Extra Questions Answers - National Income Accounting, Related Concept, Measurement Notes | Study Crash Course of Macro Economics -Class 12 - Commerce

Commerce: Extra Questions Answers - National Income Accounting, Related Concept, Measurement Notes | Study Crash Course of Macro Economics -Class 12 - Commerce

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(Q1) What is current replacement cost ?

Ans: It refers to the estimated value of depreciation for all the producing units in the economy, during the period of an accounting year.

(Q2) Production of defence goods is a limitation of GDP as an index of social welfare. How ?
Ans: Because, defence goods to not make any direct contribution to the  welfare of the individuals and households of a country. 

(Q3) Mr. Ram is an employee of XYZ company. He takes an interest free loan from his       employer of Rs. 5 lakhs for the marriage of his daughter. However interest is paid by employer on interest free loan provided by him to Mr. Ram. How you will treat interest free loan in calculation of compensation of employees.

Ans: (i) Interest free loan taken by Mr. Ram is not included in compensation as loan has to be paid by him to his employer. It does not matter if it is interest free loan.

(ii) Interest on Interest free loan paid by his employer will be included in case as it is paid by employer but it is for the benefit of employee.

(Q4) How can estimates of GDP using income method and expenditure method be identical when households do not spend their entire income on the purchase of goods and services, and a part of them remain unsold during an accounting year ?

Ans: Goods which remain unsold during the year are treated as a part of change in stock during the year. These goods become a part of inventory investment of the producers.

(Q5) Mr. Shyam has an old house and now wants to build a new floor on the old house. How the value of the new floor will be treated while calculating national income.

Ans: Only the value of the new floor will be included in national income as it is a               construction of an additional floor   

(Q6) Should purchase of wheat in the wholesale market be treated as the purchase of final good ?   
Ans: Depends upon of type of purchaser.

(Q7) Although India’s GDP is increasing, but the welfare of the people is not increasing with that pace. Do you think that concept of “Green GNP” should be followed ?

Ans: Yes, the concept of Green GNP can be followed.

(Q8) The plastic industry contributes to GDP of the country. However, it is not considered as an index of social welfare. Why ? Identify the value highlighted.

Ans: The value highlighted is “Environment Conservation”.

(Q9) Suppose X Ltd. purchases 10 tonnes coal in 2011 for making glasses. Only 7 tonnes coal was used up in 2011. Classify into intermediate good and final good ?

Ans: Now, 7 tonnes coal will be taken as intermediate goods and  remaining 3 tonnes coal will be treated as final goods and will be included in National Income

(Q10) How do you classify the expenditure by households on painting, plumbing, and repairs of air-conditioning system in residential buildings ?

Ans: Such expenditure is intermediate consumption of households. 

(Q11) “ The government has withdrawn subsidy on petrol in the domestic market. But Petrol is now selling cheaper than before.” Do you think the withdrawal of subsidy has led to a rise in real income of the people in India ? Frame your answer in the context of price of petrol in the  international market.

Ans: The bulk of domestic supply of petrol is met through imports. The price of petrol in the international market has so significantly reduced that, even after withdrawal of subsidy in the domestic market, petrol is available to the people cheaper than before. Thus, real income of the people has risen not because of withdrawn of subsidy, but because of a substantial fall in price of petrol in the international market , leading to a substantial fall in price in the domestic market.

(Q12) Distinguish between old-age pension and retirement pension in estimation of national income.

Ans: Old-age pension is given on account of being old and, therefore, it is a unilateral payment.  Being a transfer payment, it is net included in estimation of national income.  

 Retirement pension is like a deferred wage is paid for rendering services prior to his retirement.  Being a factor payment, it is included in national income.

(Q13)  Are Inventory and Change in inventory stock variables or flow variables?  Give reasons.

Ans: Inventory refers to the stock of finished goods, semi-finished goods and raw material which a firm carries from one year to the next year.  Being a part of capital, inventory is a stock variable. Change in inventory is a flow variable because it is the addition or fall in the stock of capital over a period of time.

(Q14) During a given year nominal national income increased by 12% while the real national income increased by only 5%.  Population increased by 2%.  What has caused the difference between nominal income and real income?  What is real per capita rise in income?

Ans: Change in nominal income over a year occurs due to (i) change in quantity of goods and services and (ii) change in price level.  But change in real income occurs due to change in quantity of goods and services only.Hence, a change of 12% in nominal national income is partly on account of 5% change in quantity of goods and services and the balance 7% (= 12 -5) must be due to rise in price level.

 Real per capital rise in income = Rise in real national income – Rise in population 

 = 5% - 2% = 3%.

(Q15) . A firm dumps its factory wastage in a nearby river.  The other situation is people use public park for their daily morning walk.  What do both the situations indicate in the context of value of environment pollution and economic welfare?

Ans: The first situation indicates negative externality because industrial waste falling in nearby rive causes water pollution resulting in loss of economic and social welfare.  

 The second situation indicates positive externality because public parks and gardens promote public health and economic as well as social welfare.

(Q16) How far do you justify government expenditure on (i) providing free education and (ii) taking care of aged parents?  Name any two values highlighted in the question.

Ans: Being a welfare state, government is fully justified in making expenditure on social welfare schemes like providing free education and giving old-age pension.  We all know that illiteracy has been one of the main causes of underdevelopment of the Indian economy.  So free education can give a great impetus to rapid growth of the country.  Similarly , providing old-age pension and other facilities to aged parents and senior citizens justifies government claim of being a welfare state.

Values –
(i) social responsibility towards aged.  

(ii) Providing education to all which is their basic right.

(Q17) GDP calculations do not include directly social costs of environmental damages like global warming, acid rain, etc.  should these costs be included in calculation of GDP ?

Ans: To this  extent GDP is not a correct index of economic welfare.  As a result welfare decreases whereas welfare means sense of material well being among the people.  Therefore, to get true picture of welfare, social costs of environmental damages should be included in GDP.

(Q18) Define term ‘normal resident’.  Mention three main categories of normal residents of a country by giving examples.

Ans: Normal residents can be of three types.  They include:

(a) Nationals of a country residing in the country of which they are the nationals, such as Indians living in India.

(b) Nationals of a country living abroad temporarily (for less than one year) but their interest lie in the country of which they are the nationals such as Indians living temporarily in the foreign countries.

(c) Foreigners living in a country for more than one year.

(Q19)  What do you mean by fixed investment and inventory investment ?  Give examples

Ans: Fixed investment means addition to the stock of fixed capital assets during a year e.g., expenditure on the purchase of machines, building etc.  It raises the production capacity of the economy. Investment in the stock of finished goods, semi-finished goods and raw-material is called inventory investment.  Inventory of finished goods is essential to meet the rising demand and inventory of raw-material is essential to avoid the situation of shortage.

(Q20) Is expenditure on replacement of engine in a car owned by a corporate enterprise, intermediate consumption ?

Ans: Although the expenditure on the new parts of the fixed assets in included in intermediate consumption, but for this two essential conditions are 

(i) the life of the new parts may be around one year or slightly more and 

(ii) the vale should be relatively small. 

Thus, replacement of engine does not quality for intermediate consumption.  So replacement of engine does not fall under intermediate consumption.  It is treated as replacement cost which is a part of gross investment.

(Q21) What causes change in stock of goods ?

Ans: Change in inventory stock is caused by two factors :

(a) Unexpected fall in demand in the current year : Due to unexpected to fall in demand, sales during the current year reduces leading to increase in stock.

(b) Expected rise in demand in the near future : Producers may expect a rise in demand and hence increase in price in near future.  Accordingly, they wish to maintain larger stocks to earn more profits in future.

(Q22) Operating surplus does not arise in (i) subsistence sector and (ii) general government sector.  Explain why so?

Ans: (i) In the subsistence sector production is meant only for the subsistence of the producing families, as there is no marketable surplus Therefore, there is no operating surplus here.  

(ii) In the general government sector, production is meant for collective consumption.  Goods and services are not produced for sale in the market but for the general welfare of the people.  The government makes these produced goods and services available to the people either free of cost or at a nominal price.  It is not meant for sale in the market.  For example, services of law and order, defence etc are produced free of cost.  Accordingly, there is no operating surplus in the general government sector.

(Q23) What is the difference between planned and unplanned inventory accumulation?  Writes down the relation between change in inventories and value added of a firm.

Ans: Inventory accumulation may be planned or unplanned.  In case of an unexpected fall in sales of a firm, the firm will have unsold stock of goods which is called unplanned inventory accumulation. And when the firm wants to raise inventories, it is called planned inventory accumulation.  This can be illustrated with the help of an example.  

Suppose a firm manufactures shirts.  In the beginning of the year it has an inventory of 1000 shirts.  During the coming year, it expects to sell 10,000 shirts.  Therefore, it manufactures 10,000 shirts while maintaining the inventory of 1000 shirts at the and of the year.  But during the year sales were unexpectedly low.  The firm sells only 6000 shirts which means that firm is left with 4000 unsold shirts.  The closing stock then becomes 5000 shirts (4000 + 1000).  This increase of stock by 4000 shirts is thus an of unplanned accumulation of inventories.

(Q26) ‘ If depreciation reserve fund is not maintained, production capacity in the economy would tend to go down’.  Do you agree?  Give reasons in support of your answer.

Ans: Depreciation is the normal wear and tear of assets in an economy.  An amount is kept aside as reserves called the depreciation reserve.  Money is transferred into this reserve at the end of every year throughout the assets useful life.

The economy has already amassed sufficient funds to replace the assets when they stop working and hence avoiding any hindrance in the growth of an economy.

(Q27) To promote the rate of growth of the economy, India needs to pay more attention to high-tech industries.  Do you agree ?

Ans: One can agree and disagree. High-tech industries have high value-added , hence they result the  accelerated growth.  But these industries are low on employment.  Thus, one finds growth and joblessness.

(Q28)  How are the following treated in national income ?

(a) Pocket money received from parents.

(b) Examination fees paid by students to CBSE.

(c) Payment of bonus to school employees by the management.

(d) Income tax collected by the Income Tax Department

(e) Change in stocks of goods at a departmental store

(f) Corporation tax collected by government.


(a) It is not included in national income.  It is a transfer payment.

(b) Examination fees are paid against services and hence are included in national income.

(c) It is a form of compensation to employees and hence a part of national income.

(d)  Income tax is a transfer payment and hence is not included in national income.

(e) Change in stocks is a part of capital formation and hence is included in national income.

(f) It is paid out of the profits of a corporate and hence is a part of national income.

(Q29) The government asserts the MGNREGA is to be related to asset creation.  How would you evaluate this statement ?

Ans: The government has specified that work finished under MGNREGA will either create  a new asset or will link up to an existing asset earlier created under MGNREGA.  Work done under MGNREGA results in the creation of assets in villages like canals or ponds.  This results in positive externalities for the overall society.

(Q30)  It is important to increase disposable income more than national income.  Do you agree?

Ans: In a well-governed society, higher consumption results in more income for the producers and hence more saving and incentive for investments.  

 To promote personal disposable income the government may reduce income tax rates, and also reduce excise duties on consumer goods.

(Q30) GDPMP is a better measure of welfare than GDPFC.  Comment.

Ans: The difference between market process and factor costs is the value of net indirect taxes that are collected by the government. This amount also defines the government’s ability to spend money on welfare programmes.

(Q31) How shall the free services provided by the owners of the production units be treated while estimating National Income?

Ans: It should be noted that the ‘Imputed Value’ of these must be included in national Income.

(Q32) ‘Rapid urbanization and industrialization have brought about a rise in real GDP.’  Analyse this finding with reference to GDP as an indicator of welfare.

Ans: Both rapid urbanization and industrialization undoubtedly have contributed to a rise in real GDP, but at the same time they have led to negative externalities like pollution of water, air, global warming, soil erosion etc.  

 Due to deforestation pollution created is very harmful for people.  Urbanization and industrialization has led to increasing production, which increases welfare, but creating pollution reduces welfare.

(Q33) The vegetables grown in kitchen gardening are final goods, yet their value is not considered in estimating national income.  Why?

Ans: Such transactions (termed as Non-Market Transactions) are not considered in estimating national income because it is difficult to ascertain their market value. Moreover, such transactions are not done for the purpose of earning income

(Q34) Who all are considered as the residents of a country ?

Ans: Residents of a country include its individuals, firms and government agencies.

(Q35)  A Soft Drinks Company purchases 20 trucks for the transportation of soft drinks from the factory to the wholesale agents.  Whether the trucks purchased will be treated as final good or intermediate good?

Ans: Trucks purchased by the company are final goods as they are purchased for investment

(Q36) Explain the economic value of high component of net exports (X – M) in the total expenditure on final goods and services.

Ans: High component of ‘X – M’ in the total expenditure on final goods and services is a sign of higher exports than imports of the domestic economy.  It implies.

(a) That the inflow of foreign exchange (on account of exports) is greater than the outflow of foreign exchange (on account of imports).  Accordingly, balance of trade is favourable.

(b) That the domestically produced goods are able to find markets abroad &  deficiency of domestic demand no longer remains a hurdle in the growth process of the domestic economy.

(Q37) How does higher rate of net capital formation lead to higher level of productivity/efficiency of labour ?

Ans: Higher rate of net capital formation implies greater availability of capital (in terms of machines) per unit of labour. Aided by machines, efficiency of labour definitely increases. This precisely is the reason why labour in developed countries (like USA) is more efficient than in less developed countries like India.

(Q38) An ambassador in US embassy in India stays in his job for a period exceeding one year. Would he be treated as a resident or non-resident of India? Give reason. 

Ans: Accordingly, US ambassador in India would be treated as non-resident of India, even when his stay in India exceeds the period of one year.

(Q39) The government of India has launched a scheme of ‘cash transfers’ to the people below poverty line. Would you consider these transfers as a part of domestic income of the country?

Ans: No. Because these are just transfer payments, not related to factor services rendered by the beneficiaries.

(Q41) The government claims that demonetisation of 500 and 1,000 rupee notes will lead to GDP growth. Do you agree ?

Ans: Demonetisation will shrink the shadow economy (black money economy).       Unaccounted GDP would now become accounted GDP. Accordingly, GDP growth would look to be higher than before, even when real output in the economy remains the same.

(Q42) Export are just sales yielding revenue, not income. Comment.

Ans: It is true that exports are just sales and yield revenue, not income. Exports are just sales because these are purchases of rest of the world from the domestic economy. Accordingly, exports yield revenue (receipts from sales). These do not yield income is in the form of rent, interest, profit or wages. Exports do not yield any of these directly.

(Q43) Mona purchased a car worth Rs. 4,50,000 to commute between her home and the office.Would you treat it as an intermediate consumption and therefore not included in the estimation of national income ? Justify your answer.

Ans: Car purchased by Mona will not be treated as intermediate good. Because, Mona is not using her car for purpose of value adding through intermediate                           consumption. Mona’s car would be treated as a final good, being finally used by her as a consumer durable. Mona’s expenditure on car would be treated as private final consumption expenditure.

(Q44) In what sence can defence and security services provided by the government be treated as intermediate services?

Ans: Defence and security services provided by the government can be treated as intermediate services in the sence that these services offer a peaceful environment to the producers for the production of goods and services.

(Q45) Cash transfer of subsidy on LPG raises annual income of the households. Does it mean a rise in domestic income ? Justify your answer.

Ans: No. Cash transfer of subsidy is to be treated as transfer payment. Of course, it increases annual income of the households. But this increase is not related to factor services rendered by the households. 

(Q46) ‘ If primary sector produces intermediate goods, then tertiary sector mostly produces final goods’. Comment.

Ans: Primary sector includes agriculture and its allied activities. It produces foodgrains, raw-material and other intermediate goods. However tertiary sector includes, insurance, transportation, communication etc. It produces various types of services which are of final nature. Hence the above statement seems to be true.

(Q47) ‘ Indian government sanctioned Rs. 1500 crores to farmers for drought affected areas; will it be a part of national income ’ ? Illustrate.

Ans: No, it is a financial help by the govt. to farming sector, therefore considered as a transfer earning. It cannot be claimed as a factor earning, therefore there is no value addition in it and not a part of national income.

(Q48) GDP growth rate in India for the last few years is more than 6% but still more than 28% of population lying below poverty line. Explain any two factors responsible for it.

Ans: (i) Unequal distribution of GDP (ii) Rise in price level.

(Q49) ‘GDP of a nation rose by 6%’, does it represent real growth of the country ?

Ans: No, because inflationary growth must be discounted from it.

(Q50) ‘ GDP does include all the economic transactions in it ’ Comment on it with the reference of Indian Economy.

Ans: Indian economy is an underdeveloped economy. There occur several non-monetary transactions. In rural India, people exchange some goods with other goods or exchange goods with services without involving money. Money value of such transactions is excluded from GDP. Thus GDP is not a true index of all the transactions of the country.

(Q51) National income rose by 8% during the year 2011, does it represent the growth of every Indian ? Discuss.

Ans: No , because national income includes the factor income of all the factors of a nation. It does not analyse the distribution of income of every Indian. Some people might have very high income while others income might be negligible. Thus 8% growth of national income does not mean equivalent growth of every Indian.

(Q52) Why comparing the GDP of various nations might not tell you which nation is better off ?

Ans: Because, well being of nation or standard of living of people is measured through per capita income and distributional pattern of income, which is not reflected through GDP.

(Q53) ‘ In GDP, we take into account production of Horlicks and Pizzas.’  Analyse the statement the context of adequacy of GDP as an indicator of welfare.      

State two reasons as to Per Capital Real GDP by itself not being an adequate indicator of economic welfare.

‘All product may not contribute equally to the economic welfare.’ Explain with examples.

Ans: GDP as an indicator of welfare by itself is not adequate indicator because it includes all final products, whether they contribute to welfare or lead to decline in welfare.  In the given example, Horlicks contributes to welfare as it contributes to good health, whereas pizzas are junk food which are harmful to good health , thus their consumption brings about a decline in welfare.

(Q54) How are the following treated while estimating private final consumption expenditure?  

(a) Exports.

(b) Direct purchases made abroad by resident households.

(c) Final consumption expenditure of non-profit institutions serving households.

(d) Change in stocks.

Ans: (a) Exports will not be included in private final consumption expenditure as export do not reflect consumption expenditure by residents.

(b) It will be included in private final consumption expenditure as such purchases are meant for consumption.

(c) It will be included in private final consumption expenditure as non-profit institutions serving households are a component of household sector.

(d) It will not be included in private final consumption expenditure as it is a component of capital formation.

(Q55)  If the government spends on providing iron-supplement tables to girls in all schools and colleges across India, analyse its impact on GDP and welfare of the people.

(Q56) Mention any one positive externality arising from a morning walk in a part in the neighbourhood.

(Q57) ‘Production of eco-friendly products is beneficial for an economy.’  Examine this fact in the light of real GDP as an indicator of welfare.

(Q58) Abhinav and his friends use public park for their daily morning walk and no payment is made by them for this. What does this indicate and identify the economic value it signifies ? 

(Q59) Explain the term ‘normal residents of a country’.Are the following normal resident of India

(a) Indians employed in WHO located in India    (b) A Russian tourist staying in India.

(Q60)  Mothers or housewife render services to the family out of sheer love, care and responsibility towards it.  Give your opinion on their inclusion or exclusion in estimation of NI.

(Q61) A truck purchased by a firm is used for transportation of final goods from one place to another and also leather, threads, etc. from retailers to the factory for manufacturing shoes. Classify, what are final goods and what are intermediate goods here.

(Q62) Give reasons and explain the treatment assigned to the following estimations of National income.
(i) Subsidy on the output produced.
(ii) Contribution to provident fund by the employees.

(iii) Pension paid to the widows of war victims.

(iv) Pension paid to the retired government officials.

(Q63 ) If a person marries his maid, national income will fall; Find out how ?

(Q64) What is the difference between capital and investment ? 

(Q65) What is the difference among value of output, value added and value of income generated? 

(Q66) What do you mean by public goods ?

(Q67) Justify the following statements : 

(a) Factor income received from abroad is added to Domestic Product.

(b) ‘Factor income paid to abroad’ is also added to Domestic Product.

(Q68)Non-market transactions like services of housewives, leisure time activities, etc.       contribute to welfare of people. However, they are not included in the estimation of national income. Why?

Ans: It is true that such non-market transactions contribute to welfare of 

(Q69) Shalini purchased a car worth Rs. 4,50,000 to commute between her home and the office. Would you treat it as an intermediate consumption and therefore not included in the estimation of national income ? Justify your answer.  
( No)

(Q70) Does increase in domestic income always lead to increase in national income ? If not, give an illustration in support of your answer. Also, write two suggestions to accelerate the growth of domestic income.        
Ans: Develop infrastructure and promote FDI

(Q71) From the data given below, calculate national income by 

(a) Expenditure method; and     (b) Income method.

        Particulars                                                                                                Rs. in crores

(i)  Consumption of fixed capital                                                                    130

(ii)  Net indirect taxes                                                                                        220

(iii)  Personal disposable income                                                                   1,570

(iv)  Imports of goods and services                                                                  200

(v)  Exports of goods and services                                                                    130

(vi)  Savings of non-departmental enterprises                                                 20

(vii)  Interest on national debt                                                                            20

(viii) Saving of private corporate sector                                                            10

(ix) Direct taxes paid by households                                                                  25

(x) Household final consumption expenditure                                             1,100

(xi) Change in stock                                                                                              60

(xii) Gross domestic fixed capital formation                                                    400

(xiii)Net earned income from abroad                                                             - 10

(xiv) Net current transfers from government administrative departments 50

(xv) Government final consumption expenditure                                           210

(xvi) Income from entrepreneurship propery accruing to government 

    administrative departments                                                                               30    

(xvii) Corporate tax                                                                                                 35

(xviii) Net current transfers from abroad                                                             40

(xix) Private Non-Profits Serving Households Final Consumption Expenditure  240

Ans: Rs. 1,580 cr; Rs. 1,580 cr.)    

(Q72) On Nov. 9, 2016 Government of India demonetised Rs. 500 and Rs. 1000 forming 86% of total currency, with the motive of controlling black money. What is its impact on GDP of the country?

Ans: With demonetisation, old currency has been recalled back as Rs. 1000 and Rs. 500 notes are no more a legal tender since 9th Nov. 2016. Almost 14 lakh crores of liquidity is out of circulation. It has created a cash crunch for the household and producers. Shortage of liquid cash has put a temporary break on trade. Free movement of goods and factor services has been slowed down. RBI on 7th Dec. 2016 has lowered the targets of GDP growth to 7.1% against 7.6% last year.    

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