CBSE Class 12 Economics Determination of Income And Employment VBQs

AGGREGATE DEMAND AND ITS COMPONENTS

AGGREGATE DEMAND:
Aggregate demand refers to the demand for all finished goods and services in an economy during a given period of time. It is the total level of spending in the economy. It is often measured for the period of an accounting year and hence is a flow concept.

Components of Aggregate demand
Aggregate demand is measured in terms of aggregate expenditure on goods and services by different sectors of the economy. The components of aggregate demand may be discussed for closed economy and open economy. A closed economy is composed of a two sector economy including households and firms. An open economy includes households, firms, government sector and rest of the world.

Components of aggregate demand for a closed economy consisting of two sectors include:
a. Household consumption expenditure (C)
b. Private investment expenditure (I)
Components of aggregate demand for an open economy consisting of four sectors include:
1. Household consumption expenditure (C)
2. Private Investment expenditure (I)
3. Government expenditure (G)
4. Net export by rest of the world (X-M)
For an open economy, AD = C+I+G+(X-M) and for a closed economy AD = C + I.

Consumption Function
The functional relationship between consumption and income is called consumption function. Household consumption expenditure (C) is the most important determinant of aggregate demand and is directly proportional to level of income in the economy (Y).

Tabular presentation of Consumption function
Income (Y) in Rs.     Consumption (C) in Rs.
0                                50
50                              75
100                            100
200                            150
300                            200

The table shows consumption at various levels of income. As income increases, consumption also increases. John Maynard Keynes propounded the fundamental psychological law of consumption which forms the basis for consumption function. The law states that, as income increases consumption increases but not as much as the increase in income.
Relationship between Consumption and Income
Figure 1 consumption curve
1. Consumption can never be zero. Even at zero level of income, there is always a minimum level of consumption. This is known as autonomous consumption (a). The positive intercept OB in the Y axis in the fig 1 indicates the autonomous consumption (a). The autonomous consumption at the level of income zero is Rs. 50 crores.
2. Consumption and income are directly related. A rise in income causes a rise in consumption and vice versa.
3. When consumption expenditure increases and reaches the level of income, it is called break-even point. At the level of income Y = Rs. 100 crores, Y = C. This is called break-even point. At this level, savings in the economy will be zero and Y=C =Rs.100 crores. Break-even point is marked as point D in the figure 1.
 

The table shows consumption at various levels of income. As income increases, consumption also increases. John Maynard Keynes propounded the fundamental psychological law of consumption which forms the basis for consumption function. The law states that, as income increases consumption increases but not as much as the increase in income.

Relationship between Consumption and Income

1. Consumption can never be zero. Even at zero level of income, there is always a minimum level of consumption. This is known as autonomous consumption (a). The positive intercept OB in the Y axis in the fig 1 indicates the autonomous consumption (a). The autonomous consumption at the level of income zero is Rs. 50 crores.
2. Consumption and income are directly related. A rise in income causes a rise in consumption and vice versa.
3. When consumption expenditure increases and reaches the level of income, it is called break-even point. At the level of income Y = Rs. 100 crores, Y = C. This is called break-even point. At this level, savings in the economy will be zero and Y=C =Rs.100 crores. Break-even point is marked as point D in the figure 1.
4. With an increase in income, the entire increase in income is not consumed. A part of the income is saved as well. Hence with increase in income, the rate of increase in consumption is less than the increase in income. This is explained by the Keynes psychological law of consumption. When Y increases each time by Rs.100 crores, C increase by less than 100 crores.
Consumption curve
When income is plotted along the X axis and consumption is plotted along the Y axis of a graph paper, we derive the consumption curve.
In the figure, C represents the consumption function and Y is a 45◦ line representing income. The slope of the consumption curve is the marginal propensity to consume (b). It refers to the rate at which C responds to a given increase in Y.

Linear consumption function
Algebraically linear consumption function is expressed in the following equation:
C = a + b Y
Where, a = autonomous consumption
b = marginal propensity to consume
Y = National income
Given autonomous consumption (a) = Rs. 50 and marginal propensity to consume b = 0.5, consumption at various levels of income is derived using the linear equation in the table given below:

Income (Y)             Consumption (C = a +b Y)
Rs.in crores             Rs. in crores
0                          50 + 0.5 x 0 = 50
50                        50+ 0.5 x 50 = 75
100                      50 + 0.5 x 100 = 100
200                      50 + 0.5 x 200 = 150
300                      50 + 0.5 x 300 = 200

Propensity to consume
Propensity to consume is the proportion of total income or an increase in income that the consumer tends to spend on goods and services. Propensity to consume is of two types:
1) average propensity to consume (APC) and
2) marginal propensity to consume (MPC).
Average propensity to consume (APC): The ratio of total consumption to total income is known as average propensity to consume.
APC = Total consumption/Total income = C/Y

Income (Y) in    Consumption (C)   APC
Rs. Crores          in Rs. Crores
0                         50                           -
50                       75                           1.5
100                     100                         1
200                     150                        .75
300                     200                       0.66

Table 2 APC schedule

Properties of APC
1. APC decreases with increase in income. Income rises faster than consumption and the rich are expected to save more from their income than the poor.
2. APC can never be zero, as consumption can never be zero.
3. APC can never be negative, as consumption can never be negative.
4. The value of APC can be equal to 1, at break-even point when Y = C.
(When Y = C, C/Y = 1).
5. The value of APC can be more than 1 at lower levels of income. The APC of poor economies are greater than 1. (when C > Y, C/Y > 1).
6. The value of APC can be less than 1 at higher levels of income. The APC of rich economies are less than 1. (when C < Y, C/Y < 1).

Marginal Propensity to Consume (MPC): The ratio of change in consumption to change in income is known as marginal propensity to consume. MPC = change in consumption / change in income = ΔC/ΔY

Income (Y)       Consumption (C)     ΔY      ΔC     MPC
in Rs. crores      in Rs. crores
0                          50                          -         -         -
50                        75                         50       25      0.5
100                      100                       50       25       0.5
200                      150                       100     50       0.5
300                      200                       100     50       0.5

Properties of MPC
1. The value of MPC ranges from 0 to 1. 0<MPC<1.
2. When the entire increase in income is consumed, the value of MPC will be 1. (when ΔY = ΔC, ΔC/ΔY = 1). This indicates that, change in income has resulted in a corresponding change in consumption.
3. When the entire increase in income is saved and nothing is consumed, the value of MPC will be 0. (when ΔC = 0, ΔC/ΔY = 0). This indicates that, the change in income has not led to a change in consumption.
4. When the change in income has resulted in a relatively less change in consumption, MPC will be less than 1. When ΔC > ΔY, ΔC/ΔY >1.
5. The MPC is higher in case of poor economies and lower in case of developed economies.
6. MPC can never be greater than 1.

Investment Function (I)
Investment is often referred to the addition to the existing stock of capital or capital formation. According to Keynes, investment is a function of marginal efficiency of capital (MEC) and the rate of interest (r). Investment refers to the expenditure incurred on purchase of capital assets viz., machinery, building, equipment etc. Investments can be autonomous investment and induced investment.

Marginal Efficiency of Capital:
MEC is the expected rate of return from additional investment. It is directly proportional to investment. If MEC is high, so will be the investment and vice versa.
Rate of interest:
Rate of interest is the cost of borrowing money for financial investments. It is inversely proportional to investment. If the rate of interest is high, the investment will be low and vice versa.

Autonomous investment:
Autonomous investment is the investment which is independent of the level of income or profit. This investment is not influenced by the change in the level of income. Autonomous investment is not made for profit. It remains constant at any level of income. Such investments are generally made by the government.

Income (Y) in Rs.    Autonomous Investment (I) in Rs.
0                               100
100                           100
200                           100
300                           100

Table 4 Autonomous Investment sche

Induced investment:
Induced investment is the investment which depends on the level of income or profit. It is influenced by the change in the level of income and is made with the sole aim of profit motive. This investment varies with the level of income. Such investments are made by private sector.

Income (Y) in Rs.    Induced Investment (I) in Rs.
0                                 0
100                            100
200                            150
300                            200

Table 5 Induced Investment schedule

The induced investment curve slopes upwards from left to right, while autonomous investment curve is a straight line parallel to the X-axis.

Aggregate Supply
Aggregate supply is the total flow of goods and services in an economy during a period of one year. Aggregate supply shows the total quantity of output in an economy during an accounting year. Hence aggregate supply can be treated as national income. AS = Y

Components of Aggregate supply
The components of aggregate supply are savings and consumption.
AS = C + S
C = Consumption
S = Savings

Savings Function
Savings function shows the functional relationship between savings and income.

Linear savings function
S = -a + (1-b) Y
Where -a = dissaving
1-b = MPS
Y = national income

Propensity to Save
It is the proportion of total income or the increase in income that is saved. Propensity to save is of two types: average propensity to save and marginal propensity to save.

Average Propensity to Save (APS)
It is the ratio of total savings to total income. It is the proportion of total income saved.
APS = Total savings / Total income = S/Y

Income (Y)       Savings (C)       APS = S/Y
in Rs. Crores     in Rs. Crores
0                            -50                    -
50                          -25                  -0.5
100                         0                     0
200                         50                   0.25
300                       100                   0.33

Table 7 APS schedule

Properties of APS
1. APS can never be 1 or more than 1, because Savings can never be equal to income or more than income.
2. APS can be negative or less than 1, at lower levels of income.
3. APS can be zero, when savings is zero at break-even point.
4. APS increases with increase in income, as level of income saved increases with income

Marginal propensity to save
It is defined as the ratio of change in savings to change in income. It is the incremental savings with incremental income. MPS = change in savings / change in income = ΔS/ΔY

Income (Y)       Savings (C) in    ΔY      ΔS     MPS = ΔS/ΔY
in Rs. Crores     Rs. Crores
0                        -50                     -          -               -
50                       -25                    50        25          0.5
100                      0                      50        25          0.5
200                     50                     100      50          0.5
300                    100                    100      50          0.5

Properties of MPS
1. MPS varies between 0 and 1.
2. The minimum value of MPS is zero, when the entire increase in income is consumed and not saved.
3. The maximum value of MPS is 1, when the entire increase in income is saved and not consumed.
4. MPS for e developed economies are high and for under developed economies are low.

Relationship between propensity to consume and propensity to save
The relationship between propensity to consume and save can be expressed in the following equations:

1. APC + APS = 1 2. MPC +MPS = 1

APC+APS is always equal to 1. If half of the total income is consumed, then the other half must be saved.
Y = C + S Y/Y = C/Y +S/Y (Dividing both the side by Y)
i.e. APC + APS = 1            (C/Y = APC, S/Y = APS)
MPC +MPS is always equal to

1. If half of the increase in income is consumed, then the other half of the increase in income must be saved.
Y = C + S
Then ΔY = ΔC + ΔS
ΔY/ΔY = ΔC/ΔY + ΔS/ΔY (dividing both sides by ΔY)
MPC + MPS = 1     (ΔC/ΔY=MPC, ΔS/ΔY = MPS)

SHORT RUN EQUILIBRIUM OUTPUT
In the short run, the output is exclusively determined by the level of employment in the economy. An economy is said to be in short run equilibrium when the level of aggregate output demanded is equal to the level of aggregate output supplied. The equilibrium level of output is determined using two approaches.
1. AD – AS approach
2. Savings – Investment approach
AD-AS approach
AD is the level of GDP that the buyers wish to buy during an accounting year and AS is the desired level of output that the producers wish to produce in an economy. Equilibrium level of income / GDP is that level of GDP which the producers wish to produce is exactly equal to what the buyers wish to buy during an accounting year. It implies the equality between AD and AS
 AD = AS

The table 8 and figure 8 represents how equilibrium level of income is determined using AD-AS approach. The 45 ◦AS line intersects the AD curve at point E, which is the equilibrium point. OP is the equilibrium level of income determined where what the producers wish to produce is exactly equal to what the households wish to buy in the economy. The equilibrium level of income or output is 300, where AD = AS = 300. At point E there is no excess demand or deficient demand in the economy.

What happens when AD>AS?
When AD is more than AS, the supply of goods and services in the economy is less than the demand for goods and services. The existing stock or the inventories will be sold out and the producers would plan to increase the production to rebuild the stocks. As a result of increase in production, AS would increase to match the AD and the equilibrium is restored.

What happens when AD<AS?
When AD is less than AS, the supply of goods and services in the economy is more than the demand for goods and services. The existing stock or the inventories remains unsold and pile up. To clear the unwanted stocks, the producers would plan to cut the production. This reduces the AS to match with the AD prevailing in the economy to restore the equilibrium.

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The equilibrium level of income is determined using S-I approach when, S = I. E1 is the point of equilibrium where S = I. OM1 is the equilibrium level output determined when S=I. At this point the there are no excess demand or deficient demand.

What happens when S < I?
When S< I, the households are saving less and making more of expenditure. The producers in this situation are experiencing an increase in demand and would suffer a shortage of unsold stock or inventories. This will prompt the producers to increase the production. This will increase the income and savings in the economy until the equality between savings and investment is achieved to restore the equilibrium.

What happens when S > I?
When S > I, the households are saving more and demanding less. In this situation the producers would be experiencing an increase in the unsold stock or inventories. To clear the unsold stock, the producers would go for a cut in the production until the equality between savings and investment is achieved to restore equilibrium.

Investment Multiplier
Investment multiplier refers to the increase in income due to an increase in income in the economy. It is the ratio of change in income to change in investment. It is the number of times by which the increase in income exceeds the increase in investment.

Investment Multiplier (k) = Change in income / Change in investment = ΔY/ΔI

Mechanism of Investment
multiplier Investment multiplier measures the number of times an increase in investment in the economy leads to an increase in income. Additional investment in the economy means additional expenditure and thus additional income. The investment multiplier is based on the principle that “one man’s expenditure is another man’s income”. It is influenced by the expenditure and propensity to consume in the economy.

Assuming that in the economy MPC is 0.5, the mechanism of investment multiplier is explained with the numerical schedule given below.

Working of multiplier
1. The MPC in the economy is assumed to be 0.5. The initial increase in investment in the economy is ΔI = 100. If ΔI=100, then ΔY = 100.
2. The increase in income in round 1 is ΔY =100. Which would split into ΔC and ΔS as 50 each (MPC and MPS is 0.5 respectively).
3. In round 2, ΔC is converted into ΔY=50. This will again split into increase in consumption =Rs.25 crore and increase in savings = Rs.25 crores.
4. In round 3, there will be an increase in income of Rs. 25 due to an increase in consumption of Rs.25 crores in the second round.
5. At each rounds, ΔC is converted into ΔY and the process continues till there is not scope for further increase in income.
6. There are so many rounds of increase in income caused by increase in consumption.
7. The multiple times by which an increase in consumption leads to increase in income is defined by the equation k = 1/1-mpc.
K = 1/1-0.5 = 2. Investment multiplier = 2
8. It implies that there will be a two times increase in income in the economy due to initial increase in investment.
K = ΔY/ΔI, ΔY= k x ΔY = 2 x 100 = Rs. 200 crores is the increase in income in the economy due to an initial increase in income of Rs. 100 crores.

Full Employment, Voluntary unemployment and Involuntary Unemployment
Full employment refers to a situation in the economy when all those who are able and willing to do work at the prevailing wage rate are getting work. At full employment there is no excess capacity or unemployment and economy is in a state of equilibrium.
Voluntary unemployment: is a situation when people choose to remain unemployed even when jobs are available. In this situation, people are not willing to work at the prevailing wage rate.
Involuntary unemployment refers to a situation when people are able and willing to work at the prevailing wage rate and are not getting work. The aggregate demand in the economy is not sufficient to use the existing resources in the economy.

Excess and Deficient demand.
Excess demand is a situation when AD is more than what is required for full employment. Excess demand is defined as a situation when AD is greater than AS at full employment.

In the diagram, the full employment equilibrium is attained at point E where the AS and AD for full employment (AD FE) are intersecting. AD AE shows aggregate demand in the economy which is higher than the aggregate demand for full employment AD FE. The vertical difference between AD AE and AD FE is excess demand.
Excess demand in the economy arises due to following reasons:
1. An increase in the private consumption (C)
2. An increase in the investment expenditure by firms (I)
3. An increase in the government expenditure (G)
4. Increase in exports.
5. Decrease in imports.

Inflationary gap and excess demand
Excess demand leads to inflationary gap in the economy. The increase in aggregate demand leads to increase in price levels and then to inflationary gap. Inflationary gap is measured as the difference between aggregate demand beyond full employment and aggregate demand required for full employment. In the diagram, inflationary gap is the vertical difference between AD AE and AD FE, i.e., FE.

Problems of excess demand
When there is excess demand in the economy, the demand for goods and services exceeds more than the production in the economy. To meet this excess demand, the producers starts selling the unsold stock and inventories decreases. With excess demand, the price level in the economy starts increasing and leads to inflation.

Measures to correct Excess demand
The measures to correct excess demand are classified into:
1. Fiscal policy: Government expenditure and taxes.
2. Monetary policy: Quantitative and qualitative tools.
Fiscal policy measures to correct excess demand:
1. Increase in taxes.
2. Decrease government expenditure.
3. Increase in public debt.
4. Decrease deficit financing.

Monetary Policy measures to correct excess demand:
1. Increase in bank rate.
2. Sale of securities.
3. Increase in CRR.
4. Increase in SLR.
5. Increase in repo rate.
6. Increase in reverse repo rate.
7. Increase in margin requirements.

Deficient demand
Deficient demand is a situation d when AD is less than what is required for full employment. Deficient demand is defined as a situation when AD is less than AS at full employment.

In the diagram, the full employment equilibrium is attained at point E where the AS and AD for full employment (AD FE) are intersecting. AD IU shows aggregate demand in the economy which is less than the aggregate demand for full employment AD FE. The vertical difference between AD FE and AD IU is deficient demand.

Deficient demand in the economy arises due to following reasons:
1. A decrease in the private consumption (C)
2. A decrease in the investment expenditure by firms (I)
3. A decrease in the government expenditure (G)
4. Decrease in exports.
5. Increase in imports.

Deflationary gap and deficient demand
Deficient demand leads to deflationary gap in the economy. The decrease in aggregate demand leads to decrease in price levels and then to deflationary gap. Deflationary gap is measured as the difference between aggregate demand less than full employment and aggregate demand

required for full employment. In the diagram, deflationary gap is the vertical difference between AD FE and AD IU, i.e., EF.

Problems of deficient demand
When there is deficient demand in the economy, the demand for goods and services decreases than what is produced in the economy. This leads to piling up of unsold stock/inventories in the economy. To overcome this deficient demand, the producers cut the production of goods and services. As a result, the price level in the economy starts decreasing to clear the unsold stock and leads to deflation.

Measures to correct deficient demand
The measures to correct deficient demand are classified into:
1. Fiscal policy: Government expenditure and taxes.
2. Monetary policy: Quantitative and qualitative tools.

Fiscal policy measures to correct deficient demand:
1. Decrease in taxes.
2. Increase government expenditure.
3. Decrease in public debt.
4. Increase in deficit financing.

Monetary Policy measures to correct deficient demand:
1. Decrease in bank rate.
2. Purchasing of securities.
3. Decrease in CRR.
4. Decrease in SLR.
5. Decrease in repo rate.
6. Decrease in reverse repo rate.
7. Decrease in margin requirements.

Question: According to the theory of Keynesian Economics,the value of the average propensity to consume can never be ……… .
(a) zero
(b) unity
(c) more than one
(d) less than one  

Answer: A

Question: If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be
(a) greater than 2
(b) less than 2
(c) equal to 2
(d) equal to 5 

Answer: A

Question: If Marginal Propensity to Save (MPS) is equal to zero, the value of investment multiplier will be .................... .
(a) 1
(b) 0
(c) ∞
(d) None of these 

Answer: c

Question: Suppose in a hypothetical economy, the income rises from` R.s.500 crores to ` R.s.600 crores. As a result, the consumption expenditure rises from` R.s.400 crores to ` R.s.500 crores. Marginal propensity to consume in such a case would be...... . (Choose the correct alternative)
(a) 0.8
(b) 0.4
(c) 1.0
(d) 0.6 

Answer: C

Question: If the value of Average Propensity to Consume (APC) is 0.8 and national income is `R.s. 4,000 crores, the value of savings will be ............ . (Choose the correct alternative)
(a) ` R.s.100 crores
(b) `R.s. 200 crores
(c) ` R.s.800 crores
(d) `R.s. 500 crores 

Answer: C

Question: Expenditure on Goods and Services =
(a) Government Expenditure + Investment Expenditure
(b) Consumption Expenditure + Government Consumption Expenditure
(c) Consumption Expenditure + Investment Expenditure 
(d) None of the above 

Answer: C

Question: In an open economy, aggregate demand is estimated as
(a) Private Consumption Expenditure + Net Exports
(b) Private Consumption Expenditure + Government Expenditure
(c) Private Consumption Expenditure + Government Expenditure + Net Exports
(d) Private Consumption Expenditure + Private Investment
Expenditure + Government Expenditure + Net Exports 

Answer: D

Question: When C function shoots from Y-axis, it indicates that  
(i) consumption is zero when income is zero
(ii) saving is negative when income is zero
(iii) consumption is positive when income is zero
(iv) saving is positive when income is zero Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i), (ii) and (iii)
(d) (ii), (iii) and (iv)  

Answer: B

Question: Which of the following statements is/are correct?
(i) Autonomous investment increases with increase in the level of income in an economy.
(ii) Induced investment changes with change in the rate of interest and income level in an economy.
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: When household consumption expenditure 
.= `R.s. 9,000, private investment expenditure
= `R.s. 7,000, government expenditure = ` R.s 12,000,
exports = ` R.s. 1,000 and imports = `R.s 3,000, the level of AD in an open economy will be
(a) `R.s.16,000
(b) ` R.s.26,000
(c) ` R.s.28,000
(d) ` R.s.29,000 

Answer: B

Question: Constant slope of S-line indicates that 
(a) S-line will be a straight line
(b) saving function will be non-linear
(c) saving function will be linear
(d) Both (a) and (c) 

Answer: D

Question: Perfectly elastic AS implies that 
(i) there is fuller utilisation of resources in the economy
(ii) there is unemployment of resources in the economy
(iii) there is excess capacity in the economy 
Alternatives
(a) Both (i) and (ii)
(b) Both (ii) and (iii)
(c) (i), (ii) and (iii)
(d) None of these 

Answer: B

Question: Propensity to save is the
(a) additional income that is not to be saved
(b) ratio of saving to income
(c) level of saving at which saving and consumption are equal
(d) tendency of the consumer towards higher saving 

Answer: B

Question: Which of the following is correct?
(a) APC =C/Y
(b) MPC = 1 – MPS
(c) APC + APS = 1
(d) All of these 

Answer: D

Question: Which of the given pair is correctly matched? 14 TABLE
Codes
(a) A-(i)
(b) B-(ii)
(c) C-(iii)
(d) D-(iv) 

Answer: D

Question: In Keynesian Economics, equilibrium level of income implies
(a) equilibrium level of output
(b) equilibrium level of employment
(c) Both (a) and (b)
(d) None of the above 

Answer: C

Question: If MPC = 0.5, the value of multiplier equals
(a) 2
(b) 1
(c) 5
(d) ∞ 

Answer: A

Question: With the increase in investment, MEC
(a) rises
(b) falls
(c) remains constant
(d) None of these 

Answer: B 

Question: 45 degree line in the context of equilibrium GDP is a (i) line of reference
(ii) line of identity
(iii) line of equality between AS and AD Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i) and (iii)
(d) None of the above 

Answer: C

Question: According to classical economists, real wage rate is ……… to the marginal productivity of labour. 
(a) equal
(b) more
(c) less
(d) None of these  

Answer: A

Question: If Autonomous Consumption (C) is greater than zero, it indicates that the level of national income in an economy will be
……… .
(a) rising
(b) falling
(c) constant
(d) Any of these 

Answer: D

Question: Saving is a ............. function of disposable income.
(a) positive
(b) negative
(c) constant
(d) None of these  

Answer: A

Question: Value of marginal propensity to consume varies from ……… to ……… .
(a) negative infinity, positive infinity
(b) one, positive infinity
(c) negative infinity, one
(d) zero, one  

Answer: D 

Question: Which of the following statements is/are correct?
(i) Autonomous investment is the expenditure incurred on creation of capital assets.
(ii) If the level of investment in an economy is greater than savings, the level of income will also rise so long as full employment is not achieved.
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: A 

Question: …… is equal tothe difference between ‘AD beyond full employment’ and ‘AD at full employment’.
(a) Recession
(b) Inflationary gap
(c) Deflationary gap
(d) None of these 

Answer: A 

Question: In case of excess demand, RBI …… the bank rate or interest rate which makes the credit dear.
(a) increases
(b) decreases
(c) deposit
(d) None of these   

Answer: B

Question: Which of the following can be used to correct the situation of deflationary gap?
(a) Increase in bank rate
(b) Increase in CRR
(c) Reduction in SLR
(d) Increase in margin requirement  

Answer: D

Question: Which of the following statements is/are true?
(a) Ex-ante savings is the actual level of savings in the economy.
(b) Ex-post investment is the planned investment at a given point of time.
(c) Ex-ante saving is always equal to ex-post savings.
(d) All of the above statements are false.  

Answer: C

Question: By increasing the tax burden on the producers, the government intends to
(a) correct the situation of deficient demand
(b) correct the situation of inflationary gap
(c) correct the situation of excess demand
(d) Both (b) and (c) 

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

Question: Assertion (A) AD is measured not as the sum total of goods but as the sum total of planned expenditure on the goods during an accounting year.
Reason (R) It is not possible to add up physical quantities of the goods and services planned to be purchased by the people. 

Answer: A 

Question: Assertion (A) The value of marginal propensity to consume can be greater than one.
Reason (R) The value of marginal propensity to save can be negative as well. 

Answer: D 

Question:Assertion (A) Full employment does not imply zero unemployment in an economy.
Reason (R) There are certain people in the economy who are both voluntary as well involuntary unemployed and there also exist certain level of natural unemployment in an economy. 

Answer: A 

Question: Assertion (A) The value of investment multiplier varies between one and infinity.
Reason (R) The minimum value of investment multiplier is one when MPC equals zero and maximum value equals infinity when MPC equals one. 

Answer: D

Question: Assertion (A) Saving function depicts linear relationship when MPS is found to be constant.
Reason (R) A linear saving function is a straight line savings function. The slope of a straight line is constant as indicated by constant MPS. 

Answer: A 

Question: Assertion (A) There is an inverse relationship between the value of investment multiplier and marginal propensity to consume.
Reason (R) Saving is a leakage in the circular flow of income.
Greater the savings, greater the leakage and lower the value of investment multiplier. 

Answer: A

Question: Assertion (A) The value of marginal propensity to  save can never be negative.
Reason (R) MPS is the ratio between additional saving and additional income which is always positive because of positive relationship between savings and income. 

Answer: A

DETERMINATION OF INCOME AND EMPLOYMENT

Question:  ―Investment demand includes financial investment like purchase of shares from secondary market‖. Do you agree?

Answer: The term investment here refers to real investment, not the financial investment. Real investment is concerned with the increase in stock of capital assets such as machines, tools, equipment, inventories and also fixed assets. Therefore investment demand does not include financial investments.

Question:  If in an economy seasonal-unemployment exists with voluntary unemployment, is it a situation of full employment?

Answer: Yes, it is a situation of full employment. Full employment is a situation in which there is no involuntary unemployment. If seasonal unemployment exists, they can be absorbed in alternative employment opportunities.

Question:  If disposable income increases what happens to household consumption expenditure?

Answer: Household consumption expenditure has a tendency to increase with the increase in disposable income, but at lesser rates than the rate of increase of income.

Question:  Rising inflation is a matter of corners for the Govt. in India. Suggest four measures to control inflation?

Answer: (i) Increase in the bank rate.

(II) Increase in reserve ratio

(III) Increase in taxation

(IV) Increase in margin requirement.

Question:  Assume that in India general price level is falling. Suggest four measures to raise the price level?

Answer: (a) Decrease in tax rates

(b)Increase in public expenditure

(c) Reduction in bank rate

(d)Decrease is reserve ratio

Question:  ―MPC falls with successive increase in the level of income‖. It is true always?

This may be true if there is equitable distribution of income. But, if there is unequal distribution of income the MPC will be high for a poor person as he needs to spend more to fulfill his requirements. 

Important Questions for Class 12 Economics Determination of Income and Employment

Question. Explain various instruments of monetary policy to control excess demand/ inflationary gap.
Answer: Monetary policy refers to the policy used by central bank to control and regulate money supply and credit in the economy. It includes following instruments: –

a) Quantitative instruments
(i) Bank rate: It is the rate at which central bank lends to commercial banks or discounts first class bills and securities of commercial banks for long-term needs.
In the situation of excess demand, central bank increase bank rate. It will further increase interest rate by commercial bank, so credit will become costlier and it will discourage the people to borrow from commercial banks. As a result, excess demand can be controlled.
(ii) Open market operations: It refers to buying and selling of government securities by central bank in open market. In the situation of excess demand, central bank sells government securities to commercial banks. So, it will decrease availability of funds available for credit with the banks, and it will result contraction of credit and thereby reduce AD of goods and services.
(iii) Capital Reserve Ratio(CRR): It is the percentage of total deposits which commercial bank has to keep with central bank in the form of reserves.
In the situation of excess demand, central bank increases CRR. It means bank must keep more percentage of deposits with central bank as reserve. So, it will decrease the capacity of commercial banks for credit. Thus, contraction of credit will help in controlling excess demand.
(iv) Statutory Liquidity Ratio(SLR): It is the percentage of total deposits which a commercial bank must keep with itself in the form liquid assets.
In the situation of excess demand, central bank increases SLR. It means more percentage of bank deposits has to keep by the bank itself. Thus, availability of funds for credit will decrease. So, contraction of credit will control excess demand.

b) Qualitative instruments
(i) Marginal requirement: It is the difference between value of securities offered against loan and amount of loan sanctioned.
In the situation of excess demand, central bank increases marginal requirement. It means less amount of loan will be sanctioned against the security offered to bank. So, it will result contraction of credit and helps to control excess demand.
(ii) Moral suasion: It refers to written or oral instruction given by central bank to commercial banks either for expansion or contraction of credit. In the situation of excess demand, central bank may compel commercial banks to reduce availability of credit.

Question. What do you mean by full employment equilibrium?
Answer: Full Employment Equilibrium refers to that situation when AD=AS at full employment. At this level, all economic resources are fully utilized with zero involuntary unemployment.

Question. What do you mean by deficient demand in macroeconomics?
Answer: Deficient Demand- In an economy when AD is less than AS at full employment, then it is called deficient demand.
Thus, it is the situation when current aggregate expenditure is less than full employment output level.
Deflationary gap- In the situation of deficient demand, the gap between current AD and AS at full employment level is called deflationary gap.
Thus, it is the amount by which AD is less than required AD to attain full employment level. 

Question. Explain the derivation of saving curve from given linear consumption curve.
Answer: Saving refers to that part of income which is not spent on consumption. Thus, it is the excess of income over the consumption. Consumption and savings are complimentary to each other. Derivation of saving curve from linear consumption curve is explained as below: –

* Income curve is shown by 45˚ line and linear consumption curve is given by upward sloping as directly related to income level and starts from positive value of y-axis due to autonomous consumption.
* At income level zero, saving is negative value of autonomous consumption as shown by ‘a’ in the lower panel of the diagram.
* When income and consumption curve intersect each other i.e. point ‘M’ i.e. both are equal, then savings will be equal to zero shown by point ‘M₁’.

* At income level OY₂, saving will be equal to ΔS. By joining three points, i.e. S, M₁ and T, we get saving curve.

Question. What is excess demand in macroeconomics?
Answer: In an economy when AD is more than AS at full employment level, it is called excess demand. Thus, it is a situation where current aggregate expenditure exceeds full employment output level.
Inflationary gap: In the situation of excess demand, the gap between current AD and AS at full employment level is called inflationary gap. In other words, it is the excess of current AD over the full employment output level.

Question. GDP of a Nation rose by 6%, does it represent real Growth of the Country?
Answer. No, because inflationary growth must be discounted from it.

Question. ―GDP does not include all the economic transactions in it‖. Comment,
Answer. Indian Economy is an underdeveloped economy. There occur several non-monetary transactions. In rural India, people exchange some goods with other goods or exchange goods with services without involving money. Money Value of such transactions is excluded from GDP. Thus GDP is not a true index of all the transactions of a nation.

Question. National Income rose by 8% during the year 2010, Does it represent the growth of every Indian? Discuss
Answer. No, because national income includes the factor income of all the factors of the nation. It does not analyse the distribution of income of every Indian. Some people might have very high income while others income might be negligible. Thus 8% growth of national income does not mean equivalent growth of every Indian.

Question. Does private income include Net Factor Income from Abroad
Answer. Yes, Private Income is private because it does not include income of public sector. Income of any Govt. Department or savings of public enterprises is excluded from it. However net foreign income of every factor earned from abroad is part of private income. Thus private income is a part of national income of a nation.

Question. ―National Disposable Income has a greater value than national income‖. Do you agree?
Answer. Yes, because national disposable income includes some additional factors which national income does not include.
These are:
I. Net Indirect Taxes.
II. Net Current Transfers from Abroad.
National Disposable Income does not distinguish factor income from transfer income. It can be disposed off by a nation, the way it likes.

Question. ―The value of Private income is greater than Personal income and Personal Disposable Income‖. Comment.
Answer. Yes, the value of Private income is greater than Personal Income as well as Personal Disposable income in every nation because Private income has the following extra elements in it:
I. Private Income includes corporate Taxes as well as Corporate Savings where as personal income does not include these amounts.
II. Private income includes personal Taxes as well as Miscellaneous income where as Personal Disposable income does not include it

Question. Why transfer income is not included in National income? Explain.
Answer. Transfer Income is any income of the people which is paid to them without providing any service. It is unearned income, received as a help from Govt. or from some other donor. National income, on the other hand is the income of all the factors for providing some service. It is the sum total of earned incomes.

Question. Determine National income when the following data is given:
                                                                                       Rs. Crores
i. National Disposable income                                         12,000
ii. Net Indirect Taxes                                                           150
iii. Net Current Transfers Income from Abroad              200
iv. Net Factor Income from Abroad                                 (-)50
Answer.                                                                           Rs. Crores
National Disposable income =                                              12000
(-) Net Indirect Taxes =                                                            150
(-) Net Current Transfers Income from Abroad =                   200
                                NATONAL INCOME =            Rs. 11650 crores

Question. How far Retained Earnings of National Thermal Plant Corporation (NTPC) Rs.1500 crs.is a part of national income?
Answer. It is an income of Public Sector Company, therefore, included in National income.

Question. State Bank of India Earned Rs.500 crs from its branch at London. Is it a part of Indian National Income?
Answer. Yes, it is a part of income of India, since economic interest of SBI at London lies in India.

Question. Although India‘s GDP is increasing but the welfare of the people is not increasing with that pace. Do you think the concept of ―Green GNP‖ should be followed?
Answer. Yes, the concept of Green GNP can be followed.
i. Green GNP measures national income or Output adjusted for the depletion of natural resources and degradation of the environment.
ii. It will help to attain a sustainable use of natural environment and equitable distribution of benefits of development. A large number signifies greater Sustainability

Question. Old age pension by the Govt. Increases the welfare of the people. However it is not included in the estimation of national income. Why?
Answer. It is not included in the estimation of National income because it is a transfer payment.

Question. Services of house wife and leisure time activities contribute to welfare of people. However they are not included in the estimation of national income. Why?
Answer. Such non-market transactions are not included in the national income because it is difficult to ascertain their market value and such services are not rendered for the purpose of earning income.

Question. A City in Northwest India is hit by a massive earthquake causing huge loss of property. Life of people has come to a standstill. Govt. of India announces compensation to earthquake victims to meet the needs of their food, clothes and shelter.
a) Is this expenditure included in National income?
b) How does it impact life in the city?
Answer. a) This Expenditure by the Govt. is not included in National income as it is transfer Payment and does not correspond to the flow of goods and services
b) This Expenditure will help the people to get their lives back on track. It will add to their consumption expenditure. Also, if some expenditure is incurred to rebuild their houses, it will add to the capital formation in the city.

Question. Measurement of national income suffers from various limitations which lead us to conclude that it is not an overall appropriate measure of welfare of people, still national income accounting is done and national income estimates are prepared. Justify.
Answer.
i) National income Accounting helps in identifying specific economic achievements of a country.
ii) It provides an objective base of evaluation and review of policies implemented.
iii) It indicates specific contribution of each sector of the economy.
In spite of certain limitations, it is a measure of economic production if not overall welfare

Question. Countries GDP and National income are increasing. Higher GDP is generally taken as greater welfare of people. However this generalization may not always be correct. Why? Give reasons.
Answer.If rise in National income is due to production of more of war time goods such as explosives, guns, bombs, etc. are due to production of more goods which are socially undesirable such as opium, liquor, etc. then increased GDP may not be welfare oriented.
If there is unequal distribution of income economic welfare may not increase.

Question. Every rational producer makes provision for depreciation to replace fixed assets after expiry of expected life time. He takes care of physical capital, but in the pursuit of increasing production he must have been causing damage to natural capital (Resources and Environment). Suggest solution to the problem.
Answer. The producer should also make provision for loss caused to nature (in the form of exploitation of natural resources and environmental pollution) he should follow the concept of Green GNP (Green GNP is defined as GNP which would help to attain a sustainable use of natural environment and equitable distribution of National income)
Green GNP = GNP - Net fall in stock of Natural capital.

NUMERICAL QUESTIONS

Question. Find out net value added at factor cost:
Sl.no.        Particulars                             (in crores)
(i)       Price per unit of output                   25
(ii)      Output sold (units)                         1000
(iii)      Excise duty                                   5000
(iv)     Consumption of fixed capital           1000
(v)      Opening stock                               1500
(vi)     Intermediate consumption              7000
(vii)     Rent                                             500
(viii)    Purchase of raw materials               4000
(ix)     Closing stock                                 1000
           Purchase of machine                     3000
Answer.
GVA mp = GVO – Intermediate consumption
GVO = Sales + change in stock
= (25 x 1000) + (1000-1500) = 25000 + (-)500 = 24500 crores
GVA mp = 24500 – 7000 = 17500
NVA fc = GVA mp – depreciation – NIT
= 17500 – 1000 – (5000 -0)
=11500 crores

Question. Find out Gross value added at factor cost
Sl. No.  Particulars         (in crores)
(i)        Sales                                             500
(ii)       Opening stock                                30
(iii)      Closing stock                                  20
(iv)     Purchase of intermediate product      300
(v)      Purchase of machinery                    150
(vi)     Subsidy                                          40
Answer.
GVA mp = GVO – intermediate consumption
= (Sales + change in stock) – intermediate consumption
= 500 + (20 – 30) – 300
=500 + (-)10 – 300
=190 crores
GVA fc = GVA mp – NIT
= 190 – (0 – 40)
= 190 +40 = 230 crores

Question. An economy has two firms A and B. calculate (a) Value added by firms A and B. (b) GDP at MP
Sl. No.     Particulars                               (in crores)
(i)        Export by firm A                           20
(ii)       Import by firm A                           50
(iii)      Sales to household by firm A          90
(iv)      Sales to firm B by firm A               40
(v)       Sales to firm A by firm B               30
(vi)     Sales to household by firm B          60
Answer. Value added by Firm A = value of output – value of intermediate consumption
= (20+90+40) + 0 – (50+30)
= 150 – 80 = 70 crores
Value added by Firm B = value of output – value of intermediate consumption
=(30+60) + 0 – (40)
= 90 – 40 = 50 crore
GDP mp = 70+ 50 = 120 crores

Question. An economy has two firms A and B. calculate (a) Value added by firms A and B. (b) GDP at FC.
(i) Sales by firm A = 100
(ii) Purchase from firm B by Firm A    = 40
(iii) Purchase from firm A by Firm B = 60
(iv) Sales by firm B = 200
(v) Closing stock of firm A = 20
(vi) Closing stock of firm B =35
(vii) Opening stock of firm A =25
(viii) Opening stock of firm B =45
(ix) Indirect Taxes paid by both the firm = 30
Answer.
Value added by Firm A = GVO –IC
= (Sales + Change in stock) – IC
= 100 +(-)5 – 40 = 55
Value added by Firm A = GVO –IC
= (Sales + Change in stock) – IC
= 200 +(-)10 – 60 = 130
GDP mp = 55+130 = 185
GDP fc = GDP mp –NIT
= 185- 30 = 155

Question. Calculate ‘intermediate consumption’
(i) Value of output = 200
(ii) NVA fc =80
(iii) Sales tax = 15
(iv) Subsidies =5
(v) Depreciation 20
Answer.
NVA fc = GVA mp – Depreciation – NIT
= (Value of output – IC) - Depreciation – NIT
80 = 200 – IC – 20 – (15-5)
IC = 200 – 30 – 80 = 90

Question. Calculate ‘Sales’
(i) NVA fc = 300
(ii) Intermediate consumption = 200
(iii) Indirect tax =20
(iv) Depreciation = 30
(v) Change in stock =(-)50
Answer.
NVA fc = GVA mp – Depreciation – NIT
NVA fc = (Value of output – IC) - Depreciation – NIT
NVA fc = (Sales + change in stock – IC) - Depreciation – NIT
300 = sales + (-) 50 – 200 – 30 – 20
300 = sales – 300
Sales = 600

Question. Calculate GDP mp
(i) Intermediate consumption by
(a) Primary sector = 500
(b) Secondary sector = 400
(c) Tertiary sector = 300
(ii) Value of output by
(a) Primary sector = 1000
(b) Secondary sector = 900
(c) Tertiary sector = 700
Answer.
GDP mp = (1000+900+700) – (500 +400 +300)
= 1400

Question. Calculate National Income:
(i) Value of Output of Primary sector = 1600
(ii) Value of Output of secondary sector =400
(iii) Value of Output of Tertiary sector =600
(iv) Indirect taxes paid by all sector = 50
(v) Subsidies paid by all sector = 20
(vi) Value of IC
(a) Primary sector =800
(b) Secondary sector = 400
(c) Tertiary sector = 200
(vii) Depreciation in all sector = 80
(viii) Factor income received from ROW =10
(ix) Factor income paid to non-residents =20
Answer.
GDP mp = (1600+400+600) – (800+400+200)
2600 – 1400 = 1200
NI = NNP fc = GDP mp – Dep. +NFIA – NIT
1200 – 80 +(10 -20) – (50 – 20)
= 1200 – 80 – 10 – 30
= 1080

INCOME METHOD
NDP fc = COE + OS + MI
COE = Wages and Salaries + Employer’s contribution to SSS (social Security Scheme)
OS = Rent + Interest + Royalty + Profit
Profit = dividend + corporate tax + corporate saving (undistributed profit or retained profit)
MI = mixed income of self employed

Question. Calculate NDP at FC
Sl.No.     Particulars                          (in crores)
(i)         Rent                                       1400
(ii)       Royalty                                    200          
(iii)      Interest                                    1500
(iv)      Wages and salaries                    800
(v)       Profit                                       500
(vi)      Mixed income                           1000
(vii)     Depreciation                             70
(viii)    Employer’s contribution to SSS   200
Answer.
NDP fc = COE + OS + MI
NDP fc = (wages and salaries + Employer’s contribution to SSS) +
(rent + Royalty + Interest + Profit) + MI
= (800 +200) + (1400+ 200 + 1500 + 500) +1000
= 1000 + 3600 + 1000 = 5600 crores.

Question. Calculate National Income:
Sl. No.       Particulars                               (in crores)
(i)          Compensation of employees          2000
(ii)         Rent                                              400
(iii)         Profit                                            900
(iv)        Dividend                                        100
(v)         Interest                                         500
(vi)        Mixed income of self employed        7000
(vii)       Net factor income to abroad             50
(viii)      Net export                                      60
(ix)        Net indirect taxes                           300              
(x)         Depreciation                                  150
(xi)       Net current transfer to abroad          30
Answer.
NDP fc = COE + OS + MI
NDP fc = COE + (rent + Royalty + Interest + Profit) + MI
= 2000 + (400+ 900 + 500) + 7000
= 10,800 crores
NNP fc = NDP fc + NFIA
=10800 + (-)50
= 10750 crores

Question. Calculate NNP mp:
SL. No.       Particulars                             (in crores)
(i)           Mixed income of self employed     8000
(ii)           Depreciation                               200
(iii)          Dividend                                     600
(iv)          Rent                                           600
(v)          Wages and salaries                       2000
(vi)         Undistributed profit                       300
(vii)        Interest                                       700
(viii)       Compensation of employees          3000
(ix)         Net indirect taxes                         500
(x)          Corporate tax                               100
(xi)         Net factor income to abroad           60 
(xii)        Net export                                    (-) 50
(xiii)       Net current transfer to abroad         20
Answer.
NDP fc = COE + OS + MI
NDP fc = COE + (rent + Interest + dividend + undistributed profit +corporate tax) + Mixed income of self-employed.
= 3000 + (600+700+600+300+100) +8000
= 13,300 crores
NNP mp = NDP fc + NFIA + NIT
=13300 + (-) 60 +500
= 13740 crore

Question. Calculate GNP mp:
Sl. No.    Particulars                              (in crores)
(i)         Profit                                       220
(ii)      Compensation of employees         350
(iii)     Interest                                      100
(iv)    Consumption of fixed capital         50
(v)     Opening stock                              30
(vi)     Subsidies                                    20
(vii)    Closing stock                               50
(viii)   Mixed income                              150
(ix)    Employer’s contribution to SSS      30
(x)     Net factor income from abroad      10
(xi)  Rent                                              80
(xii)   Indirect taxes                              90
Answer.
NDP fc = COE + OS + MI
NDP fc = COE + (rent + Royalty + Interest + Profit) + MI
= 350 + (220 + 100 + 80) + 150
= 900
GNP mp = NDP fc + Dep. +NFIA +NIT
=900 + 50 +10+(90-20)
= 1030 crores

Question. Calculate Operating Surplus
Sl. No.   Particulars                              (in crores)
(i)         Sales                                       4000
(ii)        Compensation of employees       800
(iii)       Intermediate consumption          600
(iv)       Rent                                         400
(v)       Net indirect tax                          500
(vi)      Consumption of fixed capital       200
(vii)     Mixed income                            1400
Answer.
GVO mp = Sales + change in stock
= 4000 +0 = 4000 crores
GDP mp= GVO mp - IC
= 4000 – 600 =3400 crores
NDP fc =GDP mp – Dep. – NIT
= 3400 – 200 – 500 = 2700 crore
NDP fc = COE + OS + MI
2700 = 800 + OS + 1400
OS = 500 crores

Question. Calculate Net Domestic Product at Market price:
Sl. No.    Particulars                    (in lakh)
(i)         Wages and salaries           500
(ii)        Net capital formation        100
(iii)       Export                              50
(iv)       Import                             60
(v)       Gross capital formation      120
(vi)    Employers contribution to SSS      20
(vii)   Net factor income from abroad   (-)10
(viii)   Rent and interest                         250
(ix)    Profit                                          400      
(x)     Indirect taxes                              50
(xi)    subsidies                                     10
Answer.
 NDP fc = COE + OS + MI
NDP fc = (wages and salaries + Employer’s contribution to SSS) +
(rent + Royalty + Interest + Profit) + MI
= (500 +20) + (250 +400) +0
= 1170 lakh
NDP mp = NDP fc +NIT
= 1170 + (50 – 10) = 1170 +40 =1210 lakh

Question. Calculate national income
Sl. No.      Particulars                             (in lakh)
(i)       Mixed income                                200
(ii)     Old age pension                              20
(iii)     Dividend                                        100
(iv)     Operating surplus                           900
(v)     Wages and salaries                          500
(vi)    Profit                                              400
(vii)    Employer’s contribution to SSS         50
(viii)   Net factor income from abroad    (-) 10
(ix)    Consumption of fixed capital             50
(x)     Net indirect taxes                            50
Answer.
NDP fc = NDP fc = COE + OS + MI
NDP fc = (wages and salaries + Employer’s contribution to SSS) + OS + MI
= (500 + 50) + 900 + 200
= 1650 crores
NNP fc= NDP fc + NFIA
= 1650 + (-)10 = 1640 crores
EXPENDITURE METHOD
GDP mp = PFCE + GFCE + GDCF +NET EXPORT
GDCF = GDFCF + CHANGE IN STOCK
GDFCF = Gross Business fixed investment
+Gross Residential construction investment
+ Gross public investment
NNP fc = GDP mp – Dep. + NFIA – NIT

Question. Calculate (a) GDP at mp and (b) national income
           Particulars                                                 (in crore)
(i)      Government final consumption expenditure      4000
(ii)     Private final consumption expenditure             3500
(iii)    Gross domestic capital formation                     1100
(iv)    Net exports                                                   500
(v)     Net factor income from abroad                       100
(vi)    Net indirect taxes                                          300
(vii)   Subsidies                                                      40
(viii)  Change in stock                                              80
(ix)    Consumption of fixed capital                          120
Answer.
GDP mp = PFCE + GFCE + GDCF +NET EXPORT
=3500 + 4000 + 1100 + 500
=9100
NI/NNP fc = GDP mp – Dep. + NFIA – NIT
= 9100 – 120 +100 – 300
= 8780 CRORES

Question. Calculate national income
Sl.No.    Particulars                                              (in crore)
(i)      Current transfer from rest of the world              50
(ii)     Net indirect taxes                                            100
(iii)    Net export                                                  (-) 25
(iv)    Rent                                                                90
(v)     Private final consumption expenditure                900             
(vi)    Net domestic capital formation                           200
(vii)   Compensation of employees                               500
(viii)  Net factor income from abroad                       (-) 10
(ix)    Government final consumption expenditure         400
(x)     Profit                                                               220
(xi)    Mixed income of self employed                          400
(xii)   Interest                                                           230
Answer.
NDP mp = PFCE + GFCE + NDCF +NET EXPORT
=900 + 400 + 200 +(-)25
= 1475 crores
NI/NNP fc = NDP mp + NFIA – NIT
= 1475 + (-) 10 - 100
= 1365 CRORES

Question. Calculate Domestic Income
Sl. No.     Particulars                                     (in crore)
(i)         Private final consumption expenditure    8000
(ii)       Govt. final consumption expenditure       1000
(iii)       Exports                                                70
(iv)      Imports                                                120
(v)      Consumption of fixed capital                    60
(vi)     Gross domestic fixed capita formation      500
(vii)    Change in stocks                                    100
(viii)    Factor income to abroad                         40
(ix)     Factor income from abroad                      90
(x)      Indirect taxes                                        700
(xi)      Subsidies                                              50
(xii)     Net current transfers to abroad           (-)30
Answer.
GDP mp = PFCE + GFCE + GDCF (GDFCF + change in stock) +NET EXPORT
=8000 + 1000 + (500 +100) + (70 – 120)
= 9550 crores
NDP fc = GDP mp - Dep. – NIT
= 9550 – 60 – 650 =9550 – 710
= 8840 CRORES

Question. Calculate national Income
Sl. No.     Particulars                                                   (in crore)
(i)        Net factor income to abroad                            (-) 50
(ii)       Net indirect taxes                                                800
(iii)      Net current transfers from rest of the world           100
(iv)      Net import                                                          200
(v)       Private final consumption expenditure                   5000
(vi)      Government final consumption expenditure           3000
(vii)     Gross domestic capital formation                         1000
(viii)    Consumption of fixed capital                                150
(ix)      Change in stocks                                            (-) 50
(x)       Mixed income                                                    4000
(xi)      Scholarship to students.                                      80
Answer.
GDP mp = PFCE + GFCE + GDCF (GDFCF + change in stock) +NET EXPORT
=5000 + 3000 + 1000 – 200
= 8800 crores
NNP fc = GDP mp - Dep. + NFIA – NIT
= 8800 – 150 + (50) – 800
= 7900 CRORES

Question. Calculate national Income
Sl. No.      Particulars                                            (in crore)
(i)     Government final consumption expenditure     60
(ii)    Net imports                                                  10
(iii)   Change in stock                                             5
(iv)   Consumption of fixed capital                         20
(v)    Private final consumption expenditure           250
(vi)   Net factor income from abroad                 (-) 5
(vii)   Net domestic capital formation                     40
(viii)  Net current transfer from abroad                  10
(ix)   Net indirect tax                                            15
Answer.
NDP mp = PFCE + GFCE + NDCF +NET EXPORT
=250 + 60 + 40 - 10
= 340 crores
NNP fc = NDP mp + NFIA – NIT
= 340 + (-) 5 - 15
= 320 crores

Question. Calculate national Income
Sl. No.   Particulars                                     (in crore)
(i)          Imports                                            20
(ii)     Govt. final consumption expenditure       60
(iii)    Net factor income from abroad              (-)5
(iv)    Net current transfer from abroad             5
(v)    Private final consumption expenditure      200
(vi)   Subsidies                                               10
(vii)   Indirect tax                                            40
(viii)  Net domestic capital formation                70
(ix)   Export                                                   20
(x)    Consumption of fixed capital                   15
Answer.
NDP mp = PFCE + GFCE + NDCF +NET EXPORT
=200 + 60 + 70 +(20 – 20)
= 330 crores
NNP fc = NDP mp + NFIA – NIT
= 330 + (-) 5 – (40 – 10)
= 330 – 5 – 30 = 295 crores

Question. Calculate national Income
Sl. No.     Particulars                                               (in crore)
(i)        Net change in stock                                          50
(ii)       Government final consumption expenditure       100
(iii)      Net current transfer to abroad                          30
(iv)      Gross domestic fixed capital formation              200
(v)       Private final consumption expenditure              500
(vi)      Net imports                                                    40
(vii)      Depreciation                                                 70
(viii)    Net factor income to abroad                       (-) 10
(ix)     Net indirect tax                                              120
(x)      Net capital transfer to abroad.                         25
Answer.
GDP mp = PFCE + GFCE + GDCF (GDFCF + change in stock) +NET EXPORT
=500 + 100 + (200 +50) + (-) 40
= 810 crores
NNP fc = GDP mp - dep. + NFIA – NIT
= 810 – 70 + 10 - 120
= 630 crores

Question. Calculate compensation of employees from the following data:
Sl. No.   Particulars                                      Amount (in ₹crores)
(i)       Profits after tax                                         20
(ii)      Interest                                                    45
(iii)    Gross Domestic Product at Market Price        200
(iv)    Goods and Services Tax                               10
(v)     Consumption of Fixed Capital                       50
(vi)    Rent                                                          25
(vii)   Corporate Tax                                             5
Answer. Compensation of Employees = (iii) – (v) – (iv) – (vi+ii+i+vii)
= 200 – 50 -10 – (25+45+20+5) = ₹45 crores.

Question. Calculate National Income by (i) income method (ii) expenditure method
Particulars                                         In crores
Compensation of employees                    1200
Net factor income to abroad.                   20
Net subsidies                                      (-)120
Dividend                                               500
Closing stock                                        200
Private final consumption expenditure     2000
Net domestic fixed capital formation       700
Consumption of fixed capital                  130
Corporate tax                                       100  
Opening stock                                       130
Rent                                                     400
Interest                                                620
Net import                                            30
Undistributed profit                                200
Mixed income of self employed               700
Govt. final consumption expenditure       1100
Answer.
Income method
NDP fc =COE + OS +MI
= 1200+ (400+620+500+200+100) +700 = 3720 crores
NNP fc = NDP fc + NFIA
= 3720 + (-) 20 = 3700 crores
Expenditure method
NDP mp = PFCE +GFCE + (NDFCF + change in stock) +Net export
= 2000 + 1100 + [700 + (200 -130)] + (-) 30
= 2000 + 1100 + 770 – 30
=3840 crores
NNP fc =NDP mp + NFIA – NIT
=3970 + (- 20) – (120)
= 3840 – 20 – 120 = 3700 crores

Question. Calculate GNP mp by (i) income method (ii) expenditure method
Particulars                                           In crores
Mixed income of self employed                400
Change in stock                                      10
Wages and salaries                                 500
Private final consumption expenditure      900
Net factor income from abroad               (-) 20
Net indirect taxes                                  100 
Business fixed investment                       200
Employee’s contribution to SSS               200
Profit                                                     350
rent                                                      100
Residential construction investment         70
Govt. final consumption expenditure       450
Public investment                                  120
Interest                                                150
Net export                                        ( -) 30
Consumption of fixed capital                   120
Answer.
Income method
NDP fc =COE + OS +MI
= (500 + 0) + (150+100+350) + 400 = 1500 crores
GNP mp = NDP fc + Dep. + NFIA +NIT
= 1500 + 120 + (-) 20 + 100 = 1700 crores

Expenditure method
GDP mp = PFCE +GFCE + (GDFCF + change in stock) +Net export
=450 +900+(200+70+120+10) + (-)30
= 450 + 900 + 400 - 30
= 1720 crores
GNP mp = GDP mp + NFIA
= 1720 + (-) 20 = 1700 cores