000
(ii) Change in stock (–) 100
(iii) Depreciation 300
(iv) Intermediate consumption 2,000
(v) Exports 500
(vi) Indirect taxes 250
(vii) Net factor income from abroad (–) 50
Answer: GVA_FC
= (i) + (v) + (ii) – (iv) – (vi)
= 3,000 + 500 + (–100) – 2,000 – 250
= ₹ 1,150 crores.

Question.. Giving reason, explain how should the following
be treated in estimating national income : (i) Expenditure on fertilizers by a farmer. (ii) Purchase of tractor by a farmer.
Answer: (i) Expenditure on Fertilizers—It is intermediate cost for the farmer and deducted from the value of output while arriving at National Income.
Therefore, not included. 
(ii) Purchase of Tractor—It is included because it is capital formation / investment by the farmer.

Question.. Giving reason, explain how should the following
be treated in estimating national income : (i) Payment of bonus by a firm. (ii) Payment of interest on a loan taken by an employee from the employer. 
Answer: (i) Payment of bonus : It will be included in national income as it is a part of compensation of employees.
(ii) Payment of Interest : It will not be included in the national income accounting as it is assumed that the loan is taken for consumption purpose and therefore, treated as a transfer in cause.

Question. Calculate Sales from the following data :
(Items) (₹ in lakh)
(i) Subsidies 200
(ii) Opening Stock 100
(iii) Closing Stock 600
(iv) Intermediate Consumption 3,000
(v) Consumption of Fixed Capital 700
(vi) Profit 750
(vii) Net Value Added at Factor Cost 2,000
Answer: Sales = (vii) – [(iii) – (ii)] + (iv) + (v) – (i) 
= 2,000 – [600 – 100] + 3,000 + 700 – 200 
= ₹ 5,000 lakh

Question. Giving reason, explain how should the following
be treated in estimating national income : (i) Interest paid by banks on deposits by individuals. (ii) National Debt interest. 
Answer: (i) Interest paid by banks : It will be included as it is a factor income.
(ii) National Debt Interest : It will not be included as it is assumed that Government borrows for consumption purpose. Therefore, it is treated as transfer income.

Question. Giving reason, explain how should the following
be treated while estimating national income : (i) Expenditure on free services provided by government. (ii) Payment of interest by a Government firm.
Answer: (i) Expenditure on free services provided by Government should be included in the estimation of national income because expenditure on
these services is a part of Government Final Consumption Expenditure.
(ii) Payment of interest by a Government firm should be included while estimating national income because it is a kind of factor payment.

Question.. How should the following be treated while
estimating national income ? Give reasons. (i) Expenditure on education of children by a family. (ii) Payment of electricity bill by a school.
Answer: (i) Expenditure on education of children by a family is included in national income since it is a part of Private Final Consumption Expenditure.
(ii) Payment of electricity bill by a school is not included in national income since it is a part of intermediate consumption.

Question. Calculate Net Value Added at Market Price. (Items) (₹ in crore)
(i) Intermediate consumption 1,000
(ii) Consumption of fixed capital 50
(iii) Net indirect taxes 150
(iv) Sales 2,000
(v) Exports 200
(vi) Net factor income to abroad 100
(vii) Change in stock (–) 50
Answer: NVA_mp = (iv)+(vii) − (i) − (ii)
= 2000 + (−50) − 1000−50
= ₹ 900 crore

Question.. Giving reason, explain how the following should
be treated while estimating national income: (i) Payment of excise duty by a firm. (ii) Payment of interest by a firm. 
Answer: (i) Payment of excise duty only increases the market value of final goods and services. Therefore, this is not included in the estimation of national
income.
(ii) Payment of interest by a firm is included in the national income because a firm takes loans for productive purposes.

Question. How should the following be treated while estimating national income ? Give reasons for your answer.
(i) Festival gift from an employer. (ii) Rent free house from an employer. 
Answer: (i) Festival gift from an employer is not included in the estimation of national income because it is a transfer payment.
(ii) Rent free house from an employer is included in the estimation of national income because it is a kind of wages in kind and therefore, a part of compensation of employees.

Question. Calculates Sales from the following data :
(Items) (₹ in lakh)
(i) Intermediate Costs 700
(ii) Consumption of Fixed Capital 80
(iii) Change in Stock (–) 50
(iv) Subsidy 60
(v) Net Value Added at Factor Cost 1,300
(vi) Exports 50
Answer: Sales = (v + ii – iv + i) – iii 
= 1,300 + 80 – 60 + 700 – (–50) 
= ₹ 2,070 lakh

Question. Giving reason, explain how the following should
be treated while estimating national income : (i) Free medical facilities by the employer. (ii) Contribution to provident fund by employees.
Answer: (i) Free medical facilities by the employer is included in the estimation of national income because it is a kind of wages in kind and therefore, a part of compensation of employees.
(ii) Contribution to provident fund by the employees is an integral component of income. It is paid out of income. It is, therefore, not separately added in the estimation of national income.

Long Answer Type Questions

Question. Discuss briefly, the circular flow of income in a two sector economy with the help of a suitable diagram. U[SQP 2018-19]OR Explain the circular flow of income.
Answer: Circular Flow of income in a two sector economy: Households are owners of factors of production, they provide factor services to the films (producing units). Firms provide factor payments in exchange of their factor services. So, factor payments flow from firms (producing units) to households.
Households purchase goods and services from firms (producing units) for which they make payment to them. So consumption expnditure (spending on goods and services) flows from households to the firms.

Question. Define Real Flow. Explain how money flows are opposite to real flows. How ? 
Answer: Real Flow : Real flow of income implies the flow of factor services from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector. 2 Money flows are opposite to real flows because money flows are in response to the real flows. Example, There is a real flow of goods and services from the producers to the households. It is in response to it, that the households makes payments to the producers. So, that money flows from the households to producers in terms of consumption expenditure. Likewise, there is a real flow of factor services from the households to the producers. It is in response to it, that the producers make payments to the households so that, money flows from producers to the households in terms of factor payments.

Question. Explain the precautions that are to be taken while estimating national income by value added method. 
OR
What precautions should be taken while estimating national income by value added method ? Explain.
Answer: (i) Intermediate Goods are not to be included in the national income since such goods are already included in the value of final goods. If they are included again, it will lead to double counting. (ii) Sale and purchase of second-hand goods is not included as they were included in the year in which they were produced and do not add to current flow of goods and services. However, any commission or brokerage on sale or purchase of such goods will be included in the national income as it is a productive service. (iii) Production of services for self-consumption or domestic services are not included. Domestic services like services of a housewife, kitchen gardening, etc. are not included in the national income since it is difficult to measure their market value. These services are produced and consumed at home and never enter the market place and are termed as non-market transactions. (iv) Production of goods for self-consumption will be included in the national income as they contribute to the current output. Their value is to be estimated or imputed as they are not sold in the market. (v) Imputed value of owner-occupied houses should be included. People who live in their own houses, do not pay any rent. But, they enjoy housing services similar to those people who stay in rented houses. Therefore, value of such housing services is estimated according to market rent of similar accommodation. Such an estimated rent is known as imputed rent.
(vi) Change in stock of goods will be included. Net increase in the stock of inventories will be included in the national income as it is a part of capital formation.

Question. What precautions should be taken while estimating national income by income method ? Explain.  
Answer: (i) Transfer incomes like scholarships, donations, charity, old age pensions, etc. are not included in the National income because such receipts are not connected with any productive activity and there is no value addition. (ii) Income from sale of second-hand goods will not be included in national income as their original sale has already been counted. If they are included again, it would lead to double counting. However, any brokerage or commission received by brokers or commission agents on sale of such goods will be included as it is an income received for rendering productive service. (iii) Income from sale of shares, bonds and debentures will not be included as such transactions do not contribute to current flow of goods and services. These financial assets are mere paper claims and involve a change of title only. However, any commission or brokerage on such financial assets is included as it is a productive service. (iv) Windfall gains like income from lotteries, horse race, etc. are not included as there is no productive activity connected with them. (v) Imputed value of services provided by owners of production units will be included. Imputed value of owner-occupied houses, interest on own capital, production for self-consumption, etc. will be included as these are productive activities and add to the flow of goods and services. (vi) Payments out of past savings like death duties, gift tax, wealth tax, etc. are not included in the national income because they are paid out of wealth or past savings and do not add to current flow of goods and services. Indirect taxes are not included in national income at factor cost. However, they are included in national income at market price.

Question. Explain the precautions that should be taken while estimating national income by expenditure method. 
OR
What precautions should be taken while estimating national income by expenditure method ? Explain.
Answer: (i) Expenditure on intermediate goods will not be included in the national income as it is already included in the value of final expenditure. If it is included again, it will lead to double counting of expenditures. (ii) Transfer Payments are not included as such payments are not connected with any productive activity and there is no value addition. (iii) Purchase of second-hand goods will not be included as such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of goods and services. However, any commission or brokerage on such goods is included as it is a payment made for productive services. (iv) Purchase of financial assets (shares, debentures, bonds, etc.,) will not be included as such transactions do not contribute to current flow of goods and services. These financial assets are mere paper claims and involve a change of title only. However, any commission or brokerage on such financial assets is included as it is a productive service. (v) Expenditure on own account production (like production for self-consumption, imputed value of owner occupied houses, free services from general government and private non-profit making institutions serving households) will be included in the national income since these are productive services.

Question. Explain the problem of Double Counting in estimating national income, with the help of an example. Also, explain two alternative ways of avoiding the problem.
Answer: The counting of the value of commodity more than once is called Double Counting. This leads to overestimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding overestimating the value of domestic product. For example, a farmer produces one ton of wheat and sells it for ` 400 in the market to a flour mill. The flour mill sells it for ₹ 600 to the baker. The baker sells to the bread shopkeeper for ` 800. The shopkeeper sells the entire bread to the final consumers for ` 900. Thus,Value of Output = ₹ 400 + ₹ 600 + ₹ 800 + ₹ 900 = ₹ 2,700 Infact, the value of wheat is counted four times, the value of services of the miller thrice, and the value of services by the baker twice. In other words, the value of wheat and value of services of the miller and of the baker have been counted more than once. The counting of the value of commodity more than once is called Double Counting. To avoid the problem of double counting two methods are used : (i) Final Output Method, and (ii) Value Added Method. (i) Final Output Method : According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. In the above example, the value of final good, i.e., Bread is ₹ 900. (ii) Value Added Method : Another method to avoid the problem of double counting is to estimate the total value added at each stage of production. In the above example, the value added at each stage of production is ₹ 400 + ₹ 200 + ₹ 200 + ₹ 100 = ₹ 900.

Question. (i) State any two precautions that must be taken into consideration while estimating national income by value added method. (ii) In any economy, following transactions took place. Calculate total consumption expenditure of households and value added by Firm B : (a) Firm A sold to firm B goods of ₹ 80 crore; to firm C ₹ 50 crore; to household ` 30 crore and goods of value ₹ 10 crore remains unsold. (b) Firm B sold to firm C goods of ` 70 crore; to firm D ₹ 40 Crore; goods of value ₹ 30 crore were exported and goods of value ₹ 5 crore was sold to government.
Answer: (i) Precautions of value added method are : (a) Value of sale and purchase of second hand goods is not considered while estimating value added as the value of second hand goods is already accounted during the year they were produced. (b) Value of intermediate goods is not included in the estimation of value added because value of intermediate goods is reflected in the value of final goods. (ii) Value of output of firm B = Sales of firm B to firm C + Sales of firm B to firm D + Exports + Sales of firm B to Government =70+40+30+5 = ₹ 145 crores Value Added by Firm B = Value of output by Firm B - Purchases by Firm B from firm A =145-80 = ₹ 65 crore

Question. Calculate National Income by (i) Income Method, and (ii) Expenditure Method from the following data : (Items) (₹ in crore)
(i) Profit 200
(ii) Private Final Consumption Expenditure 440
(iii) Govt. Final Consumption Expenditure 250
(iv) Compensation of Employees 350
(v) Gross Domestic Capital Formation 90
(vi) Consumption of Fixed Capital 20
(vii) Net Exports (–) 20
(viii) Interest 60
(ix) Rent 70
(x) Net Factor Income to Abroad 50
(xi) Net Indirect Taxes 60
Answer: Income Method NNPFC
= Profit + Compensation of Employees + Interest + Rent – Net Factor Income to Abroad 
= 200 + 350 + 60 + 70 – 50 1
= ₹ 630 crore. ½ Expenditure Method NNP_FC
= Private Final Consumption Expenditure + Govt. Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports – Consumption of Fixed Capital – Net Factor Income to Abroad – Net Indirect Taxes 
= 440 + 250 + 90 + (– 20) – 20 – (50) – 60 1
= 780 – 20 – 20 + 50 – 60
= 780 – 100 + 50
= 780 – 150 NNP_FC = ₹ 630 crore.

Question. Calculate National Income by
(i) Income Method and
(ii) Expenditure Method from the following data : (Items) (₹ in crore)
(i) Govt. Final Consumption Expenditure 2,000
(ii) Net Domestic Capital Formation 600
(iii) Consumption of Fixed Capital 70
(iv) Net Exports 60
(v) Net Indirect Taxes 200
(vi) Private Final Consumption Expenditure 4,000
(vii) Net Factor Income to abroad 60
(viii) Compensation of Employees 3,660
(ix) Profits 1,500
(x) Rent 500 (xi) Interest 800
(xii) Dividend 300
Answer: National Income : Income Method NNPFC
= Compensation of Employees + Profit + Rent + Interest – Net Factor Income to Abroad 
= 3,660 + 1,500 + 800 – 60 + 500 1
= 6,460 – 60 NNPFC
= ₹ 6,400 crore. Expenditure Method NNPFC = Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports + Private Final Consumption Expenditure – Net Indirect Taxes – Net Factor Income to Abroad 
= 2,000 + 600 + 60 + 4,000 – 200 – 60
= [6,660] – [260] NNPFC or NI = ₹ 6,400 crore.

Question. Calculate National Income : (Content) (₹ in crore)
(i) Net current transfer from rest of the world 30
(ii) Private final consumption expenditure 400
(iii) Net domestic capital formation 100
(iv) Change in stock 50
(v) Depreciation 20
(vi) Government final consumption expenditure 200
(vii) Net exports 40
(viii) Net indirect taxes 80
(ix) Net factor income paid to abroad 10
Answer: NI = (ii) + (vi) + (iii) + (vii) – (ix) – (viii)
= Private final consumption expenditure + Govt. final consumption expenditure + Net domestic capital formation + Net exports
– [Net factor income paid to abroad + Net indirect taxes] 
= 400 + 200 + 100 + 40 – [10 + 80] 
= 740 – 90 National Income
= ₹ 650 crore.

Question. Calculate National Income (Content) (₹ in crore)
(i) Net domestic capital formation 150
(ii) Government final consumption expenditure 300
(iii) Net factor income from abroad (–) 20
(iv) Private final consumption expenditure 600
(v) Depreciation 30 (vi) Net exports 50
(vii) Net indirect taxes 90 (viii) Net current transfers from rest of the world 40
Answer: National Income = (iv) + (ii) + (i) + (vi) + (iii) – (vii)
= Private final consumption expenditure + Govt. final consumption expenditure + Net domestic capital formation + Net exports + [Net factor income from abroad
– Net indirect taxes] 3
= 600 + 300 + 150 + 50 + (– 20) – 90 
= 1,100 – 110 N.I.
= ₹ 990 crore.

Question. Calculate National Income from the following data : (Content) (` in crore)
(i) Private final consumption expenditure 900
(ii) Profit 100 (iii) Government final consumption expenditure 400
(iv) Net indirect taxes 100
(v) Gross domestic capital formation 250
(vi) Change in stock 50
(vii) Net factor income from abroad (–) 40
(viii) Consumption of fixed capital 20
(ix) Net imports 30
Answer: N.I. = (i) + (iii) + (v) – (viii) – (ix) – (iv) + (vii) 
= 900 + 400 + 250 – 20 – 30 – 100 + (–40) 
= ₹ 1,360 crore.

Question. Differentiate between National Income at Current Prices and National Income at Constant Prices. Which of the two presents a better view of the economic growth of economy and why ?
Answer: National income at Constant Prices : When
National product is estimated on the basis of prices
prevailing in the base year, it is called national income at constant prices or real national income.
National Income at Current Prices : When
national product is estimated on the basis of
prices prevailing in the current year, it is called
national income at current prices or nominal
national income.
National income at constant prices = National income at current prices/Price index of current year x Price index of base year
National income at constant prices reflects the real growth of an economy because it increases only when there is an increase in real national output over a period of time.
National income at current prices may increase due to increase in prices of goods and services during the current year, thus it does not reflect the true picture of economic growth.

Question. Calculate Net Domestic Product at Factor Cost by (i) Income Method, and (ii) Production Method from the following data : (Items) (₹ in crore)
(i) Net Value Added at market price by primary sector 1,000
(ii) Wages and salaries 2,000
(iii) Social Security Contribution by Employers 100
(iv) Net value added at market price by the secondary sector 600
(v) Corporation Tax 30
(vi) Retained Earnings of Private Corporations 10
(vii) Net value added at market price by the tertiary sector 1,400
(viii) Dividend 60
(ix) Rent 300
(x) Interest 300
(xi) Net Indirect Tax 200
(xii) Social Security Contribution by Employees 80
Answer: (i) By Income Method
Net Domestic Product at Factor Cost (NDPFC) =
Wages and Salaries + Social Security Contribution
by Employers + Corporation Tax + Retained
Earning of Private Corporations + Dividend +
Rent + Interest 1½
= 2,000 + 100 + 30 + 10 + 60 + 300 + 300 1
= ₹ 2,800 crore. ½
(ii) By Production Method
Net Domestic Product at Factor Cost (NDPFC) =
Net Value Added by Primary Sector + Net Value
Added by Secondary Sector + Net Value Added
by Tertiary Sector – Net Indirect Taxes 1½
= 1,000 + 600 + 1,400 – 200
= 3,000 – 200 1
= ₹ 2,800 crore.

Question. (i) Define Real Gross Domestic Product.” (ii) Calculate Gross National Product at market prices by (a) expenditure method and (b) income method.
(i) Compensation of employees 100
(ii) Private final consumption expenditure 200
(iii) Rent 20
(iv) Government final consumption expenditure 50
(v) Profits 10
(vi) Interest 10
(vii) Gross domestic Capital Formation 60
(viii) Net imports 10
(ix) Consumption of fixed capital 20
(x) Net Indirect Taxes 30
(xi) Net factor income from abroad (−)20
(xii) Change in Stocks 10
(xiii) Mixed income 110
Answer: (i) Real GDP : When Gross Domestic Product is
evaluated at constant/base year prices 2
(ii) (a) GNPMP (Expenditure Method) = (ii) + (iv) +
(vii) - (viii) + (xi) 1
=200–50+60-(10)+(-20) ½
= ₹ 280 crores ½
(b) GNPMP (Income Method)
= (i) + (iii) + (v) + (vi) +(xiii) + (ix) + (x) + (xi)
=100 + 20 + 10 + 10 + 110 + 20 + 30 + (–20)
= ₹ 280 Crores.

Question. Calculate (a) Operating Surplus and (b) Domestic Income. (₹ in crore)
(i) Compensation of Employees 2,000
(ii) Rent and Interest 800
(iii) Indirect taxes 120
(iv) Corporation tax 460
(v) Consumption of Fixed Capital 100
(vi) Subsidies 20
(vii) Dividend 940
(viii) Undistributed profits 300
(ix) Net Factor Income to Abroad 150
(x) Mixed Income 200
Answer: (a) Operating surplus = Rent and interest + Corporation tax + Dividend + Undistributed profits = 800 + 460 + 940 + 300 Operating surplus = 2500 crores (b) Domestic income / NDPFC = Compensation of employees + Rent and interest + Corporation tax + Dividend + Undistributed profits + Mixed income = 2000 + 800 + 460 + 940 + 300 + 200 NDP_FC = 4700 crores.

Question. Giving reason, explain how should the following be treated in estimating gross domestic product at Market Price.
(i) Fees to a mechanic paid by a firm. (ii) Interest paid by an individual on a car loan taken from a bank. (iii) Expenditure on purchasing a car for use by a firm. 
Answer: (i) Fees paid to mechanic by a firm : It is not included because it is an intermediate cost of the firm. 
(ii) Interest paid by an individual : It is not included because the loan is taken to meet consumption expenditure and therefore, interest paid on such a loan is not a factor payment.
(iii) Expenditure on purchasing car by a firm : It is included because it is an investment expenditure, a final expenditure.

Question. How should the following be treated in estimating national income of a country ? You must give reasons for your answer.
(i) Taking care of aged parents. (ii) Payment of corporate tax. (iii) Expenditure on providing police services by the Government.
Answer: (i) Taking care of aged parents—Should be included because it is a productive service rendered to the parents. 2 (ii) Payments of Corporation Tax—Should not be included because any tax payment is a transfer payment as no good or service is provided in return. 2 (iii) Expenditure on Providing Police Services by Government—Should be included because expenditure on any free services provided by government is government final consumption expenditure.

Question. How should the following be treated while estimating national income ? You must give reason in support of your answer : (i) Bonus paid to employees. (ii) Addition to stocks during a year. (iii) Purchase of taxi car by a taxi driver.
Answer: (i) Bonus : It should be included because it is compensation paid to employees. 2 (ii) Addition to stock : It should also be included because it is investment, a final expenditure. 2 (iii) Purchase of a Taxi by Taxi Driver : It should be included because it is final expenditure on investment.

Question. Giving reason, explain how should the following be treated in estimating National Income : (i) Electricity consumed by a firm. (ii) Pension paid to retired employees. (iii) Free treatment of the poor in hospitals.
Answer: (i) Included in National Income because it results in flow of income through productive activities. (ii) It is not included in the national income because it is a transfer payment. (iii) It is not included in national income because it is unproductive.

Question. Will the following be included in the domestic product of India ? Give reasons for your answer. (i) Profits earned by foreign companies in India. (ii) Salaries of Indians working in the Russian Embassy in India. (iii) Profits earned by a branch of State Bank of India in Japan.
Answer: (i) Yes, as it is a factor income earned within domestic territory of India. (ii) No, because Russian Embassy is not a part of the domestic territory of India. It is factor income from abroad. (iii) No, as profits are not earned within the domestic territory of India.

Question. How will you treat the following while estimating domestic product of a country ? Give reasons for your answer : (i) Profits earned by branches of country’s bank in other countries (ii) Gifts given by an employer to his employees on independence day (iii) Purchase of goods by foreign tourists
Answer: (i) Not a part of domestic product as it is not generated in the domestic territory of the country. (ii) Not a part of domestic product as it is a transfer payment. (iii) Part of domestic product as these are exports produced in the domestic territory.

Question. Will the following be included in the national income of India ? Give reasons for your answer. (i) Financial assistance to flood victims (ii) Profits earned by the branches of a foreign bank in India (iii) Salaries of Indians working in the American Embassy in India.
Answer: (i) No. Financial assistance to flood victims are not included as it is a transfer payment. (ii) No. It is a factor income to abroad. (iii) Yes. Included as it is a factor income from abroad so it is added to NDP to get NI.

Question. Will the following factor incomes be included in domestic factor income of India? Give reasons for your
(i) Compensation of employees to the resident of Japan working in Indian embassy in Japan. (ii) Payment of fees to a Chartered Accountant by a firm. (iii) Rent received by an Indian resident from Russian embassy in India. (iv) Compensation given by insurance company to an injured worker. 
Answer: (i) Yes, it will be included as its part of Factor Income earned in domestic territory of the country. (ii) Payment of fees to a Chartered Accountant is an intermediate expenditure for the firm. Hence, it is to be deducted from the value of output of the firm to obtain value added. Hence
it is not included in domestic factor income of India (iii) No, as rent received by Indian resident from Russian embassy will be part of Factor Income received from abroad as Russian Embassy is not part of domestic territory of the country. (iv) No, as compensation is given by insurance company to employee and not by employer.