National Income Accounting Assertions & Reason Type Questions - Economics Class 12

Direction: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Question 1: 
Assertion: With every increase in the level of GDP, social welfare definitely increases in the economy. 
Reason (R): GDP is not a true indicator of welfare of the economy.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (d)
Explanation:
(i) Assertion: The assertion is false. An increase in GDP does not necessarily mean social welfare has increased, because GDP measures only the monetary value of final goods and services produced and ignores how income is distributed and whether social or environmental costs have risen.
(ii) Reason: The reason is true. GDP is an imperfect indicator of welfare as it excludes non-market activities (for example, unpaid household work), does not reflect income distribution, and ignores negative externalities like pollution.
(iii) Justification: Since GDP can rise while inequality, environmental damage or depletion of resources worsen, social welfare may not improve. Therefore the Reason is true but it does not make the original Assertion correct; rather it explains why the Assertion is false.

Question 2:
Assertion (A): The flour purchased by a baker is considered an intermediate good.
Reason (R): The flour is used for the production of bread, cakes and biscuits to be sold to the consumer.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. Flour bought by a baker is an intermediate good because it is used up in producing other goods.
(ii) Reason: The reason is true. The flour is employed to produce bread, cakes and biscuits that are sold to final consumers.
(iii) Justification: Since intermediate goods are those used as inputs in the production of final goods, the reason correctly explains the assertion.

Question 3:
Assertion (A): GDP is the correct measure of the improvement of welfare of the people.
Reason (R): Many activities in an economy are not evaluated in monetary terms, they are not included in GDP due to non-availability of data.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (d)
Explanation:
(i) Assertion: The assertion is false. GDP alone is not a complete or correct measure of improvements in people's welfare because it focuses only on monetary transactions and total output.
(ii) Reason: The reason is true. Many useful activities (for example, unpaid domestic work, volunteer services, and informal exchanges) have no market price and are therefore excluded from GDP.
(iii) Justification: Because GDP omits non-market activities, distributional changes, and environmental costs, it cannot fully capture welfare. The Reason correctly identifies one key limitation, which helps explain why the Assertion is false.

Question 4:
Assertion (A): Refrigerator used at home is considered as Capital Good.
Reason (R): Refrigerator is a one-time purchase for the household and will not be purchased for a very long time.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (d)
Explanation:
(i) Assertion: The assertion is false. A refrigerator used at home is classified as a consumer durable (final good), not a capital good. Capital goods are assets purchased by firms to produce other goods or services.
(ii) Reason: The reason is true. A household refrigerator is typically bought infrequently and lasts for several years, so it is a one‑time or durable purchase for the household.
(iii) Justification: Although the Reason is true about the purchase pattern, it does not convert a household consumption good into a capital good. Therefore the Assertion is false while the Reason is true.

Question 5:
Assertion (A): GDP does not exhibit the structure of the product.
Reason (R): If the increase in GDP is mainly due to increased production of war equipment and ammunitions, then such an increase cannot improve welfare in economy.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. GDP measures aggregate value of output but does not reveal the composition or structure of production - that is, which goods and services are expanding.
(ii) Reason: The reason is true. If growth in GDP comes mainly from goods that do not improve human welfare (for example, weapons or production causing environmental damage), overall welfare may not increase despite higher GDP.
(iii) Justification: Because GDP does not distinguish between 'useful' and 'harmful' output, the Reason correctly explains why the Assertion holds: the structure of production matters for welfare, and GDP alone does not show it.

Question 6:
Assertion (A): Car purchased by the hotel for the purpose of tourism facilitation is a Capital Good.
Reason (R): The car is purchased by the hotel to provide long term service to the consumers.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. A car bought by a hotel to offer tourism services is a capital good because it is used by the business to provide services and generate income over time.
(ii) Reason: The reason is true. The car is intended to provide long-term services to customers, not for immediate resale, which characterises capital goods.
(iii) Justification: Since the car is a productive asset used in the hotel’s business operations and provides services over several periods, the Reason correctly explains the Assertion.

Question 7:
Assertion (A): Profits of chemical industries increased 150%; fishermen income reduced by 70% due to untreated chemical pollutants in water bodies. This is a negative externality.
Reason (R): The profits of chemical industries is causing pollution which is harming the water and inturn leading the fishermen to catch less fish as the biodiversity of the water body is disturbed.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. The situation described - firms gaining profits while fishermen lose income because of pollution - is an example of a negative externality, where private production imposes costs on others.
(ii) Reason: The reason is true. Pollution from chemical industries can damage aquatic biodiversity, reduce fish catches and harm fishermen’s livelihoods.
(iii) Justification: Because the chemical firms' production causes harm to third parties (fishermen) without compensation, the Reason correctly explains the Assertion. This is a classic case where private gains are accompanied by social costs.

Question 8:
Assertion (A): Furniture purchased by a household is considered a final good.
Reason (R): Furniture will not be used for further production.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. Furniture bought by a household is a final good because it is intended for direct use by consumers.
(ii) Reason: The reason is true. Typically, household furniture is not used as an input in production of other goods and services.
(iii) Justification: As final goods are for direct consumption and not as intermediate inputs, the Reason correctly explains the Assertion.

Question 9:
Assertion (A): Leisure is not included in GNP.
Reason (R): It does not involve rendering of any factor service.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. Leisure activities are not counted in GNP because they do not have a market price and are not recorded as market transactions.
(ii) Reason: The reason is true. Leisure does not normally involve the rendering of factor services for which market payments are made, so it does not generate recorded factor incomes.
(iii) Justification: Since national accounts rely on market transactions and observable monetary values, activities like leisure and informal household tasks are excluded; therefore the Reason correctly explains the Assertion.

Question 10:
Assertion (A): The cement purchased by the constructor is considered an intermediate good.
Reason (R): The cement is used for the construction of the building to be sold to the consumer.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (a)
Explanation:
(i) Assertion: The assertion is true. Cement purchased by a constructor is an intermediate good because it is used as an input in producing the final product (the building).
(ii) Reason: The reason is true. The cement is consumed in construction which results in a final good that will be sold to the consumer or owner.
(iii) Justification: Since intermediate goods are goods used up in producing final goods, the Reason correctly explains the Assertion.

Question 11:
Assertion (A): Brokerage on the sale/purchase of shares and bonds is to be included.
Reason (R): They form the value of final goods and so need to be included with respect to the Value Added Method.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (b)
Explanation:
(i) Assertion: The assertion is true. Brokerage fees charged on transactions of shares and bonds represent payments for services and are included in national income as part of the services sector.
(ii) Reason: The reason, as stated, is not the correct explanation. Brokerage does not “form the value of final goods” in the usual sense. Rather, brokerage is itself a service that contributes to value added.
(iii) Justification: Under the Value Added Method, what is included is the value added by each firm or service provider. Brokerage fees are included because they are the value added by brokerage firms, not because they are part of the price of some distinct final good.

Question 12:
Assertion (A): Income from illegal activities like smuggling, theft, gambling, etc., should not be included.
Reason (R): Including illegal activities will cause the problem of double counting.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation  of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

Ans: (c)
Explanation:
(i) Assertion: The assertion is true. Income from illegal activities is generally excluded from official national accounts because such activities are not part of the legal and measurable economy and reliable data are not available.
(ii) Reason: The reason is false. Excluding illegal activities is not primarily about avoiding double counting. Double counting refers to counting intermediate and final outputs repeatedly; the main obstacles with illegal activities are legality, lack of reliable records and measurement difficulties.
(iii) Justification: While in theory some illegal market transactions could be counted if reliably measured, in practice they are omitted because of the difficulties of measurement and legal issues. Thus the Assertion is correct but the stated Reason is not the correct explanation.