Passage Based Questions: National Income Accounting | Economics Class 12 - Commerce PDF Download

Passage - 1

Direction: Read the hypothetical case study given below and answer the questions that follow:

Passage: The economy can be thought of as two cycles moving in opposite directions. In one direction, we see goods and services flowing from individuals to businesses and back again. This represents the idea that, as labourers, we go to work to make things or provide services that people want.
In the opposite direction, we see money flowing from businesses to households and back again. This represents the income we generate from the work we do, which we use to pay for the things we want.
Both of these cycles are necessary to make the economy work. When we buy things, we pay money for them. When we go to work, we make things in exchange for money.
The circular flow model of the economy distills the idea outlined above and shows the flow of money and goods and services in a capitalist economy.

What is the Circular Flow Model in Economics?
The circular flow model is an economic model that shows the flow of money through the economy. The most common form of this model shows the circular flow of income between the household sector and the business sector. Between the two are the product market and the resource market.
Households purchase goods and services, which businesses provide through the product market. Businesses, meanwhile, need resources in order to produce goods and services. Members of households provide labour to businesses through the resource market. In turn, businesses convert those resources into goods and services.
Here’s how it works: When households need a good or service, their money flows to the product market in a process called consumer spending.
To provide goods and services to households, the product market purchases them from businesses, generating revenue.
To make goods and services for the product market, businesses purchase resources from the resource market, generating cost.
Finally, to generate resources businesses need to create goods, the resource market pays for other resources—namely, workers and land. This generates income for labour and landholders.
The above process can be summarized as follows: Consumer spending —> Revenue —> Cost —> Income

Q1: What is the focus of the article above? Draw a model of the concept discussed.
Ans: The above article is talking of the circular flow model.

Q2: What are the key benefits of the concept discussed in the article?
Ans: The importance of the Circular Flow of Income includes: (i) It shows the flow of stocks among the different sectors. (ii) It shows the flow of money among the different sectors. (iii) It reflects the structure of an economy. (iv) It shows interdependence among different sectors. (v) It shows injections and leakages from the flow of money. (vi) It helps in the estimation of national income and related aggregates.

Passage - 2

Direction: Read the news article given below and answer the questions that follow:

Passage: The gross domestic product (GDP) of a nation is an estimate of the total value of all the goods and services it produced during a specific period, usually a quarter or a year. Its greatest use is as a point of comparison: Did the nation's economy grow or contract compared to the previous period measured?

KEY TAKEAWAYS
GDP can be calculated by adding up all of the money spent by consumers, businesses, and government in a given period.
It may also be calculated by adding up all of the money received by all of the participants in the economy.
In either case, the number is an estimate of "nominal GDP."
Once adjusted to remove any effects due to inflation, "real GDP" is revealed.
There are two main ways to measure GDP: by measuring spending or by measuring income.And then there's real GDP, which is an
adjustment that removes the effects of inflation so that the economy's growth or contraction can be seen clearly.

Calculating GDP Based on Spending
One way of arriving at GDP is to count up all of the money spent by the different groups that participate in the economy. These include consumers, businesses, and government. All pay for goods and services that contribute to the GDP total.
In addition, some of the nation's goods and services are exported for sale overseas. And some of the products and services that are consumed are imports from abroad. The GDP calculation accounts for spending on both exports and imports. Thus, a country’s GDP is the total of consumer spending (C) plus business investment (I) and government spending (G), plus net exports, which is total exports minus total imports (X – M).

Calculating GDP Based on Income
The flip side of spending is income. Thus, an estimate of GDP may reflect the total amount of income paid to everyone in the country.
This calculation includes all of the factors of production that make up an economy. It includes the wages paid to labour, the rent earned by land, the return on capital in the form of interest, and the entrepreneur’s profits. All of these make up the national income.

This approach is complicated by the need to make adjustments for some items that don't always appear in the raw numbers. These include:

• Indirect business taxes such as sales taxes and property taxes
• Depreciation, a measure of the decreasing value of business equipment over time
• Net foreign factor income, which is foreign payments made to a country's citizens minus the payments those citizens made to foreigners.

In this income approach, the GDP of a country is calculated as its national income plus its indirect business taxes and depreciation, plus its net foreign factor income.

Q1: What is the subject of the article above? Define the term.
Ans: The above article is talking about GDP. Gross Domestic Product is the value of all goods and services produced within the territory of the country.

Q2: What are the two methods mentioned in the article for calculating GDP? Provide the formulas for each method.
Ans: The two methods mentioned in the article are: (i) Expenditure Method: National Income = GDPMP – Depreciation – Net Indirect Taxes + Net Income from Abroad (ii) Income Method: National Income = Compensation to Employees + Operating Surplus + Mixed Income from Self Employment + Net Income from Abroad

Passage - 3

Direction: Read the following Passage and Answer the Questions.
Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer goods. (This also includes services which are consumed but for convenience we may refer to them as consumer goods.) Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines. While they make production of other commodities feasible, they themselves don’t get transformed in the production process. They are also final goods yet they are not final goods to be ultimately consumed.

Q1: What are goods like food, clothing, and services like recreation called in economic terms?
Ans:

• Goods like food, clothing, and services like recreation, which are consumed when purchased by ultimate consumers, are called consumption goods or consumer goods.

Q2: How are goods like tools, implements, and machines classified in the production process?
Ans:

• Goods like tools, implements, and machines, which are used in the production process but do not get transformed themselves, are classified as capital goods or durable goods.
• They facilitate the production of other commodities but are not consumed in the process.

Q3: Why are tools, implements, and machines considered final goods but not ultimately consumed?
Ans:

• Tools, implements, and machines are considered final goods because they are the end products of manufacturing processes.
• However, they are not ultimately consumed as they are used in the production of other commodities rather than being consumed by end-users.

Passage - 4

Direction: Read the following Passage and Answer the Questions.
We may note here that some commodities like television sets, automobiles or home computers, although they are for ultimate consumption, have one characteristic in common with capital goods – they are also durable. That is, they are not extinguished by immediate or even short period consumption; they have a relatively long life as compared to articles such as food or even clothing. They also undergo wear and tear with gradual use and often need repairs and replacements of parts, i.e., like machines they also need to be preserved, maintained and renewed. That is why we call these goods consumer durables.

Q1: What characteristic do commodities like television sets, automobiles, and home computers share with capital goods?
Ans:

• Commodities like television sets, automobiles, and home computers share the characteristic of durability with capital goods.
• They are not immediately extinguished by consumption and have a relatively long lifespan compared to items like food or clothing.

Q2: Why are these durable commodities referred to as "consumer durables"?
Ans:

• These durable commodities are referred to as "consumer durables" because, like machines and capital goods, they also have a long life span.
• Additionally, they undergo wear and tear with use and often require maintenance, repairs, and replacements of parts, similar to the way machines are preserved, maintained, and renewed.

Q3: How do consumer durables differ from items like food and clothing in terms of their lifespan and consumption?
Ans:

• Consumer durables have a longer lifespan compared to items like food and clothing.
• While food and clothing are typically consumed within a short period, consumer durables have a relatively long life and can be used over an extended period with proper maintenance.

Passage - 5

Direction: Read the following Passage and Answer the Questions.
Of the total production taking place in the economy a large number of products don’t end up in final consumption and are not capital goods either. Such goods may be used by other producers as material inputs. Examples are steel sheets used for making automobiles and copper used for making utensils. These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods.

Q1: What are goods like steel sheets used for making automobiles and copper used for making utensils called in economic terms?
Ans:

• Goods like steel sheets and copper, which are used as material inputs by other producers, are called intermediate goods.
• They are used as raw materials or inputs in the production of other commodities.

Q2: How are intermediate goods different from final goods in the context of production?
Ans:

• Intermediate goods are products used in the production process as raw materials or inputs for other commodities.
• They do not end up in final consumption and are not capital goods. In contrast, final goods are products that are ultimately consumed by end-users or consumers.

Q3: Can you provide examples of intermediate goods mentioned in the passage?
Ans:

• Examples of intermediate goods mentioned in the passage include steel sheets used for making automobiles and copper used for making utensils.
• These goods are used as inputs in the production of final consumer goods but are not consumed directly by end-users.

Passage - 6

Direction: Read the following Passage and Answer the Questions.
At this stage it is important to introduce the concepts of stocks and flows. Often we hear statements like the average salary of someone is Rs 10,000 or the output of the steel industry is so many tonnes or so many rupees in value. But these are incomplete statements because it is not clear whether the income which is being referred to is yearly or monthly or daily income and surely that makes a huge difference. Sometimes, when the context is familiar, we assume that the time period is known and therefore do not mention it. But inherent in all such statements is a definite period of time. Otherwise, such statements are meaningless. Thus income, or output, or profits are concepts that make sense only when a time period is specified. These are called flows because they occur in a period of time.

Q1: Why are statements like "the average salary of someone is Rs 10,000" incomplete without additional information?
Ans:

• These statements are incomplete because they lack a specified time period (yearly, monthly, or daily), which is crucial for understanding the context.
• The time period determines the accuracy and relevance of the statement.

Q2: What are income, output, and profits referred to as when a specific time period is specified?
Ans:

• When a specific time period is specified, concepts like income, output, and profits are referred to as flows.
• Flows represent quantities that occur over a defined period of time.

Q3: Why is it necessary to mention a time period when discussing income, output, or profits?
Ans:

• Mentioning a time period is necessary because income, output, and profits are meaningful concepts only when associated with a specific period.
• Without a defined time frame, such statements lack context and become meaningless.

Passage - 7

Direction: Read the following Passage and Answer the Questions.
Stocks are defined at a particular point of time. However we can measure a change in stock over a specific period of time like how many machines were added this year. Such changes in stocks are thus flows, which can be measured over specific time periods. A particular machine can be part of the capital stock for many years (unless it wears out); but that machine can be part of the flow of new machines added to the capital stock only for a single year when it was initially installed. To further understand the difference between stock variables and flow variables, let us take the following example. Suppose a tank is being filled with water coming from a tap. The amount of water which is flowing into the tank from the tap per minute is a flow.

Q1: How are stocks and flows differentiated in the context of measuring change over time?
Ans:

• Stocks represent quantities at a specific point in time, whereas flows are changes in stocks measured over specific periods, indicating how much has been added or subtracted during that time.

Q2: How can a machine be part of both stock and flow variables?
Ans:

• A machine can be part of the capital stock for many years unless it wears out (stock variable).
• However, it becomes part of the flow of new machines added to the capital stock only for the single year when it was initially installed (flow variable).

Q3: How is the difference between stock variables and flow variables illustrated using the example of filling a tank with water from a tap?
Ans:

• In the example, the amount of water flowing into the tank from the tap per minute represents a flow variable.
• The water level in the tank at a specific moment represents a stock variable. While the flow measures the rate of change, the stock represents the quantity at a particular point in time.

Passage - 8

Direction: Read the following Passage and Answer the Questions.
But all the capital goods produced in a year do not constitute an addition to the capital stock already existing. A significant part of current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods. This is because the already existing capital stock suffers wear and tear and needs maintenance and replacement. A part of the capital goods produced this year goes for replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment. This deletion, which is made from the value of gross investment in order to accommodate regular wear and tear of capital, is called depreciation.

Q1: Why does a significant part of current output of capital goods go towards maintenance and replacement of existing stock?
Ans:

• The existing capital stock suffers wear and tear, necessitating maintenance and replacement.
• Therefore, a significant portion of the current output of capital goods is used for maintaining or replacing part of the existing stock of capital goods.

Q2: What is the term used to describe the subtraction made from the value of gross investment to account for wear and tear of capital goods?
Ans:

• The subtraction made from the value of gross investment to accommodate regular wear and tear of capital is called depreciation.

Q3: How is net investment calculated, considering the concept of depreciation?
Ans:

• To calculate net investment, the value allocated for replacement of existing capital goods (depreciation) is subtracted from the gross investment, providing a measure that represents the addition to the existing stock of capital goods after accounting for wear and tear.

Passage - 9

Direction: Read the following Passage and Answer the Questions.
conomy – without a government, external trade or any savings – may function. The households receive their payments from the firms for productive activities they perform for the latter. As we have mentioned before, there may fundamentally be four kinds of contributions that can be made during the production of goods and services (a) contribution made by human labour, remuneration for which is called wage (b) contribution made by capital, remuneration for which is called interest (c) contribution made by entrepreneurship, remuneration of which is profit (d) contribution made by fixed natural resources (called ‘land’), remuneration for which is called rent.

Q1: What are the four kinds of contributions made during the production of goods and services, and their corresponding remunerations?
Ans: The four kinds of contributions are:

• Contribution made by human labour, remuneration for which is called wage.
• Contribution made by capital, remuneration for which is called interest.
• Contribution made by entrepreneurship, remuneration for which is profit.
• Contribution made by fixed natural resources (called 'land'), remuneration for which is rent.

Q2: How do households receive their payments in the absence of government, external trade, or savings, according to the passage?
Ans: 

• In the absence of government, external trade, or savings, households receive payments from firms for the productive activities they perform.
• These payments are based on the contributions made during the production process, such as labor, capital, entrepreneurship, and fixed natural resources.

Q3: What is the remuneration called for the contribution made by human labor during the production of goods and services?
Ans: 

• The remuneration for the contribution made by human labor during the production of goods and services is called wage.

Passage - 10

Direction: Read the following Passage and Answer the Questions.
In the next period the firms will once again produce goods and services and pay remunerations to the factors of production. These remunerations will once again be used to buy the goods and services. Hence year after year we can imagine the aggregate income of the economy going through the two sectors, firms and households, in a circular way. This is represented in Fig. 2.1. When the income is being spent on the goods and services produced by the firms, it takes the form of aggregate expenditure received by the firms. Since the value of expenditure must be equal to the value of goods and services, we can equivalently measure the aggregate income by “calculating the aggregate value of goods and services produced by the firms”.

Q1: What happens year after year in the economic cycle described in the passage?
Ans: 

• Year after year, firms produce goods and services and pay remunerations to the factors of production.
• These remunerations are used by households to buy goods and services, creating a circular flow of income within the economy.

Q2: How is aggregate income represented in the circular flow of income between firms and households?
Ans: 

• Aggregate income is represented as the flow of income between firms and households in a circular way, as illustrated in Figure 2.1.
• When income is spent on goods and services produced by firms, it takes the form of aggregate expenditure received by the firms.

Q3: How can aggregate income be measured in this economic model?
Ans:

• Aggregate income can be measured by calculating the aggregate value of goods and services produced by the firms.
• The value of expenditure must be equal to the value of goods and services produced, providing an equivalent way to measure aggregate income.

Passage - 11

Direction: Read the following Passage and Answer the Questions.
Since the same amount of money, representing the aggregate value of goods and services, is moving in a circular way, if we want to estimate the aggregate value of goods and services produced during a year we can measure the annual value of the flows at any of the dotted lines indicated in the diagram. We can measure the uppermost flow (at point A) by measuring the aggregate value of spending that the firms receive for the final goods and services which they produce. This method will be called the expenditure method.

Q1: What method can be used to estimate the aggregate value of goods and services produced during a year in the circular flow of income model?
Ans: 

• The expenditure method can be used to estimate the aggregate value of goods and services produced during a year in the circular flow of income model.

Q2: How can the annual value of the flows in the circular flow of income be measured using the expenditure method?
Ans: 

• The annual value of the flows can be measured by measuring the uppermost flow (at point A) in the diagram.
• This flow represents the aggregate value of spending that firms receive for the final goods and services they produce.

Q3: What is the key concept of the expenditure method in measuring aggregate value?
Ans: 

The expenditure method focuses on measuring the value of spending that firms receive for the final goods and services they produce as a way to estimate the aggregate value of goods and services produced during a year.

Passage - 12

Direction: Read the following Passage and Answer the Questions.
The additional factor payments must be equal to the value of the additional goods and services that are being produced. Thus the households will eventually get the extra earnings required to support the initial additional spending that they had undertaken. In other words, the households can decide to spend more – spend beyond their means. And in the end their income will rise exactly by the amount which is necessary to carry out the extra spending. Putting it differently, an economy may decide to spend more than the present level of income. But by doing so, its income will eventually rise to a level consistent with the higher spending level.

Q1: According to the passage, what must be equal for an economy considering additional spending?
Ans:

• For an economy considering additional spending, the additional factor payments must be equal to the value of the additional goods and services that are being produced.

Q2: How does the passage describe the relationship between additional spending and household income?
Ans: 

• If households decide to spend more, even beyond their means, their income will eventually rise by exactly the amount necessary to support the extra spending.
• In other words, an economy can spend more than its present level of income, and its income will eventually rise to a level consistent with the higher spending level.

Q3: What does the passage suggest about an economy's ability to spend beyond its current income level?
Ans: 

• The passage suggests that an economy can decide to spend more than its current income level.
• By doing so, its income will eventually rise to a level consistent with the higher spending, supporting the additional expenditures made by households.

Passage - 13

Direction: Read the following Passage and Answer the Questions.
Since the capital which is used to carry out production undergoes wear and tear, the producer has to undertake replacement investments to keep the value of capital constant. The replacement investment is same as depreciation of capital. If we include depreciation in value added then the measure of value added that we obtain is called Gross Value Added. If we deduct the value of depreciation from gross value added we obtain Net Value Added. Unlike gross value added, net value added does not include wear and tear that capital has undergone. For example, let us say a firm produces Rs 100 worth of goods per year, Rs 20 is the value of intermediate goods used by it during the year and Rs 10 is the value of capital consumption.

Q1: What is the purpose of replacement investments in the context of capital used in production?
Ans: 

• Replacement investments are undertaken to keep the value of capital constant, compensating for the wear and tear that capital undergoes during production.

Q2: How is Gross Value Added (GVA) calculated in the context of production and depreciation?
Ans:

• Gross Value Added (GVA) is calculated by including depreciation (the value of wear and tear) in the measure of value added.
• It includes the value of production and the cost of replacing the worn-out capital.

Q3: What is the difference between Gross Value Added (GVA) and Net Value Added?
Ans:

• Gross Value Added (GVA) includes wear and tear of capital, while Net Value Added deducts the value of depreciation from GVA.
• Net Value Added represents the value added without considering the wear and tear of capital, providing a clearer picture of the actual value generated.

Passage - 14

Direction: Read the following Passage and Answer the Questions.
It is to be noted that while calculating the value added we are taking the value of production of firm. But a firm may be unable to sell all of its produce. In such a case it will have some unsold stock at the end of the year. Conversely, it may so happen that a firm had some initial unsold stock to begin with. During the year that follows it has produced very little. But it has met the demand in the market by selling from the stock it had at the beginning of the year. How shall we treat these stocks which a firm may intentionally or unintentionally carry with itself? Also, let us remember that a firm buys raw materials from other firms.

Q1: What issue is raised in the passage regarding the calculation of value added by a firm?
Ans:

• The issue raised is how to treat unsold stock that a firm may intentionally or unintentionally carry at the end of the year.

Q2: How does the passage describe a situation in which a firm may have unsold stock at the end of the year?
Ans:

• The passage describes a scenario in which a firm, at the end of the year, may have unsold stock because it was unable to sell all of its produce.

Q3: In addition to addressing unsold stock, what other aspect of a firm's operations is mentioned in the passage?
Ans:

• The passage also mentions that a firm buys raw materials from other firms, indicating that the acquisition of raw materials is part of a firm's operations.

Passage - 15

Direction: Read the following Passage and Answer the Questions.
Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment. There can be three major categories of investment. First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm. The second category of investment is the fixed business investment, which is defined as the addition to the machinery, factory buildings and equipment employed by the firms. The last category of investment is the residential investment, which refers to the addition of housing facilities.

Q1: How are inventories treated in economic terms, and what is their significance for a firm?
Ans:

• Inventories are treated as capital in economic terms, and the addition to the stock of capital of a firm is known as investment.
• Inventories represent the goods a firm holds for future sale or use, and changes in inventory levels are considered investments.

Q2: What are the three major categories of investment mentioned in the passage?
Ans: The three major categories of investment are:

• Rise in the value of inventories: Increase in the value of inventories of a firm over a year, treated as investment expenditure.
• Fixed business investment: Addition to machinery, factory buildings, and equipment employed by firms.
• Residential investment: Addition of housing facilities.

Q3: How is fixed business investment defined in the passage?
Ans:

• Fixed business investment is defined as the addition to the machinery, factory buildings, and equipment employed by firms.
• It represents the investment made in the expansion or improvement of a firm's production facilities.

Passage - 16

Direction: Read the following Passage and Answer the Questions.
An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method. In the farmerbaker example that we have described before, the aggregate value of the output in the economy by expenditure method will be calculated in the following way. In this method we add the final expenditures that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes. The Rs 50 worth of wheat which the bakers buy from the farmers counts as intermediate goods, hence it does not fall under the category of final expenditure. Therefore the aggregate value of output of the economy is Rs 200 (final expenditure received by the baker) + Rs 50 (final expenditure received by the farmer) = Rs 250 per year.

Q1: What is the alternative method for calculating GDP mentioned in the passage?
Ans:

• The alternative method for calculating GDP mentioned in the passage is the expenditure method.

Q2: How is final expenditure defined in the context of the expenditure method?
Ans:

• Final expenditure is defined as that part of expenditure which is undertaken not for intermediate purposes. It includes expenditures made on goods and services for final use and consumption.

Q3: How is the aggregate value of output calculated using the expenditure method in the farmer-baker example provided in the passage?
Ans:

• In the farmer-baker example, the aggregate value of output using the expenditure method is calculated by adding the final expenditures made by each firm.
• It excludes expenditures on intermediate goods. For example, if the baker spends Rs 200 and the farmer spends Rs 50 on final goods, the total aggregate value of output for the economy is Rs 250 per year.

Passage - 17

Direction: Read the following Passage and Answer the Questions.
The idea of GVA has already been discussed: it is the value of total output produced in the economy less the value of intermediate consumption (the output which is used in production of output further, and not used in final consumption). Here we discuss the concept of basic prices. The distinction between factor cost, basic prices and market prices is based on the distinction between net production taxes (production taxes less production subsidies) and net product taxes (product taxes less product subsidies). Production taxes and subsidies are paid or received in relation to production and are independent of the volume of production such as land revenues, stamp and registration fee. Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise tax, service tax, export and import duties etc.

Q1: What is GVA, and how is it calculated according to the passage?
Ans:

• GVA stands for Gross Value Added. It is the value of total output produced in the economy less the value of intermediate consumption.
• In other words, GVA is the output that remains after deducting the value of goods and services used in the production of other goods and services (intermediate consumption).

Q2: What is the distinction between factor cost, basic prices, and market prices based on?
Ans:

• The distinction between factor cost, basic prices, and market prices is based on the distinction between net production taxes (production taxes less production subsidies) and net product taxes (product taxes less product subsidies).

Q3: Can you provide examples of production taxes and subsidies and product taxes and subsidies mentioned in the passage?
Ans:

• Examples of production taxes include land revenues, stamp, and registration fees. Examples of product taxes include excise tax, service tax, export and import duties.
• Production subsidies and product subsidies refer to the opposite: payments made to producers to encourage production or consumption.

Passage - 18

Direction: Read the following Passage and Answer the Questions.
Through the expression given above, we get the value of NNP evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost or National Income.

Q1: Why do we need to deduct indirect taxes from NNP evaluated at market prices according to the passage?
Ans:

• Indirect taxes increase the prices of goods and services.
• These taxes accrue to the government and need to be deducted from NNP evaluated at market prices to calculate the portion of NNP that actually accrues to the factors of production.

Q2: How do subsidies affect the calculation of Net National Product (NNP) at factor cost or National Income?
Ans:

• Subsidies, when granted on certain commodities, reduce their prices. These subsidies need to be added to NNP evaluated at market prices to obtain Net National Product at factor cost or National Income.

Q3: What is the measure obtained after deducting indirect taxes and adding subsidies to NNP evaluated at market prices?
Ans:

• The measure obtained after deducting indirect taxes and adding subsidies to NNP evaluated at market prices is called Net National Product at factor cost or National Income.

Passage - 19

Direction: Read the following Passage and Answer the Questions.
First, let us note that out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households. On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either.

Q1: What does the term "Undistributed Profits (UP)" refer to, and how does it affect the calculation of Personal Income (PI)?
Ans:

• Undistributed Profits (UP) refer to the portion of profit earned by firms and government enterprises that is not distributed among the factors of production.
• UP needs to be deducted from National Income (NI) to arrive at Personal Income (PI) since UP does not accrue to the households.

Q2: How does Corporate Tax impact the calculation of National Income (NI), and why is it deducted from NI?
Ans:

• Corporate Tax, imposed on earnings made by firms, is deducted from NI because it does not accrue to the households. It is not part of the income that households receive.

Q3: What role do interest payments and receipts play in the calculation of Personal Income (PI)?
Ans:

• Interest payments received by households from private firms or the government, as well as interest payments made by households to firms and the government, are considered in the calculation of PI.
• Households receive interest payments on past loans advanced by them, and they may also pay interests if they had borrowed money. PI takes into account these interest transactions.

Passage - 20

Direction: Read the following Passage and Answer the Questions.
Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold. For example, let us suppose there is an oil refinery which refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value added of the refinery by deducting the value of intermediate goods used by the refinery (crude oil in this case) from the value of its output. The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well being will fall.

Q1: What are externalities in the context of economics, and how are they defined in the passage?
Ans:

• Externalities, in economics, refer to the benefits or harms that a firm or individual causes to another party for which they are not compensated or penalized.
• In other words, externalities are the unintended consequences of an economic activity that affect others without any corresponding market transaction.

Q2: Can externalities be bought and sold in a market, according to the passage?
Ans:

• No, externalities cannot be bought and sold in a market. They do not have any market in which they can be traded or exchanged.

Q3: How does the passage illustrate the concept of externalities with an example?
Ans:

• The passage illustrates externalities with the example of an oil refinery that refines crude petroleum.
• While the value added by the refinery is counted as part of the GDP, the production process may also result in pollution of a nearby river, causing harm to the people who use the river water.
• This harm represents a negative externality resulting from the refinery's activities.