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Class 12 Economics Case Study Questions

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In this article, we will discuss how to download CBSE class 12 Economics Case Study Questions from the myCBSEguide App and our Student Dashboard for free. For the students appearing for class 12 board exams from the commerce/ humanities stream, Economics is a very lucrative and important subject. It is a very high-scoring subject that aids the students to increase their percentile and excel in academics.

The exam is divided into 2 parts:

• Macro Economics
• Indian Economics Development

12 Economics Case Study Questions

CBSE introduced case-based questions for class 12 in the year 2021-22 to enhance critical thinking in students. CBSE introduced a few changes in the question paper pattern to enhance and develop analytical and reasoning skills among students. Sanyam Bharadwaj, controller of examinations, CBSE quoted that the case-based questions would be based on real-life situations encountered by students.

The purpose was to drift from rote learning to competency and situation-based learning. He emphasized the fact that it was the need of the hour to move away from the old system and formulate new policies to enhance the critical reasoning skills of students. Introducing case study questions was a step toward achieving the goals of the National Education Policy (NEP) 2020.

What is a Case Study Question?

As part of these questions, the students would be provided with a comprehensive passage, based on which analytical questions will have to be solved by them. The students will have to read the given passage thoroughly before attempting the questions. In The current examination cycle (2021-22), case-based questions have a weightage of around 20%.

Types of Case Study Questions in Economics

CBSE plans to increase the weightage of such questions in the following years, so as to enhance the intellectual and analytical abilities of the students. Case-based questions are predominantly of 3 types namely:

• Inferential

Local questions

Local questions can be easily solved as the answers are there in the given passage itself.

Global Questions

For Global questions, the students will have to read the passage in depth, analyze it and then solve it.

Inferential questions

Inferential questions are the ones that would require the student to have complete knowledge of the topic and could be answered by application of the concepts. The answers to such questions are tricky and not visible in the given passage, though the passage would highlight the concept on which the questions would be asked by CBSE.

HOTS Questions in Class 12 Economics

Personally, the concept of case-based questions is not new since CBSE has always included questions based on Higher Order Thinking Skills (HOTs). Though now we will have an increased percentage of such questions in the question paper.

Advantages of Case-based Questions

Class 12 Economics has two books and CBSE can ask Case study questions from any of them. Students must prepare themselves for both the books. They must practice class 12 Economics case-based questions as much as possible.

Case study questions:

• Enhance the intellectual and analytical abilities of the students.
• Provide a complete and deeper understanding of the subject.
• Inculcate intellectual reasoning and scientific temperamental in students.
• Help students retain knowledge for a longer time.
• Would definitely help to discard the concept of memorizing insanely and cramming without a factual understanding of the content.
• The questions would help to terminate the existing system of education in India that promotes rote learning.

Sample case study questions (Economics) class 12

Here are some case study questions for CBSE class 12 Economics. If you wish to get more case study questions and other related study material, download the myCBSEguide App now. You can also access it through our Student Dashboard.

Case Study 1

Keeping in view the continuing hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, the Reserve Bank of India has extended the relaxation of the minimum daily maintenance of the CRR of 80% for up to September 25, 2020. Currently, CRR is 3% and SLR is 18.50%.

“As announced in the Statement of Development and Regulatory Policies of March 27, 2020, the minimum daily maintenance of CRR was reduced from 90% of the prescribed CRR to 80% effective the fortnight beginning March 28, 2020 till June 26, 2020, that has now been extended up to September 25, 2020,” said the RBI.

Q.1 The full forms of CRR and SLR are:

• Current Reserve Ratio and Statutory Legal Reserves
• Cash Reserve Ratio and Statutory Legal Reserves
• Current Required Ratio and Statutory Legal Reserves
• Cash Reserve Ratio and Statutory Liquidity Ratio (ans)

Q.2 What will be the value of the money multiplier?

• None of these

Q.3 SLR implies:

• a) Certain percentage of the total banks’ deposits has to be kept in the current account with RBI
• b) Certain percentage of net total demand and time deposits have to be kept by the bank themselves (ans)
• c) Certain percentage of net demand deposits has to be kept by the banks with RBI
• d) None of the above

Q.4 Decrease in CRR will lead to __.

• a) fall in aggregate demand in the economy
• b) rise in aggregate demand in the economy (ans)
• c) no change in aggregate demand in the economy
• d) fall in the general price level in the economy

Case Study 2

An important lesson that the COVID-19 pandemic has taught the policymakers in India is to provide greater impetus to sectors that make better allocation of resources and reduce income inequalities. COVID-19 has also taught a lesson that in crisis the population returns to rely on the farm sector. India has a large arable land, but the farm sector has its own structural problems. However, directly or indirectly, 50 percent of the households still depend on the farm sector. Greater support to MSMEs, higher public expenditure on health and education and making the labour force a formal employee in the economy are some of the milestones that the nation has to achieve.

One of the imminent reforms to be done in the country is labour reforms. Labour laws are outmoded in India, and some of these date back to the last century.

India’s complex labour laws have been blamed for keeping manufacturing businesses small and hindering job creation. Industry hires labour informally because of complex laws and that is responsible for low wages.

• Which types of structural problems are faced by the agricultural sector?
• “It is necessary to create employment in the formal sector rather than in the informal sector.’’ Defend or refute the given statement with valid argument.
• Hired labour comes in …………………. (Informal organisation / formal organisation)
• What do you mean by MSMEs?

Case Study 3

People spend to acquire information relating to the labour market and other markets like education and health. This information is necessary to make decisions w.r.t investment in human capital and its efficient utilization. Thus, expenditure incurred for acquiring information relating to the labour market and other markets is also a source of human capital formation.

Q1. Which of the following is the source of human capital formation in India?

• Acquiring information
• All of these (ans)

Q2. Education provides

• Private benefit
• Social benefit
• Both 1) and 2) (ans)

Q3. __ persons contribute more to the growth of an economy.

Q4. Training given by a company to its employees is generally__________

• Investment (ans)
• Social wastage
• Both 1) and 2)

Tips to Solve Case Study Questions in Economics

Let’s understand how you can solve case study questions in class 12 Economics. The two books are Macroeconomics and Indian Economic Development.

• Read the passage thoroughly
• Can follow a reversal pattern, especially macroeconomics questions, i.e. read questions first and then look for the answers in the passage.
• In case the question asked is about Indian Economic Development, read the passage very carefully as most of the answers would be hidden in the passage itself.
• Macro Economics questions will be more application-based and would test your conceptual clarity.
• Answer briefly and precisely.

Important Chapters – Economics Case Study Questions

Following are some of the very important topics that need to be prepared very thoroughly under CBSE class 12 Economics. We expect that CBSE will certainly ask case-based questions from these chapters.

• National income and its aggregates
• Government budget
• Current challenges faced by the Indian economy

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CBSE Class 12 Economics Case study Questions & Answers For Chapter (Microeconomics & Macroeconomics)

Understudies can discover the chapter astute vital questions for course 12th Economics within the table underneath. These imperative questions incorporate questions that are regularly inquired in a long time. Moreover, arrangements are to give for these questions, with extraordinary accentuation on ease-of-study. Tap on the joins underneath to begin investigating.

Below we posted all the Case Study Questions & Answers for Class 12 Economics all Chapters –

CBSE Class 12 Case Study Question for Economics

Case study 01:.

(a) From the following data calculate the value of Domestic Income:

Ans:- Domestic Income (NDP@fc)

=(i)+(ii)+(iv)+(vii)+(viii)+(x)

=₹2000+₹800+₹460+₹940+₹300+₹200

=₹4,700 crore

(b) Distinguish between ‘Value of Output’ and ‘Value Added’.

Ans: Value of output is the estimated money value of all the goods and services, inclusive of change in stock and production for self-consumption. Whereas,

Value added is the excess of value of output over the value of intermediate consumption.

(a) Given the following data, find Net Value Added at Factor Cost by Sambhav (a farmer) producing Wheat:

Ans: Net Value Added at Factor Cost (NVA @ FC)

=(i)+(iii)+(iv)+(vi)-(v)

=₹6800+₹200+₹50+₹20-₹100

=₹6,970crore

(b) State any two components of ‘Net Factor Income from Abroad’.

Ans: Component of net factor income from abroad are:

(i)  Net compensation of employees

(ii) Net income from property and entrepreneurship

(iii) Net retained earnings of resident companies abroad

(a) ‘Pesticides are chemical compounds designed to kill pests. Many pesticides can also pose health risks to people even if exposed to nominal quantities. ‘In the light of the above statement, suggest any two traditional methods for replacement of the chemical pesticides.

Ans: The traditional practices can help in controlling contamination without the use of chemical fertilizers, as follows:

(i) Neem trees and its by products are a natural pest-controller, which has been used since ages in India. Recently, the government promoted the sale Neem coated urea as a measure of natural pest control.

(ii) Large variety of birds should be allowed to dwell around the agricultural areas, they can clear large varieties of pests including insects

(b) ‘In recent times the Indian Economy has experienced the problem of Casualisation of the workforce. This problem has only been aggravated by the outbreak of COVID-19.’ Do you agree with the given statement? Discuss any two disadvantages of casualisation of the workforce in the light of the above statement.

Ans:- The given statement is quite appropriate with reference to the ‘casualisation of labour’ in India.

(i) For casual workers, the rights of the labour are not properly protected by labour laws. Particularly, during pandemic times, as demand for goods and services fell the casual workers were left jobless, without any compensation or support.

(ii) During the COVID-19 lockdown millions of casual workers lost their jobs, raising the question of their survival. Also, additional health expenditure added to their troubles.

Key questions for 12th review Biology are outlined agreeing to the CBSE NCERT program. All address sorts are accessible within the PDF, from one-word to one-line answers, brief reply sorts to five point long reply sorts. Hence, understudies can plan for exams and indeed clarify their concepts through them. On the off chance that they refer to these questions, it’ll get ready their minds to pick up a competitive advantage. Understudies will gotten to be commonplace with question patterns and the sorts of questions that will show up on exams.

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NCERT Solutions for Class 12 Macroeconomics Chapter 4 Case Study

NCERT Solutions for Class 12 Macroeconomics Chapter 4 Case Study Questions with answers in English Medium designed for session 2024-25. The Case Study MCQ of class 12 Economics chapter 4 Determination of Income and Employment are given here to understand Case Studies and to prepare the Case based questions.

Class 12 Macroeconomics Chapter 4 Case Studies Question Answers

• Class 12 Macroeconomics Chapter 4 Case Study
• Class 12 Macroeconomics Chapter 4 NCERT Solutions
• Class 12 Macroeconomics Chapter 4 MCQ Answers
• Class 12 Indian Eco & Macro Economics Solutions
• Class 12 NCERT Solutions in Hindi & English Medium
• Class 12 NCERT Books in Hindi & English Medium

Aggregate call for refers to the overall cost of very last items and offerings which all of the sectors of an economic system are making plans to shop for at a given stage of profits in the course of a duration of 1 accounting year. In different words, AD is the mixture expenditure that unique sectors of the economic system are inclined to incur in the course of a given duration. It approaches, AD and mixture expenditure imply the equal. It is vital to notice that mixture expenditure refers back to the deliberate expenditure and now no longer the real expenditure. So, AD is the overall costs that each one family, companies, authorities and the relaxation of the arena are making plans to incur in the course of a given duration of time. AD is a go with the drift idea as its miles normally measured during an accounting year.

Components of mixture call for: The diverse additives of mixture call for are:

• Private intake expenditure – It refers to the overall expenditure incurred through families on buy of products and offerings in the course of an accounting year. Consumption expenditure is without delay prompted through the extent of disposable profits i.e., better the disposable profits, extra is the intake expenditure and vice versa. Disposable profits refer back to the profits from all sources that is to be had to families for spending on intake and saving.
• Investment expenditure – It refers to the overall expenditure incurred through all non-public companies on capital items. It consists of addition to the inventory of bodily capital belongings inclusive of machinery, equipment, homes etc. and alternate in stock.
• Government expenditure – It refers to the overall expenditure incurred through authorities on purchaser items and capital items to meet the not unusual place desires of the economic system. It approaches, authorities incur intake expenditure in addition to funding expenditure. Consumption expenditure is incurred to satisfy public desires like regulation and order, education, health, transport, defence, etc. Investment expenditure entails production of highways, roads, energy plants, etc.
• Net Exports – Export suggest call for items produced in the home territory of a rustic through the relaxation of the arena. Imports consult with needs of the citizens of a rustic for the products which have been produced abroad. The distinction among exports and imports is named as NET Exports.
• Question 1: Name the 4 additives of mixture call for.
• Question 2: State whether or not True or False. (a) AD and mixture expenditure imply the equal. (b) AD is the overall costs that each one family, companies, authorities and the relaxation of the arena are making plans to incur in the course of a given duration of time. (c) Imports consult with needs of the citizens of a rustic for the products which have been produced in a rustic. (d) The distinction among exports and imports is named as Gross Exports. (e) AD is a go with the drift idea as its miles normally measured during an accounting year. (f) Investment expenditure consists of addition to the inventory of bodily capital belongings inclusive of machinery, equipment, homes etc. and alternate in stock.
• Question 3: What is Government expenditure?
• Question 4: What is mixture call for and marketplace call for?
• Question 5: Fill with inside the blanks: (a) AD and mixture expenditure imply the _________. (b) Consumption expenditure is incurred to satisfy _________ like regulation and order, education, health, transport, defence, etc. (c) ________ entails production of highways, roads, energy plants, etc. (d) AD is a _________ as its miles normally measured during an accounting year. (e) Export suggests call for items produced in the _________ territory of a rustic through the relaxation of the arena.
• Answer 1: Private intake expenditure, Investment expenditure, Government expenditure and Net exports.
• Answer 2: (a) True, (b) True, (c) False, (d) False, (e) True, (f) True
• Answer 3: Government expenditure refers to the overall expenditure incurred through authorities on purchaser items and capital items to meet the not unusual place desires of the economic system. It approaches, authorities incur intake expenditure in addition to funding expenditure.
• Answer 4: Aggregate call for is the overall call for all items and offerings inside the complete economic system. Whereas, marketplace call for is the overall call for one commodity within the marketplace.
• Answer 5: (a) equal, (b) public desires, (c) Investment expenditure, (d) go with the drift idea, (e) home.

Aggregate deliver refers to cash cost of very last items and offerings that each one the manufacturers are inclined to deliver in an economic system in a given duration of time. It has to be mentioned that AS refers handiest to deliberate manufacturing or preferred output in the course of a given time duration. Aggregate deliver is equals to country wide profits. When AS is expressed in bodily phrases, it refers to general output of products and offerings in an economic system. We recognise that cost of general output is shipped to elements of manufacturing within the shape of rent, wages, hobby and income. The sum general of those element earning at home and country wide stage is named as country wide profits. So, we will say that mixture deliver and country wide profits, are one and the equal thing.

The primary part of country wide profits is spent on intake of products and offerings and the stability is stored. It approaches, profits are both fed on or stored. Consumption expenditure refers to that part of profits that is spent on the acquisition of products and offerings on the given stage of profits. Consumption feature refers to purposeful courting among intake and country wide profits. It represents the willingness of families to buy items and offerings at a given stage of profits in the course of a given time duration. It additionally indicates the intake stage at unique degrees of profits in an economic system. It is a mental idea as its miles prompted through subjective elements like customer’s options and habits, etc.

• Question 1: What is mixture deliver?
• Question 2: What do you recognize through intake feature?
• Question 3: State whether or not True or False. (a) Aggregate deliver and country wide profits, are one and the equal thing. (b) The primary part of country wide profits is spent on intake of products and offerings and the stability is stored. (c) When AS is expressed in bodily phrases, it refers to general output of products and offerings in an economic system. (d) Aggregate deliver isn’t always equals to country wide profits. (e) The sum general of the element earning at home and country wide stage is named as country wide profits.
• Question 4: Fill with inside the blanks: (a) It is a mental idea as its miles prompted through _____________ elements like customer’s options and habits, etc. (b) When AS is expressed in bodily phrases, it refers to ______________ of products and offerings in an economic system. (c) Consumption feature refers to _______________ among intake and country wide profits. (d) It has to be mentioned that AS refers handiest to _______________ or preferred output in the course of a given time duration. (e) Aggregate deliver refers to ______________ of very last items and offerings that each one the manufacturers are inclined to deliver in an economic system in a given duration of time.
• Question 5: How can we calculate country wide profits?
• Answer 1: Aggregate deliver refers to cash cost of very last items and offerings that each one the manufacturers are inclined to deliver in an economic system in a given duration of time.
• Answer 2: Consumption feature refers to purposeful courting among intake and country wide profits. It represents the willingness of families to buy items and offerings at a given stage of profits in the course of a given time duration.
• Answer 3: (a) True, (b) True, (c) True, (d) False, (e) False
• Answer 4: (a) subjective, (b) general output, (c) purposeful courting, (d) deliberate manufacturing, (e) cash cost
• Answer 5: The cost of general output is shipped to elements of manufacturing inside the shape of rent, wages, hobby and income. The sum general of those element earning at home and country wide stage is named as country wide profits.

There are technical factors of propensity to devour: 1. Average propensity to devour (APC) 2. Marginal propensity to devour (MPC) Average propensity to devour refers back to the ratio of intake expenditure to the corresponding stage of profits. Some vital factors approximately APC are: As lengthy as intake is extra than country wide profits, APC is extra than 1. At the break-even factor intake is same to country wide profits, so APC is equals to 1. Beyond the break-even factor, intake is much less than country wide profits. APC Falls constantly with the growth in profits due to the fact the share of profits spent on intake continues on decreasing. APC may be 0 handiest while intake turns into 0. However, intake is in no way 0 at any stage of profits. Even at 0 stage of country wide profits, there’s self-sustaining intake. Marginal propensity to devour refers back to the ratio of alternate in intake expenditure to alternate in general profits. MPC explains what percentage of alternate in profits is spent on intake. Some vital factors approximately MPC: We recognise, incremental profits are both spent on intake or stored for destiny use. In everyday conditions cost of MPC varies among zero to 1.

MPC of negative is extra than that of wealthy due to the fact negative human beings spend an extra percent in their multiplied profits on intake as maximum in their simple desires continue to be unsatisfied. On the alternative hand, which human beings spend a smaller percentage as they already experience a better popular of living. MPC Falls with successive growth in profits due to the fact as an economic system turns into richer, it has the tendency to devour smaller percent of every increment to its profits.

• Question 1: When does APC turns into 0?
• Question 2: Why does MPC falls with successive growth in profits?
• Question 3: Fill with inside the blanks: (a) In everyday conditions cost of MPC varies among ____________. (b) APC Falls constantly with the ___________in profits due to the fact the share of profits spent on intake continues on decreasing. (c) Incremental profits are both spent on intake or _____________ for destiny use. (d) Average propensity to devour refers back to the ratio of ______________ to the corresponding stage of profits. (e) As lengthy as intake is extra than country wide profits, APC is ______________ than 1. (f) Marginal propensity to devour refers back to the _____________ in intake expenditure to alternate in general profits. (g) Even at 0 stage of country wide profits, there’s ______________ intake.
• Answer 1: APC may be 0 handiest while intake turns into 0. However, intake is in no way 0 at any stage of profits. Even at 0 stage of country wide profits, there’s self-sustaining intake.
• Answer 2: MPC Falls with successive growth in profits due to the fact as an economic system turns into richer, it has the tendency to devour smaller percent of every increment to its profits.
• Answer 3: (a) zero to 1, (b) growth, (c) stored, (d) intake expenditure, (e)extra, (f) ratio of alternate, (g) self-sustaining

Investment refers back to the expenditure incurred on advent of New Capital belongings. It consists of the expenditure incurred on belongings like machinery, building, equipment, uncooked material, etc. This caused growth inside the effective ability of an economic system. The funding expenditure is assessed below heads: Induced funding and self-sustaining funding. Induced funding refers back to the funding which relies upon at the income expectancy and is without delay prompted through profits stage. IT will increase with growth in profits and reduces with the lower in profits. Autonomous funding refers back to the funding which isn’t always suffering from modifications within the stage of profits and isn’t always caused totally through income motive. It isn’t always prompted through alternate in profits.

According to a well-known economist, the selection to spend money on a brand-new task relies upon elements: Marginal performance of funding and Rate of hobby. Marginal performance of funding – It refers back to the anticipated price of go back from an extra funding. It is decided through elements:

• Supply rate refers back to the price of manufacturing a brand-new asset of that kind. It is the rate at which the New Capital Asset may be furnished or replaced.
• Prospective yield refers to internet go back, anticipated from the Capital Asset over its lifetime.
• Rate of hobby – it refers to price of borrowing cash for financing the funding. There exists an inverse courting among ROI and the quantity of funding. At an excessive ROI, the funding spending could be much less and at a low ROI, the funding spending could be extra.
• Question 1: What is ROI?
• Question 2: State whether or not True or False. (a) Induced funding refers back to the funding which relies upon at the income expectancy and is without delay prompted through profits stage. (b) Prospective yield refers to gross go back, anticipated from the Capital Asset over its lifetime. (c) Marginal performance of funding refers back to the anticipated price of go back from an extra funding. (d) Autonomous funding isn’t always suffering from modifications within the stage of profits and isn’t always caused totally through income motive. (e) At an excessive ROI, the funding spending could be extra and at a low ROI, the funding spending could be much less.
• Question 3: Fill with inside the blanks: (a) Rate of hobby refers to price of _____________ cash for financing the funding. (b) The funding expenditure is assessed below heads: ____________ and self-sustaining funding. (c) Supply rate is the rate at which the new _____________ may be furnished or replaced. (d) ___________ funding isn’t always prompted through alternate in profits. (e) ___________ funding will increase with growth in profits and reduces with the lower in profits.
• Question 4: What is funding?
• Answer 1: Rate of Interest refers to price of borrowing cash for financing the funding. There exists an inverse courting among ROI and the quantity of funding. At an excessive ROI, the funding spending could be much less and at a low ROI, the funding spending could be extra.
• Answer 2: (a) True, (b) False, (c) True, (d) True, (e) False
• Answer 3: (a) borrowing, (b) Induced funding, (c) capital asset, (d) Autonomous, (e) Induced.
• Answer 4: Investment refers back to the expenditure incurred on advent of New Capital belongings. It consists of the expenditure incurred on belongings like machinery, building, equipment, uncooked material, etc. This caused growth within the effective ability of an economic system.

Ex-ante variable is the deliberate or anticipated cost of variable, whereas, ex-publish variable is the real or found out cost of the variable. Both those phrases are normally utilized in context of saving and funding. There are factors of saving and Investments: 1) Ex-ante saving and ex-ante funding 2) Ex-publish saving and ex-publish funding Ex-ante saving refers to quantity of financial savings, which families deliberate to keep at unique degrees of profits in the economic system. In different words, ex-ante saving are the deliberate financial savings of an economic system at unique degrees of profits. The quantity of ex-ante or deliberate saving is given through the saving feature. Ex-ante funding refers to quantity of funding which companies plans to make investments at unique degrees of profits within the economic system. The quantity of ex-ante or deliberate funding is decided through the relation among funding call for and price of hobby, i.e., through funding call for feature.

Ex-publish financial savings consult with the real or found out saving in an economic system in the course of a year. Ex-publish or real saving is the sum general of deliberate saving and unplanned saving. Ex-publish funding refers back to the found out or real funding in an economic system in the course of a year. Ex-publish or real funding is the sum general of deliberate funding and unplanned funding. Planned cost of the variables are their ex-ante measures, whereas, found out cost of the variables are their ex-publish measures. The importance of difference among Ex-ante and Ex-publish is that each one the variables inside the principle of profits dedication are ex-ante valuables, i.e., ex-ante variables shape the premise of principle of country wide profits dedication.

• Question 1: What is the difference among ‘ex-ante’ and ‘ex-publish’?
• Question 2: What is ex-publish saving?
• Question 3: Fill with inside the blanks: (a) Ex-publish or real funding is the ______________ of deliberate funding and unplanned funding. (b) Ex-ante saving refers to quantity of financial savings, which families deliberate to keep at unique _____________ with inside the economic system. (c) The quantity of ex-ante or deliberate funding is decided through the _____________ among funding call for and price of hobby. (d) The quantity of ex-ante or deliberate saving is given through the ______________. (e) __________ funding refers back to the found out or real funding in an economic system in the course of a year.
• Question 4: State whether or not True or False (a) Planned cost of the variables are their ex-ante measures, whereas, found out cost of the variables are their ex-publish measures. (b) There are factors of saving and Investments: 1) Ex-ante saving and ex-ante funding. 2) Ex-publish saving and ex-publish funding (c) The quantity of ex-publish saving is given through the saving feature. (d) Ex-publish or real saving is the sum general of deliberate saving and unplanned saving. (e) The quantity of ex-ante or deliberate funding isn’t always decided through the relation among funding call for and price of hobby. (f) Ex-ante variable is the deliberate or anticipated cost of variable, whereas, ex-publish variable is the real or found out cost of the variable.
• Answer 1: The importance of difference among Ex-ante and Ex-publish is that each one the variables with inside the principle of profits dedication are ex-ante valuables, i.e., ex-ante variables shape the premise of principle of country wide profits dedication.
• Answer 2: Ex-publish financial savings consult with the real or found out saving in an economic system in the course of a year. Ex-publish or real saving is the sum general of deliberate saving and unplanned saving.
• Answer 3: (a) sum general; (b)degrees of profits; (c)relation; (d) saving feature; (e)Ex-publish.
• Answer 4: (a) True; (b) True; (c)False; (d) True; (e) False; (f) True.

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• CBSE Class 12 Macro Economics Chapter 2 – National Income Accounting Class 12 Notes

National Income Accounting Class 12 Revision Notes 

We will introduce the concept of national income accounting by providing national income accounting class 12 notes. We will be beginning by introducing some basic concepts of Macro Economics.  Thus, we will illustrate some primary ideas we shall work with. Then, we will describe the circular flow of income across different sectors in a circular way. Moreover, we will study the three methods to calculate the national income. These will include gaining knowledge of namely product method, expenditure method and income method.  Furthermore, we will describe the various sub-categories of national income.

Also, we will describe some of the Macro Economic identities.  Moreover, we will define different price indices like GDP deflator, Consumer Price Index, Wholesale Price Indices. Also, we will discuss the problems associated when we take the GDP of a country as an indicator of the aggregate welfare of the people of the country.

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Sub-Topics Covered Under National Income Accounting :

• Some Basic Concepts of Macroeconomics : Under this Subtopic, we will discuss the basic concepts in Macro Economics. We will get familiar with terms: final goods, capital goods, intermediate goods, etc.
• Circular Flow of Income and Methods of Calculating National Income :  Here, we will describe the circular flow of income across different sectors. Also three ways to calculate the national income: product method, expenditure method, and income method.
• Expenditure Method and Income Method :  Here, we will discuss the expenditure method and income Methods in detail.
• Some Macroeconomic Identities : Here, we will study about some macroeconomic identities such as Gross National Product (GNP), Net National Product (NNP), Personal Income (PI), etc., in detail.
• Goods, Prices, GDP and Welfare : Here we will learn to calculate Real GDP. Also, we will get to know as to how the GDP of a country be taken as an index of the welfare of the people of that country.

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CBSE Class 12 Macro Economics Revision Notes

• CBSE Class 12 Macro Economics Chapter 4 – Income Determination Class 12 Notes
• CBSE Class 12 Macro Economics Chapter 3 – Money and Banking Class 12 Notes
• CBSE Class 12 Macro Economics Chapter 6 – Open Economy Macroeconomics Class 12 Notes
• CBSE Class 12 Macro Economics Chapter 5 – Government Budget and the Economy Class 12 Notes 
• CBSE Class 12 Macro Economics Chapter 1 – Introduction to Macro Economics Class 12 Notes

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CBSE Class 12 Economics Important Case Study Based Questions for 2023 Board Exams

Cbse class 12 economics important case study based questions: class 12th economics exam is just a few hours away. get important case study questions to practice before cbse class 12 economics board examinations scheduled to be conducted on march 17, 2023. .

Important Case Study Based Questions for CBSE Class 12 Economics Board Exam 2023

Read the following case study paragraph carefully and answer the questions on the basis of the same..

Q1 The central bank of India i.e. Reserve Bank of India, is the apex institution that control the entire financial market. It's one of the major functions is to maintain the reserve of foreign

exchange. Also, it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the foreign exchange rate.

In other words, it is the central bank's job to control a country's economy through monetary policy; if the economy is moving slowly or going backward, there are steps that central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all Involve injecting more cash into the economy. The simple supply and demand economic projection occur and currency will devalue.

When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices.

Whatever the central bank does or in fact don't do, will affect the currency of that country.

Sometimes, it is within the central bank's interest to purposefully effect the value of a currency.

For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country's commodities will seek cheaper supply; hence directly effecting the economy.

1 Which of the following tools are used by the central bank to control the flow of money in domestic economy?

(a) Fiscal tools (b) Quantitative monetary tools

(c) Qualitative monetary tools (d) Both (b) and (c)

• a) Tighten the money supply in the economy
• b) Ease the money supply in the economy
• c) Allow commercial banks to work under less strict environment
• d) Both (b) and (c)

3 Which of the following steps should be taken by the central bank if there is an excessive rise in the foreign exchange rate?

(a) Supply foreign exchange from its stock

(b) Demand more of other foreign exchange

(c) Not intervene in the market as the exchange rate is determined by the market forces

(d) Help central government to stabilize the foreign exchange rate.

Answer: 

1(d) Both (b) and (c)

2(a) Tighten the money supply in the economy

3(a) Supply foreign exchange from its stock

Q2 Changes in aggregate demand bring about changes in the level of output, employment, income, and price. These changes are generally cyclical in nature. These changes, more generally, follow a cycle of four different stages namely boom, recession, depression and recovery. The cyclical nature of economic activity is known as trade cycle or business cycle. Boom is a stage of economic activity characterized by rising prices, rising employment, rising purchasing power.

• During the time of ‘excess demand’, Govt. should .................. the public expenditure.
• a) Reduce b) increase c) unchanged d) none of these.
• Investment depends on: a) Supply b) income c) saving d) Both (a) and (c)

Answer: Income.

Q3 In the modern world, govt. aims at maximizing the welfare of the people and the country. It

requires various infrastructure and economic welfare activities. These activities require huge govt. spending through appropriate planning and policy. Budget provides a solution to all these concerns. Budget is prepared by the government at all levels.

Estimated expenditure and receipts are planned as per the objectives of the government. In India, budget is prepared by the parliament on such a day as the president may direct. The parliament approves the budget before it can be implemented. The receipts and expenditures as shown in the budget are only the estimated values for the upcoming fiscal year, and not the actual figure.

• a) Reallocation of resources.
• b) Re distribution of income
• c) Reducing expenditure
• d) Economic stability.

Answer: c) Reducing expenditure

Answer: False

Q4 India’s balance of payments position improved dramatically in 2013-14 particularly in the last three quarters. this moved in large part to measure taken by the government and the Reserve Bank of India (RBI) and eat some part to the overall macro-economic slowdown that fed into the external sector. current account deficit (CAD) declined sharply from a record high of U.S. dollar 88.2 billion (4.7% of GDP) in 2012 -1/3 to U.S. dollars 32.4 billion (1.7% of GDP) in 2013 -14. After staying at perilously unsustainable levels off well over 4.0 percentage of GDP in 2011 -12 and 2012 -13, the improvement in BOP position is a welcome relief, and there is need to sustain the position going forward. This is because even as CAD came down, net capital flows moderated sharply from U.S. dollars 92.0 billion in 2012 -13 do U.S. dollar 47.9 billion in 2013-14, that two after a special swap window of

The RBI under the nonresident Indian (NRI) scheme / overseas borrowings of banks alone yielded U.S. dollar 3 4.0 billion. This led to some increase in the level of external debt, but it has remained at the manageable levels. the large depreciation of the rupee during the course of the year, note with standing sizable accretion to reserve in 2013 – 14, could partly be attributed to frictional forces and partly to the role of expectations in the forex market. the rupiah has stabilized the recently, reflecting an overall sense of confidence in the forex market as in the other financial markets of a change for better economic

prospects there is a need to nurture and build upon this optimism through creation of an enabling environment for investment inflows so as to sustain the external position in an as yet uncertain global milieu. --------- The Hindu, archives

• a) credit, capital account
• b) debit, capital account
• c) credit, current account
• d) debit, current account
• a) current account
• b) revenue account
• c) capital account
• d) official reserves
• a) outward flow of foreign exchange
• b) inward flow of foreign exchange
• c) decrease in the level of external debt
• d) decrease in future claims

Answers: 1.b 2. c 3. b 4. d

Q5 The green revolution for the third agricultural revolution is the set of research technology

e-transfer initiatives earring between GNE E and the late 1960 that increased agricultural

production worldwide beginning most markedly in the late 1960 the initiative resulted in

the adoption of new technologies including high yield varieties of CSR rules of cells

especially does wheat and rice it was associated with chemical fertilizers agrochemicals

and controlled water supply and newer methods of cultivation including machine isolation

National bank for agriculture and rural development is and apex development finance

institution fully owned by government of India the bank has been entrusted with Martyrs

concerning policy planning and operations in the field of credit for agriculture and other

economic activities in rural areas in India.

1 Who among the following is known as the father of green revolution

(a) Dr. M S Swaminathan

(b) Dadabhai Naoroji

(c) Vikram Sarabhai

(d) all of these

2 Green revolution is also known as ..................

(a) Golden revolution

(b) milk revolution

(c) Wheat revolution

(d) None of this

3 Which of the following institutions were setup as the apex body in rural areas to support the small farmers in the adoption of modern farming methods?

4 Green revolution was the ............... set of agricultural reforms brought in India

Answer: 1 (a) 2 (c) 3 (d) 4(c)

• Narasimha Rao. This policy opened the door of the India Economy for the global exposure for the first time. In this New Economic Policy P. V. Narasimha Rao governmentreduced the import duties, opened reserved sector for the private players, devalued the Indian currency to increase the export. This is also known as the LPG Model of growth. New Economic Policy refers to economic liberalization or relaxation in the import tariffs, deregulation of markets or opening the markets for private and foreign players, and reduction of taxes to expand the economic wings of the country. Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24,1991. Main Objectives of New Economic Policy – 1991, July 24 The main objectives behind the launching of the New Economic policy (NEP) in 1991 by the union Finance Minister Dr. Manmohan Singh are stated as follows:

The main objective was to plunge Indian Economy in to the arena of ‘Globalization and to give it a new thrust on market orientation. The NEP intended to bring down the rate of inflation.

1 New Economic Policy of India was launched in the year 1991 under the

• P. V. Narasimha Rao
• Atal Bihari Bajpayi
• Sharad Pawar
• None of these

2 .................................. is also known as the LPG Model of growth. ((choose

the correct alternative)) (New Economic Policy / New Education Policy)

Answer: New Economic Policy

3 State whether the given statement is true or false:

Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. ((choose the correct alternative))

True / False

Answer: True

Q7 Both forms of capital formation are the outcomes of conscious investment decisions. The decision regarding investment in physical capital is taken on the basis of one’s knowledge in this regard. The ownership of physical capital is the outcome of the conscious decision of the owner the physical capital formation is mainly an economic and technical process.

Human capital formation takes place in one’s life when she/he is unable to decide whether it would maximize her/his earnings. Children are given different types of school education and health care facilities by their parents and society. Moreover, the human capital formation at this stage is dependent upon the already formed human capital at the school level. Human capital formation is partly a social process and partly a conscious decision of the possessor of the human capital.

• a) Human capital is intangible whereas physical capital is tangible.
• b) Human capital can cope up with the changing technology whereas physical cannot.
• c) Human capital generates both personal and societal benefits whereas physical capital generates only personal benefit.
• d) Human capital gets obsolete with time whereas physical capital does not.
• In the context of the paragraph, it can be argued that human capital depreciates faster than the physical capital. The given statement is:
• c) Partially true
• d) can’t comment due to lack of proper estimation mechanism
• Machines and industrial tools are examples of _
• a) Physical capital
• b) Human capital
• c) Both physical and human capital
• d) Natural capital
• Investment in education by parents is the same as_______
• a) Investment in intermediate goods by companies
• b) Investment in CSR activity by companies
• c) Investment in capital goods by companies
• d) None of the above

Answer: – c) Investment in capital goods by companies

Q8 The central government will spend Rs. 9800 crores on livestock development over the next five years in a bid to leverage almost Rs. 55000 crore of outside investment into the Animal Husbandry Sector. It would do this by merging a slew of schemes of the Department of Animal Husbandry and Dairying into three main programmes, focused on indigenous cows and dairy development, livestock health and infrastructure development, an official statement said. The Cabinet Committee on Economic Affairs approved the implementation of the special livestock sector package by revising and realigning the various components of the existing schemes in order to boost growth and make animal husbandry more remunerative for the 10 crore farmers engaged in it.

1) Livestock production provides ------------- for the family without disrupting other food producing activities

(a)Increased stability in income 

(b) food security

(c)transport and fuel 

Answer: (d) all of these

2) The central bank undertakes to invest on livestock development in ----------- (horticulture/ animal husbandry) sector

Answer: animal husbandry

3) State one limitation of livestock sector in India

Answer: The livestock productivity is quite low as compared to other countries

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National Income and Related Aggregates Class 12 Notes: A Comprehensive Guide

Master the concepts of Class 12 Macroeconomics Chapter 2 National Income and Related Aggregates (also known as National Income Accounting) with these class 12 notes, designed to provide a clear and concise understanding of the topic. Check out these comprehensive notes and study materials to help you ace your exams.

Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful. - Albert Schweitzer

Class 12 Economics: National Income Accounting Class 12 Notes

Final goods and intermediate goods.

Final Goods

• Goods that are used either for final consumption by consumers or for investment by producers are known as final goods. These goods do not pass through the production process and are not used for resale. For example, bread, butter, biscuits, etc. used by the consumer
• It is not in the nature of the good but in the economic nature of its use that a good becomes a final good : Whether a good is a final good or an intermediate good depends on its use. For example, milk used by a sweet maker is an intermediate good but when it is used by the consumer it becomes a final good.

Types of Final Goods -

• Consumer goods can be durable (TV, Mobiles, etc.) and non-durable (bread, milk, etc.)
• Capital goods are durable.
• Investment is an addition to capital stock.

Intermediate Goods

• Intermediate goods are those goods that are meant either for reprocessing or for resale. Goods used in the production process during an accounting year are known as intermediate goods. Goods that are purchased for resale are also treated as intermediate goods. For example, Rice, wheat, sugar, etc. purchased by a retailer/wholesaler.
• Intermediate goods are not included in the calculation of national income. Only final goods are included in the calculation of national income because the value of intermediate goods is included in the value of final .goods. If it is included in national income it will lead to the problem of double counting .

Stock and Flow

• A stock is a quantity that is measured at a point of time i.e. at 4 p.m., on 31st March, etc.
• It has no time dimension.
• Wealth, population, money supply, wealth, stock, inventory, etc. are stock concepts.
• A flow is a quantity that is measured over a period of time i.e. days, months, years, etc.
• It has a time dimension.
• National income, population growth, income, change in stock, value-added, change in inventory, etc. are flow concepts.

Gross Investment and Net Investment

• Part of our final output that comprises capital goods constitutes a gross investment of an economy.
• These may be machines, tools, and implements; buildings, office spaces, storehouses, or infrastructure like roads, bridges, airports, or jetties.
• A part of the capital goods produced this year goes for the replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment. This part is called Depreciation.
• Depreciation is also known as 'Consumption of Fixed Capital'.
• Net Investment = Gross Investment - Depreciation
• Depreciation is thus an annual allowance for the wear and tear of a capital good.

• Depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.

Circular Flow of Income

There may fundamentally be four kinds of contributions that can be made during the production of goods and services:

• the contribution made by human labor, remuneration for which is called wage
• the contribution made by capital, remuneration for which is called interest
• the contribution made by entrepreneurship, remuneration of which is profit
• the contribution made by fixed natural resources (called ‘land’), remuneration for which is called rent.

Circular flow of income in a two-sector economy

• Households are owners of factors of production, they provide factor services to the firms (producing units). Firms provide factor payments in exchange for their factor services. So, factor payments flow from firms (producing units) to households.
• Households purchase goods and services from firms (producing units) for which they make payments to them. So, consumption expenditure (spending on goods and services) flows from households to firms.
• The aggregate consumption by the households of the economy is equal to the aggregate expenditure on goods and services produced by the firms in the economy.
• The aggregate spending of the economy must be equal to the aggregate income earned by the factors of production (the flows are equal at A and C).
• Real Flow: Real flow is the flow of factor services and goods and services between households and firms.
• Nominal Flow: Nominal flow/Money flow is the flow of factor payments and payments for goods and services between households and firms.

Factor Cost and Market Price

Factor cost includes only the payment to factors of production, it does not include any tax. In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less total subsidies.

Market price - Indirect taxes (IT) + Subsidies = Factor Cost

Factor costs + Indirect taxes (I.T.) - Subsidies = Market price

⇒ Factor costs + Net Indirect tax (NIT) = Market price

• GDP mp = GDP fc + I.T. - Subsidies
• GDP mp = GDP fc + net I.T.

National Product and Domestic Product

Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year. But the whole of it may not accrue to the citizens of the country. For example, a citizen of India working in Saudi Arabia may be earning her wage and it will be included in the Saudi Arabian GDP. But legally speaking, she is an Indian. Is there a way to take into account the earnings made by Indians abroad or by the factors of production owned by Indians? When we try to do this, in order to maintain symmetry, we must deduct the earnings of the foreigners who are working within our domestic economy, or the payments to the factors of production owned by the foreigners. For example, the profits earned by the Korean-owned Hyundai car factory will have to be subtracted from the GDP of India.

The macroeconomic variable which takes into account such additions and subtractions is known as Gross National Product (GNP).

GNP = GDP + Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy

Hence, GNP = GDP + Net factor income from abroad (NFIA)

• The national product includes the production activities of residents irrespective of whether performed within the economic territory or outside it.
• In comparison, the domestic product includes the production activity of the production units located in the economic territory irrespective of whether carried out by the residents or non-residents.

Gross and Net

Gross - depreciation (consumption of fixed capital) = Net

Methods of Calculating National Income

• The Product or Value Added Method Or Production Method
• Expenditure Method Or Final Expenditure Method
• Income Method or Income Distribution Method

1. Value Added Method Or Production Method

It is now a matter of general practice to group all the production units of the economic territory into three broad groups: primary sector, secondary sector, and tertiary sectors.

Inventory : In economics, the stock of unsold finished goods, semi-finished goods, or raw materials which a firm carries from one year to the next is called inventory. It is a stock variable.

Change of inventories of a firm during a year ≡ production of the firm during the year – sale of the firm during the year. It is a flow variable.

Inventories are treated as capital. Addition to the stock of capital of a firm is known as an investment. Therefore, a change in the inventory of a firm is treated as an investment.

There can be three major categories of investment.

• First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm.
• The second category of investment is fixed business investment , which is defined as the addition of the machinery, factory buildings, and equipment employed by the firms.
• The last category of investment is residential investment , which refers to the addition of housing facilities.

Changes in inventories may be planned or unplanned.

• In case of an unexpected fall in sales, the firm will have unsold stock of goods that it had not anticipated. Hence there will be an unplanned accumulation of inventories .
• In the opposite case where there is an unexpected rise in sales, there will be unplanned decumulation of inventories .

Also, Change of inventories = production of the firm – sale of the firm

⇒ Production of the firm = Change of inventories + Sale of the firm

∴ Equation (i) can also be written as

Net Value Added = Gross Value Added - Depreciation

If we sum the gross value added of all the firms of the economy in a year, we get a measure of the value of the aggregate amount of goods and services produced by the economy in a year. Such an estimate is called Gross Domestic Product (GDP) .

In the production method, we first find out Gross Value Added at Market Price (GVA mp ) in each sector and then take their sum to arrive at GDP mp .

Thus, GDP mp = Sum total of gross value added (GVA mp ) of all the firms in the economy.

2. Income Method

In this method, we first estimate factor payments by each sector. The sum of such factor payments equals Net Value Added at Factor Cost (NVA fc ) by that sector. Then we take sum total of NVA fc by all the sectors to arrive at NDP fc .

The components of NDP fc are:

• Compensation of employees
• Rent and royalty

i.e., (1) + (2) + (3) + (4) = NDP fc

Compensation of employees : It is the total remuneration in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.

The main components of compensation of employees are :

• Social security contributions by employers.

Rent : It is the amount receivable by a landlord from a tenant for the use of land.

Royalty : It is the amount receivable by the landlord for granting the leasing rights of sub-soil assets.

Interest : It is the amount payable by a production unit to the owners of financial assets in the production unit. The production unit uses these assets for production and in turn makes interest payments, imputed or actual.

Profit : It is a residual factor payment by the production unit to the owners of the production unit.

The main source of data on factor payments is the accounts of production units. Since accounts of most production units are not available to the estimators, and also since the accounting practices differ, it is not possible for the estimators to clearly identify the components. Therefore, in cases where total factors payment is estimable but not its different components, an additional factor payment item called ‘mixed income’ is added. Since this problem arises mainly in the case of self-employed people like doctors, chartered accountants, consultants, etc, this factor payment is popularly called “ mixed income of the self-employed ”.

In case there is such an item then,

NDP fc = Compensation of employees + Rent and royalty + Interest + Profit + Mixed income (if any)

There is another term used in factor payments. It is ‘ operating surplus ’. It is defined as the sum of rent and royalty, interest, and profits.

Operating Surplus = Rent and royalty + Interest + Profit

∴ NDP fc = Compensation of employees + operating surplus + mixed income (if any)

Once we estimate NDP fc , we can find NNP fc , or national income, by adding NFIA.

NDP fc + NFIA = NNP fc .

3. Final Expenditure Method

In this method, we take the sum of final expenditures on consumption and investment. This sum equals GDPmp. These final expenditures are on the output produced within the economic territory of the country.

Its main components are: Private final consumption expenditure (PFCE) + Government final consumption expenditure (GFCE) + Gross domestic capital formation (GDCF) (Gross Investment) + Net exports (= export - imports) (X-M) = GDP mp

=GDP mp - Depreciation + NFIA -NIT

= National Income

• GDCF= Net domestic fixed capital formation + (Closing stock - Opening stock) + Consumption of fixed capital
• Closing stock - opening stock = Net change in stocks.

Precautions in making estimates of National Income:

A. value added (production) method:.

• Avoid Double Counting : Value added equals value of output less intermediate cost. There is a possibility that instead of counting ‘value added’ one may count the value of output. You can verify by taking some imaginary numerical example that counting only values of output will lead to counting the same output more than once. This will lead to an overestimation of national income. There are two alternative ways of avoiding double counting: (a) count only value-added and (b) count only the value of final products.
• Do not include the sale of second-hand goods : Sale of the used goods is not a production activity. The good should not be treated as fresh production and therefore doesn’t qualify for inclusion in national income. However, any brokerage or commission paid to facilitate the sale is a fresh production activity. It should be included in production but to the extent of brokerage or commission only.
• Self-consumed output must be included : Output produced but retained for self-consumption, rather than selling in the market, is output and must be included in estimates. Services of owner-occupied buildings, farmers consuming their own produce, etc. are some examples

B. Income Distribution Method:

• Avoid transfers : National income includes only factor payments, i.e. payment for the services rendered to the production units by the owners of factors. Any payment for which no service is rendered is called a transfer, and not a production activity. Gifts, donations, charities, etc. are the main examples. Since transfers are not a production activity it must not be included in national income.
• Avoid capital gain: Capital gain refers to the income from the sale of second-hand goods and financial assets. Income from the sale of old cars, old houses, bonds, debentures, etc. are some examples. These transactions are not production transactions. So, any income arising to the owners of such things is not a factor income.
• Include income from the self-consumed output : When a house owner lives in that house, he does not pay any rent. But in fact, he pays rent to himself. Since rent is a payment for services rendered, even though rendered to the owner itself, it must be counted as a factor payment.
• Include free services provided by the owners of the production units : Owners work in their own units but do not charge salaries. Owners provide finance but do not charge any interest. Owners do production in their own buildings but do not charge rent. Although they do not charge, the services have been performed. The imputed (estimated) value of these must be included in national income.

C. Final Expenditure Method:

• Avoid intermediate expenditure : By definition, the method includes only final expenditures, i.e. expenditures on consumption and investment. Like in the value-added method, the inclusion of intermediate expenditures like that on raw materials, etc, will mean double counting.
• Do not include expenditure on second-hand goods and financial assets: Buying second-hand goods is not a fresh production activity. Buying financial assets is not a production activity because financial assets are neither goods nor services. Therefore they should not be included in estimates of national income.
• Include the self-use of own-produced final products : For example, a house owner using the house for himself. Although explicitly he does not incur any expenditure, implicitly he is making payment of rent to himself. Since the house is producing a service, the imputed value of this service must be included in national income.
• Avoid transfer expenditures : A transfer payment is a payment against which no services are rendered. Therefore no production takes place. Since no production takes place it has no place in national income. Charities, donations, gifts, scholarships, etc. are some examples.

National Product and Other Aggregates

First, let us note that out of NI (NNP fc ), which is earned by the firms and government enterprises, a part of the profit is not distributed among the factors of production. This is called Undistributed Profits (UP) . We have to deduct UP from NI to arrive at PI since UP does not accrue to households. Similarly, Corporate Tax , which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households. On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interest to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interest paid by the households to the firms and government. The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.

However, even PI is not the income over which the households have a complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as Personal Disposable Income.

Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decide to consume a part of it and save the rest.

The idea behind National Disposable Income is that it gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal. Current transfers from the rest of the world include items such as gifts, aids, etc.

• The sum of net value added by all the production units in the domestic territory is net domestic product of factor cost (NDP fc ). All the income generated in a year is not received by consumer households. Income from property and entrepreneurship accruing to the departmental commercial enterprise of the government is retained by the government. Secondly, non-departmental enterprises of the government save a part of their profits for future expansion. This sum also is not available for distribution. It these two sums are deducted from NDP fc , we get income from domestic product or NDP fc accruing to the private sector.
• Income from domestic product accruing to the private sector = NDP fc – income from property and entrepreneurship accruing to the government administration department - savings of non-departmental enterprises.
• 'National debt interest’ is the interest paid by the government on loans taken to meet its administrative expenditure, a consumption expenditure. Since interest on loans taken to meet consumption expenditure is not a factor income it was not included in NDP fc . But since it is a disposable income it is added to NDP fc to arrive at disposable income of the private sector, called Private Income.

Remember this Formula Chart for solving Numerical Problems:

Basic national income aggregates, nominal and real gdp.

GDP Deflator : It is the ratio of nominal GDP to real GDP.

GDP Deflator = ( Nominal GDP / Real GDP x 100) %

Consumer Price Index (CPI) : We calculate the cost of purchase of a given basket of commodities in the base year. We also calculate the cost of purchase of the same basket in the current year. Then we express the latter as a percentage of the former. This gives us the Consumer Price Index of the current year vis-´a-vis the base year.

Wholesale Price Index (WPI) : It is worth noting that many commodities have two sets of prices. One is the retail price that the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk. These two may differ in value because of the margin kept by traders. Goods that are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers. Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI). In countries like USA, it is referred to as Producer Price Index (PPI) .

GDP and Welfare

If a person has more income he or she can buy more goods and services and his or her material well-being improves. So it may seem reasonable to treat his or her income level as his or her level of well-being.

But there are at least three reasons why this may not be correct:

• Distribution of GDP – how uniform is it : If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased.
• Non-monetary exchanges : Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. In barter exchanges, goods (or services) are directly exchanged against each other. But since money is not being used here, these exchanges are not registered as part of economic activity. In developing countries, where many remote regions are underdeveloped, these kinds of exchanges do take place, but they are generally not counted in the GDPs of these countries. This is a case of underestimation of GDP. Hence, GDP calculated in a standard manner may not give us a clear indication of the productive activity and well-being of a country.
• Externalities : Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). For example, let us suppose there is an oil refinery that refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value added by the refinery by deducting the value of intermediate goods used by the refinery (crude oil in this case) from the value of its output. The value added by the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well-being will fall. Pollution may also kill fish or other organisms of the river on which fish survive. As a result, the fishermen of the river may be losing their livelihood. In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of the welfare of the economy we shall be overestimating the actual welfare. This was an example of a negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy.

Frequently Asked Questions

What is National Income Accounting?

National Income Accounting is the process of measuring the total economic output of a country over a specific period of time. It is used to evaluate the economic performance of a country and to make comparisons between countries.

What are the components of National Income?

The components of National Income include compensation of employees, gross operating surplus, taxes on production and imports, and net property income from abroad.

What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the total value of all goods and services produced within a country's borders in a specific period of time. It is one of the most widely used indicators of a country's economic performance.

What is Gross National Product (GNP)?

Gross National Product (GNP) is the total value of all goods and services produced by a country's residents, regardless of where they are located in the world. It includes income earned by citizens working abroad and excludes income earned by foreigners within the country.

What is the difference between GDP and GNP?

The main difference between GDP and GNP is that GDP only considers the economic activity within a country's borders, while GNP includes economic activity by a country's citizens, regardless of where it occurs.

Why is National Income Accounting important?

National Income Accounting is important because it provides a framework for analyzing the economic performance of a country and making comparisons between countries. It helps policymakers to identify areas where economic growth can be encouraged and to assess the impact of economic policies.

What is the difference between nominal GDP and real GDP?

Nominal GDP is the total value of goods and services produced in a country using current market prices, while real GDP is the total value of goods and services produced in a country adjusted for inflation. Real GDP is considered a more accurate measure of a country's economic growth over time.

How is net domestic product (NDP) calculated?

Net domestic product (NDP) is calculated by subtracting the depreciation of capital goods from the gross domestic product (GDP).

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• CBSE Class 12 Important Questions for Macro Economics Chapter 2: National Income Accounting

CBSE Class 12 Macro Economics Chapter-2 Important Questions - Get Free PDF Download

Economics is one of the most important subjects in the Class 12 curriculum. Students must have studied Microeconomics and Statistics in Class 11 and in Class 12 they get to study Macroeconomics and the Indian economy. National Income including its various methods of calculation is one of the important chapters for both theory and practical questions. Our subject experts at Vedantu have come up with important questions for Class 12 Macroeconomics Chapter 2 .

CBSE Class 12 Macro Economics Chapter 2 covers important concepts and theories related to National Income Accounting. To excel in this subject, it is crucial to have a strong understanding of these concepts and their applications. One effective way to enhance your preparation is by practicing important questions that cover a wide range of topics from the chapter. These questions not only help you gauge your understanding but also familiarize you with the pattern and types of questions that could appear in the examinations. While seeking additional study resources, you may come across websites or platforms that offer free PDF downloads of important questions for Chapter 2. These PDFs can be a valuable addition to your study material, providing you with a comprehensive set of questions to practice and consolidate your knowledge.

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Study Important Questions for Class 12 Macro Economics Chapter 2 – National Income Accounting

VERY SHORT ANSWER QUESTIONS                                                        (1 Mark)

1. Explain the meaning of non-market activities

a) Production

b) Non-marketable

c) Involuntary

d) Economic

Ans: (b) Non-marketable.

2. Nominal GNP is same as

a) GNP at constant prices

b) Real GNP

c) GNP at current prices

d) GNP less Net factor income from abroad

Ans: (c) GNP at current prices

3. Real flow is the flow of

b) Goods only

c) Services only

d) Goods and services

Ans: (d) Goods and services

4. What is national disposable income?

Ans: The term "national disposable income" refers to the amount of money available to the entire economy for spending or disposition.

The formula for calculating national disposable income is NNP MP + Net Current Transfers from Abroad (NDI).

5. What is real flow?

Ans: The flow of services and goods between various segments is referred to as real flow. Flow sector services, for example, flow from household to firm and then back again.

6. Define money flow.

Ans: The flow of money between different sectors of the economy, such as firms, households, and so on, is referred to as money flow. For example, consider the flow of income from firms to households and the flow of consumption expenditure from households to firms.

7. What must be added to domestic factor income to obtain national income?

Ans: To calculate the national income, net factor income from outside the country must be added to domestic factor income.

8. Explain the meaning of non-market activities.

Ans: Non-marketing activities are those that are gained as a result of the purchase of a large number of finished goods and services. They are really not bought and sold on the open market. Vegetables, for example, cultivated in the house kitchen garden.

9. Define Real GNP.

Ans: In economics, real GNP is defined as GNP computed at constant prices, or through a base year price.

10. Money flow is the flow of

a) Factor payments

d) Goods and services only

Ans: (a) Factor payments

11. State which one of the following is true.

a) Bread is always a consumer good.

b) Gross domestic capital formation is always greater than gross fixed capital

c) Capital formation is a flow

d) Nominal GDP can never be less that real GDP

Ans: (c) Capital formation is a flow

12. Which of the following is an example of macroeconomics

a) Price determination

b) Consumer’s equilibrium

c) Producer’s equilibrium

d) Inflation

Ans: (d) Inflation

13. Microeconomics is different from macroeconomics as

a) Microeconomics deals with economic behaviour

b) Microeconomics deals with individual behaviour

c) Microeconomics deals with prices only

d) Microeconomics deals with government’s decisions

Ans: (b) Microeconomics deal with individual behaviour

14. Intermediate goods are those

a) Which are sold

b) Which capital can buy

c) Which are for long term use

d) Which are for resale

Ans: (d) Which are for resale

15. An example of transfer payments is

a) Free meals in the company canteen

b) Employers’ contribution for social security

c) Retirement pension

d) Old age pension

Ans: (d) Old age pension

SHORT ANSWER QUESTIONS                                                                              (3/4 Marks)

16. Distinguish between personal income and private income.

Ans: The distinction between the two is as follows:

Individuals' personal income is the sum of their earned and transfer revenues from all sources of income, both within and outside the country. 

Personal Income is computed as follows: Private Income – Corporate Tax – Corporate Savings (undistributed profits)

Factor and transfer income obtained from all private sources within and outside the country is classed as private income.

Personal income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

17. Explain the main steps involved in measuring national income through the product method.

Ans: The most important steps in calculating national income using the product approach:

1. First, divide the manufacturing units into industrial sectors such as primary, secondary, and tertiary.

2. Next, calculate the factor cost's net value added.

3. In the third phase, calculate the output value by adding sales and stock changes.

4. Calculate gross value added by deducting intermediate consumption from output value.

5. Subtract depreciation and net indirect tax from gross value added at market price to get NDP FC (net value added at factor cost).

6. Finally, add net factor income from outside the country to NDP FC to get NNP FC , which is national income once more.

18. What is double counting in the economy? How can it be avoided?

Ans: Doubt counting is the process of calculating the value of goods multiple times at each stage of production. 

The following methods can be used to avoid it:

a ) When estimating national income, use the value-added technique.

b) Calculating national income only on the basis of the final commodity's worth.

19. Do you agree with the statement, ‘Machine purchased is always a final good’. Give reason for your answer.

Ans: Yes, we agree with the assertion made here. It is up to the user to decide if a machine is a finished product or not. When a machine is purchased by a household, it is referred to as a final good. On the other hand, if a machine is purchased by a business, it is referred to as a final good. However, if it is purchased by a company for resale, it is referred to as an intermediate good.

20. What are the precautions to be taken while calculating national income through product method, specially value-added method?

Ans: The steps will be as follows:

a) Instead of relying on the value added by each production unit, avoid using the production's doubt counting approach.

b) Inclusion of output produced for self-consumption.

c) The cost of intermediary consumption should never be taken into account.

d) The sale and acquisition of used products should never be included.

g) The value of services rendered must always be factored into sales.

LONG ANSWER QUESTIONS                                                                                  (6 Marks)

21. Calculate net value added at market price of a firm:

Ans: Value of output: - Sale + Change in stock (300+ (-) 10 = 290/-) Gross Value added at MP= Value of output - Purchase of intermediate product.

290 - 150 = 140/-

Net Value added at MP = Gross Value added at MP - Depreciation

140 - 20 = 120/-

Thus, the final answer is Rs. 120.

22. Calculate national income and gross national disposable income from the

following data

Ans: Putting the equation together

Net national income (NNP FC ) = Net disposable income (NNDPM) 

= (Government final consumption expenditure + private final consumption

expenditure + net domestic fixed capital formation + net exports)

= 200 + 600 + 100 + 10 + (-) 20

= 910 – 20 = 890

So NDP MP = 890 crores

NNP FC = NNDPM + (Net factor income from abroad – Net indirect tax)

= 890 + 5 – 5 

So NNP FC = 890 crores

Depreciation = (Gross domestic fixed capital formation - Net domestic fixed

capital formation)

= 125-100= 25 crores

GNDI = (NNP FC + Net indirect tax + Net current transfers from abroad +

Depreciation)

= 890 + 05 + 15 + 25

 GDNI = 935 crores

23. Calculate NNP at market price by production method and income method.

Ans: 1. By Production Method:

Value added at MP = Value of output - Intermediate consumption

= (1000 + 900 + 700) – (500 + 400 + 300)

= 2600 - 1200

Hence GDP MP = 1400 crores

NNP MP = GDP MP - (Consumptive of fixed capital + Net factor income from

= 1400 – 40 = (-20)

NNP MP is equal to 1380 crores

2. By Income Method:

NNP MP = Emoluments of employers + Mixed income + Operating surplus + Net indirect tax + Net factor income from abroad

= 400 + 650 + 300 + 10 + (-20)

NNP MP = 1350 + 10 - 20

 = 1340 crores

24. Giving reason, explain whether the following are included in domestic product

1. Profits earned by a branch of foreign bank in India

2. Payment of salaries to its staff by embassy located in New Delhi

3. Interest received by an Indian resident from its abroad firms

1. Profits earned by a foreign bank branch in India are included in India's domestic income because they are earned within the country's borders.

2. Since the embassy in New Delhi is not part of India's domestic territory, salaries paid to its employees will not be included in the country's domestic income.

3. Interest received by an Indian resident from his or her foreign enterprises is not included in India's domestic income because it is a factor income.

25. Calculate National Income and Private Income from the following data.

Ans: a) National Income (NNP FC ) = (Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Net exports + Net factor income from abroad- Net indirect tax)

= 600 + 100 + 70 + (-20) + 10 - 30

= 730 crores

b) Private Income = NNP FC - Net domestic product at factor cost accruing to govt + 

Transfer payments + National debt interest

= 730 – 25 + (10 + 5) + 15

= 735 crores

National Income Class 12 Important Questions

National Income is one of the Important chapters of Macro Economics of Class 12. This chapter talks about what is national income, what is the difference between national income and domestic income, how to calculate the national income, its various methods, etc. This is important for both theoretical and practical knowledge. The total number of goods and services produced by the residents of the country in an accounting year is termed as the National Income of the country. There are various methods to calculate the national income of the country which we discussed in this chapter such as product method, income method, and expenditure method. Here, we have come up with important questions of National Income Class 12 which will surely help the students to understand important concepts and allow them to practice important questions so that they can solve the practical problems in their board exams.

Why You Should Practice Important Questions of National Income 12?

As national income is one of the most important and difficult chapters of Macroeconomics these important questions will help the students to understand and solve more and more questions.

Understanding the concepts is not enough. The study of any concept is useless until you practice that and these important questions of National Income Class 12 will surely help the students in practicing the concepts of National Income.

If you fail to answer any question, then answers are also given along with the questions so that you can save your time from finding answers and can focus on your studies.

These questions are well framed and are made by the Vedantu experts.

These questions will help the students who face difficulty in finding out the consolidated questions and answers for practice.

These Class 12 Macroeconomics Chapter 2 extra questions will surely help the students to get extra marks in the board exams.

These questions have been created by the experienced faculty at Vedantu. They have prepared these National Income Class 12 important questions for the students of Class 12 especially so that they can practice these questions and can get good marks. You can also find important questions of other chapters and subjects on Vedantu.

Chapter Wise Important Questions for Class 12 Macro Economics

Important Questions for CBSE Class 12 Macro Economics Chapter 1 - Introduction to Macro Economics

Important Questions for CBSE Class 12 Macro Economics Chapter 3 - Money and Banking

Important Questions for CBSE Class 12 Macro Economics Chapter 4 - Determination of Income and Employment

Important Questions for CBSE Class 12 Macro Economics Chapter 5 - Government Budget and the Economy

Important Questions for CBSE Class 12 Macro Economics Chapter 6 - Open Economy Macroeconomics

Chapter Wise Important Questions for Class 12 Micro Economics

Important Questions for CBSE Class 12 Micro Economics Chapter 1 - Introduction to Micro Economics

Important Questions for CBSE Class 12 Micro Economics Chapter 2 - Theory of Consumer Behaviour

Important Questions for CBSE Class 12 Micro Economics Chapter 3 - Production and Costs

Important Questions for CBSE Class 12 Micro Economics Chapter 4 - The Theory of the Firm under Perfect Competition

Important Questions for CBSE Class 12 Micro Economics Chapter 5 - Market Equilibrium

Important Questions for CBSE Class 12 Micro Economics Chapter 6 - Non-competitive Markets

Study Materials Related to Class 12 Macro Economics Chapter-2

NCERT Solutions for Class 12 Macro Economics - Chapter 2 - National Income Accounting

CBSE Class 12 Macro Economics Revision Notes Chapter 2 - National Income Accounting

Other Related Links

CBSE Syllabus for Class 12 Economics Term (1 & 2)

NCERT Solutions for Class 12 Economics

Previous Year Question Paper for CBSE Class 12 Economics with solutions

CBSE Class 12 Economics Revision Notes

CBSE Sample Papers for Class 12 Economics with Solution & Marking Scheme

Important Topics in Class 12 Economics Chapter 2

The following subjects and sub-topics are covered in the chapter on National Income Accounting. Our specialists have compiled relevant questions and answers from these themes to assist students in studying for their examinations.

Final Goods

Intermediate Goods

Consumption Goods

Capital Goods

Gross Investment

Net Investment

Circular Flow of Income

Depreciation

Condition for Equilibrium in the Four Sector Economy

Factor Incomes

Normal Residents of a Country

Transfer Payment

Domestic Territory of a Country

Methods of Measurement of National Income

Value Added

Planned Change in Inventories

Unplanned Change in Inventories

Final Expenditure

Components of Domestic Factor Income

Domestic Income

National Income

NNP at Market Price

National Income at Current Price

NNP at Factor Cost

Private Income

Personal Income

National Disposable Income

Personal Disposable Income

Nominal GDP

Consumer Price Index

Externalities

GNP Deflator

Important Topics in Class 12 Economics

What is Demand?

Consumer Protection Act

Consumer Equilibrium

Central Problems of an Economy

All of the crucial questions and answers provided above are in accordance with the most recent CBSE Class 12 rules. This chapter discusses various essential ideas of national income, such as categories of commodities, investments, requirements for equilibrium in a four-sector economy, GDP, the Consumer Price Index, and so on. With the aid of this question-and-answer style, students will be able to simply prepare these topics.

Students can learn all subjects and subtopics in depth from the NCERT textbook and use the NCERT Answers for Class 12 Macroeconomics Chapter 2 if they have any questions. Pupils can use the revision notes for Class 12 Macroeconomics National Income Accounting to refresh their memory before the test. In addition, for test preparation, students can use the NCERT Answers and other study tools for all topics included in the CBSE Class 12 syllabus .

FAQs on CBSE Class 12 Important Questions for Macro Economics Chapter 2: National Income Accounting

1. What are the important concepts of Chapter 2 of Class 12 Macroeconomics?

In NCERT Solutions for Chapter 2 of Class 12 Macroeconomics, Vedantu provides students with all the important topics and concepts to learn and understand. These important concepts are explained from the examination point of view. Some important concepts in this chapter include types of goods, types of investment, the flow of income and circular flow of income, conditions for equilibrium in a four sector economy, techniques of measurement of national income, components of domestic factor income, national income, and GDP.

2. How can I learn Chapter 2 of Class 12 Macroeconomics using NCERT Solutions?

NCERT Solutions for Class 12 macroeconomics Chapter 2 National Income Accounting covers a huge variety of concepts and topics that students can learn. Vedantu provides students with an opportunity to learn all these important concepts and topics. Chapter 2 helps students understand how to calculate the national income and the related concepts to it. It gives them a complete outlook as to what the students need to understand and what they need to learn about national income accounting.

3. How do we calculate the National Income?

National Income refers to the aggregate of income factors of all the residents living in the country. The National Income of a country can be calculated by using three main methods. These methods include the Income method, Expenditure method, and Product method or output method or value added method. All three methods are equally important to learn and understand. However, students can use the Income method to calculate the National Income as it is faster, easier, and more convenient for students to use.

4. What is National Disposable Income?

National Disposable Income (NDI) refers to the total income that is available for the entire economy in terms of spending purpose and/or for disposition. It is the maximum amount a country can afford to spend for the consumption of services and goods during an accounting year without any added expenditure or increase in liabilities. The NDI formula is as follows: 

Net National Disposable Income = Net National Product at Factor Cost + Net Indirect taxes + Net Current Transfers from Rest of the World

5. Where can I find NCERT Solutions for Chapter 2 of Class 12 Macroeconomics?

Vedantu provides students with the best NCERT Solutions for Class 12 Macroeconomics. It provides all the important questions and answers for Chapter 2 “National Income Accounting”. NCERT Solutions covers all types of questions including exercise questions, HOTs questions, and in-text questions. There are a variety of questions that will help students understand the chapter better. These solutions to all the important questions are crucial for all CBSE Students from the examination viewpoint. Students can even download the Solutions PDF for free on the Vedantu Mobile App and official website(vedantu.com).

CBSE Class 12 Macro Economics Important Questions

Cbse study materials.

National Income and Related Aggregates Chapter 1 Notes, QnA 2023

National income and related aggregates.

Below are some of the very important NCERT Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions. These Class 12 National Income And Related Aggregates Notes And Questions have been prepared by expert teachers and subject experts based on the latest syllabus and pattern of term 2. Questions with Answers to help students understand the concept.

These Questions for Class 12 Economics National Income And Related Aggregates Notes And Questions are very important for the latest CBSE term 2 pattern. These class 12 notes and Q and A are very important for students who want to score high in CBSE Board.

We have put together these NCERT  Questions of Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions. for practice on a regular basis to score high in exams. Refer to these Questions with Answers here along with a detailed explanation.

Basic Concepts of Macroeconomics

Macroeconomics deals with the overall economy of the market and other systems on a large scale. 

Macroeconomics studies about the performance, structure, and behavior of the entire economy. It focuses on the way the economy performs as a whole.

It analyzes how different sectors of the economy relate to one another. This includes unemployment, GDP, inflation, aggregate consumption, aggregate investment, saving, energy, international trade, international finance, etc. Its main instruments are  demand and supply.

Macroeconomists study topics such as GDP, unemployment rates, national income, price indices, output, consumption, unemployment, inflation, saving, investment, energy, international trade, and international finance.

There are three main topics for macroeconomic theories which are related  to the phenomena of output, unemployment, and inflation.

Output : It is the total amount of everything a country produces and sold in a given which generates an equal amount of income. The total output of the economy is measured GDP per person.

Unemployment : It refers to people who are employable but are unable to find a job. It also Includes people in the workforce who are working but do not have an appropriate job. 

Unemployment is measured by the unemployment rate, which is dividing the number of unemployed and employed people in the workforce, unemployment is one of the indicators of a country’s economic status.

Inflation : When a general price increase across the entire economy is called inflation and when prices decrease, that is deflation. These changes in prices are measured with price indexes. Inflation can occur when an economy grows too quickly. Similarly, a declining economy can lead to deflation.

Types of Goods

Consumer Goods:

Consumer goods are products made for consumption by the average consumer. It is the end result of production and manufacturing. Consumer goods are purchased to fulfill personal consumption needs

Examples of consumer goods are clothing, food, furniture, jewelry etc. Basic materials, such as copper, are not considered consumer goods because they must be transformed into usable products.

These goods can be classified as durable (longer than 3 years), nondurable (less than 3 years), or pure services (consumed instantaneously).

Capital Goods:

Capital goods are the goods that can be used to increase production. These goods are fixed, durable or tangible assets that are purchased by a business in order to produce finished products or consumer goods.

Examples of capital goods are equipment, machinery, buildings, computers, vehicles, and more. The concept of capital goods is used in macroeconomic terms where it is used in determining the capital formation and the production capacity.

For purchasing capital goods, a considerable amount of investment is required. This purchase of a capital good is referred to as a capital expense in accountancy.

Final Goods:

A final good is a product that are used by the final consumer which does not require any additional processing. It is for the direct use of the final consumer.

Final goods are also purchased by the firms for investment purposes or for capital formation.

Classification of Final Goods

Convenience goods

Convenience goods are those goods that are regularly consumed, e.g milk, bread, pulses, and more.

Specialty goods

Speciality goods that provide luxury and are expensive. These goods are not a necessity. Examples of such goods are antique cars, jewellery, and more.

Shopping goods

These goods are durable and, more expensive than the convenience goods. e.g. refrigerators, televisions, laptops, and more.

Unsought goods

These types of goods are not purchased often by the consumers, e.g. fire extinguishers, snow jackets, etc.

Intermediate Goods

Intermediate goods are partially finished goods that are used for the production of other goods or services, that become final goods.

Intermediate goods are an integral part of the production process, they are also known as producer goods, because they are used in the production process.

These goods are transformed into another product, which is either another intermediate good or a final good for end user.

Intermediate goods are of three main categories:

Stocks and Flows

Any quantity that is measured at a particular point in time is known as Stock, and the quantity that can be measured over a period of time is called Flow

Both stocks and flow are dependent on each other. The concept of stock and flow is very important in Economics, it helps to understand the development of economic variables.

In a small period of time, flows will be close to zero, whereas stocks could have some value. Stocks are accumulated over time by flows, whereas flows represent the rate of movement of items in and out of stocks. 

Flows can be divided into two parts: inflows (that add to stocks), and outflows (that deplete the stocks). The difference between these two is called net inflows.

If the inflow is more, than net inflow is positive and the stock will be rising, but if the inflow is less, than net inflow is negative, and the stock will be falling.

Example of stocks and flow is a bucket. The level of water in the bucket is a stock, the water coming from the tap is an inflow, and the draining of the water through the drain is an outflow. 

If we plug the drain and turn on the tap, the net inflow will be positive, and the stock of water in the bucket will be rising. If, instead, we close the tap and open the drain, the net inflow of water will be negative, and the stock of water in the bucket will fall.

Economic development can be well described with the knowledge of which variables represent stock and which variables represent flows. Most of the macroeconomic variables reported by statistical agencies are flow variables. 

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• Unit 2: Money and Banking
• Unit 3: Determination of Income and Employment  
• Unit 4: Government Budget and the Economy 
• Unit 5: Balance of Payments
• Unit 6: Development Experience (1947-90) and Economic Reforms since 1991
• Unit 7: Current challenges facing Indian Economy  
• Unit 8: Development Experience of India

Gross Investment and Depreciation

Gross investment refers to the total expenditure on new capital goods over a specific period of time without considering depreciation. The investment which considers depreciations is known as Net investment 

Net investment is calculated by subtracting depreciation from gross investment. 

Some gross investment is required each year just to replace technologically, obsolete or worn-out plant and machinery.

Investment is done to obtain a good target return over a specified period of term. The target returns may be of any forms like an increase in the value of assets or securities. 

There are different types of investments like autonomous, financial, real, planned, unplanned, gross and net. 

If gross investment is greater than depreciation over any period of time then the net investment is positive and the capital stock has increased.

This indicates that businesses will have a higher productive capacity and can meet rising demand in the future.

But, if gross investment is less than depreciation, then the net investment tends to be negative and the capital stock declines. 

Circular Flow of Income (two sector model)

Circular flow of income.

It refers to flow of money, income, goods and services across different sectors of the economy in a circular form.

This flow shows the redistribution of income in a circular manner between the production unit and households

These flows include land (rent), labour (wages), capita (interest), and entrepreneurship (profit).

There are two types of Circular flow:

• Real/Product/Physical Flow
• Money/Monetary/Nominal Flow

This is the flow of factor services from the household sector to the producing sector and in return flow of goods and services from the producing sector to the household sector

This flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services 

Circular Flow Of Income In Two Sector Model:

It is the flow of payments and receipts for goods, services, and factor services between the households and the firm sectors of the economy. 

Household supply factor services to firms and firms hire factor services from Households. Households spend their income on consumption and firms sell all its products to the households.

Methods of calculating National Income

There are three known methods by which national income is determined. These are:

• Value added method
• Expenditure method
• Income method

Value Added Method

The value added method is also known as the product method. Its main objective is to calculate national income by taking the value added to a product during the various stages of production into account.

The formula for calculating the national income by the value added method can be expressed as:

National income (NI) = (NDPfc) + Net factor income from abroad

Expenditure Method

The expenditure method of national income calculation is based on the expenditures taking place in the economy. This expenditure is done by individuals, households, business enterprises, and the government.

The formula for calculating the national income by the expenditure method can be expressed as:

National income (NI) = C + G + I + (X – M) Or, National income (NI) = C + G + I + NX

Income Method

This method is based on the income generated by the individuals by providing services to the other people in the country either individually or by using the assets at disposal.

The income generated from land, capital in the form of rent, interest, wages and profit is taken into consideration.

In this method the national income is calculated by adding up the wages, interest earned on capital, profits earned, rent obtained from land, and income generated by the self-employed people in an economy. It is known as net domestic product at factor cost or NDPfc.

The formula for income method is :

NNPfc = (NDPfc) + Net factor income from abroad

Aggregate Of National Income

In an economy, various types of goods and services are produced by different productive units during a period of one year. Such goods and services cannot be added together in terms of quantity . Therefore, these are expressed in terms of money .

There are many aggregates in national income to measure the value of goods and services in terms of money. 

• Gross Domestic Product at Market Price (GDPMP ) : It is the gross market value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units.
• Gross Domestic Product at Factor Cost ( GDPFC): It is the gross factor value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units excluding Net Indirect Tax.

GDPFC = GDPMP  – Net Indirect Taxes

• Net Domestic Product at Market Price (NDPMP ).

It is defined as the net market value of all the final goods and services produced within the domestic territory of a country by its normal residents and non-residents during an accounting year.

NDPMP =GDPMP – Depreciation

• Net Domestic Product at Factor Cost (NDPFC ).

It refers to a total factor income earned by the factor of production within the domestic territory of a country during an accounting year.

NDPFC = GDPMP – Depreciation – Net Indirect Taxes NDPFC is also known as Domestic Income or Domestic factor income.

• Gross National Product at Market Price (GNPMP).

It refers to market value of all the final goods and services produced by the normal residents of a country during an accounting year.

GNPMP = GDPMP + Net factor income from abroad (NIFA)

GNPMP is less than GDPMP when NFIA is negative. However, GNPMP will be more than GDPMP  when NFIA is positive.

• Gross National Product at Factor Cost (GDPFC ). It refers to gross factor value of all the final goods and services produced by the normal residents of a country during an accounting year.

GDPFC  = GNPMP  – Net Indirect Taxes

• Net National Product at Market Price (NNPMP ).

It refers to net market value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNPMP = GNPMP – Depreciation

• Net National Product at Factor Cost (NNPFC ).

It refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNPFC = GNPMP  – Depreciation – Net Indirect Taxes It must be noted that NNPFC  is also known as National Income.

Gross National Product (GNP)

Gross National Product (GNP) is Gross Domestic Product (GDP) plus net factor income from abroad.

It measures the monetary value of all the finished goods and services, which are produced by the nation’s economy during a specific period of time irrespective of their location. 

Only the finished goods are considered as factoring intermediate goods used for manufacturing would amount to double counting. It only includes taxes not including subsidies.

The GNP is identical to gross domestic product (GDP) only difference is that the latter does not include the income accruing to a nation’s residents from investments abroad.

Gross national product is an indicator of the level of a nation’s economic activity. 

Net National Product (NNP)

Net national product (NNP) is the monetary value of finished goods and services, which are produced by a country’s citizens, both overseas and domestically, in a given period of time minus depreciation.

NNP is generally examined on an annual basis as a way to measure a nation’s success in continuing minimum production standards.

It is a very useful method to keep track of an economy as it takes into account all its citizens, regardless of where they make their money. It acknowledges the fact that capital must be spent to keep production standards high.

Gross Domestic Product (GDP) is the most popular method to measure national income and economic prosperity, although NNP is prominently used in environmental economics.

Gross Domestic Product (GDP) and Net Domestic Product (NDP) – at market price, at factor cost; 

Real and Nominal GDP

Real gross domestic product (Real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year

It is a macroeconomic measure of the value of the economy’s output adjusted for price changes (inflation or deflation). 

Real GDP compares GDP from year to year which shows comparisons for both the quantity and value of goods and services.

Real GDP is calculated by dividing nominal GDP over a GDP deflator

Nominal GDP is a macroeconomic measure of the value of the economy’s output that is not adjusted for inflation.

Nominal gross domestic evaluated at current market prices. Nominal GDP includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

GDP is measured as the monetary value of goods and services produced.

Since nominal GDP doesn’t remove the pace of rising prices when comparing one period to other.

GDP Deflator

GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.

The GDP deflator measures the changes in prices for all of the goods and services produced in an economy. It helps to identify how much prices have inflated over a specific time period.

GDP deflator helps economists to compare the levels of real economic activity from one year to another.

It is a more comprehensive inflation measure than the CPI index because it isn’t based on a fixed basket of goods.

Formula to calculate the GDP price deflator:

GDP Price Deflator = (Nominal GDP÷Real GDP)×100

Frequently Asked Questions

Short Answer (SA) Type Questions

1. Domestic services (household services) performed by a woman are not considered as an economic activity. Defend or refute the given statement with valid reason. (CBSE 2020)

Ans . The given statement is refuted on the basis of the following reasons

(i) Domestic services are performed by women 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.

2. ‘Subsidies to the producers should be treated as transfer payments’. Defend or refute the given statement with valid reason. (CBSE 2020)

Ans. 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

3. Suppose the GDP at market price of a country in a particular year was 1,100 crore. Net factor income from abroad was 100 crore. The value of Indirect taxes — Subsidies was 150 crore and national income was 850 crore. Calculate the aggregate value of depreciation. (NCERT)

Ans. NNPmp = NNPfc  + NIT

= 850 + 150 = 1,000 crore 

GNPmp = NFIA + GDPmp

= 100 + 1,100 

= 1,200 crore 

Depreciation = GNPmp — NNPmp

= 1,200 – 1,000 = 200 crore

Therefore, depreciation = 200 crore 

4. 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?

Ans. 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 a new machine. 

So, a sum of money is set aside every year into a depreciation account and new machines can be purchased by utilizing this accumulated sum.

So, depreciation is deducted from GNP in order to get a more accurate measure of the sustainable production of goods and services in a country in a given year.

5. Compute the values of xa and xb on the basis of given data pertaining to an economy.

Ans. Computing the value of xa

Gross Fixed Capital Formation

= GDPmp – (Final Consumption Expenditure + Change in Stocks + Net Exports)

= 5050345 – 3353748 – 255126 – (1018907 – 1219109)

Computing the value of xb

Gross Domestic Product at Market Price

    = Final Consumption Expenditure + Gross Fixed Capital Formation + Change in Stock + Net Exports (Exports — Imports)

= 3846417 + 1821099 + 179004 + (1328765 + 1614040)

6. Calculate net domestic product at factor cost.

S.No.     Contents                   (in crores)

(i)        Interest                              700

(ii)       Compensation of

           employees                        3000

(iii)    Net Indirect Taxes          500

(iv)    Rent and Profit          700

(v)    Transfer Payments by 

            Government                      10

(CBSE 2020)

Ans. Net Domestic Product at Factor Cost

(NDPfc) = Compensation of Employees + Interest + Rent and Profit

= 3,000 + 700 + 700 

= 4,400 crore

7. In a single day Raju, the barber, collects 500 from haircuts; over this day, his equipment depreciates in value by 50. Of the remaining 450, Raju pays sales tax worth 30, takes home 200 and retains 220 for improvement and buying of new equipment. He further pays 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.

Ans. Assuming intermediate consumption= 0 and Change in stock = 0

(i) GVAmp = 500 (Raju’s contribution to GDP)

(ii) NVA mp = GVAmp – Depreciation

= 500 – 50

= 450 (Raju’s contribution to NNPmp )

(iii) NVAfc = NVA mp    – Net Indirect Taxes

= 450 – 30

= 420 (Raju’s contribution to NNPfc)

8. Calculate Net Value Added at Factor Cost (NVAfc) from the following data.

S.No.     Contents              (in crores)

(i)     Value of Output        800                          

(ii)    Intermediate Consumption       200

(iii)    Indirect Taxes                          30

(iv)    Depreciation                          20

(v)    Subsidies                                 50

(vi)    Purchase of Machinery              50

Ans. GVAmp = Value of Output — Intermediate Consumption

= 800 — 200 = 600 crores

NVAfc = GVAmp – Depreciation – Indirect Tax + Subsidies

NVAfc = 600 – 20 – 30 + 50 =    600 crores

9. 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,

Ans. (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 fee received is just a revenue from the sale of services.

10. 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 ofJapan working in the Indian embassy in Japan.

(ii) Rent received by an Indian resident from the Russian embassy in India.

(iii) Profits earned by a branch of state Bank of India in

Ans. (i) Compensaåon of employees to the residents ofJapan working in the Indian embassy in Japan is a part of factor income of India because the Indian embassy in Japan is a part of the domestic territory of India.

(ii) Rent received by an Indian resident from the Russian embassy in India is not a part of the domestic factor income of India because the Russian embassy in India is not a part of the domestic territory of India.

(iii) Profits earned by a branch of the State Bank of India in England are not a part of the domestic factor income of India because the branch of SBI in England is not a part of the domestic territory of India.

11. Calculate Gross Value Added at Market Price (GVAmp) from the following data.

S.No.       Contents                   (in crores)

(i)        Depreciation                         20

(ii)     Domestic Sales                       200

(iii)    Change in Stock                      – 10

(iv)     Export                                      10

(v)     Single use Producer 

          Goods                                      120

(vi)   Net Indirect Taxes                  20

Ans. Gross Value Added at Market Price (GVAmp )

 = Value of Output — Intermediate Consumption

Value of Output = Sales + Change in Stock

Value of Output = (200 + 10) + (—) 10

    = 210 – 10 = 200

GVAmp = 200 – 120

GVA mp = 80 lakhs

12. Calculate intermediate consumption from the following data.    (CBSE 2019)

(i)      Gross Value output             300                    

(ii)    Net Value Added 

        at Factor Cost                          100     

(iii)    Subsidies                                 15

(iv)    Depreciation                             30

Ans. NVAfc = 100 crores (given)

GVAmp = NVAfc + Depreciation- Subsidy

GVAmp = (100 + 30 – 15) = 115 crores

GVAmp = Value of Output — Intermediate Consumption 115 = 300 – Intermediate Consumption

Intermediate Consumption = 300 – 115 crores   = 185 crores

13. Giving reason states 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 the government.

(iii) Expenditure on engine oil by car service station. (CBSE (C) 2017)

Ans. (i) Payment of interest by the bank to its depositors should be included in the estimation of national income as it will be treated as factor income.

(ii) Expenditure on old age pensions by the government is not a part of the national economy as it is a transfer payment.

(iii) Expenditure on engine oil by car service stations is not a part of national income as it is an intermediate cost.

14. Find net value added at factor cost.

(i)     Durable use Producer 

       Goods with a Life Span

       of 10 years                                 10

(ii)    Single useProducerGoods         5

(iii)    Sales                                        20

(iv)   Unsold Output

        Produced during theYear           2

(v)    Taxes and Production                1

Ans. Net Value Added at Factor Cost (NVAfc)

= Sales + Unsold Output Produced during the Year — Single use Producer Goods —

Depreciation on Durable use Producer Goods — Taxes on Production 

 = 20+2-5 -1-1

Depreciation = Value of Durable Goods / Life Span = 10 / 10

15. Calculate the value of change in Stock from the following data:

(i)     Sales                                400

(ii)   Net Value Added at 

       Factor Cost                           200

(iii)    Subsidies                            100

(iv)   Change in Stock                    ?

(v)    Depreciation                          40

(vi)   Intermediate Consumption     100

Ans. (i) Net value Added at Factor cost (NVAfc)

= Sales + Change in Stock Intermediate

Consumption – Depreciation – Net Indirect Taxes

200 = 400 + (Change in Stock) -100-40-(0-100)

200 = 360 + Change in Stock – Change in Stock

= 360 – 200

Change in Stock = 160 crores

Decrease in Stock = 160 crores

(ii) Real gross domestic product is the sum total of the money value of all final goods and services produced in an economy during the year estimated at same given base year prices.

16. Social welfare may not increase even when real GDP increases. Explain.

Ans . Increase in GDP tnay not cause an increase in welfare in a situation when distribution of income becorncs 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 the population. The bulk of the 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.

17. “Management of a water polluting oil refinery says that it (oil refinery) ensures welfare through its contribution to gross domestic product.” Defend or refute the argument of management with respect to GDP as a welfare measure of the economy.

Ans. 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 into 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, an oil refinery may pollute the nearby source of water. 

Such harmful effects to people and marine life should not be penalized. Thus it is not ensuring the welfare of the economy through GDP.

18. Sales of petrol and diesel cars are rising particularly in big cities. Analyze its impact on gross domestic product and welfare. (CBSE 2016)

Ans. 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.

19, Explain how ‘non-monetary exchanges’ act as a limitation in taking GDP as an index of welfare. (CBSE 2017)

Ans. 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 laborers are Inade in kind rather than cash. But such transactions are not recorded.

(iii) Even while producing goods and services, a 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.

20. “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.    (CBSE 2020)

Ans. “Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a counåy.” 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 the rural economy, the barter system of exchange still prevails to some extent. Payments for farm labor are often made in kind rather than in cash. All such transactions remain unrecorded which causes underestimation of GDP.

(iii) Externalities It refers to the good and bad impact of an activity without paying the price or penalty for that activity. Impact of external entities are not accounted for in the index of social welfare in terms of GDP.

21. Government incurs expenditure to popularize yoga among the masses. Analyze its impact on Gross Domestic Product and welfare of the people. (Delhi 2016) 

Ans. The expenditure incurred by the government to popularize yoga among the masses will increase the government’s 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 popularize 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 eing will increase in general.

22, Find net value added at market price. 

(i)     Fixed Capital Good 

        with a Life Span of 5 years     15                   

(ii)    Raw material                               6

(iii)   Sale                                            25

(iv)    Net changes in Stock                – 2

(v)     Taxes on Production                  1

Ans. Net Value Added at Market Price (NVAmp)

= Sales + Net Change in Stock — Raw Materials – Depreciation on Fixed Capital Good

= 25 + (-2) – 6 – 3= 14 lakh

Note.  Depreciation on Fixed Capital Good

= Value of Fixed Capital Good / Life Span

= 15 / 3 

 = 5 lakh

23. Calculate net national product at market price from the following data:

(i)    Net factor income 

       from abroad                                – 5

(ii)   Private Final Consumption 

       Expenditure                               100

(iii)   Personal Tax                              20

(iv)   Gross National 

        Disposable Income                    170

(v)    Government Final 

        Consumption Expenditure           20

(vi)    Corporation Tax 50                  

(vii)    Gross Domestic 

  Capital Formation        30                                  

(viii)   Personal Disposable Income     70          

(ix)     Net Exports                            -10

(x)    Saving of private 

       Corporation sector                         5

(xi)    Net National Disposable 

          Income                                           145

NNPmp = Private Final Consumption Expenditure + Government Final Consumption

Expenditure + Gross Domestic Capital Formation + Net Export – Depreciation

= 100 + 20 + 30 + (-10) – 25 + (-5)

= 110 crore

Depreciation = Gross National Disposable Income –  Net National Disposable Income

= 170 – 145 = 25 crore

24. Find net value added at market price.

(Delhi 2012)

(i)      Output Sold                        800      

(ii)     Price Per Unit of Output          20

(iii)     Exercise                                 1600

(iv)     Import Duty                          400

(v)     Net Change in Stock             – 500

(vi)    Depreciation                           1000

(vii)   Intermediate Cost                8000                              

Ans. Sales = Output Sold × Price Per Unit

= 800 x 20 = 16,000 crore

Now, Value of Output = Sales + Change in Stock

=  [16000 + (-500)] = 15,500 crore

Now, GVAmp = Value of Output — Intermediate Cost

= (15,500-8000) = 7,500 crore

Hence, NVAmp = GVAmp — Depreciation

= (7,500 – 1,000)     

= 6,500 crore

25. From the following data, calculate net value added at factor cost    (All India 2011)

(i)          Sales                                      500

(ii)      Purchase of Intermediate 

           Goods                                    350

(iii)      Opening Stock                         60

(iv)       Indirect Taxes                         50

(v)       Consumption of Fixed 

           Capital                                      90

(vi)      Import of Raw Materials        85                           

(vii)      Closing Stock         80                                               

Ans . Here,

Net Value Added at Factor Cost (NVAfc)

= 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 = 30 crore

   Long Answer (LA) Type Questions

1. 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.

Ans. (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 labor.

(ii) Rent free house from nn employer ig included in 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.

2. Define the problem of double counting in the estimation of national income. Discuss two approaches to correct the problem of double counting.    (CBSE 2020)

Ans. The counting of the value of a 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 products.

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

In Fact, 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.  the value of final goods and services are eonsiclerecl. In the above example, the value of final goods i.e., bread is 

(ii) Value Added Method. Another 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 at each stage of production is 400 + 200 + 200 + 100 = 900

3. 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.    (CBSE, 2018)

Ans . (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     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.

4. Given the following data, find the missing value of ‘government final consumption expenditure’ and ‘mixed income of self-employed’,

(i) National Income                        71,000

(ii) Gross Domestic 

     Capital Formation                       10,000

(iii) Government Final 

      Consumption Expenditure           ?

(iv) Mixed Income of Self-employed    ?

(v) Net Factor Income from Abroad    1,000

(vi) Net Indirect Taxes                     2,000

(vii) Profits                                        1,200

(viii) Wages and Salaries              15,000

(ix) Net Exports                            5,000

(x) Private Final Consumption 

      Expenditure                            40,000

(xi) Consumption of Fixed Capital    3,000

(xij) Operating Surplus                30,000

(CBSE 2019)

Ans. NNPfc = 71000 (given) crores

GDPfc = NNPfc – Net Factor Income from Abroad + Depreciation + Net Indirect Taxes

= 71,000 – 1,000 + 3,000 + 2000

= 75,000 crores

Let government final consumption expenditure = x

GDPmp = Private Final Consumption Expenditure + Government final Consumption Expenditure +

Gross Domestic Capital Formation + Net Exports

75,000 (40,000 + x + 10,000 + 5,000) 

 x = 20,000 crores

Let mixed income = y

NDPpc = Wages and Salaries + Operating Surplus + Mixed Income 

70,000 = (15,000 + 30,000 + y)

so, y =    25,000

Note.  NDPpc = NNPmp – NFIA    

  = 71000 – 1,000

  = 70000 crores

So, Government final consumption expenditure

= 20000 crores

Mixed income = 25,000 crores

5. Given the following data, find the missing values of ‘private final consumption expenditure’ and ‘operating surplus’

S.No.      Content                          in crores

(i)    National Income                    50000

(ii)    Net Indirect Taxes (NIT)    1,000

(iii)    Private Final Consumption    Expenditure                                           ?

(iv)      Gross Domestic Capital 

           Formation                                 17000

(v)     Profits                                        1,000

(vi)     Government Final 

         Consumption    Expenditure      12,500

(vii)      Wages and Salaries                20000

(viii)     Consumption of Fixed income   700

(ix)      Mixed income of self-employed 13000

(x)      Operating Surplus                          ?

(xi)      Net factor income from abroad     500

(xii)     Net Exports                                 2000

Ans. Private final consumption expenditure=y

Operating surplus = x

NDPfc = CoE + Operating Surplus + Mixed Income

Also, NDPfc = NNPfc – NFIA

 50,000 – 500 = 49,500 crores

49,500 = Wages and Salaries + x +13, 000

49500 = 20,000 + 13,000 + x

49,500 = 33,000 + x 

x = 49,500 – 33,000 = 16,500 crore

Also, GDPmp =  PFCE + GFCE + Gross Domestic Capital Formation + Net Exports

GDPmp  = NPPfc + Depreciation + NIT

= 49,500 + 700 + 1,000

 51,200 crores

51,200 = y + 12500 + 17,000 + 2000

y = 19700 crores 

So, private final consumption expenditure

  = 16500 crores 

Operating surplus = = 19,700 crores 

6. Given the following data, find the values of ‘operating surplus’ and ‘gross domestic capital formation’

S. No.         Contents                       (in crores)

(i)  Government Final Consumption

Expenditure                                           2000

(ii)   Mixed income of Self-employed     1500

(iii) National Income,                            12,000

(iv)  Net Factor Income from Abroad         200

(v)   Operating Surplus                              ?

(vi)  Profits                                            500

(vii) Private Final Consumption 

       Expenditure                              6,000

(viii) Net Indirect Taxes                            700

(ix)   Net Exports                              1,800

(x) Consumption of Fixed Capital        600

(xi) Gross Domestic Capital Formation     ?

(xii)  Wages and Salaries                  6,000

 (CBSE 2019)

Ans. NNPFc = 12,000 (Given)

Let Gross domestic capital formation = x

And Operating surplus = y

GDPmp = NNPfc + Depreciation – NFIA + NIT

GDPmp = 12000 + 600 – 200 + 700 = 13100 crores

GDPmp= Private Final Consumption Expenditure +

Government Final Consumption Expenditure + Gross Domestic Capital Förmation + Net   Exports

13,100 = 6,000 + 2000 + x + 1,800 

x = 13,100 – 9,800 = 3,300 crores

Gross domestic capital formation = 3,300 crores

NDPfc = NNPfc – NFIA

NDPfc = 12000 – 200 = 11,800 crores 

NDPfc = Compensation of Employees + Operating Surplus + Mixed Income

11,800 = 6,000 + y + 1,500 

     y = 11,800 – 7,500 = 4,300 crores Operating surplus = 4,300 crores 

7. Calculate

(i) Net National Product at Market Price

(ii) Gross Domestic Product at Factor Cost

S.N0.            Contents                (in crores)

(a)       Rent and Interest          6,000

(b)    Wages and Salaries          1,800

(c)    Undistributed Profit            400

(d)    Net Indirect Taxes                100

(e)       Subsidies                              20

(f)       Corporation Tax                   120

(g)      Net factor income to abroad    70

(h)      Dividend                                  80

(i)     Consumption of Fixed Capital   50

(j)   Social Security Contribution by      employees                                         200

(k)       Mixed Income                        1000

NDPfc = Compensation of Employees + Operating Surplus + Mixed Income 

NDPfc = Wages and Salaries + Social Security Contribution by employees + Rent and Interest + Undistributed Profit + Corporation Tax + Dividends + Mixed Income

NDPfc  =  1,800 + 200 + 6,000 + 400 + 120 + 80 + 1,000

NDPfc = 2, 000 + 6,600 + 1,000 = 9,600 crores

NNPmp  = NDPfc + Net factor income from abroad + Net Indirect Taxes 

NNPmp = 9,600 + (-) 70 + 100

NNPmp = 9,600 – 70 + 100 =  9,630 crores

(ii) GDPfc = NDPfc + Depreciation

GDPfc =  9,600 + 50 = 9,650 crores

8. (i) Define ‘net factor income from abroad’. How is it different from ‘net exports’?

(ii) Calculate the value of “Rent” from the following data.    (CBSE 2019)

S.N0.            Contents          (in crores)

(a)   Gross Domestic Product 

       at Market Price                      18,000

(b)   Mixed Income 

       of Self-employed                      7,000

(c)    Subsidies                          250

(d)    Interest                          800

(e)    Rent                                        ?

(f)    Profit                                    975

(g)  Compensation of Employees   6,000

(h)  Consumption of Fixed Capital  1,000

(i)    Indirect Tax                        2,000

Ans. (i) Difference between Net Export and Net Factor Income from Abroad (NFIA).

Net Factor Income from Abroad (NFIA) refers to the difference between factor income received from and paid to abroad.

(ii) By income method    

NDPfc     = COE + Operating Surplus  + Mixed Income        …… (i)

*Operating Still)lus Rent + Interest + Profits and NDOfc =  GDPmp –  Depreciation –  NIT

    = 18000 – 1,000 – (2000 250)

    = 15,250 crores

Now, putting values in eq. (i)

15,250 = 6,000 + Rent + 800 + 975 + 7,000

15,250 = 14,775 + Rent 

Rent = 475 crores

9. Explain the precautions that are taken while estimaång national income by value added method. (CBSE 2017)

Ans. While using value added method for compuång 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 account.

10. (i) Giving valid reasons, state how the services of a ‘school teacher’ will be undertaken in estimation of national income.

(ii) Distinguish between ‘Real Gross Domestic Product’ and ‘Nominal Gross Domestic Product (CBSE 2020)

Ans. (i) The services of a school teacher will be taken in the estimation of national income of the country as they provide services in consideration of some payment and adds to the current flow of services.

(ii) Difference between Real GDP and Nominal GDP

11.  Calculate (i) Gross Domestic Product at Market Price and (ii) Factor income from abroad from the following data.

S,N0.          Contents                    (in crore)

(a)       Gross National Product 

            at Factor Cost                            6,150

(b)        Net Exports                            (-) 50

(c)    Compensation of Employees    3,000

(d)    Rent                                          800

(e)    Interest                               900

(f)    Profit                                        1,300

(g)    Net Indirect Taxes                  300

(h)   Net domestic capital formation   800

(i)     Gross Fixed Capital Formation   850

(j)    Change in Stock                           50

(k)       Dividend                                       300

(l)        Factor income to abroad              80

(i) GDPmp = Compensation of Employees + Rent + Interest + Profit + Net Indirect Taxes

+ Consumption of Fixed Capital

= 3,000+ (800+ 900+ 1,300) + 300

+ (850 +50 – 800)

= 6,400 crore

Note.  Depreciation = Gross Domestic Fixed Capital Formation + Change in Stock — Net

Domestic Capital Formation

(ii) GNPfc = GDPmp — Net Indirect Taxes + Factor Income from Abroad — Factor Income to Abroad

6,150 = 6,400 – 300 + Factor Income from    Abroad — 80

6,150 = 6, 020 + Factor Income from Abroad

Factor Income from Abroad

= 6,150 – 6,020 = 130 crore

Q1: What is Macroeconomics?

Answer: Macroeconomics deals with the overall economy of the market and other systems on a large scale.  Macroeconomics studies about the performance, structure, and behavior of the entire economy. It focuses on the way the economy performs as a whole.

Q2: What is the difference between consumer goods and capital goods?

Answer: Consumer goods are products made for consumption by the average consumer. It is the end result of production and manufacturing. Consumer goods are purchased to fulfill personal consumption needs Capital goods are the goods that can be used to increase production. These goods are fixed, durable or tangible assets that are purchased by a business in order to produce finished products or consumer goods

Final Words

From the above article, you have practiced Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions. We hope that the above-mentioned notes and Q & A for term 2 will surely help you in your exam. 

If you have any doubts or queries regarding Class 12 Economics chapter 1 National Income And Related Aggregates Notes And Questions feel free to reach us and we will get back to you as early as possible.

Project Report on National Income

In this report we will discuss about:- 1. Definitions of National Income 2. Concepts of National Income 3. Methods of Measuring National Income 4. Limitations in Measuring National Income 5. Importance of National Income Analysis 6. Inter-Relationship among Different Concepts of NI.

Definitions of National Income :

National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways.

In common parlance, national income means the total value of goods and services produced annually in a country. In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.

The definitions of national income can be grouped into two classes: One, the traditional definitions advanced by Marshall, Pigou and Fisher; and two, modern definitions.

ADVERTISEMENTS:

The Marshallian Definition:

According to Marshall: “The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. …This is the true net annual income or revenue of the country or national dividend.” In this definition, the word ‘net’ refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this, must be added income from abroad.

Its Defects:

Though the definition advanced by Marshall is simple and comprehensive, yet it suffers from a number of limitations. First, in the present day world, so varied and numerous are the goods and services produced that it is very difficult to have a correct estimation of them.

Consequently, the national income cannot be calculated correctly. Second, there always exists the fear of the mistake of double counting, and hence the national income cannot be correctly estimated.

Double counting means that a particular commodity or service like raw material or labour, etc. might get included in the national income twice or more than twice. For example, a peasant sells wheat worth Rs. 2,000 to a flour mill which sells wheat flour to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells it to the customers.

If each time, this wheat or its flour is taken into consideration, it will work out to Rs. 8,000, whereas, in actuality, there is only an increase of Rs. 2,000 in the national income.

Third, it is again not possible to have a correct estimation of national income because many of the commodities produced are not marketed and the producer either keeps the produce for self-consumption or exchanges it for other commodities. It generally happens in an agriculture-oriented country like India. Thus the volume of national income is underestimated.

The Pigouvian Definition:

Marshall’s follower, A.C. Pigou, has in his definition of national income included that income which can be measured in terms of money. In the words of Pigou, “National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money.”

This definition is better than the Marshallian definition. It has proved to be more practical also. While calculating the national income now-a-days, estimates are prepared in accordance with the two criteria laid down in this definition.

First, avoiding double counting, the goods and services which can be measured in money are included in national income. Second, income received on account of investment in foreign countries is included in national income.

The Pigouvian definition is precise, simple and practical but it is not free from criticisms. First, in the light of the definition put forth by Pigou, we have unnecessarily to differentiate between commodities which can and which cannot be exchanged for money. But, in actuality, there is no difference in the fundamental forms of such commodities, no matter they can be exchanged for money.

Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured. According to Pigou, a woman’s services as a nurse would be included in national income but excluded when she worked in the home to look after her children because she did not receive any salary for it.

Similarly, Pigou is of the view that if a man marries his lady secretary, the national income diminishes as he has no longer to pay for her services. Thus the Pigovian definition gives rise to a number of para­doxes. Third, the Pigovian definition is applicable only to the developed countries where goods and services are exchanged for money in the market.

According to this definition, in the backward and underdeveloped countries of the world, where a major portion of the produce is simply bartered, correct estimate of national income will not be possible, because it will always work out less than the real level. Thus the definition advanced by Pigou has a limited scope.

Fisher’s Definition:

Fisher adopted ‘consumption’ as the criterion of national income whereas Marshall and Pigou regarded it to be production. According to Fisher, “The National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from the human environ­ments. Thus, a piano, or an overcoat made for me this year is not a part of this year’s income, but an addition to the capital. Only the services rendered to me during this year by these things are income.”

Fisher’s definition is considered to be better than that of Marshall or Pigou, because Fisher’s definition provides an adequate concept of economic welfare which is dependent on consumption and consump­tion represents our standard of living.

But from the practical point of view, this definition is less useful, because there are certain difficulties in measuring the goods and services in terms of money. First, it is more difficult to estimate the money value of net consumption than that of net production.

In one country there are several individuals who consume a particular good and that too at different places and, therefore, it is very difficult to estimate their total consumption in terms of money. Second, certain consumption goods are durable and last for many years.

If we consider the example of piano or overcoat, as given by Fisher, only the services rendered to use during one year by them will be included in income. If an overcoat costs Rs. 100 and lasts for ten years, Fisher will take into account only Rs. 10 as national income during one year, whereas Marshall and Pigou will include Rs. 100 in the national income for the year, when it is made.

Besides, it cannot be said with certainty that the overcoat will last only for ten years. It may last longer or for a shorter period. Third, the durable goods generally keep changing hands leading to a change in their ownership and value too. It, therefore, becomes difficult to measure in money the service-value of these goods from the point of view of consumption.

For instance, the owner of a Maruti sells it at a price higher than its real price and the purchaser after using it for a number of years, further sells it at its actual price. Now the question is as to which of its price, whether actual or black market one, should we take into account, and afterwards when it is transferred from one person to another, which of its value according to its average age should be included in national income?

Conclusion:

But the definitions advanced by Marshall, Pigou and Fisher are not altogether flawless. However, the Marshallian and Pigovian definitions tell us of the reasons influencing economic welfare, whereas Fisher’s definition helps us compare economic welfare in different years.

From the modern point of view, Simon Kuznets has defined national income as “the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.”

On the other hand, in one of the reports of United Nations, national income has been defined on the basis of the systems of estimating national income, as net national product, as addition to the shares of different factors, and as net national expenditure in a country in a year’s time. In practice, while estimating national income, any of these three definitions may be adopted, because the same national income would be derived, if different items were correctly included in the estimate.

Concepts of National Income :

There are a number of concepts pertaining to national income and methods of measurement relating to them.

(A) Gross Domestic Product (GDP):

GDP is the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices. Dernberg defines GDP at market price as “the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.”

There are three different ways to measure GDP:

Product Method, Income Method and Expendi­ture Method. These three methods of calculating GDP yield the same result because National Product = National Income = National Expenditure.

1. The Product Method:

In this method, the value of all goods and services produced in differ­ent industries during the year is added up. This is also known as the Value Added Method to GDP or GDP at Factor Cost by Industry of Origin.

The following items are included in India in this agriculture and allied services; mining; manufacturing, construction, electricity, gas and water supply; transport, communication and trade; banking and insurance, real estates and ownership of dwellings and business services; and public administration and defence and other services (or government services). In other words, it is the sum of Gross Value Added.

2. The Income Method:

The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.

3. Expenditure Method:

This method focuses on goods and services produced within the coun­try during one year.

GDP by expenditure method includes:

(1) Consumer expenditure on services and durable and non-durable goods (C),

(2) Investment in fixed capital such as residential and non-residential building, machinery, and inventories (I),

(3) Government expenditure on final goods and services (G),

(4) Export of goods and services produced by people of the country (X),

(5) Less imports (M). That part of consumption, investment and government expenditure which is spent on imports is subtracted from GDP. Similarly, any imported component, such as raw material, which is used in the manufacture of export goods is also excluded.

Thus GDP by expenditure method at market prices = C+ I + G + (X – M), where (X – M) is net export which can be positive or negative.

(B) GDP at Factor Cost:

GDP at factor cost is the sum of net value added by all producers within the country. Since the net value added gets distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or depreciation).

Thus GDP at Factor Cost = Net value added + Depreciation.

GDP at factor cost includes:

(i) Compensation of Employees i.e., wages, salaries, etc.

(ii) Operating Surplus which is the business profit of both incorporated and unincorporated firms,

(iii) Mixed Income of Self-employed.

Conceptually, GDP at factor cost and GDP at market price must be identical. This is because the factor cost (payments to factors) of producing goods must equal the final value of goods and services at market prices. However, the market value of goods and services is different from the earnings of the factors of production.

In GDP at market price are included indirect taxes and are excluded subsidies by the government. Therefore, in order to arrive at GDP at factor cost, indirect taxes are subtracted and subsidies are added to GDP at market price.

Thus, GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies.

(C) Net Domestic Product (NDP):

NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.

(D) Nominal and Real GDP:

When GDP is measured on the basis of current prices, it is called GDP at current prices or nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP.

Nominal GDP is the value of goods and services produced in a year and measured in terms of rupees (money) at current (market) prices. In comparing one year with another, we are faced with the problem that the rupee is not a stable measure of purchasing power. GDP may rise a great deal in a year, not because the economy has been growing rapidly but because of rise in prices (or inflation).

On the contrary, GDP may increase as a result of fall in prices in a year but actually it may be less as compared to the last year. In both the cases, GDP does not show the real state of the economy. To rectify the underestimation and overestimation of GDP, we need a measure that adjusts for rising and falling prices.

This can be done by measuring GDP at constant prices which is called real GDP. To find out the real GDP, a base year is chosen when the general price level is normal, i.e., it is neither too high nor too low. The prices are set to 100 (or 1) in the base year.

Now the general price level of the year for which real GDP is to be calculated is related to the base year on the basis of the following formula which is called the deflator index:

Real GDP = GDP for the Current Year x Base Year (=100)/Current Year Index

Suppose 1990-91 is the base year and GDP for 1999-2000 is Rs. 6,00,000 crores and the price index for this year is 300.

Thus, Real GDP for 1999-2000 = Rs. 6,00,000 x 100/300 = Rs. 2,00,000 crores.

(E) GDP Deflator:

GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.

GDP Deflator = Nominal (or Current Prices) GDP/Real (or Constant Prices) GDP x 100

For example, GDP Deflator in 1997-98 = 1426-7th- crores/1049.2th. crores at 1993-94 prices = 135.9

It shows that at constant prices (1993-94), GDP in 1997-98 increased by 135.9% due to infla­tion (or rise in prices) from Rs. 1049.2 thousand crores in 1993-94 to Rs. 1426.7 thousand crores in 1997-98.

GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad.

GNP includes four types of final goods and services:

(1) Consumers’ goods and services to satisfy the immediate wants of the people;

(2) Gross private domestic investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods;

(3) Goods and services pro­duced by the government; and

(4) Net exports of goods and services, i.e., the difference between value of exports and imports of goods and services, known as net income from abroad.

In this concept of GNP, there are certain factors that have to be taken into consideration:

First, GNP is the measure of money, in which all kinds of goods and services produced in a country during one year are measured in terms of money at current prices and then added together. But in this manner, due to an increase or decrease in the prices, the GNP shows a rise or decline, which may not be real.

To guard against erring on this account, a particular year (say for instance 1990-91) when prices be normal, is taken as the base year and the GNP is adjusted in accordance with the index number for that year. This will be known as GNP at 1990-91 prices or at constant prices.

Second, in estimating GNP of the economy, the market price of only the final products should be taken into account. Many of the products pass through a number of stages before they are ultimately purchased by consumers. If those products were counted at every stage, they would be included many a time in the national product. Consequently, the GNP would increase too much. To avoid double counting, therefore, only the final products, and not the intermediary goods should be taken into ac­count.

Third, goods and services rendered free of charge are not included in the GNP, because it is not possible to have a correct estimate of their market price. For example, the bringing up of a child by the mother, imparting instructions to his son by a teacher, recitals to his friends by a musician, etc.

Fourth, the transactions which do not arise from the produce of current year or which do not contribute in any way to production, are not included in the GNP. The sale and purchase of old goods, and of shares, bonds and assets of existing companies are not included in GNP because these do not make any addition to the national product, and the goods are simply transferred.

Likewise, the payments received under social security, e.g., unemployment insurance allowance, old age pension, and interest on public loans are also not included in GNP, because the recipients do not provide any service in lieu of them. But the depreciation of machines, plants and other capital goods is not deducted from GNP.

Fifth, the profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices are not included in the GNP if they are not responsible for current produc­tion or economic activity. For example, if the price of a house or a piece of land increases due to inflation, the profit earned by selling it will not be a part of GNP.

But if, during the current year, a portion of a house is constructed anew, the increase in the value of the house (after subtracting the cost of the newly constructed portion) will be included in the GNP. Similarly, variations in the value of assets, that can be ascertained beforehand and are insured against flood or fire, are not included in the GNP.

Last, the income earned through illegal activities is not included in the GNP. Although the goods sold in the black market are priced and fulfill the needs of the people, but as they are not useful from the social point of view, the income received from their sale and purchase is always excluded from the GNP. There are two main reasons for this. One, it is not known whether these things were produced during the current year or the preceding years. Two, many of these goods are foreign made and smuggled and hence not included in the GNP.

Three Approaches to GNP:

After having studied the fundamental constituents of GNP, it is essential to know how is it estimated. Three approaches are employed for this purpose. One, the income method to GNP; two, the expenditure method to GNP; and three, the value added method to GNP. Since gross income equals gross expenditure, GNP estimated by all these methods would be the same with appropriate adjust­ments.

1. Income Approach to GNP:

The income approach to GNP consists of the remuneration paid in terms of money to the factors of production annually in a country.

Thus GNP is the sum total of the following items:

(i) Wages and Salaries:

Under this head fall all forms of wages and salaries earned through productive activities by workers and entrepreneurs. It includes all sums received or deposited during a year by way of all types of contributions like overtime, commission, provident fund, insurance, etc.

(ii) Rents:

Total rent includes the rents of land, shop, house, factory, etc. and the estimated rents of all such assets as are used by the owners themselves.

(iii) Interest:

Under interest comes the income by way of interest received by the individual of a country from different sources. To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. But the interest received on governmental loans has to be excluded, because it is a mere transfer of national income.

(iv) Dividends:

Dividends earned by the shareholders from companies are included in the GNR

(v) Undistributed Corporate Profits:

Profits which are not distributed by companies and are retained by them are included in the GNP.

(vi) Mixed incomes:

These include profits of unincorporated business, self-employed persons and partnerships. They form part of GNP.

(vii) Direct Taxes:

Taxes levied on individuals, corporations and other businesses are included in the GNP.

(viii) Indirect Taxes:

The government levies a number of indirect taxes, like excise duties and sales tax. These taxes are included in the prices of commodities. But revenue from these goes to the government treasury and not to the factors of production. Therefore, the income due to such taxes is added to the GNP.

(ix) Depreciation:

Every corporation makes allowance for expenditure on wearing out and depreciation of machines, plants and other capital equipment. Since this sum also is not a part of the income received by the factors of production, it is, therefore, also included in the GNP.

(x) Net Income earned from abroad:

This is the difference between the value of exports of goods and services and the value of imports of goods and services. If this difference is positive, then it is added to the GNP and if it is negative it is deducted from the GNP.

Thus GNP according to the Income Method = Wages and Salaries + Rents + Interest + Divi­dends + Undistributed Corporate Profits + Mixed Income + Direct Taxes + Indirect Taxes + Deprecia­tion + Net Income from abroad.

2. Expenditure Approach to GNP:

From the expenditure view point, GNP is the sum total of expenditure incurred on goods and services during one year in a country.

It includes the following items:

(i) Private Consumption Expenditure:

It includes all types of expenditure on personal con­sumption by the individuals of a country. It comprises expenses on durable goods like watch, bicycle, radio, etc., expenditure on single-used consumers’ goods like milk, bread, ghee, clothes, etc., as also the expenditure incurred on services of all kinds like fees for school, doctor, lawyer and transport. All these are taken as final goods.

(ii) Gross Domestic Private Investment:

Under this comes, the expenditure incurred by pri­vate enterprise on new investment and on replacement of old capital. It includes expenditure on house construction, factory-buildings, all types of machinery, plants and capital equipment. In particular, the increase or decrease in the inventory is added to or subtracted from it.

The inventory includes produced but unsold manufactured and semi-manufactured goods during the year and the stocks of raw material, which have to be accounted for in GNP. It does not take into account the financial exchange of shares and stocks because their sale and purchase is not real investment. But depreciation is added.

(iii) Net Foreign Investment:

It means the difference between exports and imports of export surplus. Every country exports to or imports from certain foreign countries. The imported goods are not produced within the country and hence cannot be included in national income, but the exported goods are manufactured within the country. Therefore, the difference of value between exports (JO and imports (M), whether positive or negative, is included in the GNP.

(iv) Government Expenditure on Goods and Services:

The expenditure incurred by the gov­ernment on goods and services is a part of the GNP. Central, State or Local governments spend a lot on their employees, police and army.

To run the offices, the governments have also to spend on contingen­cies which include paper, pen, pencil and various types of stationery, cloth, furniture, cars, etc. It also includes the expenditure on government enterprises. But expenditure on transfer payments is not added, because these payments are not in exchange for goods and services produced during the current year.

Thus GNP according to the Expenditure Method=Private Consumption Expenditure (C) + Gross Domestic Private Investment (I) + Net Foreign Investment (X-M) + Government Expenditure on Goods and Services (G) = C+ f + (X-M) + G.

As already pointed out above, GNP estimated by either the income or the expenditure method would work out to be the same, if all the items are correctly calculated.

3. Value Added Approach to GNP:

Another method of measuring GNP is by value added. In calculating GNP, the money value of final goods and services produced at current prices during a year is taken into account. This is one of the ways to avoid double counting.

But it is difficult to distinguish properly between a final product and an intermediate product. For instance, raw materials, semi-finished products, fuels and services, etc., are sold as inputs by one industry to the other. They may be final goods for one industry and intermedi­ate for others.

So, to avoid duplication, the value of intermediate products used in manufacturing final products must be subtracted from the value of total output of each industry in the economy.

Thus, the difference between the value of material outputs and inputs at each stage of production is called the value added. If all such differences are added up for all industries in the economy, we arrive at the GNP by value added. GNP by value added = Gross value added + net income from abroad. Its calculation is shown in Tables 1, 2 and 3.

Table 1 is constructed on the supposition that the entire economy for purposes of total produc­tion consists of three sectors. They are agriculture, manufacturing, and others, consisting of the tertiary sector. Out of the value of total output of each sector is deducted, the value of its intermediate purchases (or primary inputs) to arrive at the value added for the entire economy.

Thus the value of total output of the entire economy as per Table 1 is Rs. 155 crores and the value of its primary inputs comes to Rs. 80 crores. Thus the GDP by value added is Rs. 75 crores (Rs. 155 minus Rs. 80 crores).

The total value added equals the value of gross national (domestic) product of the economy. Out of this value added, the major portion goes in the form of wages and salaries, rent, interest and profits, a small portion goes to the government as indirect taxes and the remaining amount is meant for depre­ciation. This is shown in Table 2.

Thus we find that the total gross value added of an economy equals the value of its gross domestic product. If depreciation is de­ducted from the gross value added, we have net value added which comes to Rs. 67 crores (Rs. 75 minus Rs. 8 crores).

This is nothing but net domestic product at market prices. Again, if indirect taxes (Rs. 7 crores) are de­ducted from the net domestic product of Rs. 67 crores, we get Rs. 60 crores as the net value added at factor cost which is equivalent to net domestic product at factor cost. This is illus­trated in Table 2.

Thus value added at factor cost is equal to the net domestic product at factor cost, as given by the total of items 1 to 4 of Table 3 (Rs. 45+3+4+8 crores = Rs. 60 crores). If we add net income received from abroad to the gross value added, this gives us gross national income. Suppose net income from abroad is Rs. 5 crores. Then the gross national income is Rs. 80 crores (Rs. 75 crores + Rs. 5 crores) in Table 3.

Its Importance :

The value added method for measuring national income is more realistic than the product and income methods because it avoids the prob­lem of double counting by excluding the value of intermediate products. Thus this method estab­lishes the importance of intermediate products in the national economy. Second, by studying the national income accounts relating to value added, the contribution of each production sector to the value of the GNP can be found out.

For instance, it can tell us whether agriculture is contributing more, or the share of manufacturing is falling, or of the tertiary sector is increasing in the current year as compared to some previous years. Third, this method is highly useful because “it provides a means of checking the GNP estimates obtained by summing the various types of commodity purchases.”

Its Difficulties :

However, difficulties arise in the calculation of value added in the case of certain public services like police, military, health, education, etc. which cannot be estimated accurately in money terms. Similarly, it is difficult to estimate the contribution made to value added by profits earned on irrigation and power projects.

(G) GNP at Market Prices :

When we multiply the total output produced in one year by their market prices prevalent during that year in a country, we get the Gross National Product at Market Prices. Thus GNP at market prices means the gross value of final goods and services produced annually in a country plus net income from abroad. It includes the gross value of output of all items from (1) to (4) mentioned under GNP.

GNP at Market Prices = GDP at Market Prices + Net Income from Abroad.

(H) GNP at Factor Cost :

GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. It includes all items mentioned above under Income Approach to GNP less indirect taxes.

GNP at market prices always includes indirect taxes levied by the government on goods which raise their prices. But GNP at factor cost is the income which the factors of production receive in return for their services alone. It is the cost of production.

Thus GNP at market prices is always higher than GNP at factor cost. Therefore, in order to arrive at GNP at factor cost, we deduct indirect taxes from GNP at market prices. Again, it often happens that the cost of production of a commodity to the producer is higher than the price of a similar commodity in the market.

In order to protect such producers, the government helps them by granting monetary help in the form of a subsidy equal to the difference between the market price and the cost of production of the commodity. As a result, the price of the commodity to the producer is reduced and equals the market price of a similar commodity.

For example, if the market price of rice is Rs. 3 per kg but it costs the producers in certain areas Rs. 3.50, the government gives a subsidy of 50 paise per kg to them in order to meet their cost of production. Thus in order to arrive at GNP at factor cost, subsidies are added to GNP at market prices.

GNP at Factor Cost = GNP at Market Prices – Indirect Taxes + Subsidies.

(I) Net National Product (NNP):

NNP includes the value of total output of consumption goods and investment goods. But the process of production uses up a certain amount of fixed capital. Some fixed equipment wears out, its other components are damaged or destroyed, and still others are rendered obsolete through technologi­cal changes.

All this process is termed depreciation or capital consumption allowance. In order to arrive at NNP, we deduct depreciation from GNP. The word ‘net’ refers to the exclusion of that part of total output which represents depreciation. So NNP = GNP—Depreciation.

(J) NNP at Market Prices:

Net National Product at market prices is the net value of final goods and services evaluated at market prices in the course of one year in a country. If we deduct depreciation from GNP at market prices, we get NNP at market prices. So NNP at Market Prices = GNP at Market Prices – Depreciation.

(K) NNP at Factor Cost:

Net National Product at factor cost is the net output evaluated at factor prices. It includes income earned by factors of production through participation in the production process such as wages and salaries, rents, profits, etc. It is also called National Income. This measure differs from NNP at market prices in that indirect taxes are deducted and subsidies are added to NNP at market prices in order to arrive at NNP at factor cost.

NNP at Factor Cost = NNP at Market Prices – Indirect taxes+ Subsidies.

= GNP at Market Prices – Depreciation – Indirect taxes + Subsidies.

= National Income.

Normally, NNP at market prices is higher than NNP at factor cost because indirect taxes exceed government subsidies. However, NNP at market prices can be less than NNP at factor cost when government subsidies exceed indirect taxes.

(L) Domestic Income:

Income generated (or earned) by factors of production within the country from its own re­sources is called domestic income or domestic product.

Domestic income includes:

(i) Wages and salaries,

(ii) Rents, including imputed house rents,

(iii) Interest,

(iv) Dividends,

(v) Undistributed corpo­rate profits, including surpluses of public undertakings,

(vi) Mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships, etc., and

(vii) Direct taxes.

Since domestic income does not include income earned from abroad, it can also be shown as: Domestic Income = National Income – Net Income earned from abroad. Thus the difference between national income and domestic income is the net income earned from abroad. If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic Income + Net income earned from abroad.

But the net national income earned from abroad may be positive or nega­tive. If exports exceed imports net income earned from abroad is positive. In this case, national income is greater than domestic income. On the other hand, when imports exceed exports, net income earned from abroad is negative and domestic income is greater than national income.

(M) Private Income:

Private income is income obtained by private individuals or firms from any source, productive or otherwise, and the retained income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.

The additions include transfer payments such as pensions, unemployment allowances, and sickness and other social security benefits, gifts and remittances from abroad, windfall gains from lotteries or from horse racing, and interest on public debt. The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc.

Thus Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Inter­est on Public Debt – Social Security – Profits and Surpluses of Public Undertakings.

(N) Personal Income:

Personal income is the total income received by individuals of a country from all sources before payment of direct taxes in one year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are not included in national income. Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employees’ contributions to social security schemes.

These three components are excluded from na­tional income because they do reach individuals. But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall gains, and interest on public debt which are a source of income for individuals are added to national income. Thus Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribu­tion + Transfer Payments + Interest on Public Debt.

Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.

Thus Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.

(O) Disposable Income:

Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and families. The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct taxes have actually been paid. There­fore, in order to obtain disposable income, direct taxes are deducted from personal income.

Thus Disposable Income=Personal Income – Direct Taxes.

But the whole of disposable income is not spent on consumption and a part of it is saved. Therefore, disposable income is divided into consumption expenditure and savings.

Thus Disposable Income = Consumption Expenditure + Savings.

If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies, direct taxes on persons and on business, social security payments, undistributed corporate profits or business savings from it and add transfer payments and net income from abroad to it.

Thus Disposable Income = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income from abroad.

(P) Real Income:

Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is the value of goods and services produced, as expressed in terms of money at current prices. But it does not indicate the real state of the economy. It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing to an increase in prices, the NNP might be higher this year.

On the contrary, it is also possible that NNP might have increased but the price level might have fallen, as a result of which national income would appear to be less than that of the last year. In both the situations, the national income does not depict the real state of the country. To rectify such a mistake, the concept of real income has been evolved.

In order to find out the real income of a country, a particular year is taken as the base year when the general price level is neither too high nor too low and the price level for that year is assumed to be 100. Now the general level of prices of the given year for which the real national income is to be determined is assessed in accordance with the prices of the base year.

For this purpose, the following formula is employed:

Real NNP = NNP for the Current Year x Base Year Index (=100)/Current Year Index

Suppose 1990-91 is the base year and the national income for 1999-2000 is Rs. 20,000 crores and the index number for this year is 250. Hence, Real National Income for 1999-2000 will be = 20,000 x 100/250 = Rs. 8,000 crores. This is also known as NI at constant prices.

(Q) Per Capita Income:

The average income of the people of a country in a particular year is called Per Capita Income for that year. This concept also refers to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income for 2001 at current prices, the national income of a country is divided by the population of the country in that year.

Per Capita Income for 2001 = National income for 2001/Population in 2001

Similarly, for the purpose of arriving at the Real Per Capita Income, this very formula is used.

Real Per Capita Income for 2001 = Real national income for 2001/Population in 2001

This concept enables us to know the average income and the standard of living of the people. But it is not very reliable, because in every country due to unequal distribution of national income, a major portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita income.

Methods of Measuring National Income :

There are four methods of measuring national income. Which method is to be used depends on the availability of data in a country and the purpose in hand.

(1) Product Method:

According to this method, the total value of final goods and services produced in a country during a year is calculated at market prices. To find out the GNP, the data of all productive activities, such as agricultural products, wood received from forests, minerals received from mines, commodities produced by industries, the contributions to production made by transport, communications, insurance companies, lawyers, doctors, teachers, etc. are collected and assessed at market prices. Only the final goods and services are included and the intermediary goods and services are left out.

(2) Income Method:

According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e., net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form of transfer payments are not included in it.

The data pertaining to income are obtained from different sources, for instance, from income tax department in respect of high income groups and in case of workers from their wage bills.

(3) Expenditure Method:

According to this method, the total expenditure incurred by the soci­ety in a particular year is added together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment. This concept is based on the assumption that national income equals national expenditure.

(4) Value Added Method:

Another method of measuring national income is the value added by industries. The difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.

Difficulties or Limitations in Measuring National Income :

There are many conceptual and statistical problems involved in measuring national income by the income method, product method, and expenditure method. We discuss them separately in the light of the three methods.

(A) Problems in Income Method:

The following problems arise in the computation of national income by income method:

1. Owner-occupied Houses:

A person who rents a house to another earns rental income, but if he occupies the house himself, will the services of the house be included in national income? The services of the owner-occupied house are included in national income as if the owner sells to himself as a tenant its services.

For the purpose of national income accounts, the amount of imputed rent is estimated as the sum for which the owner-occupied house could have been rented. The imputed net rent is calculated as that portion of the amount that would have accrued to the house-owner after deducing all expenses.

2. Self-employed Persons:

Another problem arises with regard to the income of self-employed persons. In their case, it is very difficult to find out the different inputs provided by the owner himself. He might be contributing his capital, land, labour and his abilities in the business. But it is not possible to estimate the value of each factor input to production. So he gets a mixed income consisting of interest, rent, wage and profit for his factor services. This is included in national income.

3. Goods meant for Self-consumption:

In under-developed countries like India, farmers keep a large portion of food and other goods produced on the farm for self-consumption. The problem is whether that part of the produce which is not sold in the market can be included in national income or not.

If the farmer were to sell his entire produce in the market, he will have to buy what he needs for self-consumption out of his money income. If, instead, he keeps some produce for his self-consumption, it has money value which must be included in national income.

4. Wages and Salaries paid in Kind:

Another problem arises with regard to wages and salaries paid in kind to the employees in the form of free food, lodging, dress and other amenities. Payments in kind by employers are included in national income. This is because the employees would have received money income equal to the value of free food, lodging, etc. from the employer and spent the same in paying for food, lodging, etc.

(B) Problems in Product Method:

The following problems arise in the computation of national income by product method:

1. Services of Housewives:

The estimation of the unpaid services of the housewife in national income presents a serious difficulty. A housewife renders a number of useful services like preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up children, etc. She is not paid for them and her services are not included in national income. Such services performed by paid servants are included in national income.

The national income is, therefore, underestimated by excluding the services of a housewife. The reason for the exclusion of her services from national income is that the love and affection of a housewife in performing her domestic work cannot be measured in monetary terms.

That is why when the owner of a firm marries his lady secretary, her services are not included in national income when she stops working as a secretary and becomes a housewife. When a teacher teaches his own children, his work is also not included in national income. Similarly, there are a number of goods and services which are difficult to be assessed in money terms for the reason stated above, such as painting, singing, dancing, etc. as hobbies.

2. Intermediate and Final Goods:

The greatest difficulty in estimating national income by product method is the failure to distinguish properly between intermediate and final goods. There is always the possibility of including a good or service more than once, whereas only final goods are included in national income estimates. This leads to the problem of double counting which leads to the overestimation of national income.

3. Second-hand Goods and Assets:

Another problem arises with regard to the sale and purchase of second-hand goods and assets. We find that old scooters, cars, houses, machinery, etc. are transacted daily in the country. But they are not included in national income because they were counted in the national product in the year they were manufactured. If they are included every time they are bought and sold, national income would increase many times.

Similarly, the sale and purchase of old stocks, shares, and bonds of companies are not included in national income because they were included in national income when the companies were started for the first time. Now they are simply financial transactions and represent claims.

But the commission or fees charged by the brokers in the repurchase and resale of old shares, bonds, houses, cars or scooters, etc. are included in national income. For they are the payments they receive for their productive services during the year.

4. Illegal Activities:

Income earned through illegal activities like gambling, smuggling, illicit extraction of wine, etc. is not included in national income. Such activities have value and satisfy the wants of the people but they are not considered productive from the point of view of society. But in countries like Nepal and Monaco where gambling is legalised, it is included in national income. Similarly, horse-racing is a legal activity in England and is included in national income.

5. Consumers’ Services:

There are a number of persons in society who render services to consumers but they do not produce anything tangible. They are the actors, dancers, doctors, singers, teachers, musicians, lawyers, barbers, etc. The problem arises about the inclusion of their services in national income since they do not produce tangible commodities. But as they satisfy human wants and receive payments for their services, their services are included as final goods in estimating national income.

6. Capital Gains:

The problem also arises with regard to capital gains. Capital gains arise when a capital asset such as a house, some other property, stocks or shares is sold at higher price than was paid for it at the time of purchase. Capital gains are excluded from national income because these do not arise from current economic activities. Similarly, capital losses are not taken into account while estimat­ing national income.

7. Inventory Changes:

All inventory changes (or changes in stocks) whether positive or nega­tive are included in national income. The procedure is to take changes in physical units of inventories for the year valued at average current prices paid for them.

The value of changes in inventories may be positive or negative which is added or subtracted from the current production of the firm. Remember, it is the change in inventories and not total inventories for the year that are taken into account in national income estimates.

8. Depreciation:

Depreciation is deducted from GNP in order to arrive at NNP. Thus deprecia­tion lowers the national income. But the problem is of estimating the current depreciated value of, say, a machine, whose expected life is supposed to be thirty years. Firms calculate the depreciation value on the original cost of machines for their expected life. This does not solve the problem because the prices of machines change almost every year.

9. Price Changes:

National income by product method is measured by the value of final goods and services at current market prices. But prices do not remain stable. They rise or fall. When the price level rises, the national income also rises though the national production might have fallen.

On the contrary, with the fall in the price level the national income also falls, though the national production might have increased. So price changes do not adequately measure national income. To solve this problem, economists calculate the real national income at a constant price level by the consumer price index.

(C) Problems in Expenditure Method:

The following problems arise in the calculation of national income by expenditure method:

(1) Government Services:

In calculating national income by expenditure method, the problem of estimating government services arises. The government provides a number of services, such as police and military services, administrative and legal services. Should expenditure on government serv­ices be included in national income?

If they are final goods, then only they would be included in national income. On the other hand, if they are used as intermediate goods, meant for further production, they would not be included in national income. There are many divergent views on this issue.

One view is that if police, military, legal and administrative services protect the lives, property and liberty of the people, they are treated as final goods and hence form part of national income.

If they help in the smooth functioning of the production process by maintaining peace and security, then they are like intermediate goods that do not enter into national income. In reality, it is not possible to make a clear demarcation as to which service protects the people and which protects the productive process. Therefore, all such services are regarded as final goods and are included in national income.

(2) Transfer Payments:

There arises the problem of including transfer payments in national income. The government makes payments in the form of pensions, unemployment allowance, subsi­dies, interest on national debt, etc.

These are government expenditures but they are not included in national income because they are paid without adding anything to the production process during the current year. For instance, pensions and unemployment allowances are paid to individuals by the gov­ernment without doing any productive work during the year.

Subsidies tend to lower the market price of the commodities. Interest on national or public debt is also considered a transfer payment because it is paid by the government to individuals and firms on their past savings without any productive work.

(3) Durable-use Consumers Goods:

Durable-use consumers’ goods also pose a problem. Such durable-use consumers’ goods as scooters, cars, fans, TVs, furniture, etc. are bought in one year but they are used for a number of years. Should they be included under investment expenditure or consumption expenditure in national income estimates? The expenditure on them is regarded as final consumption expenditure because it is not possible to measure their used up value for the subsequent years.

But there is one exception. The expenditure on a new house is regarded as investment expendi­ture and not consumption expenditure. This is because the rental income or the imputed rent which the house-owner gets is for making investment on the new house. However, expenditure on a car by a household is consumption expenditure. But if he spends the amount for using it as a taxi, it is investment expenditure.

(4) Public Expenditure:

The government spends on police, military, administrative and legal services, parks, street lighting, irrigation, museums, education, public health, roads, canals, buildings, etc. The problem is to find out which item is consumption expenditure and which is investment expendi­ture. Expenses on education, museums, public health, police, parks, street lighting, civil and judicial administration are consumption expenditure.

Expenses on roads, canals, buildings, etc. are investment expenditure. But expenses on defence equipment are treated as consumption expenditure because they are consumed during a war as they are destroyed or become obsolete. However, all such expenses including the salaries of armed personnel are included in national income.

Importance of National Income Analysis :

The national income data have the following importance:

1. For the Economy:

The national income data are of great importance for the economy of a country. These days the national income data are regarded as accounts of the economy, which are known as social accounts. These refer to net national income and net national expenditure, which ultimately equal each other.

Social accounts tell us how the aggregates of a nation’s income, output and product result from the income of different individuals, products of industries and transactions of international trade. Their main constituents are inter-related and each particular account can be used to verify the correctness of any other account.

2. National Policies

The national income data form the basis of national policies such as em­ployment policy, because these figures enable us to know the direction in which the industrial output, investment and savings, etc. change, and proper measures can be adopted to bring the economy to the right path.

3. Economic Planning:

In the present age of planning, the national data are of great importance. For economic planning, it is essential that the data pertaining to a country’s gross income, output, saving and consumption from different sources should be available. Without these, planning is not possible.

4. Economic Models:

The economists build short-run as well as long-run economic models or long-run investment models in which the national income data are very widely used.

5. Research:

The national income data are also made use of by the research scholars of econom­ics. They make use of the various data of the country’s inputs, outputs, income, saving, consumption, investment, employment, etc., which are obtained from social accounts.

6. Per Capita Income:

The national income data are significant for a country’s per capita in­come which reflects the economic welfare of the country. The higher the per capita income, the higher the economic welfare and vice versa.

7. Distribution of Income:

The national income statistics enable us to know about the distribu­tion of income in the country. From the data pertaining to wages, rent, interest and profits, we learn of the disparities in the incomes of different sections of the society.

Similarly, the regional distribution of income is revealed. It is only on the basis of these that the government can adopt measures to remove the inequalities in income distribution and to restore regional equilibrium. With a view to removing these personal and regional disequilibria, the decisions to levy more taxes and increase public expenditure also rest on national income statistics.

Inter-Relationship among Different Concepts of NI :

The inter-relationships among the various concepts of national income can be shown in the form of equations as under:

1. Gross National Product (GNP) = Gross National Expenditure (GNE)

2. Gross Domestic Product (GDP) = GNP – Net Income from abroad.

3. GNP at market Prices = GNP at Factor cost + Indirect Taxes – Subsidies

4. NNP at Market Prices = GNP at Market Prices – Depreciation or Capital Consumption Allowance

5. Net Domestic Product (NDP) = NNP at Market Prices – Net Factor at Market Prices Income from abroad

6. NNP at Factor Cost or National Income or National Product = NNP at Market Prices – Indirect Taxes + Subsidies

7. NDP at Factor Cost or Domestic = National Income – Net Factor Income or Domestic Product Income from abroad

8. Private Income = NNP at Factor Cost + Government and Business Transfer Payments + Current Transfers from abroad in the form of Gifts and Remittances + Windfall Gains + Net Factor In­come from abroad + Interest on Public Debt and Consumer Interest – Social Security Contribution – Income from Gov­ernment Departments and property – Profits and Surpluses of Public Corporations (or Undertakings) Or

= Income from Domestic Product accruing to Private Sector + Interest on Public Debt + Net Factor Income from abroad + Transfer Payments + Current Transfers from the rest of the world (or abroad)

9. Income from Domestic Product = NDP at Factor Cost – Income from accruing to Private Sector Domestic Product accruing to Government Departments – Saving of Non-Departmental Enterprises.

10. Personal Income = Private Income – Saving of Private Corporate Sector (or Undistributed Corporate Profits) – Corporation Tax (or Profit Taxes)

11. Personal Disposable Income or = Personal Income – Direct Taxes Disposable Income paid by Households (or Direct Personal Taxes) and Miscella­neous Fees, Fines, etc.

= NDP at Factor Cost + Transfer Payments + Net Factor In­come from abroad – Corporation Tax – Undistributed Cor­porate Profits – Social Security Payments – Direct Personal Taxes Or

= National Income at Factor Cost + Transfer Payments + Net Income from abroad – Corporate Tax – undistributed Cor­porate Profits – Social Security payments – Direct Personal Taxes – Indirect Taxes + Subsidies.

Solved Problems :

1. From the data pertaining to the Indian Economy given below, calculate (a) GNP at Factor Cost, (b) NNP at Factor Cost, (c) Net Domestic Product at Factor Cost, and (d) Net Domestic Product at market Prices.

Chapter 1: NATIONAL INCOME

• CBSE Class 12
• Macroeconomics
• Chapter 1: NATIONAL INCOME Notes

CIRCULAR FLOW OF INCOME - GENERAL

• MacroEconomics & Indian Economy Book Class-12
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Circular Flow of Income

INTRODUCTION

The term macro is derived from the Greek word ‘makro’, which means “large”. It is a branch of economics concerned with the description and explanation of economic processes involving aggregates. 

• An aggregate is a collection of economic subjects that have some characteristics in common. 
• Macroeconomics emerged after the publication of John Maynard Keynes' book, ‘The Theory of Employment, Interest, and Money’ in 1936. This branch investigates the economic relationships or issues that affect an economy as a whole, such as saving and total consumption. 
• Macroeconomics  is the part of economic theory that studies the economy as a whole, such as national income, aggregate employment, general price level, aggregate consumption, aggregate investment, etc. Its main instruments are aggregate demand and aggregate supply. It is also called the  ‘Income Theory’  or  ‘Employment Theory’
• Macroeconomics is concerned with economic problems at the level of an economy as a whole. Structure of Macroeconomics implies study of different sectors of the economy.
• Producer sector engaged in the production of goods and services.
• Household sector engaged in the consumption of goods and services.
• Note:  Households are taken as the owners of factors of production.
• The government sector engaged in activities like taxation and subsidies
• Rest of the world sector engaged in exports and imports.
• Financial sector (or financial system) engaged in the activity of borrowing and lending.

CIRCULAR FLOW OF INCOME

It refers to the cycle of generation of income in the production process, its distribution between the factor of production namely Land, Labour, Capital and Enterprise and finally, its circulation from households to firms in the form of consumption expenditure on goods and services produced by them.

Phase in Circular Flow of Income 

• Generation Phase: In this phase, the firm produces goods & services using factors of production (Land, Labour, capital and Enterprise).
• Distribution Phase: In the Second Phase, the firms make factor payments (Rent, wages, Interest & Profit) to the household for providing factor services.
• Disposition Phase: In this phase, the households spend the amount/income received by factors of production in purchasing good and services produced by firms.

• Stock variable refers to that variable; which is measured at a particular point of time.
• It is static in nature, i.e., it does not change.
• There is no time dimension in stock variables.
• For eg. Distance, Amount of Money, National Wealth, National Capital, Money Supply, Water in Tank etc.
• Flow variable refers to that variable; which is measured over a period. The ‘period of time’ could be a day, a week, a year etc.
• It is dynamic in nature i.e. it can be changed.
• There is time dimension in flow variables
• For example, Speed, Spending of Money, Water in River, Exports, Imports, etc.

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REAL & CASH FLOW

TYPES OF CIRCULAR FLOW

Real Flow : It refers to the flow of factor services (land, labour, capital, and enterprise) from household to firms and the corresponding flow of goods and services from firms to households. It is also known as ‘Physical Flow’.

As seen in the above diagram, the households sector provides factor services to the producing sector i.e. firm which, in turn, provide goods and services to them as a reward for their productive services.

Real flow determines the magnitude of growth process in an economy. For example, when more factor services are offered to firms, then volume of production will be more and it speeds up the process of economic growth.

Money Flow: It refers to the flow of factor payments (Rent, wages, interest, and profit) from firms to households for providing factor services and corresponding flow of consumption expenditure from households to firm for purchase of goods and services produced by firm. It is also known as ‘Nominal flow’.

As seen in the above diagram, the producing sector makes factor payments to households for their factor services and households spend this income on purchase of goods and services produced by the firm.

CIRCULAR FLOW OF INCOME - TWO SECTOR ECONOMY MODEL

CIRCULAR FLOW IN A SIMPLE ECONOMY (TWO-SECTOR ECONOMY)

In a simple two-sector economy, there exist only two sectors i.e. household and firms, where households are the owners of factors of production (Land, Labour, Capital, and Enterprise) and consumers of goods & services. Firms produce goods and services and sell them to households.

In order to make our analysis simple, we can make some assumptions:-

• Only two sectors in an economy are there i.e. Households and firms. It means there is no government and foreign sector.
• Households provide factor services to firms only and firms hire factor services from household only.
• The amount received by the household from the firm for providing factor services is used entirely on consumption.

This brings us to the following conclusion.

• There are no savings in the economy, i.e. neither the household saves from their incomes, not the firm saves from their profits.
• In the given diagram, it can be seen that households are providing factor services in exchange for factor payment and firms are providing goods & services to households in exchange for consumption expenditure.
• Total Production = Total Consumption
• Factor Payment = Factor Income
• Consumption Expenditure = Factor Income
• Real Flow = Money Flow

Note: In a circular flow of income, production generates factor income, which is converted into expenditure. This flow of income continues, as production is a continuous activity due to never-ending human wants. It makes the flow of income circular.

Synonyms/Similar terms of this chapter

• Generation Phase - Production Phase
• Distribution Phase - Income Phase
• Disposition Phase - Expenditure Phase
• Real Flow – Physical Flow
• Money Flow – Nominal Flow

DOMESTIC TERRITORY, RESIDENTSHIP, CITIZENSHIP

DOMESTIC TERRITORY

In layman’s language, domestic territory means the political frontiers of a country. However, for national income accounting, it is used in a wider sense.

Definition: Domestic Territory is geographical territory administered by a government within which persons, goods and capital circular freely.

Let us first see what IS not included in a domestic territory:

The domestic territory DOES NOT include-

• Embassies, consulates and military establishment of a foreign country, for example- the American embassy in India is the domestic territory of America and not India
• An international organization like UNO, WHO located within the geographical boundaries of a country

What all is included?

Ship and aircraft owned and operated by normal residents between two countries.

• For example- Planes operated by Air India between London and Paris are part of the domestic territory of India. Similarly, planes operated by Singapore Airways between Indian and Japan are a part of domestic territory of Singapore.

Fishing Vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive rights of operation.

• For example, fishing boats operated by Indian anglers in international waters of Indian Ocean will be considered a part of domestic territory of India.

Embassies, consulates and military establishments of country located abroad.

• For example- Indian Embassy in Japan is a part of the domestic territory of India.

NORMAL RESIDENTS

Definition: Normal Residents  of a country refers to an individual or institution who ordinarily resides in the country and whose centre of economic interest also lies in that country.

‘Centre of Economic Interest’ implies:

• The resident lives or is located within the domestic Territory.
• The resident carries out basic economic activities of earning, spending, and accumulation from that location.

Following are not included in Normal residents:-

• Foreign Tourists & Visitors
• Foreign staff of Embassies, officials, diplomats and members of the armed forces.
• International Organization like WHO, UNO etc.
• Employers of International Organizations.
• Crewmembers of foreign vessels, commercial travellers and seasonal workers, provided their stay is less than one year.
• Border workers, who cross borders on a regular basis to work in other countries.

CITIZENSHIP AND RESIDENTSHIP

FINAL GOODS & INTERMEDIATE GOODS

TYPES OF GOODS

Final Goods : Final goods refer to those goods, which are used either for consumption or for investment.

For example,

• Goods purchased by consumer households as they are meant for final consumption.
• Goods purchased by firm for capital formation or investment like machinery purchased by a firm.

Intermediate Goods : Intermediate goods refer to those goods which are used either for resale or for further production in the same year.

• Goods purchased for resale like milk purchased by a dairy shop.
• Goods used for further production like milk used for making sweets.

NOTE: The distinction between intermediate goods and final goods is made based on the use of product and not on the basis of product itself. For example, sugar is an intermediate good when it is used by sweet shop for making sweets. However, if consumers use it, then it becomes a final good.

FACTOR INCOME & TRANSFER INCOME

FACTOR INCOME AND TRANSFER INCOME

Factor Income:

Definition: It refers to income received by factor of production (labour, Land, Capital and Enterprise) for rendering factor services in the production process.

• Factor Incomes of normal residents of a country is included in the National Income.
• For example-Rent, Wages, Interest and Profit.

Transfer Income:

Definition: Transfer Income refers to income received without rendering any productive service in return .

• It is unilateral (One-sided) concept.
• As there is no production of goods or services, it is not included in National Income.
• For example- Old age pension, pocket money, unemployment allowance, scholarship etc.

Note: Taxes received by the government are the transfer incomes of the government as they are received without providing any productive service in return. Similarly, subsidies paid by the government are transfer payments of the government.

CONSUMPTION GOODS & CAPITAL GOODS

Final Goods can be further classified into two groups:

• Consumption Goods
• Capital Goods

NATIONAL INCOME AGGREGATES

In an economy, different productive units produce various goods and services during a period of one year. Such goods and services cannot be added together in terms of quantity. Therefore, these are expressed in terms of money.

GROSS AND NET

• Gross means the value of product including depreciation.
• Net means the value of product excluding depreciation.
• The difference between these two terms is depreciation.
• Where depreciation is the expected decrease in the value of fixed capital assets due to its general use. It is the result of production process. Gross = Net + Depreciation Net = Gross – Depreciation

NATIONAL INCOME AND DOMESTIC INCOME

National Income refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.

Domestic Income refers to a total factor income earned by the factor of production within the domestic territory of a country during an accounting year.

The difference between these two incomes is Net Factor Income from abroad (NFIA), which is included in National Income (NY) and excluded from Domestic Income (DY).

Where NFIA is the difference between income earned by normal residents from rest of the world and similar payments made to Non-residents within the domestic territory.

NFIA = Income earned by Residents from rest of the world (ROW) – Payments to Non-Residents within Domestic territory. NY = DY + NFIA DY = NY – NFIA

BASIC AGGREGATES OF NATIONAL INCOME

1. Gross Domestic Product at Market Price (GDP MP  ):  

GDP MP   is defined as the gross market value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units .

• ‘Gross’ in GDP MP  signifies that depreciation is included, i.e., no provision has been made for depreciation.
• ‘Domestic’ in GDP MP   signifies that it includes all the final goods and services produced by all the production units located within the economic territory (irrespective of the fact whether produced by residents or non-residents).
•  ‘Market Price’ in GDP MP   signifies that indirect taxes are included and subsidies are excluded, i.e., it shows that Net Indirect Taxes (NIT) have been included.
• ‘Product’ in GDP MP   signifies that only final goods and services have to be included and intermediate goods should not be included to avoid the double counting.

2. Gross Domestic Product at Factor Cost ( GDP FC ):  

GDP FC   is defined as the gross factor value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units excluding Net Indirect Tax.

GDP FC  = GDP MP   – Net Indirect Taxes

3. Net Domestic Product at Market Price (NDP MP  ).

NDP MP   is defined as the net market value of all the final goods and services produced within the domestic territory of a country by its normal residents and non-residents during an accounting year.

NDP MP  =GDP MP  – Depreciation

4. Net Domestic Product at Factor Cost (NDP FC  ).

NDP FC  refers to a total factor income earned by the factor of production within the domestic territory of a country during an accounting year.

NDP FC  = GDP MP  – Depreciation – Net Indirect Taxes NDP FC  is also known as Domestic Income or Domestic factor income.

5. Gross National Product at Market Price (GNP MP ).

GNP MP  refers to market value of all the final goods and services produced by the normal residents of a country during an accounting year.

GNP MP  = GDP MP  + Net factor income from abroad It must be noted that GNP MP  can be less than GDP MP  when NFIA is negative. However, GNP MP  will be more than GDP MP   when NFIA is positive.

6. Gross National Product at Factor Cost (GDP FC  )  or  Gross National Income

  GNP FC    refers to gross factor value of all the final goods and services produced by the normal residents of a country during an accounting year.

GDP FC   = GNP MP   – Net Indirect Taxes

7. Net National Product at Market Price (NNP MP  ) .

NNP MP   refers to net market value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNP MP  = GNP MP  – Depreciation

8. Net National Product at Factor Cost (NNP FC  ) or National Income.

NNP FC   refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.

NNP FC  = GNP MP   – Depreciation – Net Indirect Taxes It must be noted that NNP FC   is also known as National Income .

RELATIONSHIP BETWEEN ALL AGGREGATES:

THREE GOLDEN RULES

Investment or capital formation refers to addition to the capital stock of an economy. For example-Construction of roads, flyovers, Building, etc.

Investment can be of two forms:

Gross Investment

• Definition: It is an addition to the stock of capital before making allowance for depreciation

Net Investment

• Definition: Net Investment is an actual addition made to the capital stock of the economy in a given period.
• Net Investment = Gross Investment- Depreciation

DEPRECIATION (Consumption of fixed capital)

Definition: It refers to a fall in the value of an asset due to normal wear and tear ,the passage of time or expected obsolescence (change in technology).

NET INDIRECT TAXES (NIT)

• NIT refers to the difference between Indirect Tax and Subsidies.
• Net Indirect Taxes (NIT) = Indirect Tax-Subsidies

Indirect Tax

Definition: Indirect Taxes refers to those taxes, which are imposed by the government on production and sale of goods and services. For example- Goods and Services Tax (GST)

Definition: Subsidies are the ’economic assistance’ given by the government to the firms and households, with a motive of the general welfare. For Example- Subsidy on LPG Gas Cylinders.

Factor Cost

It refers to the amount paid to factors of production for their contribution to the production process.

Market Price

It refers to the Price at which product is actually sold in the market. For example- If price of the LPG cylinder is Rs.1000 and the tax rate is 10%, the price of the cylinder becomes Rs.1100 but a subsidy of Rs.50 is provided by the government hence the final price is Rs.1050.

Here Rs.1000 is factor cost, Rs.1050 is Market Price, Rs.100 is indirect Taxes and Rs.250 is a subsidy.

NET FACTOR INCOME FROM ABROAD (NFIA)

Definition: It refers to the difference between factor income received from the rest of the world and factor income paid to the rest of the world.

NFIA = Factor Income earned from Abroad-Factor Income paid Abroad.

Significance: NFIA is significant to differentiate between ‘domestic income’ and ‘national income’.

National Income= Domestic Income + NFIA.

Components of NFIA

• Net compensation of Employees-  It is the difference between income from work received by resident workers living or employed abroad for less than one year & similar payments made to non-resident workers employed domestic territory of the country.
• Net Income from Property and entrepreneurship  -  It refers to the difference between income from property and entrepreneurship received by residents of the country and similar payments made to Non-residents
• Net Retained earnings -  It refers to the difference between retained earnings of resident’s companies located abroad and retained earnings of non-resident companies located within the domestic territory of that country.

NFIA =  Net Compensation of Employees + Net Income from Property and Entrepreneurship + Net Retained earnings

VALUE ADDED METHOD

We have learnt that production gives rise to income, income results in expenditure, which in turn, generates income again.

The National Income of a country can be measured in three different ways:

• Value Added Method
• Income Method
• Expenditure Method

It must be noted that all three methods give the same value of national income because they are used to measure the same physical output at three different phases.

VALUE-ADDED METHOD

This method is used to measure national income in different phases of production in the circular flow. Every individual enterprise adds a certain value to the product when it purchases from some other firm as intermediate goods. When value-added by each and every firm is summed up, we get the value of national income.

• Value Added: Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

Value Added =  Value of output - Intermediate consumption

For Example: Suppose a sweet shop owner buys milk worth ₹100 from the milkman. After processing the milk into sweets, he sells it for ₹250.

So, here the milk is intermediate consumption as it was used for making sweets. The sweets which are sold off are output and termed as the value of output.

The difference between this value of output and intermediate consumption is termed as ‘value-added’. Value added by each producing enterprise is known as the Gross Value Added (GVA mp).

Sum total of all GVAmp of all producing enterprises within the domestic territory of a country during one year is equal to GDPmp.

∴  Σ GVA mp   =  GDP mp

• If the value of intermediate consumption is given, then imports are not included separately as imports are already included in the value of intermediate consumption.

However, if domestic purchases are given, then imports will also be included.

For Example:

• Intermediate Consumption = ₹500
• Imports = ₹200

Here imports would not be included and the value of intermediate consumption is ₹500.

Case 2: 

• Purchase of Raw Material from domestic firm=.₹700
• Imports =₹300

Here, the value of intermediate consumption = Purchase of Raw material from domestic firm + Imports =700+300

Intermediate consumption =₹1000

• Value of Output:  Value of output refers to the market value of all goods and services produced during a period of one year.

How to calculate the value of output:

• When the entire output is used is sold in an accounting year then the value of output is equal to sales.
• When the entire output is not sold in an accounting year then the value of output is calculated as follows:      

   Value of output = Sales + change in stock

[Change in stock= Closing stock - Opening stock]

Steps to Calculate National Income by Value Added Method

Step 1-  Identify and classify the production units:

The first step is to identify all the producing units into the primary, secondary and tertiary sector.

Step 2-  Estimate Gross Domestic Product at Market Price:

Now gross value added to market price (GVAmp) of each sector calculated and the sum total of GVAmp of all sectors gives GDPmp i.e GDPmp= ΣGVA (of all sectors).

Step 3-  Calculate Domestic Income (NDPFC)

Now, to calculate NDPFC from GDPmp, we need to subtract both depreciation as well as net indirect taxes i.e NDPFC = GDPmp – Depreciation – Net Indirect Taxes.

Step 4–  Calculate National Income (NNPFC)

For calculating NNPFC from NDPFC, NFIA is to be added NNPFC= NDPFC +NFIA    

Precautions of Value-Added Method

Intermediate goods are not to be included in National Income -  If intermediate goods would be included in National Income it would lead to double-counting, as these are already included in final goods.

Sale and Purchase of Second Hand Goods are not included- Since these goods are already included in the year of manufacture, these are not included again. However, any brokerage or commission earned or paid is to be included while calculation.

Production of services for self-consumption (Domestic Services) are not included : Domestic services like services of Housewife, kitchen gardening etc. are not included in national income as these services never entered market place and it's difficult to find their market value.

Production of goods for self-consumption will be included -  It is not included in national income as they contribute to current output. Their value is to be estimated or imputed, as they are not sold in the market.

Change in the stock of goods will be included -  Net increase in the stock of inventories will be included in national income as part of capital formation.

The problem of Double Counting:

Double Counting refers to the counting of output more than once while passing through various stages of production.

While calculating national income, the only value of final goods is to be included. The problem of double counting arises when the value of intermediate goods are also included along.

How to avoid Double Counting:

Final Output Method –  As per this method, the value of only the final output should be added to determine national income. For example, the value of sweets of Rs 250 sold to final customers should be taken in national income.

Value- Added Method –  The value-added in every stage of production is included under this method for calculation of National Income.

INCOME METHOD

As per this method, all the incomes that accrue to factors of production by way of wages, profits rent, interest, etc. are summed up to obtain the national income.

Components of Factor Income

The following are components of the Income Method. Sum of all the items given below is known as Domestic Income (NDP at FC)

1. Compensation of Employees (COE) –

Definition: COE is the amount paid to employees by employers for rendering productive services. It includes all the benefits received by employees from employers.

• Wages and Salaries in cash-  It includes all the benefits, which are in monetary terms like wages, Salaries, bonus, commission, etc.
• Wages and Salaries in kind-  it includes all the benefits in non-monetary terms like free house, car, medical facilities, etc.
• Employer’s Contribution to social security schemes –  it includes contribution by an employer for social security schemas for Example- provident fund, gratuity, etc.

2. Rent and royalty-

Rent:  is income from ownership of land and building. It includes both the actual rent (rent of left out land) as well as imputed rent (rent of self - occupied factors).

Royalty:  refers to income received from granting leasing right of sub-soil assets. For example – Royalty from leasing of Iron mine, Gold mine, etc.

3. Interest –

Definition: Interest refers to the amount received from lending funds to a production unit. It involves both actual interest and imputed interest. For example, interest on loans taken for productive services only.

 It does not include the following:

• Interest paid by the government on National Debt.
• Interest paid by consumers as such interest is paid on loans taken for consumption purposes.
• Interest paid by one firm to another firm.

4. Profits –

Definition: Profits are excess of revenues over the expenditure of any corporation. It is a residual income.

This profit earned by an entrepreneur can be used for three purposes:

• Corporate Tax – it is a tax paid by a corporate to a government on total profits. It is also known as ‘Profit Tax’ and ‘Business Tax’.
• Dividend – it is divided part of profit given to share - holders. It is also known as distributed profits.
• Retained Earnings – Out of total profit a part is distributed among shareholders and a part is retained in business in business, this is kept for future as Retained Earning. It is also known as undistributed profits, Savings of the Private sector and Reserve & Surplus.

5. Mixed Income –

Definition: It is income generated by people who are self-employed. For example- Barber, farmers, etc. or unincorporated enterprises like the retail trader, small shopkeeper.

Mixed income arises from productive services of self-employed persons, whose income includes wages, rent, interest and profit. These elements cannot be separated from each other. For Example: the income of a doctor running a clinic at his residence.

Steps of Income Method

Step-1  Identify and classify the production units.

All the producing units are classified in Primary, Secondary and tertiary sectors.

Step-2  Estimate the factor income paid by each sector.

Factor incomes paid by each factor are classified under:

• Compensation of Employees,
• Rent and Royalty
• Mixed income.

Step-3  Calculate Domestic Income (NDP at FC)

When all factor incomes are summed up, we get domestic income (NDP at FC) i.e. NDP at FC= Compensation of Employees + Rent and Royalty + interest +profit + mixed income of self-employed.

Step–4  Calculating National income from Domestic income.

In the final step, we need to add NFIA to domestic income to get National Income.

National Income (NNPFC) = Domestic Income (NDPFC) + NFIA.

PRECAUTIONS OF INCOME METHOD

Transfer Income  – Transfer incomes are not included in National income as such incomes are not productive and there is no value addition.

Income from the sale of second-hand goods  – Sale of second-hand goods are not included in national income as their sale are already recorded when these were first sold. However, commission, brokerage or any other income is to be recorded.

Income from the sale of shares, bonds and debentures are not included- Such items are not included in national income, as they do not contribute to the current flow of goods and services. However, any brokerage or commission is to be included in national income.

Windfall gains-  These are gains like on lottery, horse race, etc are not included as there is no productive activity.

The imputed value of services provided by owners of production unit be the included-   Imputed value of owner-occupied houses, interest on own capital, etc are included as it is a productive activity and add to flow of goods and services.

Payments out of past savings-   These Payments like death duties, gift tax, interest tax, etc are not included in national income as they are paid out of past savings and do not add to the current flow of goods and services.

EXPENDITURE METHOD

This method measures national income as the sum total of final expenditure incurred by households, business firms, governments, and foreigners.

This method is also known as ‘ Income Disposable Method’.

Components of Final Expenditure:

1.  Private final consumption expenditure-

As the name suggests, it is the expenditure made by households and private non –profit sharing institutions on all type of consumer goods.

  It includes the following:

• Household final consumption expenditure.
• Private non-profit institutions serving household final consumption expenditure.
• Expenditure made by normal residents abroad during any tour and travel.

However, any expenditure made by foreign tourists in the domestic market would be deducted.

2.  Government Final Consumption Expenditure -  

It refers to expenditure made by the government on various administrative services like defence, law, and order, education, etc.

It includes the following:

• Intermediate consumption by government.
• Compensation paid by the government.
• Direct purchase from abroad for embassies and consulates located abroad.

However, it does not include the sale of goods and services produced by the general government.

3.  Gross Domestic Capital Formation or Gross Investment-

Definition: It refers to the addition to the capital stock of the economy.

Following are components of GDCF:

• Gross fixed capital formation: it refers to expenditure made on purchase to a fixed asset. It includes the following  Gross business fixed investment - (expenditure on new plants, machinery, equipment, etc). 
• Gross Residential construction investment- (it includes expenditure on purchase of new houses by households).  
• Gross public investment – (expenditure on construction of flyovers, bridges, etc by the government).
• Inventory Investment – it refers to the amount by which the firm’s inventories change during a period. it may include stock of raw material, semi-finished goods lying with producers.

It is calculated as the difference between closing stock and opening stock of the year.

• Change in Inventories = closing stock - opening stock.
• GDCF = Gross Fixed Capital Formation+ inventory Investment.

4.  Net Exports:

It refers to the difference between exports and imports of a country, during a period of one year. Instead of taking Imports and exports separately, the difference between the two is taken as it is turned as Net Exports.

Net Exports=Export – Import

Steps in Calculating Net Exports

Following steps are involved in the calculation of national income by expenditure method:

Step-1 Identify the economic units incurring final expenditure-

All economic units, which incur final expenditure within the domestic territory, are   classified under four groups:

• Households sector    
• Govt. Sector
• Producing sector     
• Rest of the world sector

Step-2 Classification of Final Expenditure –

Final expenditure by above economic units are estimated and classified under the following heads:

• Private Final Consumption Expenditure (PFCE)
• Government Final Consumption Expenditure (GFCE)
• Gross Domestic Capital Formation (GDCF)
• Net Exports (X-M)

Sum of all of the above components gives GDP.

GDP at MP = PFCE + GFCE + GDCF + (X-M)

Step-3  Calculate Domestic Income (NDPFC)-

Now to calculate NDP at FC from GDP at MP, we need to subtract depreciation and Net Indirect Taxes (NIT).

Step-4.  Estimate net factor income from abroad to arrive at national income.

Finally, we add net factor income from abroad to NDPFC in order to get NNPFC (National Income).

Precautions of Expenditure Method

Expenditure on intermediate goods will not be included in national income: As intermediate goods are already included in the value of final expenditure, and if it is included again it will lead to double counting.

Transfer Payments are not included: As these payments are not connected with any productive activity, these are not added while calculating national income.

Purchase of second-hand goods will not be included: As the sale of second - hand goods are already included at the time when they were originally purchased. However, any brokerage or commission on such goods is included as it is the payment made for productive service.

Purchase of financial assets: Transactions relating shares, debentures, bonds etc. are not included, as they do not contribute to the current flow of goods and services. (Commission, brokerage on such transaction to be included)

Expenditure on own account production: Production for self - consumption, imputed value of owner occupied house, free services from general government and private non-profit institutions serving households will be included in national income since these are productive services.

TREATMENT OF DIFFERENT ITEMS IN NATIONAL INCOME

Treatments of different items in National Income

• National Income includes income earned by a normal resident of a country as a reward for their productive services in the current year.

The following items are not included while calculating national income:

Transfer Income and payments like Pension, Scholarship, gifts, etc.

Compulsory Transfer Payments like interest tax, capital gain tax, etc.

Sale and purchase of financial assets.

Windfall gains like lotteries, gambling, etc.

Non - market transactions like kitchen gardening, etc.

Intermediate consumption expenditure like the purchase of raw material by a firm, vegetables purchased by a dairy shop, etc.

Sale or purchase of second- hand goods like sale/purchase of an old house, etc.

Capital loss like the destruction of a building by earthquake or flood etc.

Capital gains like profit due to increase in the price of land, building, shares, etc.

National debt interest or interest paid by households to commercial banks.

Following items are included while calculation of National Income:

Brokerage/Commission on sale/purchase of second- hand goods.

Services provided by the owners of production units like imputed rent of owner’s occupied house interest on own capital etc.

Capital Formation (Investment) like the purchase of machinery by a firm, construction of flyover, bridges, etc.

Payment of bonus, contribution to provident fund by employer etc.

Payment of bus fare by households, examination fees paid by students, payment of telephone bills, etc.

Profit earned by an Indian company from its branches abroad, wages received by Indian employee working abroad, etc.

Free services, (Dispensary, education) by government, government expenditure on street lighting.

Interest on the loan paid by commercial banks.

National Income at Current price and Constant price:

National Income at Current Price:  It is the money value of final goods and services produced by normal residents of a country in a year, measured at prices of the current year.

It is also known as  ‘Nominal National Income ’.  For example – measuring India’s National Income of 2018-19 at prices of 2018-19 or measuring India’s National Income of 2017-18 at prices of 2017-18.

It does not show the true picture of the economic growth of a country as any increase in national income may be due to rise in price level without any change in physical output.

National Income at Constant Price:  It is the money value of final goods and services produced by normal residents of a country in a year, measured at price of base - year. Base year is a normal year which is free from price fluctuations). Presently 2011-12 is taken as base year in India.

It is also known as  ‘Real National Income’.  It shows the true picture of the  economic growth of a country as  any increase in real national income is due to  the increase in output only.

Numerical Example - 

National Income at current price and at constant price.

• It can be seen that national income at current price is Rs22000 and at base price is Rs17000. The difference of Rs 5000 is not real. It does not give a true picture of economic growth as the increase is merely due to rise in prices.

Conversion of National income at current price into constant price.

• Conversion of national income at current into constant price can be done using price index, price index is an index number which shows the change in price level between two different time periods.

GDP DEFLATOR

Nominal GDP and Real GDP:

1. Nominal GDP or GDP at Current price –  When GDP is estimated on the basis of price of the same year, it is called Nominal GDP.

2. Real GDP or GDP at Constant price –  When GDP is estimated, based on the price of base year, it is called real GDP.

GDP deflator (Price Index)

Definition: GDP Deflator is one measure of overall price level. It measures the average level of prices of all the goods and services that make up GDP.

GDP Deflator or price index= Nominal GDP/Real GDP *100

If Nominal GDP is Rs 21000 Cr. and Real GDP is Rs 18000 Cr. Find GDP Deflator.

Ans: GNP Deflator = ₹116.67

  Difference between Nominal GDP and Real GDP?

Which is better Nominal GDP or Real GDP?

Real GDP is better because:

• It helps in determining the effect of the increased production of goods and services as it is affected by change in physical output only. On the other hand, Nominal GDP can increase even without any increase in physical output.
• Real GDP is better measure to make periodic comparison in the physical output over different years.
• Real GDP facilitates international comparison of economic performance across the countries.

GDP and Welfare

We generally think that the increase in GDP is good. Increasing GDP is usually considered as one of the Chief goals of government's macroeconomics policy.

Because some serious problem arises when we try to use GDP as a measure of happiness or well-being, we now point out some of the limitations of GDP concept as a measure of welfare.

1. Distribution of GDP -  GDP does not take into consideration the income distribution in an economy i.e. gap between rich and poor.

It may be possible that a large part of goods and services are consumed by rich. So, the welfare of the people may not rise as much as the rise in GDP.

2. Change in Price –  If GDP is increasing due to increase in price rather than the increase in production, and then it will not be a reliable index of economic welfare.

3. Non-Monetary Exchange –  GDP includes only those activities which are in direct monetary terms, so those activities like kitchen gardening which are non – monetary exchanges are not included in GDP due to non - availability of data. However, these activities contribute to economic welfare.

4. Externalities –  Externalities refers to those harms or benefits for which a firm is not paid or penalised. It is of two types:

• Positive Externalities – These are the activities which result in benefits to others is termed as positive externalities. For example – Gurudwaras provide free langar for everyone. It increases the welfare of society.
• Negative Externalities – The activities which results in harm to others are termed as negative externalities. Smoking in public will make people smoke passively It reduces the welfare through a negative effect on health.

GDP does not take these externalities into account.

5. Rate of Population Growth –  GDP also does not take into account the rate of growth of population i.e. if GDP is increasing due to increase in population.  If the rate and growth of population are greater than the rate and growth of GDP, then it will decrease per - availability of goods and services which would adversely affect economic welfare.

Related Chapter Name

Chapter 2: money & banking.

• BARTER EXCHANGE
• MONEY SUPPLY
• FUNCTIONS OF MONEY
• EVOLUTION OF MONEY
• DEMAND FOR MONEY
• COMMERCIAL BANK
• CREDIT CREATION
• CENTRAL BANK
• CENTRAL BANK v/s COMMERCIAL BANK

Chapter 3: DETERMINATION OF INCOME & EMPLOYMENT

• AGGREGATE DEMAND
• AGGREGATE SUPPLY
• CONSUMPTION FUNCTION
• TYPES OF PROPENSITIES TO CONSUME
• SAVING FUNCTION & NUMERICALS
• TYPES OF PROPENSITIES TO SAVE
• DERIVATION OF SAVINGS CURVE FROM CONSUMPTION CURVE
• DERIVATION OF CONSUMPTION CURVE FROM SAVINGS CURVE
• INVESTMENT FUNCTION
• SAVINGS & INVESTMENT
• FULL EMPLOYMENT
• UNEMPLOYMENT
• EQUILIBRIUM LEVEL
• INVESTMENT MULTIPLIER
• EXCESS DEMAND
• DEFICIENT DEMAND
• MEASURES TO CONTROL AD - MONETARY POLICY & FISCAL POLICY

Chapter 4: GOVERNMENT BUDGET

• GOVERNMENT BUDGET
• BUDGET RECEIPTS
• BUDGET EXPENDITURE
• MEASUREMENT OF GOVERNMENT DEFICIT

Chapter 5: FOREIGN EXCHANGE RATE

• MARKET FORCES
• TYPES OF FOREIGN EXCHANGE RATE
• CHANGES IN FOREX
• FUNCTIONS OF FOREIGN EXCHANGE MARKET
• KINDS OF FOREIGN EXCHANGE MARKETS

Chapter 6: BALANCE OF PAYMENTS

• TYPES OF BOP
• STRUCTURE OF BOP
• BALANCE OF BOP
• AUTONOMOUS & ACCOMODATING ITEMS

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• Commerce Important Questions
• Class 12 Economics
• Macro Economics Chapter 2 National Income Accounting

Important Questions for CBSE Class 12 Economics Chapter 2 - National Income Accounting

This article contains the most important questions along with the answers for CBSE  Class 12 Economics  Chapter 2 – National Income Accounting, which is curated by the expert Economics teachers from the latest version of CBSE (NCERT) books.

CBSE Class 12 Macroeconomics Chapter-2 Important Questions

Select the meaning of non-market activities from the following options

a. Production

b. Non-marketable

c. Involuntary

d. Economic

Answer :  b. Non-marketable

What is real flow?

Answer : Real flow is the flow of services and goods between different sectors of an economy. For instance, flow sector services flow from the household to the enterprise and then vice versa, i.e., from the enterprise to the household again.

Differentiate between personal income and private income.

Answer : Mentioned below are the points of differences between personal income and private income:

Calculate the net value added at the market price of a firm:

Value of output = Sale + Change in stock

= 400 + (-) 20

Gross value added at MP = Value of output – Purchase of an intermediate product

= 380 – 250 = 130/-

Net value added at MP = Gross value added at MP – Depreciation

= 130 – 30 = 100/-

Thus, the final answer = ₹ 100/-

Nominal GNP is the same as,

a. GNP at constant prices

b. Real GNP

c. GNP at current prices

d. GNP less net factor income from abroad

Answer : c. GNP at current prices

What must be added to the domestic factor income to avail national income?

Answer : Net factor income from abroad must be added to the domestic factor income to avail national income .

Define real GNP.

Answer : Gross national product calculated at constant prices i.e., via base year price is known as real GNP in economics

Which of the following is an example of transfer payment:

a. Free meals in the company canteen

b. Employers’ contribution to social security

c. Retirement pension

d. Old-age pension

Answer : d. Old age pension

Calculate the nominal income and private income from the following data.

= 600 + 100 + 70 + (-20) + 10 – 30

= 780 – 50

= 730 crores

Private income = NNP – Net domestic product at factor cost accruing to government + Transfer payments + National debt interest

= 730 – 25 + (10+5) + 15

= 760 – 25

= 735 crores

Question 10

Providing the reason, explain whether the following are included in the domestic product of India.

• Profits earned by a branch of the foreign bank in India

Answer : Profits earned by a branch of the foreign bank in India will be included in the domestic income of India because the profits are earned within the domestic territory of India

Question 11

Providing the reason, explain whether the following will be included in the domestic product of India.

• Payment of salaries to its staff by an embassy located in New Delhi

Answer : Payment of salaries to its staff by an embassy located in New Delhi will not be involved in the domestic income of India as it is not a part of the domestic territory of India

Question 12

• Interest received by an Indian resident from its abroad firms

Answer : Interest received by an Indian resident from its abroad firms will not be included in the domestic income of India because it is the factor income from abroad.

Question 13

Microeconomics is different from macroeconomics because:

a. Microeconomics deals with economic behaviour

b. Microeconomics deals with individual behaviour

c. Microeconomics deals with prices only

d. Microeconomics deals with the government’s decisions

Answer : b. Microeconomics deals with individual behaviour

Question 14

Which of the following is an example of macroeconomics?

a. Price determination

b. Consumer’s equilibrium

c. Producer’s equilibrium

d. Inflation

Answer : d. Inflation

Question 15

What is national disposable income?

Answer : National disposable income is the type of an income that is obtainable to the whole economy for the spending purpose or for disposition.

It is computed as, NNP + Net current transfers from abroad (NDI)

Also Check:  Economics MCQs

Stay tuned to BYJU’S for more CBSE Class 12 economics important questions, question papers, sample papers, syllabus and Commerce notifications.

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Here’s what to know about changes to capital gains taxes in Budget 2024

If you get Global News from Instagram or Facebook - that will be changing. Find out how you can still connect with us .

Editor’s note: An earlier version of this story said Budget 2024 is proposing an increase in the capital gains taxation rate for any gains realized above $250,000. In fact, the inclusion rate for any capital gains realized above that amount is set to increase.

The federal government’s 2024 budget proposes changes to how capital gains are taxed, which could see the wealthiest Canadians pay up a bigger share of their returns.

The Liberals announced plans Tuesday to increase the inclusion rate on capital gains, which are the proceeds of the sale of an asset like a stock, income property or a business.

Under the proposal, the inclusion rate for annual capital gains realized above $250,000 for individuals would be taxed at a rate of two-thirds, up from the current 50 per cent. Any gains under that bar would continue to be taxed at the 50 per cent rate.

The changes would also apply to all capital gains realized by corporations and trusts, regardless of the $250,000 bar.

The proposed change, if adopted, would come into effect on June 25, 2024.

The tax system also provides a lifetime capital gains exemption in the instance of an individual selling their small business or a qualifying farm or fishing property. That exemption will remain and budget 2024 proposes expanding it to $1.25 million of eligible capital gains, up from just over $1 million currently.

The budget also proposes a new carve out for entrepreneurs, protecting the sell-off of some shares in specific instances. This incentive would apply to up to $2 million in capital gains per individual over a lifetime, and would see proceeds taxed at an inclusion rate of 33.3 per cent.

Selling a primary residence will remain excluded from capital gains taxes under the proposal.

Who will this affect?

The 2024 budget calls the current 50 per cent inclusion rate the “capital gains tax advantage.” Wealthy Canadians “disproportionately benefit” from this advantage, the budget notes, when compared to middle-income households.

“Differences in taxation rates between income earned from wages, capital gains, and dividends currently favour the wealthiest among us,” the budget read.

The federal government projects that 28.5 million Canadians will not have any capital gains income next year, while three million others are expected to have proceeds below the $250,000 annual threshold.

Only 0.13 per cent of Canadians – 40,000 individuals – are expected to pay more taxes on their capital gains in any given year, according to a budget. These Canadians have an average income of $1.4 million.

The federal government estimates that only 307,000 corporations in Canada (12.6 per cent) have capital gains and will be affected by the changes.

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