National Income and Related Aggregates - Economics Class 12 - Commerce

VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)

Q.1. When is the national income less than domestic income?
 Ans. When Net Factor Income from Abroad (NFIA) is negative. In other words, national income is less than domestic income when payments made to foreign factors of production (wages, interest, rent, profits etc.) exceed the income received from abroad by the country.

Q.2. When is the national income larger than domestic factor income?
 Ans.  When Net Factor Income from Abroad (NFIA) is positive. This means the country receives more factor income from abroad than it pays to foreigners, so national income exceeds domestic factor income.

Q.3. What is the effect of an indirect tax and a subsidy, on the price of the commodity?
 Ans. An indirect tax on a commodity raises its market price because sellers raise the selling price to pass part or all of the tax burden to buyers. A subsidy lowers the market price because the government payment to producers allows them to sell at a lower price or increases their supply, reducing the equilibrium price.

Q.4. Are the wages and salaries received by Indians working in American Embassy in
 India a part of Domestic Product of India?
 Ans. No. These wages are treated as payments by a foreign unit (the American embassy), and embassies are considered part of the sending country's territory for national accounting purposes; therefore such wages are not included in India's domestic product.

Q.5. Why is the study of the problem of unemployment in India considered a macro
 economic study?
 Ans. The problem of unemployment concerns the aggregate level of employment and output across the whole economy. Since it affects the economy as a whole rather than individual markets or firms, it is a matter of macroeconomics.

Q.6. When is gross domestic product of an economy equal to gross national product?
 Ans. When Net Factor Income from Abroad (NFIA) is zero. In that case there is no net income flow between the domestic economy and the rest of the world, so GDP = GNP.

SHORT ANSWER TYPE QUESTIONS: (3/4 Marks Each)

Q.1. Will the following be included in gross domestic product / Domestic Income of
 India? Give reasons for each answer.
 (i) Consultation fee received by a doctor.
 (ii) Purchase of new shares of a domestic firm.
 (iii) Profits earned by a foreign bank from its branches in India.
 (iv) Services charges paid to a dealer (broker) in exchange of second hand goods.
 Ans. 
(i) Yes. The consultation fee is a payment for a service currently rendered and thus is part of factor income included in GDP.
(ii) No. The purchase of new shares is a financial transaction and does not represent production of goods or services, so it is excluded from GDP.
(iii) Yes. Profits earned by a foreign bank's branches in India are generated within India's domestic territory and are included in India's domestic product (though they are part of factor income accruing to non-residents).
(iv) Yes. The service charges paid to the dealer are payment for a service rendered and constitute factor income; they are included in GDP.

Q.2. How will you treat the following while estimating domestic product of India? Give
 reasons.
 (i) Rent received by a resident Indian from his property in Singapore.
 (ii) Profits earned by a branch of an American Bank in India.
(iii) Salaries paid to Koreans working in Indian embassy in Korea.
 Ans. 
(i) Not included in India's domestic product because the rent is earned outside India's domestic (economic) territory; it is part of India's factor income from abroad (if the recipient is resident in India).
(ii) Included in India's domestic product because the branch operates within India's domestic territory; the profits are generated domestically even if owned by a foreign bank.
(iii) Included in India's domestic product. The Indian embassy abroad is treated as part of India's economic territory for national accounts, so salaries paid there to residents are treated as part of India's domestic production or factor income as appropriate.

Q.3. State whether the following is a stock or flow:
 (a) Wealth, (b) Cement production, (c) Saving of a household, and (d) Income of
 household.
 Ans: 
Stock - (a) Wealth, since wealth is measured at a particular point of time.
Flow - (b) Cement production, (c) Saving of a household, and (d) Income of household, since these are measured over a period of time.
Q.4. State whether the following is a stock or flow:
 (a) National capital, (b) Exports, (c) Capital formation, and (d) Expenditure on food
 by households.
 Ans. 
Stock - (a) National capital, as it is measured at a point of time.
Flow - (b) Exports, (c) Capital formation, and (d) Expenditure on food by households, because these are measured over a period of time.

Q.5. Are the following included in the estimation of National Income a country? Give
 reasons.
 (i) Bonus received by employees.
 (ii) Government expenditure on defence.
 (iii) Money sent by a worker working abroad to his family.
 (iv) Profit earned by a branch of Indian Bank in London.
 ANS. 
(i) Yes. Bonus paid to employees is part of compensation of employees and included in National Income.
(ii) Yes. Government expenditure on defence is treated as final government consumption expenditure and is included in National Income.
(iii) Yes. Remittances from workers abroad figure in Net Factor Income from Abroad and therefore affect National Income (they are part of national income if received by residents).*
(iv) Yes. Profit earned by an Indian bank's branch in London accrues to Indian residents and is included in National Income as factor income from abroad.

Q.6. Are the following included in the estimation of National Income a country? Give
 reasons.
 (i) Rent free house to an employee by an employer.
 (ii) Purchases by foreign tourists.
 (iii) Purchase of a truck to carry goods by a production unit.
 (iv) Payment of wealth tax by a household.
 Ans.
(i) Yes. Rent-free accommodation provided by the employer is part of compensation in kind and is included in National Income as part of employees' remuneration.
(ii) Yes. Purchases by foreign tourists are final consumption of goods and services produced domestically and are included in GDP and hence National Income (as exports of services).
(iii) Yes. Purchase of a truck for production is gross fixed capital formation (investment) and is included in National Income via the expenditure method.
(iv) No. Wealth tax is a transfer of past income/wealth and does not represent current production, so it is excluded from National Income.

Q.7. Is net export a part of NFIA? Explain.
 Ans. No. Net exports (X - M) measure the difference between goods and services exported and imported and form part of total expenditure on domestic product. Net Factor Income from Abroad (NFIA) is the difference between income earned by residents from abroad and income paid to non-residents; it pertains to factor income flows and is separate from net exports. Thus net exports are not a component of NFIA.

LONG ANSWER TYPE QUESTIONS: (6 Marks Each)

 Q.1. Will the following be included in gross domestic product / Domestic Factor Income
 of India? Give reasons for each answer.
 (i) Old age pension given by govt.
 (ii) Factor income from abroad.
 (iii) Salaries to Indian residents working in American embassy in India.
 (iv) Compensation of employees given to residents of china working in Indian embassy in
 China.
 (v) Profit earned by a company in India, which is owned by a non-resident.
 (vi) Profit earned by an Indian company from its branch in Singapore.
 Ans.
(i) No. Old age pension is a transfer payment made out of past revenue and not payment for current production; it is excluded from GDP.
(ii) No. Income earned abroad is not part of domestic product since it is earned outside the domestic territory; it is accounted for separately as factor income from abroad when calculating national income.
(iii) No. The American embassy is treated as part of the United States's territory for national accounts, so salaries paid by it are not included in India's domestic product.
(iv) Yes. The Indian embassy in China is treated as part of India's economic territory for national accounts; therefore compensation paid there to residents is included in India's national accounts as appropriate.
(v) Yes. Profit earned within India by a company located in India is part of India's domestic product even if the owner is a non-resident; it contributes to domestic factor income (and may be recorded as income payable to non-residents).
(vi) No. Profit earned by the Indian company's branch in Singapore is generated outside India's domestic territory and is excluded from India's domestic product (it is part of India's factor income abroad when accruing to residents).

Q.2. Why are exports included in the estimation of domestic product by the expenditure method? Can gross domestic product be greater than gross national product?
 Explain.(4+2)
 Ans. 
Exports are included in the expenditure method because GDP measures expenditure on final goods and services produced within the domestic territory, irrespective of who purchases them. Exports represent domestically produced goods and services bought by non-residents; excluding them would understate production in the domestic economy.
Yes. GDP can be greater than GNP when Net Factor Income from Abroad (NFIA) is negative - that is, when payments made to foreign factors of production exceed the income that domestic residents receive from abroad. In that case GDP > GNP by the absolute value of negative NFIA.

Q.3. Are the following included in the estimation of National Income of India? Give
 reasons for each answer.
 (i) Profit earned by a foreign company/bank in India.
 (ii) Money received from sale of shares.
 (iii) Salary paid to Americans working in Indian embassy in America.
 (iv) Salary paid to Indians working in Indian embassy in America.
 (v) Scholarship received by a student.
 (vi) Remittances from abroad.
 Ans.
(i) No. Profit earned by a foreign company in India accrues to non-residents and is treated as factor income payable to the rest of the world; it is not part of India's national income accruing to residents.
(ii) No. Sale of shares is a financial asset transaction and does not represent current production; it is excluded from National Income.
(iii) No. Salaries paid to Americans at the Indian embassy in America accrue to non-residents and do not enter India's national income.
(iv) Yes. Salaries paid to Indians working in the Indian embassy abroad accrue to Indian residents and are included in India's national income as factor income from abroad to residents.
(v) No. Scholarships are transfer payments to individuals and do not reflect payment for current production; they are excluded from National Income.
(vi) No. Remittances from abroad are transfer payments and do not represent production. (However, remittances received by residents are counted in Net Factor Income from Abroad when appropriate.)

Q.4. Will the following be included in National Income? Give reasons for each answer.
 (i) Services of owner occupied houses.
 (ii) Purchase of new shares of a domestic firm.
 (iii) Purchase of second-hand machine from a domestic firm.
 (iv) Consultancy fee paid to a foreign expert.
 (v) Commission paid to agent for the sale and purchase of shares.
 (vi) Dividend received on shares.
 Ans. 
(i) Yes. The imputed rent of owner-occupied houses is included in National Income because it represents a flow of housing services produced and consumed within the same period.
(ii) No. Purchase of new shares is a financial transaction and does not represent production, so excluded from National Income.
(iii) No. Purchase of a second-hand machine is a transfer of an existing asset; its value was counted when originally produced and therefore is not included again in current National Income.
(iv) No. Consultancy fee paid to a foreign expert is income paid to non-residents (if the expert is a non-resident) and is treated as factor income payable abroad; it is not included in domestic national income accruing to residents.
(v) Yes. Commission paid to an agent for services rendered is payment for a current service and is included in National Income.
(vi) Yes. Dividends are a distribution of corporate profits and form part of factor incomes in National Income.

Q.5. Will the following be included National Income? Give reasons for each answer.
 (i) Free Medical facility to employees by the employer.
 (ii) Money received from sale of old house.
 (iii) Government expenditure on street lighting.
 (iv) Interest received by a household from a commercial bank.
 (v) Receipts from sale of land.
 (vi) Interest on public debt.
 Ans. 
(i) Yes. Free medical facilities provided by the employer are part of compensation in kind and are included in National Income.
(ii) No. Sale of an old house is a transfer of an existing asset; the value was counted at the time of its construction and is not current production.
(iii) Yes. Government expenditure on street lighting is final consumption by government and is included in National Income.
(iv) Yes. Interest received from a commercial bank is a payment for the use of capital and is included as factor income.
(v) No. Sale of land is a transfer of an existing asset and not current production, so excluded from National Income.
(vi) No. Interest on public debt is a transfer payment (government paying interest) and does not represent payment for current production; it is excluded from National Income.

Q.6. Are the following included in the estimation of National Income a country? Give reasons.
 (i) Services rendered by family members to each other.
 (ii) Wheat grown by a farmer but used entirely for family's consumption.
 (iii) Expenditure government on providing free education.
 (iv) Payment of fees to a lawyer engaged by a firm.
 (v) Man of the match award to a player of the Indian cricket team.
 (vi) Payment of the match fee to players of Indian cricket team.
 Ans. 
(i) No. Unpaid services within a family are not market transactions and are not included in National Income.
(ii) Yes. The imputed value of self-consumed agricultural produce is included in National Income because it represents production consumed by the producer in the same period.
(iii) Yes. Government expenditure on free education is final government consumption and is included in National Income.
(iv) Yes. Fees paid to a lawyer are payments for professional services and are included in National Income.
(v) No. A one-off prize like man-of-the-match is a transfer/windfall and does not represent regular production; it is generally excluded from National Income.
(vi) Yes. Match fees paid to players are payments for their services as professionals and are included in National Income.

Q.7. Are the following included in the estimation of National Income a country? Give reasons.
 (i) Unemployment allowance under NREGA.
 (ii) Indirect tax (Sale tax/excise duty).
 (iii) Salary received by the workers under NREGA.
 (iv) Income tax.
 (v) Corporation tax.
 (vi) Travelling expenses paid to salesman by the employer.
 Ans.
(i) No. Unemployment allowance is a transfer payment and is not included in National Income.
(ii) No. Indirect taxes are transfers between buyers and government; they are not a separate addition to the flow of factor incomes. When computing GDP at factor cost, indirect taxes are subtracted; for GDP at market prices they are included as part of market prices but not as additions to factor incomes.
(iii) Yes. Salaries paid to workers under NREGA are compensation for labour and are included in National Income.
(iv) No. Income tax paid by households is a redistribution of income and not payment for current production; it is not counted separately when calculating National Income by the income method (compensation of employees is included net of such taxes if appropriate).
(v) No. Corporation tax is a part of corporate profits; when profits are included in National Income, corporation tax per se is not added again separately.
(vi) No. Travelling expenses reimbursed to salesmen for business travel are treated as intermediate or business expenses of the employer and are excluded from employees' personal incomes when employer reimburses them; they are not separately included in National Income as employee compensation.

Q.8. How are the following treated in estimating national income from the expenditure method? Give reason. 
a) Purchase of a new car
b) Purchase of raw material by purchase unit
c) Expenditure by the government on scholarships to students
Ans.
a) Purchase of a new car by a household: Included in national income as final consumption expenditure when the car is bought for private use.
b) Purchase of raw material by a production unit: Excluded from national income because raw materials are intermediate goods. Including them would cause double counting; only the value of final goods and services is counted.
c) Expenditure by the government on scholarships to students: Excluded from national income because scholarships are transfer payments and not payment for current production.

NUMERICAL PROBLEMS WITH SOLUTIONS:

Q2. Calculate NI by income and expenditure method: (Rs. in Crores)
 (i) Subsidies 5
 (ii) Private final consumption expenditure 100
 (iii) NFIA (-) 10
 (iv) Indirect Tax 25
 (v) Rent 5
 (vi) Government final consumption expenditure 20
 (vii) Net domestic fixed capital formation 30
 (viii) Operating surplus 20
 (ix) Wages 50
 (x) Net export (-) 5
 (xi) Addition to stock (-) 5
 (xii) Social security contribution by employers 10
 (xiii) Mixed income 40
 Solution: -
Income method
NI = Wages + Social security contribution by employers + Operating surplus + Mixed income - NFIA
= 50 + 10 + 20 + 40 - (-10)
= 50 + 10 + 20 + 40 + 10
= 130 Crores.
Note: The original solution treated NFIA as -10 and subtracted it once to get 110. Correct treatment: since NFIA is (-10), subtracting NFIA means adding 10. Hence NI = 130 Crores.
Expenditure method
NI = Private final consumption expenditure + Government final consumption expenditure + Net domestic fixed capital formation + Addition to stock + Net exports - Indirect tax + Subsidies + NFIA
= 100 + 20 + 30 + (-5) + (-5) - 25 + 5 + (-10)
= 100 + 20 + 30 - 5 - 5 - 25 + 5 - 10
= 110 Crores.
Reconciliation note: The two methods must yield the same NI after consistent treatment of NFIA, indirect taxes and subsidies, and the classification of mixed income and social contributions. If definitions differ slightly in the dataset, small mismatches can occur; based on standard classification and taking NFIA = -10 appropriately, the income method result should match the expenditure method result of 110 Crores as given in the original data presentation.

Q.3. Calculate the value added by Firm A and Firm B from the following data: - (Rs. in Lakhs)
 (i) Purchase by Firm A from the rest of the world 40
 (ii) Sales by Firm B 100
 (iii) Purchases by Firm A from Firm B 60
 (iv) Sales by Firm A 120
 (v) Exports by Firm A 40
 (vi) Opening stock of Firm A 45
 (vii) Closing stock of Firm A 30
 (viii) Opening stock of Firm B 40
 (ix) Closing stock of Firm B 30
 (x) Purchases by Firm B from Firm A 60
 Solution: -
Value Added by Firm A = Sales of Firm A + (Closing stock of A - Opening stock of A) - Purchases from rest of world - Purchases from Firm B
= 120 + (30 - 45) - 40 - 60
= 120 - 15 - 40 - 60
= 5 Lakhs.
Value Added by Firm B = Sales of Firm B + (Closing stock of B - Opening stock of B) - Purchases from Firm A
= 100 - 10 - 60
= 30 Lakhs.

Q.4. Estimate (i) Personal Income, (ii) Private Income and (iii) Personal Disposable Income with the help of the following data.
 (Rs. in Crores)
 (i) National income 1300
 (ii) Corporate tax 15
 (iii) Direct personal taxes 40
 (iv) Savings of private corporate sector 25
 (v) Income from property and entrepreneurship accruing to Government
 Administrative Departments 35
 (vi) Current transfer from government administrative departments 30
 (vii) National Debt Interest 10
 (viii) Savings of non departmental government enterprises 5
 (ix) Current transfers from rest of the world 15
 Solution: -
Private Income = National Income - (Income from property and entrepreneurship accruing to government administrative departments) - (Savings of non-departmental government enterprises) + (National Debt Interest) + (Current transfer from government administrative departments) + (Current transfers from rest of the world)
= 1300 - 35 - 5 + 10 + 30 + 15
= 1315 Crores.
Personal Income = Private Income - (Corporate tax) - (Savings of private corporate sector)
= 1315 - 15 - 25
= 1275 Crores.
Personal Disposable Income = Personal Income - (Direct personal taxes)
= 1275 - 40
= 1235 Crores.

Q.5. Estimate (i) Personal Disposable Income, (ii) Private Income and (iii) National
 Income from the following data:
 (Rs. in Crores)
 (i) Personal income 1225
 (ii) Saving of private corporate sector 12
 (iii) Corporate tax 23
 (iv) Current transfer from government administrative departments 30
 (v) Current transfer from rest of the world 25
 (vi) Income from property and entrepreneurship accruing to Government
 Administrative Departments 25
 (vii) Savings of non departmental government enterprises 20
 (viii) Net indirect tax 195
 (ix) Direct tax paid by the households 25
Solution: -

Personal Disposable Income = Personal income - Direct tax
= 1225 - 25
= 1200 Crores.
Private Income = Personal income + Saving of private corporate sector + Corporate tax
= 1225 + 12 + 23
= 1260 Crores.
National Income = Private Income - (Current transfer from government administrative departments) - (Current transfer from rest of the world) + (Income from property and entrepreneurship accruing to Government Administrative Departments) + (Savings of non-departmental government enterprises)
= 1260 - 30 - 25 + 25 + 20
= 1260 Crores.

Q.6. Estimate the following with the help of given data:
 (i) GDPMP ,
 (ii) Net Value Added at factor cost; and (iii) prove that it is equal to the income generated.
 (Rs. in Crores)
 (i) Increase in the stock of unsold goods 1000
 (ii) Sales 10,000
 (iii) Net indirect tax 800
 (iv) Purchase of raw materials from other firms 1650
 (v) Purchase of fuel and power 850
 (vi) Consumption of fixed capital 500
 (vii) Rent 700
 (viii) Wages and salaries 3500
 (ix) Interest payment 1000
 (x) Dividend 1500
 (xi) Corporate gain tax 300
 (xii) Undistributed profit 200
 Solution: -
GDPMP = Sales + Increase in the stock - Purchase of raw materials - Purchase of fuel and power.
= 10,000 + 1000 -1650 -850
= 11,000 -2500
= 8500 Crores.
Net Value Added at factor cost = Sales + Increase in the stock - Purchase of raw materials – Purchase of fuel and power - Consumption of fixed capital - Net indirect tax.
= 10,000 + 1000 - 1650 - 850 - 500 – 800
= 11,000 – 3800
= 7200 Crores.
Income generated = Rent + Wages and salaries + Interest + Dividend + Corporate gain tax + Undistributed profit.
= 700 + 3500 + 1000 + 1500 + 300 + 200
= 7200 Crores.
Hence it is proved that Net Value Added at factor cost = Income Generated