Namma Kalvi 12th Economics Unit 2 Surya Economics Guide em
Namma Kalvi 12th Economics Unit 2 Surya Economics Guide em
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UNIT
2 National Income
INTRODUCTION
NATIONAL INCOME : MEANING
National Income means the total money value of all final goods and services produced
in a country during a particular period of time (one year).
ACCOUNTING YEAR:
The financial year which the flow of income in an economy is recorded.
FINAL GOODS:
Goods which directly satisfies human wants.
INTERMEDIATE GOODS:
Goods which are used in the production process to produce other goods.
PER CAPITA INCOME:
This is the average income of the citizens of a country obtained after dividing national
income by living population.
SUBSIDIES:
economic assistance given to the producing unit by the state for compensating the cost
of product so that it is available to consumers at affordable prices.
AGGREGATES RELATED TO NATIONAL INCOME:
Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic
Product (GDP and NDP) – at market price, at factor cost; National Disposable Income (gross
and net), Private Income, Personal Income and Personal Disposable Income; Real and Nominal
GDP.
13. The financial year in India is …… 17. The value of national income adjusted
(a) April 1 to March 31 for inflation is called ….
(b) March 1 to April 30 (a) Inflation Rate
(c) March 1 to March 16 (b) Disposal Income
(d) January 1 to December 31 (c) GNP
(d) Real national income
14. When net factor income from abroad is
deducted from NNP, the net value is 18. Which is a flow concept ?
(a) Gross National Product (a) Number of shirts
(b) Disposable Income (b) Total wealth
(c) Net Domestic Product (c) Monthly income
(d) Personal Income (d) Money supply
15. The value of NNP at production point is 19. PQLI is the indicator of ………………
called …… (a) Economic growth
(a) NNP at factor cost (b) Economic welfare
(b) NNP at market cost (c) Economic progress
(c) GNP at factor cost (d) Economic development
(d) Per capita income
20. The largest proportion of national
16. The average income of the country is …. income comes from …….
(a) Personal Income (a) Private sector
(b) Per capita income (b) Local sector
(c) Inflation Rate (c) Public sector
(d) Disposal Income (d) None of the above
Answers
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a c b d d a a c b c a b a c a b c c b a
Nominal GDP
GDP deflator = × 100
Real GDP
Basis of
Personal Income Disposable Income
Difference
Personal income is the total income Disposable Income is also known as
received by the individuals of a country Disposable personal income. It is the
Meaning
from all sources before payment of individuals income after the payment
direct taxes in a year. of income tax.
Basis of
Personal Income Disposable Income
Difference
Personal income is never equal to This is the amount available for
the national income, because the households for consumption.
Implication former includes the transfer payments
whereas they are not included in
national income.
32. What is the solution to the problem of double counting in the estimation of national
income?
To avoid double counting, either the value of the final output should be taken into the
estimate of GNP or the sum of values added should be taken.
Double counting is to be avoided under value added method.
Any commodity which is either raw vi. To know a country’s per capita income
material or intermediate good for the which reflects the economic welfare of
final production should not be included. the country
For example, value of cotton enters vii. To know the distribution of income for
value of yarn as cost, and value of yarn various factors of production in the
in cloth and that of cloth in garments. country.
At every stage value added only should viii. To arrive at many macro economic
be calculated. variables like Tax – GDP ratio.
33. Write briefly about national income and PART - D
welfare
Answer the following questions in
National Income is considered as an about a page.
indicator of the economic wellbeing of
a country. 35. Explain the importance of national
The economic progress of countries is income.
measured in terms of their GDP per National income is of great importance for
capita and their annual growth rate. the economy of a country. Nowadays the
A country with a higher per capita national income is regarded as accounts of
income is supposed to enjoy greater the economy, which are known as social
economic welfare with a higher standard accounts.
of living. It enables us,
But the rise in GDP or per capita income
9. To know the relative importance of the
need not always promote economic
various sectors of the economy and their
welfare.
contribution towards national income;
34. List out the uses of national income. from the calculation of national income,
i. To know the relative importance of the we could find how income is produced,
various sectors of the economy and how it is distributed, how much is spent,
their contribution towards national saved or taxed.
income 10. To formulate the national policies such as
ii. To formulate the national policies such monetary policy, fiscal policy and other
as monetary policy, fiscal policy and policies; the proper measures can be
other policies adopted to bring the economy to the right
iii. To formulate planning and evaluate path with the help of collecting national
plan progress income data.
11. To formulate planning and evaluate plan
iv. To build economic models both in
short - run and long - run. progress; it is essential that the data
pertaining to a country’s gross income,
v. To make international comparison, output, saving and consumption from
inter - regional comparison and inter -
different sources should be available for
temporal comparison of growth of the
economic planning.
economy during different periods.
12. To build economic models both in short -
factor income plus net factor incomes the depreciation allowance and other charges.
from abroad. In short, 3. Unpaid services
Y = w + r + i + π + (R-P) A housewife renders a number of useful
services like preparation of meals, serving,
w = wages, r = rent, i = interest, π = profits, tailoring, mending, washing, cleaning, bringing
Precautions up children, etc. She is not paid for them and
Items not to be included her services are not directly included in national
1. Transfer payments are not to be included income. Such services performed by paid servants
in estimation of national income are included in national income.
2. The receipts from the sale of second hand 4 Income from illegal activities
goods should not be treated as part of Income earned through illegal activities
national income like gambling, smuggling, illicit extraction of
3. Windfall gains such as lotteries are also liquor, etc., is not included in national income.
not to be included
5 Production for self-consumption and
4. Corporate profit tax should not be
changing price
separately included
Farmers keep a large portion of food
Items to be included and other goods produced on the farm for self
1. Imputed value of rent for self occupied consumption. The problem is whether that part
houses or offices is to be included. of the produce which is not sold in the market
2. Imputed value of services provided by can be included in national income or not.
owners of production units (family labour)
6 Capital Gains
is to be included.
The problem also arises with regard to
37. What are the difficulties involved in the capital gains. Capital gains arise when a capital
measurement of national income? asset such as a house, other property, stocks or
shares, etc. is sold at higher price than was paid
1 Transfer payments
for it at the time of purchase. Capital gains are
Government makes payments in the excluded from national income.
form of pensions, unemployment allowance,
subsidies, etc. These are government 7 Statistical problems
expenditure. But they are not included in the There are statistical problems, too.
national income. Because they are paid without Great care is required to avoid double counting.
adding anything to the production processes. Statistical data may not be perfectly reliable,
2 Difficulties in assessing depreciation when they are compiled from numerous sources.
allowance 38. Discuss the importance of social
The deduction of depreciation allowances, accounting in economic analysis.
accidental damages, repair and replacement National Income and Social Accounting
charges from the national income is not an easy
National income is also being measured
task. It requires high degree of judgment to assess
by the social accounting method.
22. Assertion (A) :National Income is 26. Find the incorrect match.
considered as an indicator of the a. Firms Productive Activities
economic wellbeing of a country.
b. Households Employment generation
Reason (R) :The economic progress of c. Government Public bodies
countries is measured in terms of their d. Capital sector Savings and Investment
GDP per capita and their annual growth
rate 27. Which one of the following doesn’t
include ‘income of residents’?
a. Both (A) and (R) are true and (R) is the
a. GDP
correct explanation of (A).
b. NNP
b. Both (A) and (R) are true, but (R) is
c. GNP
not the correct explanation of (A).
d. None of the above
c. (A) is true, but (R) is false.
d. (A) is false, but (R) is true. 28. Remittances made by NRIs to India in the
context of national income accounting
23. Assertion (A) : Double counting is to be
iscalled as….?
included under value added method.
a. Remittance Income
Reason (R) : Any commodity which is either
raw material or intermediate good for the b. NRI Income
final production should not be included. c. Factor Payments
a. Both (A) and (R) are true and (R) is the d. All of the above
correct explanation of (A).
29. Who first introduced the concept of
b. Both (A) and (R) are true, but (R) is circular flow of income?
not the correct explanation of (A).
a. William Petty b. Adam Smith
c. (A) is true, but (R) is false.
c. David Ricardo d. Fancois Quesnay
d. (A) is false, but (R) is true.
30. Which one of the following is roughly
24. What is the formula for value of output?
equal to national income?
a. Price x Quantity Sold
a. GDP b. NNP
b. Profit x Quantity Sold
c. GNP d. SDP
c. Revenue x Quantity Sold
d. Cost x Quantity Sold 31. Why do not the sale or purchase of used
goods are not included in the GDP?
25. What we can get by deriving the following
a. Used goods have only limited life
equation? Private Final Consumption
+ Government Final Consumption b. Used goods are not fresh production
Expenditure + Gross Domestic Capital c. Used goods are included in the previous
Formation + Net Exports (Exports – GDP calculations
Imports) d. All the above
Reason (R) :Personal income is never equal 45. Assertion (A) :The receipts from the sale of
to the national income, because the former second hand goods should not be treated
includes the transfer payments whereas they as part of national income.
are not included in national income. Reason (R) :They do create new flow of
a. Both A and R are true and R is the goods or services in the current year.
correct explanation of A. a. Both A and R are true and R is the
b. Both A and R are true but R is not the correct explanation of A.
correct explanation of A. b. Both A and R are true but R is not the
c. A is true but R is false. correct explanation of A.
d. A is false but R is true. c. A is true but R is false.
43. Assertion (A) :Double counting is to be d. A is false but R is true.
avoided under value added method.
46. Assertion (A) :The deduction of
Reason (R) :Any commodity which is either depreciation allowances, accidental
raw material or intermediate good for the fi- damages, repair and replacement charges
nal production should not be included. from the national income is not an easy
task.
a. Both A and R are true and R is the
correct explanation of A. Reason (R) :It requires high degree of judg-
ment to assess the depreciation allowance
b. Both A and R are true but R is not the and other charges.
correct explanation of A. a. Both A and R are true and R is the
c. A is true but R is false. correct explanation of A.
b. Both A and R are true but R is not the
d. A is false but R is true.
correct explanation of A.
44. Assertion (A) :Transfer payments are not c. A is true but R is false.
to be included in estimation of national d. A is false but R is true.
income.
47. Assertion (A) :National income by
Reason (R) :These payments are not received product method is measured by the value
for any services provided in the current year of final goods and services at current
such as pension, social insurance etc. market prices.
Reason (R) : Economists calculate the real
a. Both A and R are true and R is the
national income at a constant price level by
correct explanation of A. the consumer price index.
b. Both A and R are true but R is not the a. Both A and R are true and R is the
correct explanation of A. correct explanation of A.
b. Both A and R are true but R is not the
c. A is true but R is false.
correct explanation of A.
d. A is false but R is true. c. A is true but R is false.
d. A is false but R is true.
57. Sum of all kinds of income received 61. Match the correct codes
by the individuals from all sources is FC + Indirect Taxes -
1 GNP i
called--------- Subsidies
a. Personal Income MP - Indirect Taxes +
2 X-M ii
Subsidies
b. Private Income 3 MP iii C + I + G + (X-M)
c. Personal Disposable Income 4 FC iv Net exports
d. None a. (1) – (i) (2) – (ii) (3) – (iv) (4) – (iii)
58. GNPMP is equal to b. (1) – (ii) (2) – (iii) (3) – (iv) (4) – (i)
c. (1) – (iv) (2) – (iii) (3) – (i) (4) – (ii)
a. GDPMP + NFIA
d. (1) – (i) (2) – (ii) (3) – (iii) (4) – (iv)
b. GDPMP - NFIA
62. Match the correct codes
c. GDPMP – D
Indirect tax
d. None 1 Net Indirect Taxes i
– Subsidies
Price x
59. Which of the following would be
2 Value of Output ii Quantity
included in the income approach to Sold
measure GDP? Relates to international
3 economic transactions of iii Households
a. Wages, profits, rents
the country.
b. Wages, profits, investment spending Consuming entities and
c. Wages, rents, investment spending, represent the factors of
Rest of the
4 production, who receive iv
consumption spending world sector
payment for services ren-
d. The value added in production dered by them to firms.
GDP stands for Gross Domestic BASIS FOR NOMINAL REAL GDP
Product. It represents the total market COMPARI- GDP
value of a country's output. SON
Meaning The aggregate Real GDP refers
It is the market value of all final goods
market to the value
and services produced within a given value of the of economic
period of time by factors of production economic output produced
located within a country. output in a given
produced period, adjusted
21. What are Difficulties in assessing in a year according to the
depreciation allowance? within the changes in the
boundaries of general price
The deduction of depreciation the country level.
allowances, accidental damages, repair is known
and replacement charges from the as Nominal
GDP.
national income is not an easy task. What is it? GDP without Inflation
It requires high degree of judgment to the effect of adjusted GDP
assess the depreciation allowance and inflation.
Expressed in Current year Base year prices
other charges.
prices or constant
22. Mention any two statistical problems prices.
as Difficulties in Measuring National Value Higher Generally, lower.
Income.
24. What is Gross Nation Product at Market
1. Accurate and reliable data are not Price (GNPMP)?
adequate, as farm output in the
subsistence sector is not completely Gross National Product at market price
informed. is Gross Domestic Product at market price plus
net factor income from abroad.
2. Different languages, customs, etc.,
GNPMP is the money value of all final
also create problems in computing
goods and services produced in the domestic
estimates.
territory of a country during a year plus Net
23. What is the features of GDPMP? factor income from abroad. i.e.,
The main features of GDPMP are: GNPMP = GDPMP + (X-M)
It includes only final goods and services
Where,
produced in the domestic territory of a
GNPMP = Gross National Product at market
country;
price
It includes consumption of fixed capital
GDPMP = Gross Domestic Product at market
(depreciation);
price
It is estimated at the prevailing prices.
1. The enterprises are classified into 6. What are the items should be included
various industrial groups. while estimating national income
2. Factor incomes are grouped under through income method?
labour income, capital income and 1. Imputed value of rent for self occupied
mixed income. houses or offices is to be included.
i) Labour income - Wages and 2. Imputed value of services provided
salaries, fringe benefits, employer’s by owners of production units (family
contribution to social security. labour) is to be included.
ii) Capital income – Profit, interest, 7. Write a note on social account method of
dividend and royalty national income.
iii)
Mixed income – Farming, sole i. National income is also being
proprietorship and other professions. measured by the social accounting
3. National income is calculated as method.
domestic factor income plus net factor ii. Under this method, the transactions
incomes from abroad. among various sectors such as firms,
5. What are the items should not be households, government, etc., are
included while estimating national recorded and their interrelationships
income through income method? traced.
4. Consider the following are the only − Purchase of goods from industry A
transactions take place in an economy: = Rs. 500+Rs. 800 − Rs. 400
(i) Industry A imports goods worth Rs. 100. = Rs. 900.
It sells goods worth Rs. 400 to industry
(iii) Value-added by industry C
B, 'goods worth Rs. 200 to industry C,
and goods worth Rs. 1,000 for private = Sale of goods to consumers
consumption.
+ Exports − (purchase of goods from
(ii) Industry B sells goods worth Rs. 500 to industry A+purchase
industry C and goods worth Rs. 800 for
of goods from industry B)
private consumption.
= Rs. 600+Rs. 500-Rs. 200-Rs. 500
(iii) Industry C sells goods worth Rs. 600 to
private consumption. and exports goods = Rs. 400.
,valUed at Rs. 500. Gross National Product at market prices, or
(iv)
Depreciation cost during the year GNPMP equals
amounts to Rs. 100, Rs. 1,500+Rs. 900+Rs. 400
(v) Government realises taxes of the value of
=Rs. 2,800
Rs. 100.
Calculate the following with the help of Gross National Product at factor cost or
net value added method from the data GNPFC equals
given above GNPMP − Indirect taxes + Subsidies
(a) GNPMP (b) GNPFC
= Rs. 2,800 − Rs. 100 + Rs. 50
(c) NNPMP and (d) NNPFC
= Rs. 2,750.
Answers
Net National Product at market prices, or
(A) GNPMP = Sum of net value added by all
NNPMP equals '.
the industries
(i) value-added by industry A . GNPMP − Depreciation
as factors of production and include things such as land, labour, capital and entrepreneurship.
Producers of goods and services incur a cost for using these factors of production. These
costs are ultimately added onto the price of the product.
The factor cost refer to the cost of production that is incurred by a firm when producing
goods and services.
Examples of such production costs include the cost of renting machines, purchasing
machinery and land, paying salaries and wages, cost of obtaining capital, and the profit margins
that are added by the entrepreneur.
The factor cost does not include the taxes that are paid to the government since taxes
are not directly involved in the production process and, therefore, are not part of the direct
production cost.
However, subsidies received are included in the factor cost as subsidies are direct inputs
into the production.
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