Worksheet Solutions: National Income Accounting - 3 | Economics Class 12 - Commerce PDF Download

Fill in the Blanks

Q1: Macro Economics: Macroeconomics studies _________ economic variables of an economy.
Ans: aggregate
Macroeconomics studies aggregate economic variables of an economy, focusing on overall economic performance and behavior.

Q2: Consumption Goods: Durable goods include items like _________ and television.
Ans: car
Durable goods include items like a car and television, representing long-lasting consumer products.

Q3: Intermediate Goods: Milk used by a tea shop for selling tea is an example of an _________ good.
Ans: intermediate
Milk used by a tea shop for selling tea is an example of an intermediate good, as it is used in further production.

Q4: Investment: Investment is the net addition made to the existing stock of _________.
Ans: capital
Investment is the net addition made to the existing stock of capital, crucial for economic growth and development.

Q5: Domestic Territory: It includes political frontiers, territorial waters, air space, and even _________ located abroad.
Ans: embassies
It includes political frontiers, territorial waters, air space, and even embassies located abroad, defining the geographical boundaries of economic activities.

Q6: Real GDP: Real GDP reflects changes in _________ output, making it a reliable indicator of economic development.
Ans: physical
Real GDP reflects changes in physical output, providing a reliable indicator of economic development by accounting for production quantity.

Q7: Income Method: Compensation of employees and operating surplus are components of the _________ method.
Ans: income
Compensation of employees and operating surplus are components of the income method, measuring national income through earnings and profits.

Q8: National Disposable Income: NNPFC + Net Indirect tax + Net current transfer from abroad = _________.
Ans: Net National Disposable Income
NNPFC + Net Indirect tax + Net current transfer from abroad = Net National Disposable Income, representing the income available for consumption or saving after accounting for taxes and transfers.

Q9: Personal Income: Personal Income includes factor income, net factor income from abroad, interest on national debt, current transfer from government, and current transfer from _________.
Ans: rest of the world
Personal Income includes factor income, net factor income from abroad, interest on national debt, current transfer from government, and current transfer from rest of the world, reflecting individual and household earnings from various sources.

Q10: Circular Flow: Households provide factors of production to firms, and firms supply goods and services to _________.
Ans: households
Households provide factors of production to firms, and firms supply goods and services to households, illustrating the continuous exchange in the economy's production and consumption cycle.

Assertion and Reason Based

Q1: Assertion: Real GDP is a reliable indicator of economic development.
Reason: It accounts for changes in physical output and price levels.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
Real GDP adjusts for changes in physical output by using constant base-year prices, providing a more accurate reflection of economic development. Price level changes are factored out, ensuring that the growth in GDP reflects actual changes in the economy's production capacity. Hence, both the assertion and the reason are correct, and the reason explains why the assertion is true.

Q2: Assertion: Net Investment is calculated by subtracting depreciation from gross investment.
Reason: Depreciation refers to the fall in the value of fixed assets due to normal wear and tear.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
Net Investment represents the addition made to the existing stock of capital after accounting for the depreciation of existing assets. Gross investment is the total investment made, while depreciation accounts for the fall in the value of assets. Subtracting depreciation from gross investment gives the net investment, which represents the actual increase in the economy's capital stock. Hence, both the assertion and the reason are correct, and the reason explains why the assertion is true.

Q3: Assertion: Domestic territory includes political frontiers and ships operated by residents between countries.
Reason: Domestic territory only includes political boundaries and excludes international waters.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (c)
Domestic territory does include political frontiers, but it also encompasses certain mobile assets operated by residents, such as ships and aircraft. These mobile assets operated by residents between countries are considered part of the domestic territory. Hence, the assertion is true, but the reason is false, as domestic territory includes more than just political boundaries.

Q4: Assertion: Nominal GDP is unaffected by changes in price levels.
Reason: Nominal GDP is calculated using the prices of the current year.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (c)
Nominal GDP is influenced by both changes in physical output and changes in price levels. It is calculated using the current year's prices, meaning that any increase in prices directly affects nominal GDP. Therefore, the assertion is false because nominal GDP is influenced by changes in price levels.

Q5: Assertion: National Disposable Income includes depreciation.
Reason: Depreciation represents the fall in the value of fixed assets.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
National Disposable Income (NDI) is calculated after accounting for depreciation. Depreciation is subtracted from Gross National Disposable Income (GNDI) to obtain NDI. Depreciation represents the fall in the value of fixed assets and is an important factor in determining the actual income available for consumption or saving. Hence, both the assertion and the reason are correct, and the reason explains why the assertion is true.

Very Short Answer Type Questions

Q1: Define Macroeconomics.
Ans: Macroeconomics studies aggregate economic variables of an economy.

Q2: Give an example of a non-durable good.
Ans: Milk

Q3: What is an intermediate good?
Ans: Goods used either for resale or for further production.

Q4: Define Investment.
Ans: Net addition made to the existing stock of capital.

Q5: Explain the concept of Domestic Territory.
Ans: Geographical territory administered by a government where persons, goods, and capital circulate freely.

Q6: Differentiate between Nominal and Real GDP.
Ans: Nominal GDP uses current year prices, whereas Real GDP uses base year prices, adjusting for changes in physical output.

Q7: What is Depreciation in the context of national income accounting?
Ans: Fall in the value of fixed assets due to wear and tear, time, and obsolescence.

Q8: Define National Disposable Income.
Ans: Income available to residents for consumption or saving, including net indirect taxes and net current transfers from abroad.

Q9: What does Personal Income include?
Ans: Factor income from net domestic product, net factor income from abroad, interest on national debt, and current transfers from the government and rest of the world.

Q10: Explain the Circular Flow in a two-sector economy.
Ans: Households provide factors of production to firms, and firms supply goods and services to households.

Short Answer Type Questions

Q1: Explain the components of Net Factor Income from Abroad.
Ans: Net Factor Income from Abroad includes net compensation of employees, net income from property and entrepreneurship, and net retained earnings of resident companies abroad.

Q2: Describe the calculation of Real GDP.
Ans: Real GDP calculates the value of all goods and services produced using base year prices, adjusting for changes in physical output. It provides a reliable indicator of economic development.

Q3: Differentiate between GDP at Market Price and GDP at Factor Cost.
Ans: GDP at Market Price includes net indirect taxes, while GDP at Factor Cost excludes net indirect taxes.

Q4: Explain the relation between National Product and Domestic Product.
Ans: National Product includes production by both residents and non-residents within and outside the economic territory, while Domestic Product is based on production units within the economic territory.

Q5: Describe the concept of Normal Resident.
Ans: A normal resident is an individual or institution residing within the economic territory, engaging in basic economic activities with their center of economic interest in that country.

Q6: Explain the methods of calculation of National Income.
Ans: The methods of calculation of National Income are:

• Product method: Values output minus intermediate consumption.
• Income method: Includes compensation of employees and operating surplus.
• Expenditure method: Accounts for government and private consumption, net exports, and capital formation.

Q7: Describe the components of Personal Income.
Ans: Personal Income includes factor income from net domestic product, net factor income from abroad, interest on national debt, current transfers from the government, and the rest of the world.

Q8: Explain the calculation of National Disposable Income.
Ans: National Disposable Income includes NNPFC, net indirect taxes, and net current transfers from abroad, excluding depreciation.

Long Answer Type Questions

Q1: Explain the Circular Flow in a Two-Sector Economy with Examples.
Ans: The circular flow in a two-sector economy illustrates the flow of goods and services and the corresponding flow of money between households and firms. Households provide factors of production (such as labor and capital) to firms, and in return, firms produce goods and services that are sold back to households.

Example:

• Households: Households provide labor to a bakery, enabling the bakery to produce bread.
• Firms: The bakery produces bread using the labor provided by households and sells the bread back to households for consumption.

In this circular flow, households receive income from firms in the form of wages, salaries, and profits. Firms, in turn, receive revenue from households through the sale of goods and services. This flow continues, indicating the continuous interaction between households and firms in the economy.

Q2: Differentiate Between Nominal and Real GDP with Examples.
Ans:

• Nominal GDP: Nominal GDP measures the value of all goods and services produced within a country's borders using current market prices during a specific period. It includes both changes in physical output and changes in price levels. For example, if in 2023, a country produces 100 cars valued at $20,000 each, the nominal GDP related to cars would be $2,000,000.
• Real GDP: Real GDP measures the value of all goods and services produced within a country's borders, adjusting for changes in price levels. It uses constant base-year prices to exclude the effects of inflation or deflation. Using the previous example, if the base year is 2020 and the price of a car in that year was $18,000, the real GDP related to cars in 2023 would be $1,800,000, reflecting changes in physical output only.

Q3: Explain the Methods of Calculation of National Income.
Ans: Product Method (Value Added Method):

• Output: Value of output (goods and services) minus intermediate consumption (cost of raw materials and other inputs) equals gross value added.
• Income: Gross value added minus depreciation (consumption of fixed capital) plus net factor income from abroad gives net domestic product at factor cost (NDPFC).

Income Method:

• Income Components: Includes compensation of employees, operating surplus, and mixed income of self-employed individuals.
• Depreciation: Subtracting depreciation from the sum of income components provides NDPFC.

Expenditure Method:

• Components: Government final consumption expenditure, private final consumption expenditure, net exports (exports minus imports), and gross domestic capital formation.
• Calculation: Subtracting consumption of fixed capital and net indirect taxes from GDPMP yields NDPFC.

Q4: Describe the Components of Personal Income.
Ans: Factor Income from Net Domestic Product (NDP):

• Inclusions: Wages, salaries, profits, rents, and interests earned by households from factors of production.

Net Factor Income from Abroad:

• Inclusions: Net earnings from foreign investments and international trade.

Interest on National Debt:

• Inclusions: Interest payments received by individuals on government loans and bonds.

Current Transfers from Government:

• Inclusions: Social benefits, subsidies, and grants received by households from the government.

Current Transfers from Rest of the World:

• Inclusions: Remittances and gifts from individuals and organizations outside the country.

Personal income excludes corporate taxes and savings of non-departmental enterprises, providing a comprehensive view of the income available to individuals and households.