National Income and Related Aggregates | Economics Class 12 - Commerce PDF Download

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 is negative, national income is less than domestic income. This means that a country is paying more to foreign factors of production (such as wages, interest, rent, and profits) than it is receiving from foreign sources.

Q.2. When is the national income larger than domestic factor income?
 Ans. When Net Factor Income from Abroad is positive, national income is more than the domestic income.

Q.3. What is the effect of an indirect tax and a subsidy, on the price of the commodity?
 Ans. The effect of an indirect tax on a commodity is to increase the price and the effect of a subsidy is to reduce the price in the market.

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, because the American embassy is not a part of the domestic territory of India.

Q.5. Why is the study of the problem of unemployment in India considered a macro
 economic study?
 Ans. The problem of unemployment in India is an economic issue at the level of the economy as a whole, hence considered a macroeconomic study.

Q.6. When is gross domestic product of an economy equal to gross national product?
 Ans. When NFIA is zero.

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, It is a factor income. It is his salary.
(ii) No, It is not included in GDP, because it is a merely financial transaction that does not help directly in production.
(iii) Yes, It is a factor income in domestic territory.
(iv) It is included because it is his factor income (salary).

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) It will not be included in the domestic product of India as this income is earned outside the domestic (economic) territory of India.
(ii) It will be included in the domestic product of India as the branch of American Bank is located within the domestic territory of India.
(iii) It will be a part of the domestic product of India because this income is earned within the domestic territory of India. The Indian embassy in Korea is treated as located within the domestic territory of India.

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) & (b), since these are variables measurable at a point of time.
Flow – (c) & (d), since these are variables measurable over 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), since national capital is a variable measurable at a point of time.
Flow – (b), (c) & (d), since these are variables measurable over 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) It should be included in NI because it is a part of the compensation of employees (salary in cash).
(ii) It should be included in NI because the defence service is considered the final service so far as it provides a peaceful and secure environment to the citizens.
(iii) It is included in NI because it is a part of NFIA.
(iv) It is included in NI of India because it is a part of NFIA.

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) It should be included in NI because it is a part of the compensation of employees (salary in kind).
(ii) It is included in NI because it is a part of the final consumption expenditure on domestic product.
(iii) It should be included in NI because it is an addition to the capital stock of the production unit.
(iv) It should not be included in NI because it is a compulsory transfer payment and paid from past savings of the taxpayers.

Q.7. Is net export a part of NFIA? Explain.
 Ans. No, it is not.Net export, the difference between export and import (X- M), is a part of expenditure on domestic products. NFIA is the difference between income earned from abroad by the normal residents of a country and income earned by non-residents in the domestic territory of that country. It is not included in the domestic product rather it is a component of NI. Therefore both are different concepts.

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, because the pension is paid on account of the old age of a pensioner and not for his rendering productive services.
(ii) No, because factor income is earned not within the domestic territory of a country but from abroad.
(iii) No, because the American embassy is not a part of the domestic territory of India.
(iv) Yes, because the Indian embassy in China is a part of the domestic territory of India.
(v) Yes, because the company within India’s domestic territory earns a profit.
(vi) No, because the branch is located outside the domestic territory of India.

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. The expenditure method estimates expenditure on domestic product, i.e. expenditure on final goods and services produced within the economic territory of the country. It includes expenditures by residents and non-residents. Exports, though purchased by nonresidents, are produced within the economic territory, and therefore, are a part of the domestic product.
The domestic product can be greater than the national product if the factor income paid to the rest of the world is greater than the factor income received from the rest of the world i.e. when net-factor income received from abroad is negative.

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 aboard.
 Ans.
(i) No, as it is a factor income paid abroad (it is earned by non-residents).
(ii) No, it is only a transfer of paper claims.
(iii) No, this factor income belongs to non-residents.
(iv) Yes, as it is a factor income paid to normal residents of India.
(v) No, it is only a transfer payment.
(vi) No, it is only a transfer payment. No commodity is sent or services rendered in return for
this.

Q.4. Will the following be included 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, Imputed rent of owner-occupied houses will be included in NI.
(ii) No, because it is a financial transaction that does not help directly in production.
(iii) No, because it is not related to the current flow of goods and services.
(iv) No, as it is a factor income paid abroad (it is earned by non-residents).
(v) Yes, It is included in NI since it is paid for rendering productive services.
(vi) Yes, dividends are a part of corporate profit and therefore, included in NI.

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, as it is a supplementary income paid in kind and hence a part of the compensation of employees.
(ii) No, as it has already been taken into account when the house was constructed.
(iii) Yes, It is a part of the Government's final consumption expenditure and it adds to the flow of services.
(iv) Yes, as it is payment for the use of capital.
(v) No, as it does not add to the flow of goods & services.
(vi) It should not be included in NI because public debt is a loan taken on to meet consumption expenditure by the government.

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) Services rendered by family members to each other should not be included in NI because these are not rendered for the purpose of earning income.
(ii) The imputed value of self-consumed wheat grown by a farmer must be included in NI, because it adds to the flow of goods.
(iii) It should be included in NI because the government expenditure on free services is considered a part of the government's final consumption expenditure.
(iv) Yes, as it is factor income against the service of a lawyer.
(v) It should not be included in NI because it is a windfall gain and it does not add to the flow of goods and services.
(vi) It should be included in NI of India because they render productive services as professionals.

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) It is a transfer payment received by those persons who are not employed; therefore it should not be included in NI.
(ii) It is not included in NI because it does not add to the flow of goods and services.
(iii) It is included in NI because it is a factor in income.
(iv) It is a part of the compensation of an employee (income). While calculating NI by income method, compensation of employees is to be included while doing so, income tax to be paid by them should not be included separately.
(v) It is a part of the profit of the corporate sector. While calculating NI by income method, profit is to be included while doing so, Corporation tax should not be included separately.
(vi) Travel expenses incurred by employees for business purposes which are reimbursed by the employers are excluded because these are a part of the intermediate consumption of the employers.

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: The purchase of the car is included in the national income because it is a final consumption expenditure, which is part of national income. 
b) Purchase of raw material by purchase unit: purchase of raw material by purchase unit is not included in the national income because the raw material is intermediate goods and intermediate goods and services are excluded from the national income. Purchase of raw materials, if included in national income will result in double counting. 
c) Expenditure by the government on scholarships to students: It is not included in the national income because it is a transfer payment and no productive service is rendered by the student in exchange.

NUMERICAL PROBLEMS WITH SOLUTIONS:
 Q.1. Calculate private income, personal income, personal disposable income and National disposable income from the following data: (Rs. in Crores)
 (i) National income 3000
 (ii) Savings of private corporate sector 30
 (iii) Corporate tax 80
 (iv) Current transfer from government 60
 (v) Income from property and entrepreneurship to government 150
 (vi) Current transfers from rest of the world 50
 (vii) Savings of non-departmental government sector 40
 (Viii) Net indirect taxes 250
 (ix) Direct taxes paid by household 100
 (x) Net factor income from abroad (-) 10
 Solution: -
Private income = (i) - (iv + vii) + (iv + vi)
= 3000 - (150 + 40) + (60 + 50)
= 2920 Crores.
Personal income = 2920 - (ii) - (iii)
= 2920-30-80
= Rs 2810 Crores.
Personal Disposable Income = 2810- (ix)
= 2810-100
= Rs 2710 Crores.
National Disposable Income = (i) + (vi) + (viii)
= 3000 + 50 + 250
=Rs 3300 Crores.

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= (ix) + (xii) + (viii) + (xiii) – (iii)
 = 50 +10 + 20 + 40 -10
 =Rs 110 Crores.
 Expenditure method
 NI = (ii) + (vi) + (vii) + (xi) + (x) - (iv) + (i) + (iii)
 =100 + 20 + 30 + (-) 5 + (-) 5 – 25 + 5 +10
 =Rs 110 Crores.

 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 = (iv) + [(vii) – (vi)] – (i) – (iii)
= 120 + [30 – 45] – 40 – 60
= Rs 5 Lakhs.
Value Added by Firm B = (ii) + [(ix) – (viii)] - (x)
= 100 + [30 – 40] - 60
= Rs 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 = (i) - (v) – (viii) + (vii) + (vi) + (ix)
= 1300 – 35 – 5 +10 + 30 + 15
= Rs. 1315 crores.
Personal Income = Private Income – (ii) – (iv)
= 1315 -15 -25
= Rs 1275 crores.
Personal Disposable Income = Personal Income – (iii)
= 1275 – 40
= Rs 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 – (iv) – (v) + (vi) + (vii)
= 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