CBSE Class 12 Economics National Income Accounting Worksheet

MCQ Questions for  NCERT Class 12 Economics National Income and Its Measurement

Question. Which of the following is an example of normal residents of India?
(a) Foreign worker working in WHO located in India
(b) The German working as director in IMD office located in India
(c) Ambassador in India from the rest of the world
(d) Ambassador of India in rest of the world 

Answer: D

Question. Which of the given pair is incorrectly matched?
Column I Column II
A. Land (i) Rent
B. Labour (ii) Wages and salaries
C. Capital (iii) Interest
D. Entrepreneur (iv) Dividend
Codes
(a) A – (i)
(b) B – (ii)
(c) C – (iii)
(d) D – (iv) 

Answer: D

Question. Factor payment received by the households for rendering their services as employees of the producing unit is called (a) Compensation of employees
(b) Rent
(c) Interest
(d) Profit 

Answer: A

Question. Operating Surplus =
(a) Compensation of Employees + Rent + Interest +Profit
(b) Rent + Interest + Profit
(c) Compensation of Employees + Mixed Income of Self-employed
(d) Compensation of Employees + Rent + Interest + Profit +Mixed Income of Self-employed 

Answer: B

Question. Which of the following is included in the estimation of national income?
(a) Expenses on electricity by a factory
(b) Gifts from abroad
(c) Free services by the government
(d) Financial help to earthquake victims 

Answer: C

Question. Which of the following statements is/are correct?
(i) Value added and value of output are identical concepts.
(ii) Sum total of value added by all the producing units within the domestic territory of the country is equal to national product.
Alternatives
(a) Both are true
(b) Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true 

Answer: B

Question. Which of the following is not included in the estimation of national income?
(a) Brokerage on sale of bonds
(b) Imputed value of production for self-consumption
(c) Leisure-time activities
(d) Employer’s contribution to provident fund 

Answer: C

Question. Inventory investment is used as a component to calculate national income in which of the following methods?
(a) Product method and income method
(b) Income method and expenditure method
(c) Product method and expenditure method
(d) Productmethod, incomemethod and expendituremethod 

Answer: C 

Question. National income is the sum of factor incomes accruing to
(a) nationals
(b) economic territory
(c) residents
(d) Both residents and non-residents 

Answer: C

Question. If gross domestic capital formation is ` R.s.3,000, net domestic fixed capital formation is `R.s. 2,000 and inventory investment is ` R.s.150, what will be the value of consumption of fixed capital?
(a) `R.s. 1,000
(b) `R.s.` 850
(c) `R.s. 150
(d) Can’t be determined 

Answer: B

Question. Combined factor income, which can’t be separated into various income components is known as ……… .
(a) Mixed income of self-employed
(b) Compensation of employees
(c) Deferred income
(d) Any of the above 

Answer: A

Question. Other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be
(a) positive
(b) negative
(c) Both positive and negative
(d) No effect 

Answer: D

Question. Which of the following is not a ‘factor payment’?
(a) Free uniform to defence personnel
(b) Salaries to members of Parliament
(c) Rent paid to the owner of the building
(d) Scholarship given to the students 

Answer: D 

Question. If Real GDP is `R.s. 200 and Price Index (with base =100) is 110, calculate Nominal GDP.
(a) `R.s. 33
(b) `R.s. 220
(c) ` R.s.200
(d) `R.s. 100 

Answer: B

Question.Let us assume that the GDP of some country was  `R.s.100 at current prices in 2012-13 and that was `R.s. 90 in 2011-12; and that the GDP at constant 2004-05 prices was `R.s. 59 in 2012-13 and that was `R.s. 56.1 in 2011-12, then in GDP of 2011-12 at 2012-13 (constant) prices would be
(a) `R.s.59.1
(b) `R.s. 90
(c) `R.s. 95.08
(d) `R.s.100 

Answer: C 

Question. Which of the given statement is incorrect?
(a) GDP_MP GDP_FC NIT = +
(b) NNPMP NNP = _FC
(c) GNPMP GDP_MP NFIA = +
(d) NNP_FC = National Income 

Answer: B 

Question. If in an economy, all production is undertaken by firms and the recorded sales of all firms in a year are less than their respective recorded costs, then which of the following statements is necessarily true?
(a) At least some firmsmust havemade accounting errors 
(b) The economy’s GDP of that year was negative
(c) The total purchases of intermediates by firms were more than their total sales
(d) None of the above 

Answer: C

Question. With a positive externality
(a) there is under consumption in the free market.
(b) there is over consumption in the free market.
(c) the government may tax to decrease production.
(d) society could be made better-off if less was produced. 

Answer: B

Question. Given the following data for an economy Gross domestic product at market prices `R.s.20,000 Gross domestic capital formation `R.s. 5,000 Depreciation ` R.s.4,000 Net exports (–) ` R.s.2,000 Net factor incomes from abroad ` 5,000 The economy’s net domestic capital formation is
(a) `R.s.1,000
(b) `R.s. 5,000
(c) ` R.s.3,000
(d) (–) `R.s. 1,000 

Answer: A

Question: Which of the following statements is/are correct?
(i) Capital formation is a stock variable.
(ii) A car covering a distance of 400 km in 5 hours includes both stock as well as flow variable. 
Alternatives
 (a) Both are true
(b) Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true  

Answer: D

Question: Depreciation of fixed capital assets refer to
(a) normal wear and tear
(b) foreseen obsolescence
(c) Both (a) and (b)
(d) unforeseen obsolescence 

Answer: C

Question: Money flows are reciprocal of
(a) monetary flows
(b) real flows
(c) circular flow 
(d) inventory flows  

Answer: B

Question: A thousand rupee note is an example of
(a) stock variable
(b) flow variable
(c) Either stock or flow
(d) Neither stock nor flow  

Answer: A

Question:Circular flow of income is based upon which of the following assumptions?
(a) All sectors are self-sufficient and independent
(b) Income generated in one sector is consumed within the same sector
(c) One person’s expenditure is another person’s income
(d) All economies are closed economies

Answer: C

Question. In which of the following cases would the purchase of rice be included while calculating the GDP of India from the expenditure side?
(a) A resident Indian purchases rice to make a dosa which he sells to his neighbour. He then pockets the money received.
(b) A resident Indian purchases rice to make dosa which he sells to his neighbour. He donates the money received to a charity.
(c) A foreign citizen visiting Indian purchases rice to make a dosa which he sells to another foreign citizen visiting India.
(d) A non-resident Indian visiting India purchases rice, goes back to his country of residence, makes a dosa and then sells it to his neighbour. 

Answer: D 

Assertion-Reasoning MCQs

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) 
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A) 
(c) Assertion (A) is true, but Reason (R) is false
(d) Assertion (A) is false, but Reason (R) is true

Question. Assertion (A) Real GDP shows change in the level of economic activity and facilitates inter-regional and international comparison.
Reason (R) It is an inflation adjusted index and account for an increase in the level of production in response to the price changes. 

Answer: A

Question. Assertion (A) Payment of uniforms for nurses by a hospital is not included in the estimation of national income.
Reason (R) Uniforms are provided by the hospital at the time of work. It is to be treated as an intermediate consumption.  

Answer: A

Question. Assertion (A) GDP as an index of welfare may underestimate or overestimate the welfare.
Reason (R) It does not consider the non-monetary exchanges and does not take into consideration the positive or negative aspects associated with an economic activity. 

Answer:  A

Question. Assertion (A) Financial help received by the flood victims should not be included while estimating national income.
Reason (R) Financial help is a transfer payment and should not be included. 

Answer:  A

Question. Assertion (A) Money received from the sale of second hand car will be considered while estimating national income.
Reason (R) Their value is already included and it does not contribute to the current flow of goods and services. 

Answer: D 

Question. Assertion (A) Imputed value of owner-occupied lands are a part of both domestic income and national income.
Reason (R) Factors of production are bound to give its services regardless of the fact that it is giving its services to the owner or an outsider. 

Answer:  A

Question. Assertion (A) Public goods possess the characteristics of non-rivalry and non-excludability.
Reason (R) Non-rival means consumption by one person does not reduces consumption for another person whereas non-excludability implies that no one can be excluded in terms of benefitting from the consumption of public goods.  

Answer: A

Short Answer Type Questions
 

Question. ‘Subsidies to the producers, should be treated as transfer payments’. Defend or refute the given statement with valid reason.
Answer: This statement is refuted because subsidies given to the producers should not be treated as transfer payments.
Subsidies are given to reduce the market price of socially desirable goods such as fertilisers, LPG gas, etc. So, that they can be afforded by the poor section of society.
Transfer payments, on the other hand, are given to fulfill  social objectives. Examples of transfer payments are old age pension, unemployment allowance, etc.
Also, transfer payments are not taken into account while computing the GDP of the country, but subsidies are considered in the computation of GDP.

Question. Suppose the GDP at market price of a country in a particular year was `R.s. 1,100 crore. Net factor income from abroad was ` R.s.100 crore. The value of Indirect taxes – Subsidies was ` R.s.150 crore and national income was ` R.s.850 crore. Calculate the aggregate value of depreciation. 
Answer: NNP_MP NNP_FC NIT = +
= 850 + 150 = `R.s 1,000 crore
GNP<sub>MP</sub> NFIA GDP<sub>MP</sub> = +
= 100 + 1,100
= `R.s. 1,200 crore
Depreciation=GNP_MP NNP_MP −
= 1,200 – 1,000 = 200 crore
Therefore, depreciation = `R.s.200 crore

Question. ‘Domestic services (household services) performed by a woman are not considered as an economic activity. Defend or refute the given statement with valid reason.
Answer: The given statement is refuted on the basis of the following reasons
(i) Domestic services are performed by woman out of love and affection.
(ii) Such services do not add to the flow of goods and services in the economy.
(iii) These services are for self-consumption, not for economy.

Question. In a single day Raju, the barber collects `R.s. 500 from haircuts; over this day, his equipment depreciates in value by `R.s. 50. Of the remaining `R.s. 450, Raju pays sales tax worth ` R.s.30, takes home ` 200 and retains ` 220 for improvement and buying of new equipment. He further pays ` R.s.20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (i) Gross domestic product, (ii) NNP at market price and (iii) NNP at factor cost.
Answer: Assuming intermediate consumption= 0 and Change in stock = 0
(i) GVA<sub>MP</sub> = ` R.s.500 (Raju’s contribution to GDP)
(ii) NVA_MP =GVA_MP – Depreciation = 500 – 50 = `R.s. 450 (Raju’s contribution toNNP<sub>MP</sub> )
(iii) NVA<sub>FC</sub> NVA<sub>MP</sub> – = Net Indirect Taxes = 450 – 30 = `R.s.420 (Raju’s contribution to NNP_FC)  

Question. Calculate Net Value Added at Factor Cost (NVA _FC) from the following data.    

Answer: GVA_MP = Value of Output − Intermediate Consumption = 800 − 200 = `R.s. 600 crores 
NVA<sub>FC</sub> = GVA<sub>MP</sub> − Depreciation − Indirect Tax + Subsidies
NVA<sub>FC</sub> = 600 − 20 − 30 + 50 = ` R.s.600 crores   

Question. GNP is the estimated value of the total worth of production and services earned by the normal residents of a country. But to find out NNP, GNP deducts depreciation, why should we deduct depreciation from GNP?
Answer: The productive power of physical capital stock of a country diminishes gradually because of the wear and tear in the process of production. When the machine becomes totally unproductive, it has to be replaced by new machine. So, a sum of money is set aside every year into depreciation account and new machine can be purchased by utilising this accumulated sum.
So, depreciation is deducted from GNP in order to get more accurate measure of the sustainable production of goods and services in a country in a given year.

Question. Which of the following factor incomes be included in domestic factor income of India? Give reasons for your answer.
(i) Compensation of employees to the residents of Japan working in Indian embassy in Japan.
(ii) Rent received by an Indian resident from Russian embassy in India.
(iii) Profits earned by a branch of State Bank of India in England.
Answer: (i) Compensation of employees to the residents of Japan working in Indian embassy in Japan is a part of factor income of India because Indian embassy in Japan is a part of domestic territory of India.
(ii) Rent received by an Indian resident from Russian embassy in India is not a part of domestic factor income of India because Russian embassy in India is not a part of domestic territory of India.
(iii) Profits earned by a branch of State Bank of India in England is not a part of domestic factor income of India because the branch of SBI in England is not a part of domestic territory of India.

Question. How will the following be treated while estimating national income of India? Give reasons.
(i) Value of bonus shares received by shareholders of a company.
(ii) Capital gains to Indian residents from sale of shares of a foreign company.
(iii) Fees received from students.
Answer: (i) Value of bonus shares received by shareholders of a company is not included in the estimation of national
income of India because these are just financial transactions (leading to change of ownership of financial assets), not contributing to the flow of goods and services in the economy.
(ii) Capital gains to Indian residents from sale of shares of a foreign company is not included in the national income of India because it is a part of financial transactions corresponding to which there is no flow of goods and services in the economy.
(iii) From the students’ point of view, expenditure on fees is to be treated as part of private final consumption expenditure. Accordingly, it is to be included in the estimation of national income of India when expenditure method is used to estimate it. However, from the schools’ point of view, fee received is just a revenue from the sale of services.

Question.Giving reason state how the following are treated in estimation of national income.
(i) Payment of interest by banks to its depositors.
(ii) Expenditure on old age pensions by government.
(iii) Expenditure on engine oil by car service station.
Answer: (i) Payment of interests by bank to its depositors should be included in estimation of national income as it will be treated as factor income.
(ii) Expenditure on old age pensions by government is not a part of national income as it is a transfer payment.
(iii) Expenditure on engine oil by car service station is not a part of national income as it is an intermediate cost.

Question. “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.
Answer: The above argument is refuted with respect to GDP as a welfare measure of the economy. It is because GDP is not a good measure of welfare as it fails to take in to the effect of externalities. Externality means good or bad impact of an activity without paying the price or penalty for that impact of externalities is not accounted in the index of social welfare in terms of GDP.
For example, oil refinery may pollute the nearby source of water. Such harmful effects to people and marine life is not be penalised. Thus it is not ensuring the welfare of the economy through GDP.

Question. Social welfare may not increase even when real GDP increases. Explain.
Answer: Increase in GDP may not cause increase in welfare in a situation when distribution of income becomes skewed (unequal). If, along with an increase in GDP, the percentage of population below poverty line happens to increase, it implies a situation of deprivation on one hand and concentration of economic power on the other. It is a situation when a rising percentage of GDP is being pocketed by a smaller percentage of population. The bulk of population suffers poverty,while only a small segment of the society enjoys prosperity owing to a rise in GDP. The rise in GDP is achieved at the cost of social welfare.

Question. Sale of petrol and diesel cars is rising particularly in big cities. Analyse its impact on gross domestic product and welfare.
Answer: As the sale of petrol and diesel cars rises, it implies that the private consumption expenditure is also rising.
A rise in private consumption expenditure leads to a rise in the gross domestic product.
So, an increase in the sale of petrol and diesel cars will lead to an increase in the gross domestic product of the country.
However, it will not lead to an increase in the welfare of the people because of the below mentioned reasons  
(i) As the sale of petrol and diesel cars rises, then the level of pollution will also rise in the big cities.
(ii) With a rise in the number of cars, the traffic congestion on the roads will worsen.
(iii) A rise in the number of cars will increase the demand for petrol and diesel. This will lead to a rise in the prices of petrol and diesel.
(iv) The already depleted reserves of petrol and diesel will be subjected to further depletion.

Question. ‘‘Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a country.’’
Defend or refute the given statement with valid reasons.
Answer: ‘‘Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a country.’’ This statement is defended because of the following reasons (i) Distribution of GDP If the GDP of the country is rising,it is not necessary that the welfare will also rise. This is because with every increase in the level of GDP, it is not necessary that distribution of income is also equalable.
(ii) Non-Monetary Exchanges In rural economy, barter system of exchange still prevails to some extent. Payments for farm labour are often made in kind rather than in cash. All such transactions remain unrecorded  which causes underestimation of GDP.
(iii) Externalities It refers to good and bad impact of an activity without paying the price or penalty for that activity. Impact of external entities are not accounted in the index of social welfare in terms of GDP.

Question. Explain how ‘non-monetary exchanges’ act as a limitation in taking GDP as an index of welfare.
Answer: It can be understood with the help of following points 
(i) GDP measures only economic value of the current productive activity of a country.
(ii) There are many activities which are not evaluated in monetary terms. In India, non-monetary transactions are present in rural areas where payments for farm labourers are made in kind rather than cash. But such transactions are not recorded.
(iii) Even while producing goods and services, lot of human cost is also involved. For example, sacrificing leisure hours by working but this is never included in total cost.
Therefore, GDP remains underestimated and hence loses its appropriateness as an index of welfare.

Question. Government incurs expenditure to popularise yoga among the masses. Analyse its impact on Gross Domestic Product and welfare of the people.
Answer: The expenditure incurred by the government to popularise yoga among the masses will increase the government final consumption expenditure. With a rise in this component,the domestic income of the country will also rise. So, the expenditure incurred by the government to popularise yoga will lead to an increase in the Gross Domestic Product of the country.
This expenditure will also increase the welfare of the people, as is enumerated below 
(i) As more and more people practise yoga, their health and immunity will improve. This will help in increasing their working capacity.
(ii) As people’s health improve, so government’s expenditure on the curative aspect of health issues will decrease.
(iii) People will develop a positive outlook and their well-being will increase in general.

Question. From the following data, calculate net value added atfactor cost   

Answer: Here, Net Value Added at Factor Cost ( NVA _FC)
= Sales + Change in Stock (Closing Stock −
Opening Stock) − Purchase of Intermediate Goods
− Consumption of Fixed Capital − Indirect Taxes
= 500+(80− 60)− 350− 90−50
= 520− 490 = `R.s.30 crore

Question. What steps are taken while estimating national income by income method?
Answer: Steps: –
1. Identify all producing units within domestic territory of country.
2. Classify factor payment mode to factors of production in the form of rent, interest, wages and profit or compensation of employees, operating surplus and mixed income.
3. Estimate all above components of factor payments made by each producing unit within domestic territory of a country in a year and the sum of such factor payments will estimate NDPFC.
4. Estimate the value of NFIA and then add it into NDPFC to get NNPFC (National Income).

Question. What precautions should be taken while estimating national income by income method?
Answer:1. Only factor incomes are included whereas transfer incomes like gifts, donations, old age pensions etc. are not included in national income because there is no production activity against such income.
2. Income from sale of second-hand goods are not included in national income because such goods have already been taken in national income, but any brokerage/ commission given to a dealer in such transactions is included in national income as it is the reward for factor services.
3. Income for sale of financial assets like shares, debentures, bonds etc. are not included in the national income because it only includes transfer of ownership and doesn’t contribute in the production of goods and services.
4. Any windfall game like lottery income, capital gains etc. are not included in the national income.
5. Imputed rent of self-occupied houses is included in national income.

Question. Define: –
1. GDPMP- It is the market value of all final goods and services produced within the domestic boundary of a country in an accounting year.
2. NDPMP- It is the market value of all net final goods and services produced within the domestic boundary of a country in an accounting year. It excludes depreciation.
3. GNPMP- It is the market value of all final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA.
4. NNPMP- It is the market value of all net final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes depreciation.
5. GDPFC- It is the money value of all final goods and services produced within domestic boundary of country in an accounting year. It includes NIT.
6. NDPFC- It is the money value of all net final goods and services produced within domestic boundary of a country in an accounting year. It excludes depreciation and NIT.
7. GNPFC- It is the money value of all final of goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes NIT.
8. NNPFC- It is the money value of all net final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes depreciation and NIT.

Method to Learn –
G- Final
N– Net Final
MP– Market Value
FC– Money Value
DP– Domestic
NP– Normal Resident
 

Question. What steps are taken while estimating national income by expenditure method?
Answer:  Steps: –
1. Identify all economic units which incurs final expenditure and classify them as
(i)Household sector
(ii)Government sector
(iii)Firm sector
(iv) ROW sector

2. Classify final expenditure incurred by all economic units as
(i)private final consumption expenditure
(ii)government final consumption expenditure
(iii)gross domestic capital formation
(a)gross fixed capital formation
(b)change in stock
(iv)net exports

Question.  Estimate the value of all above components of final expenditure incurred by all economic units within domestic territory of country in a year and their sum will estimate GDPMP.

Question.  From the estimates of GDPMP, value of depreciation and NIT are subtracted and NFIA is added to get NNPFC (National Income).

Question. Explain the components of domestic factor income.
Answer:  1) Compensation of employees: It is the reward paid to an employee for his physical or mental services rendered in the process of production. It can be paid in three ways: –
i) Wages and salaries in cash
ii) Wages and salary in kind
iii) Social security schemes by employer
2) Operating surplus: It refers to income from property and entrepreneurship. It is the sum of rent, interest and profit.
i) Rent and Royalty- Rent is the income earned by landlord by providing the services of land, building or any sub-soil assets. It is to be noted that domestic income also includes imputed rent of self-occupied houses. Royalty is the income earned from intangible assets like copyright, patents, trademarks etc.
ii) Interest- It is the cost of capital sacrificed for a particular period of time. In other words, it refers to that amount which debtor is liable to pay to creditors for the use of funds borrowed.
It is to be noted that interest on loan taken for consumption purpose is considered transfer income so not included in domestic income.
iii) Profits- It is the reward given to factor input ‘entrepreneur’ for undertaking the risk and organising other factors of production.
3) Mixed Income- It is the income of those self-employed persons who provide all factor services of land, labour, capital in their own business so their income includes rent, interest, wages and profit which is difficult to classify individually. So, their income is called mixed income.

Question. Define NFIA. What are the components?
Answer: It refers to difference between factor income earned by normal residents of a country in abroad and factor income earned by non-residents within domestic territory of a country in a year.
Components
1. Net compensation of employees from abroad.
2. Net income from property and entrepreneurship from abroad.
3. Net retained earnings of resident company in abroad.

Question . What is meant by expenditure method?
Answer: E(cxopnesunmdiptutiroen m eextpheondd iist uthrea+t m ientvheostdm wehnitc ehx mpeenasduitruerse n) aotnio tnhael pinucrocmhaes ien o tfe firmnasl ogfo tohdes eaxnpde snedrivtiucrees produced in the economy during the period of an accounting year.

Question. Define nominal GDP.
Answer: Nominal GDP (also called GDP at current prices) refers to market value of the final goods and seesrtivmicaetse dp ruosdinugc ethde wcuitrhrienn tt hyee adr opmriecsetsi.c territory of a country during an accounting year, as

Question. Define depreciation.
Answer: aDcecporuencti aotfi:o n(i ) (Noro rcmonaslu wmeparti oannd o tfe fiarx,e adn cda p(iiit) aEl)x rpeefcetresd t oob lsooslse socfe vnacleu, e( ioiif) Aficxceidd eanstsaelt sd a(imn augsees). on

Question. Define depreciation reserve fund.
Ans. lDoessperse icnia tthioen p rreosceersvse o fuf pnrdo rdeufcetriso tno. that fund which the producers keep to cope with depreciation

Question. Why does an entrepreneur make a provision for consumption of fixed capital?
Answer: Anwo renn-toruetp firexnedeu ars mseatsk. es a provision for the consumption of fixed capital with a view to replace the

Question. What is fixed investment?
Answer: mFiaxcehdi ninevrye)s tomf ethnet prerfoedrsu cteor sin dcurerainseg iann tahcec osutonctkin og fy fiexare.d assets or capital goods (like plant and

Question. What do you mean by inventory investment?
Answer: Change in inventory stock during the year is called inventory investment of the producers.

Question. Define capital loss.
Answer: cCaalpamitailt ileoss,s aisn ad l o(isis) ofafl vla ilnu em oafr fikxeetd v aasluseet so wf hthilee athsseesets a drue rniontg i np uersieo. dIts oocfc eucros noonm acicco ruencet sosfi:o (ni). natural

Long Answer Type Questions

Question. Define the problem of double counting in the estimation of national income. Discuss two approaches to correct the problem of double counting.
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 the bread to a 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 the 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 the commodity more than once is called double counting.
To avoid the problem of double counting, two methods are used
(i) Final Output Method According to this method, the value of intermediate goods is not considered. Only the value of final goods and services are considered.
In the above example, the value of final goods 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. Explain the treatment assigned to the following while estimating national income. Give reasons.
(i) Family members working free on the farm owned by the family.
(ii) Rent free house from an employer.
(iii) Expenditure on free services provided by the government.
Answer:  (i) Family members working free on the farm owned by the family are engaged in the value addition process.
Imputed value of their farm output is included in the estimation of national income. Accordingly, income generated by the farming family would be treated as
mixed income of self-employed, which includes compensation of labour.
(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.
(iii) Expenditure on free services provided by the government should be included in the estimation of national income because expenditure on these
services is a part of government final consumption expenditure.

Question. How will the following be treated while estimating national income of India? Give reasons.
(i) Dividend received by a foreigner from investment in shares of an Indian company.
(ii) Expenditure on education of children by a family in Uttar Pradesh.
(iii) Remittances from non-resident Indians to their families in India. 
Answer:  (i) Dividend received by a foreigner from investment in shares of an Indian company is included in national income of India as a negative component because it is a part of net factor income to the rest of the world.
(ii) Expenditure on education of children by a family in Uttar Pradesh is included in the estimation of national income of India since it is a part of private final consumption expenditure.
(iii) Remittances from non-resident Indians to their families in India are to be treated as transfer payments.
Accordingly, these are not to be included in the estimation of national income of India. 

Question. Explain the precautions that are taken while estimating national income by value added method.
Answer:  While using value added method for computing national income, the following precautions should be taken
(i) The value of intermediate goods should not be included.
(ii) Purchase and sale of second hand goods should be excluded.
(iii) Imputed value of self-consumed goods should be included.
(iv) Own account production of goods should be included.
(v) Value of self-consumed services should not be included in the estimation of national income.
(vi) Imputed rent on the owner occupied house is also taken into the account.

I. Are the following included in national income of India?

a. Profit of Indian banks operating in foreign countries.

b. Interest income received by non-residents of India living abroad.

c. Fees received from students.

d. Interest received on loan given to a foreign company in India.

e. Value of bonus shares received by shareholders of a company

f. Income of foreign banks operating in India.

g. Unilateral payments received by residents of India from abroad.

h. Gift and remittances received by Indians from abroad.

i. Interest income received by residents Indians on bonds they purchased from abroad.

j. Interest paid by government on foreign loans.

k. Foreign aid received by India from friendly countries.

l. Compensation of employees paid to Indian employees working in foreign embassies functioning in India.

m. Rents received by Indians on building owned by them abroad.

n. Interest paid by banks to depositors.

o. Interest on government borrowings.

p. Death duties, Gift tax and Wealth tax

q. Sales proceeds of second hand goods