Test: National Income Accounting - 2 - UPSC MCQ

Transfer payments are unilateral ( one sided payments ) no corresponding flow of goods and services for example: donation, old age pension, unemployment allowance etc

Factors of production are the resources used in the production process to create goods and services. Factor payments are the incomes earned by these factors of production. An example of factor payments is an employer's contribution for social security. Here is a detailed explanation:
Factors of Production:
Factors of production are the resources used in the production process. They include land, labor, capital, and entrepreneurship. These factors are combined to produce goods and services.
Factor Payments:
Factor payments are the incomes earned by the factors of production. They are the rewards received for contributing to the production process. The four main types of factor payments are wages, rent, interest, and profit.
An Example of Factor Payments:
In the given options, the answer is B: Employer's contribution for social security. Here's why:
- Retirement pension: Retirement pension is a payment received by individuals after they retire. It is not a factor payment as it is not directly related to the production process.
- Employer's contribution for social security: This refers to the amount contributed by employers towards the social security system. It is a factor payment as it is directly linked to the employment of labor.
- Old age pension: Old age pension is a payment received by individuals when they reach a certain age. It is not a factor payment as it is not directly related to the production process.
- Unemployees' contribution for social security: This refers to the amount contributed by unemployed individuals towards the social security system. It is not a factor payment as it is not directly linked to the production process.
In conclusion, an example of factor payments is an employer's contribution for social security. It is a reward received by the factor of production (labor) for their contribution to the production process.

Definition of Consumption Goods:
Consumption goods are products or services that are purchased by individuals or households for personal use or satisfaction of wants.
Detailed Explanation:
Consumption goods are an essential part of our daily lives as they fulfill our wants and needs. Here is a detailed explanation of consumption goods:
1. Definition:
- Consumption goods are items that are bought and used by individuals or households for their personal satisfaction or to meet their needs and wants.
2. Types of Consumption Goods:
- Nondurable Goods: These are items that are used up or consumed quickly, usually within a short period. Examples include food, beverages, toiletries, and fuel.
- Durable Goods: These are items that are designed to last for a longer period and provide utility over time. Examples include cars, furniture, electronics, and appliances.
- Services: These are intangible actions or tasks performed by others in exchange for payment. Examples include haircuts, transportation services, healthcare services, and entertainment.
3. Purchased by Consumers:
- Consumption goods are primarily purchased by consumers, which include individuals or households. Consumers buy these goods to satisfy their personal needs, desires, or wants.
4. Importance:
- Consumption goods play a significant role in stimulating economic growth as consumer spending drives demand in the market.
- They contribute to improving the standard of living and overall quality of life for individuals.
- Consumer spending on consumption goods also influences business decisions, production levels, and employment opportunities.
5. Not Limited to Banks, Investors, or Producers:
- Consumption goods are not limited to the purchase or use by banks, investors, or producers.
- Banks provide financial services and products, but they do not directly consume these goods.
- Investors invest in various assets, including stocks, bonds, or real estate, but they do not consume these goods themselves.
- Producers, such as manufacturers or service providers, may use consumption goods in the production process, but the ultimate consumption is by consumers.
Therefore, the correct answer is D. Consumption goods are primarily bought and consumed by consumers to satisfy wants and needs.

Goods which are consumed for their own sake to satisfy current wants of consumers directly are called consumption (or consumer) goods.

Capital goods are fixed assets of producers which are repeatedly used in production of other goods and services. Alternatively durable goods which are bought for producing other goods but not for meeting immediate needs of the consumer are called capital goods. 

Durable Goods:
- Durable goods are products that have a long lifespan and are used over an extended period of time.
- These goods are tangible and can withstand repeated use or consumption.
- Examples of durable goods include appliances, furniture, vehicles, electronics, and machinery.
- Durable goods are typically more expensive and are meant to last for several years.
- They are often considered investments as they provide long-term value to the consumer.
- Durable goods can be used for personal or business purposes.
- They are typically purchased less frequently compared to non-durable goods.
- Durable goods contribute to the economy by generating revenue and creating jobs in manufacturing and related industries.
Example of Durable Goods:
- Fan: A fan is a durable good as it is a mechanical appliance that is designed to provide cooling and air circulation. It is built to last for several years and can be used repeatedly.
- Other examples of durable goods include refrigerators, washing machines, cars, laptops, and power tools.
Conclusion:
Durable goods are long-lasting products that provide value over an extended period of time. Examples of durable goods include fans, appliances, vehicles, and electronics. These goods are built to withstand repeated use and contribute to the economy by generating revenue and creating jobs.

An example of non-durable goods is milk.
Non-durable goods are products that have a short lifespan and are typically consumed or used up quickly. They are often perishable and cannot be stored for long periods of time. Milk is a perfect example of a non-durable good because it spoils relatively quickly and cannot be used once it has expired.
Here is a breakdown of why milk is considered a non-durable good:
1. Perishability: Milk is a perishable product that has a limited shelf life. It needs to be refrigerated and consumed within a certain period of time before it spoils.
2. Consumption: Milk is a consumable product that is typically used up quickly. Once opened, it needs to be consumed within a few days to ensure freshness and quality.
3. Storage limitations: Milk cannot be stored for long periods of time without spoiling. It requires proper refrigeration to maintain its freshness and prevent bacterial growth.
4. Short lifespan: Compared to durable goods like televisions or microwaves, milk has a significantly shorter lifespan. It cannot be used or consumed once it reaches its expiration date.
In contrast, durable goods like televisions and microwaves are designed to last for a longer period of time and are not meant to be consumed or used up quickly. They can be stored and used repeatedly over an extended period without losing their functionality.
Therefore, milk is an example of a non-durable good due to its perishability, limited shelf life, and the need for proper storage and consumption within a short period of time.

Semi Durable Goods
Semi durable goods are products that have a longer lifespan than non-durable goods but a shorter lifespan than durable goods. These goods are typically used repeatedly over a period of time but eventually wear out or become obsolete. An example of semi durable goods is crockery.
Explanation:
Crockery refers to dishes, plates, bowls, and other utensils used for serving and eating food. Here's why it can be classified as a semi durable good:
1. Longer lifespan: Crockery is designed to withstand repeated use and can last for a relatively long time compared to non-durable goods like paper plates or disposable cutlery.
2. Regular use: Crockery is used on a daily basis for serving meals, making it a semi durable good that fulfills a basic need.
3. Subject to wear and tear: While crockery may have a longer lifespan, it is still susceptible to damage or breakage over time due to accidents or mishandling.
4. Replacement cycle: Unlike durable goods such as furniture or appliances that may last for many years, crockery often needs to be replaced or replenished periodically as individual pieces become damaged or worn out.
5. Style and design changes: Crockery may also become obsolete or less desirable over time as trends and preferences in tableware change, prompting consumers to update their sets.
In conclusion, crockery is considered a semi durable good due to its longer lifespan compared to non-durable goods, regular use, susceptibility to wear and tear, periodic replacement needs, and potential for becoming outdated.

Capital goods are man-made, durable items businesses use to produce goods and services. They include tools, buildings, vehicles, machinery and equipment.
Capital goods are also called durable goods, real capital, and economic capital. Some experts just refer to them as "capital." This last term is confusing because it can also mean financial capital. In accounting, capital goods are treated as fixed assets. They’re also known as “plant, property, and equipment.”

Consumer goods are ultimately consumed, rather than used in the production of another good. For example, a microwave oven or a bicycle that is sold to a consumer is a final good or consumer good, but the components that are sold to be used in those goods are intermediate goods.

Intermediate goods or producer goods or semi-finished products are goods , such as partly finished goods, used as inputs in the production of other goods including final goods. A firm may make and then use intermediate goods, or make and then sell, or buy then use them.

Explanation:
In final goods, value cannot be added anymore. This means that the final goods have already gone through the production process and any additional value cannot be added to them. The value has already been determined through the production process and cannot be increased further.
Reasoning:
When goods are produced, value is added at each stage of the production process. However, once the goods reach the final stage and become final goods, no further value can be added to them. The value of the final goods is determined by the inputs and processes used during production, and it cannot be increased after the goods are completed.
Key Points:
- Value is added to goods during the production process.
- Final goods have already gone through the production process.
- Once goods reach the final stage, no further value can be added.
- The value of final goods is determined by the inputs and processes used during production.
- Value cannot be increased after the goods are completed.
Therefore, the correct answer is C: Value cannot be added anymore.

The two sectors in a two-sector circular flow model are the firm sector and the household sector.
Explanation:
The circular flow model is a simplified representation of the flow of goods, services, and money in an economy. It shows the interdependence between different sectors of the economy. In a two-sector circular flow model, there are only two sectors involved: firms and households.
1. Firm Sector:
- Firms are the producers of goods and services in an economy.
- They hire factors of production such as labor, capital, and land.
- Firms produce goods and services, which are sold to the households.
2. Household Sector:
- Households are the consumers of goods and services in an economy.
- They own and supply factors of production to the firms.
- Households receive income from the firms in the form of wages, rent, interest, and profits.
- They use this income to purchase goods and services from the firms.
The Flow of Resources and Income:
- Factors of production (labor, capital, land) flow from households to firms.
- Firms use these resources to produce goods and services.
- Goods and services flow from firms to households.
- Households consume these goods and services.
- In return for the resources provided, households receive income from the firms.
- This income is used by households to purchase goods and services from the firms, completing the circular flow.
Conclusion:
In a two-sector circular flow model, the two sectors involved are the firm sector, which produces goods and services, and the household sector, which consumes these goods and services. The flow of resources and income between these two sectors forms the basis of the circular flow model.

The three sectors in a three-sector circular flow model are:
1. Firm:
- Firms are economic units that produce goods and services.
- They employ factors of production such as labor, capital, and raw materials to produce goods and services.
- Firms sell their products to households and the government and receive revenue in return.
2. Household:
- Households are the consumers in the economy.
- They provide factors of production such as labor and capital to firms in exchange for wages, salaries, and profits.
- Households purchase goods and services from firms and pay for them using their income.
3. Government:
- The government sector includes all levels of government, such as local, state, and federal government.
- The government collects taxes from households and firms and uses the revenue to provide public goods and services.
- The government also purchases goods and services from firms and pays for them using tax revenue.
The interactions between these three sectors create a circular flow of income and expenditure in the economy. Firms produce goods and services, which they sell to households and the government. In return, firms receive revenue from these transactions. Households provide labor and capital to firms and receive income in the form of wages, salaries, and profits. They use this income to purchase goods and services from firms. The government collects taxes from households and firms and uses the revenue to provide public goods and services. The government also purchases goods and services from firms, contributing to the circular flow of income.

Gross National Income = Gross Domestic Income + Net Factor Income from Abroad

where,
Net Factor Income from Abroad = Factor Income earned from Abroad- Factor Income Paid Abroad
Thus, from here we can derive that Domestic Factor Income will be greater than the National Income when Factor income paid Abroad is more than Factor income earned from Abroad.

What must be added to domestic factor income to obtain national income?
To obtain national income, the following must be added to domestic factor income:
Net factor income earned from abroad:
- This includes income earned by domestic factors of production (such as labor and capital) from their participation in foreign economic activities.
- It represents the difference between income received from abroad and income paid to foreign factors of production within the domestic economy.
In summary, to obtain national income, net factor income earned from abroad needs to be added to domestic factor income. This ensures that all income generated domestically and internationally is accounted for in the calculation of national income.

To determine which one of the statements is true, let's analyze each option:
A: Royalty is not a factor income
- Royalty refers to the payment made to the owner of an asset or property for the use of their intellectual property rights, such as patents, copyrights, or trademarks.
- Royalty income is considered a factor income because it is a payment received for the use of a factor of production, in this case, intellectual property.
B: Rent is a factor income
- Rent refers to the payment made for the use of a property or asset, such as land or buildings.
- Rent income is considered a factor income because it is a payment received for the use of a factor of production, in this case, land or capital.
C: Subsidies is a factor payment
- Subsidies refer to financial assistance provided by the government or other organizations to support certain economic activities or industries.
- Subsidies are not considered factor payments because they are not payments made for the use of a factor of production.
D: Tax is a factor income
- Tax is a compulsory payment made by individuals or businesses to the government to fund public services and programs.
- Tax is not considered a factor income because it is not a payment received for the use of a factor of production.
Based on the analysis, the true statement is:
B: Rent is a factor income.

It is possible for GDP to be higher than GNP and it is also possible for GNP to be higher than GDP. GNP greater than GDP is best for a country because it means that the population of that country will have a greater total income (i.e. total output) than if GDP was greater than GNP.

Yes, the change in inventories can be negative.
Explanation:
- The change in inventories refers to the difference between the ending inventory and the beginning inventory over a specific period.
- If the ending inventory is less than the beginning inventory, it indicates a decrease in inventories, which is considered a negative change.
- There are several reasons why the change in inventories can be negative:
- Sales may exceed production or purchasing, leading to a decrease in inventory levels.
- Obsolete or damaged inventory may be written off, resulting in a decrease in inventory.
- Seasonal or cyclical fluctuations in demand may lead to a decrease in inventory levels.
- Inventory adjustments or corrections may result in a decrease in inventory.
- It is important to note that a negative change in inventories does not necessarily indicate a problem. It can be a normal part of business operations and may be planned or expected in certain situations.
- Negative changes in inventories can have implications for financial reporting and analysis. It can affect the cost of goods sold, gross profit, and ultimately the net income of a company.
- Understanding and analyzing the reasons behind negative changes in inventories can provide valuable insights into a company's operations and financial performance.

Can the net indirect taxes be negative?
Yes, the net indirect taxes can be negative. Here is a detailed explanation:
Definition of net indirect taxes:
Net indirect taxes refer to the difference between indirect taxes collected by the government and subsidies given by the government. It is calculated by subtracting the amount of subsidies from the total amount of indirect taxes collected.
Factors that can lead to negative net indirect taxes:
1. High subsidies: If the government provides more subsidies than the amount of indirect taxes collected, the net indirect taxes can become negative.
2. Economic conditions: During an economic downturn or recession, the government may increase subsidies to stimulate the economy. This can result in negative net indirect taxes.
3. Policy decisions: Governments may implement policies to promote certain industries or sectors by providing subsidies. If the subsidies provided exceed the indirect taxes collected from those industries, the net indirect taxes can be negative.
Significance of negative net indirect taxes:
1. Economic stimulus: Negative net indirect taxes indicate that the government is providing more support to the economy through subsidies than it is collecting through indirect taxes. This can help boost economic growth and consumer spending.
2. Redistribution of wealth: Negative net indirect taxes can also be a reflection of efforts to redistribute wealth by providing subsidies to lower-income individuals or disadvantaged sectors.
Conclusion:
In conclusion, net indirect taxes can indeed be negative. This can occur when the amount of subsidies provided by the government exceeds the amount of indirect taxes collected. It is important to consider the economic conditions and policy decisions when analyzing the net indirect taxes.

Answer:
Introduction:
The net factor income earned from abroad refers to the income earned by individuals or entities in one country from their investments or work in another country. It includes income from sources such as wages, salaries, interest, dividends, and profits. The net factor income earned from abroad can be positive or negative, depending on various factors.
Explanation:
There are several reasons why the net factor income earned from abroad can be negative. Here are some key points to consider:
1. Trade imbalances: If a country imports more goods and services than it exports, it may result in a negative net factor income. This is because the country is paying more for imports than it is earning from its exports.
2. Repatriation of profits: Multinational corporations often repatriate their profits back to their home country. If the profits earned in a foreign country are greater than the income earned by foreign entities in the home country, it can lead to a negative net factor income.
3. Investment income: If a country's investments abroad generate less income than the income earned by foreign investors in the home country, it can result in a negative net factor income.
4. Exchange rates: Fluctuations in exchange rates can also affect the net factor income earned from abroad. If the value of a country's currency depreciates, it can reduce the income earned from foreign investments and result in a negative net factor income.
5. Economic conditions: Economic recessions or downturns can impact the profitability of foreign investments, leading to a negative net factor income.
Conclusion:
In conclusion, the net factor income earned from abroad can indeed be negative. Factors such as trade imbalances, repatriation of profits, investment income, exchange rates, and economic conditions can all contribute to a negative net factor income. It is important for countries to monitor and manage these factors to maintain a positive net factor income and ensure a healthy balance of payments.