Worksheet Solutions: National Income Accounting- 2 | Economics Class 12 - Commerce PDF Download

MCQ Questions 

Q18: Combined factor income, which can’t be separated into various income components is known as ……… .
(a) Mixed income of self-employed
(b) Compensation of employees
(c) Deferred income
(d) Any of the above
Ans: a

Q19. Other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be
(a) positive
(b) negative
(c) Both positive and negative
(d) No effect
Ans: d

Q20: Which of the following is not a ‘factor payment’?
(a) Free uniform to defence personnel
(b) Salaries to members of Parliament
(c) Rent paid to the owner of the building
(d) Scholarship given to the students
Ans: d 

Q21: If Real GDP is `R.s. 200 and Price Index (with base =100) is 110, calculate Nominal GDP.
(a) R.s. 33
(b) R.s. 220
(c) R.s.200
(d) R.s. 100
Ans: b

Q21: Let us assume that the GDP of some country was R.s.100 at current prices in 2012-13 and that was R.s. 90 in 2011-12; and that the GDP at constant 2004-05 prices was R.s. 59 in 2012-13 and that was R.s. 56.1 in 2011-12, then in GDP of 2011-12 at 2012-13 (constant) prices would be
(a) R.s.59.1
(b) R.s. 90
(c) R.s. 95.08
(d) R.s.100
Ans: c

Q22: Which of the given statement is incorrect?
(a) GDPMP GDPFC NIT = +
(b) NNPMP NNP = FC
(c) GNPMP GDPMP NFIA = +
(d) NNPFC = National Income
Ans: b

Q23. If in an economy, all production is undertaken by firms and the recorded sales of all firms in a year are less than their respective recorded costs, then which of the following statements is necessarily true?
(a) At least some firmsmust havemade accounting errors
(b) The economy’s GDP of that year was negative
(c) The total purchases of intermediates by firms were more than their total sales
(d) None of the above
Ans: c

Q24: With a positive externality
(a) there is under consumption in the free market.
(b) there is over consumption in the free market.
(c) the government may tax to decrease production.
(d) society could be made better-off if less was produced.
Ans: b

Q25: Given the following data for an economy Gross domestic product at market prices `R.s.20,000 Gross domestic capital formation `R.s. 5,000 Depreciation ` R.s.4,000 Net exports (–) ` R.s.2,000 Net factor incomes from abroad ` 5,000 The economy’s net domestic capital formation is
(a) R.s.1,000
(b) R.s. 5,000
(c) R.s.3,000
(d) (–)R.s. 1,000
Ans: a

Q26: Which of the following statements is/are correct?
(i) Capital formation is a stock variable.
(ii) A car covering a distance of 400 km in 5 hours includes both stock as well as flow variable.
Alternatives
(a) Both are true
(b) Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true  
Ans: d

Q27: Depreciation of fixed capital assets refer to
(a) normal wear and tear
(b) foreseen obsolescence
(c) Both (a) and (b)
(d) unforeseen obsolescence
Ans: c

Q28: Money flows are reciprocal of
(a) monetary flows
(b) real flows
(c) circular flow
(d) inventory flows  
Ans: b

Q29: A thousand rupee note is an example of
(a) stock variable
(b) flow variable
(c) Either stock or flow
(d) Neither stock nor flow  
Ans: a

Q30: Circular flow of income is based upon which of the following assumptions?
(a) All sectors are self-sufficient and independent
(b) Income generated in one sector is consumed within the same sector
(c) One person’s expenditure is another person’s income
(d) All economies are closed economies
Ans: c

Q31: In which of the following cases would the purchase of rice be included while calculating the GDP of India from the expenditure side?
(a) A resident Indian purchases rice to make a dosa which he sells to his neighbour. He then pockets the money received.
(b) A resident Indian purchases rice to make dosa which he sells to his neighbour. He donates the money received to a charity.
(c) A foreign citizen visiting Indian purchases rice to make a dosa which he sells to another foreign citizen visiting India.
(d) A non-resident Indian visiting India purchases rice, goes back to his country of residence, makes a dosa and then sells it to his neighbour.
Ans: d

Short Answer Type Questions

Q13: Question. ‘‘Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a country.’’ Defend or refute the given statement with valid reasons.
Ans: ‘‘Gross Domestic Product (GDP) is not the best indicator of the economic welfare of a country.’’ This statement is defended because of the following reasons
(i) Distribution of GDP If the GDP of the country is rising,it is not necessary that the welfare will also rise. This is because with every increase in the level of GDP, it is not necessary that distribution of income is also equalable.
(ii) Non-Monetary Exchanges In rural economy, barter system of exchange still prevails to some extent. Payments for farm labour are often made in kind rather than in cash. All such transactions remain unrecorded  which causes underestimation of GDP.
(iii) Externalities It refers to good and bad impact of an activity without paying the price or penalty for that activity. Impact of external entities are not accounted in the index of social welfare in terms of GDP.

Q14: Explain how ‘non-monetary exchanges’ act as a limitation in taking GDP as an index of welfare.
Ans: It can be understood with the help of following points
(i) GDP measures only economic value of the current productive activity of a country.
(ii) There are many activities which are not evaluated in monetary terms. In India, non-monetary transactions are present in rural areas where payments for farm labourers are made in kind rather than cash. But such transactions are not recorded.
(iii) Even while producing goods and services, lot of human cost is also involved. For example, sacrificing leisure hours by working but this is never included in total cost.
Therefore, GDP remains underestimated and hence loses its appropriateness as an index of welfare.

Q15 Government incurs expenditure to popularise yoga among the masses. Analyse its impact on Gross Domestic Product and welfare of the people.
Ans: The expenditure incurred by the government to popularise yoga among the masses will increase the government final consumption expenditure. With a rise in this component,the domestic income of the country will also rise. So, the expenditure incurred by the government to popularise yoga will lead to an increase in the Gross Domestic Product of the country.
This expenditure will also increase the welfare of the people, as is enumerated below
(i) As more and more people practise yoga, their health and immunity will improve. This will help in increasing their working capacity.
(ii) As people’s health improve, so government’s expenditure on the curative aspect of health issues will decrease.
(iii) People will develop a positive outlook and their well-being will increase in general.

Q16 From the following data, calculate net value added atfactor cost    
Ans: Here, Net Value Added at Factor Cost ( NVA _FC)
= Sales + Change in Stock (Closing Stock −
Opening Stock) − Purchase of Intermediate Goods
− Consumption of Fixed Capital − Indirect Taxes
= 500+(80− 60)− 350− 90−50
= 520− 490 = R.s.30 crore

Q17: What steps are taken while estimating national income by income method?
Ans: Steps: –

• Identify all producing units within domestic territory of country.
• Classify factor payment mode to factors of production in the form of rent, interest, wages and profit or compensation of employees, operating surplus and mixed income.
• Estimate all above components of factor payments made by each producing unit within domestic territory of a country in a year and the sum of such factor payments will estimate NDPFC.
• Estimate the value of NFIA and then add it into NDPFC to get NNPFC (National Income).

Q18: What precautions should be taken while estimating national income by income method?
Ans:

• Only factor incomes are included whereas transfer incomes like gifts, donations, old age pensions etc. are not included in national income because there is no production activity against such income.
• Income from sale of second-hand goods are not included in national income because such goods have already been taken in national income, but any brokerage/ commission given to a dealer in such transactions is included in national income as it is the reward for factor services.
• Income for sale of financial assets like shares, debentures, bonds etc. are not included in the national income because it only includes transfer of ownership and doesn’t contribute in the production of goods and services.
• Any windfall game like lottery income, capital gains etc. are not included in the national income.
• Imputed rent of self-occupied houses is included in national income.

Define: –

• GDPMP- It is the market value of all final goods and services produced within the domestic boundary of a country in an accounting year.
• NDPMP- It is the market value of all net final goods and services produced within the domestic boundary of a country in an accounting year. It excludes depreciation.
• GNPMP- It is the market value of all final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA.
• NNPMP- It is the market value of all net final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes depreciation.
• GDPFC- It is the money value of all final goods and services produced within domestic boundary of country in an accounting year. It includes NIT.
• NDPFC- It is the money value of all net final goods and services produced within domestic boundary of a country in an accounting year. It excludes depreciation and NIT.
• GNPFC- It is the money value of all final of goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes NIT.
• NNPFC- It is the money value of all net final goods and services produced by the normal residents of a country in an accounting year. It includes NFIA and excludes depreciation and NIT.

Method to Learn –

• G- Final
• N– Net Final
• MP– Market Value
• FC– Money Value
• DP– Domestic
• NP– Normal Resident

 
Q19: What steps are taken while estimating national income by expenditure method?
Ans:  Steps: –

• Identify all economic units which incurs final expenditure and classify them as
  (i) Household sector
  (ii) Government sector
  (iii) Firm sector
  (iv) ROW sector
• Classify final expenditure incurred by all economic units as
  (i) private final consumption expenditure
  (ii) government final consumption expenditure
  (iii) gross domestic capital formation
  (a) gross fixed capital formation
  (b) change in stock
  (iv) net exports

Q20: (a)  Estimate the value of all above components of final expenditure incurred by all economic units within domestic territory of country in a year and their sum will estimate GDPMP.
(b)  From the estimates of GDPMP, value of depreciation and NIT are subtracted and NFIA is added to get NNPFC (National Income).
(c) Explain the components of domestic factor income.
Ans: (a) Compensation of employees: It is the reward paid to an employee for his physical or mental services rendered in the process of production. It can be paid in three ways: –
(i) Wages and salaries in cash
(ii) Wages and salary in kind
(iii) Social security schemes by employer
(b) Operating surplus: It refers to income from property and entrepreneurship. It is the sum of rent, interest and profit.
(i) Rent and Royalty- Rent is the income earned by landlord by providing the services of land, building or any sub-soil assets. It is to be noted that domestic income also includes imputed rent of self-occupied houses. Royalty is the income earned from intangible assets like copyright, patents, trademarks etc.
(ii) Interest- It is the cost of capital sacrificed for a particular period of time. In other words, it refers to that amount which debtor is liable to pay to creditors for the use of funds borrowed.
It is to be noted that interest on loan taken for consumption purpose is considered transfer income so not included in domestic income.
(iii) Profits- It is the reward given to factor input ‘entrepreneur’ for undertaking the risk and organising other factors of production.
(c) Mixed Income- It is the income of those self-employed persons who provide all factor services of land, labour, capital in their own business so their income includes rent, interest, wages and profit which is difficult to classify individually. So, their income is called mixed income.

Q21: Define NFIA. What are the components?
Ans: It refers to difference between factor income earned by normal residents of a country in abroad and factor income earned by non-residents within domestic territory of a country in a year.
Components

• Net compensation of employees from abroad.
• Net income from property and entrepreneurship from abroad.
• Net retained earnings of resident company in abroad.

Q22: What is meant by expenditure method?
Ans: E(cxopnesunmdiptutiroen m eextpheondd iist uthrea+t m ientvheostdm wehnitc ehx mpeenasduitruerse n) aotnio tnhael pinucrocmhaes ien o tfe firmnasl ogfo tohdes eaxnpde snedrivtiucrees produced in the economy during the period of an accounting year.

Q23: Define nominal GDP.
Ans: Nominal GDP (also called GDP at current prices) refers to market value of the final goods and seesrtivmicaetse dp ruosdinugc ethde wcuitrhrienn tt hyee adr opmriecsetsi.c territory of a country during an accounting year, as

Q24: Define depreciation.
Ans: aDcecporuencti aotfi:o n(i ) (Noro rcmonaslu wmeparti oannd o tfe fiarx,e adn cda p(iiit) aEl)x rpeefcetresd t oob lsooslse socfe vnacleu, e( ioiif) Aficxceidd eanstsaelt sd a(imn augsees). on

Q25: Define depreciation reserve fund.
Ans. lDoessperse icnia tthioen p rreosceersvse o fuf pnrdo rdeufcetriso tno. that fund which the producers keep to cope with depreciation

Q26: Why does an entrepreneur make a provision for consumption of fixed capital?
Ans: Anwo renn-toruetp firexnedeu ars mseatsk. es a provision for the consumption of fixed capital with a view to replace the

Q27: What is fixed investment?
Ans: mFiaxcehdi ninevrye)s tomf ethnet prerfoedrsu cteor sin dcurerainseg iann tahcec osutonctkin og fy fiexare.d assets or capital goods (like plant and

Q28: What do you mean by inventory investment?
Ans: Change in inventory stock during the year is called inventory investment of the producers.

Q29: Define capital loss.
Ans: cCaalpamitailt ileoss,s aisn ad l o(isis) ofafl vla ilnu em oafr fikxeetd v aasluseet so wf hthilee athsseesets a drue rniontg i np uersieo. dIts oocfc eucros noonm acicco ruencet sosfi:o (ni). natural

Long Answer Type Questions

Q3: How will the following be treated while estimating national income of India? Give reasons.
(i) Dividend received by a foreigner from investment in shares of an Indian company.
(ii) Expenditure on education of children by a family in Uttar Pradesh.
(iii) Remittances from non-resident Indians to their families in India.
Ans: (i) Dividend received by a foreigner from investment in shares of an Indian company is included in national income of India as a negative component because it is a part of net factor income to the rest of the world.
(ii) Expenditure on education of children by a family in Uttar Pradesh is included in the estimation of national income of India since it is a part of private final consumption expenditure.
(iii) Remittances from non-resident Indians to their families in India are to be treated as transfer payments.
Accordingly, these are not to be included in the estimation of national income of India.

Q4: Explain the precautions that are taken while estimating national income by value added method.
Ans:  While using value added method for computing national income, the following precautions should be taken
(i) The value of intermediate goods should not be included.
(ii) Purchase and sale of second hand goods should be excluded.
(iii) Imputed value of self-consumed goods should be included.
(iv) Own account production of goods should be included.
(v) Value of self-consumed services should not be included in the estimation of national income.
(vi) Imputed rent on the owner occupied house is also taken into the account.

I. Are the following included in national income of India?
a. Profit of Indian banks operating in foreign countries.
b. Interest income received by non-residents of India living abroad.
c. Fees received from students.
d. Interest received on loan given to a foreign company in India.
e. Value of bonus shares received by shareholders of a company
f. Income of foreign banks operating in India.
g. Unilateral payments received by residents of India from abroad.
h. Gift and remittances received by Indians from abroad.
i. Interest income received by residents Indians on bonds they purchased from abroad.
j. Interest paid by government on foreign loans.
k. Foreign aid received by India from friendly countries.
l. Compensation of employees paid to Indian employees working in foreign embassies functioning in India.
m. Rents received by Indians on building owned by them abroad.
n. Interest paid by banks to depositors.
o. Interest on government borrowings.
p. Death duties, Gift tax and Wealth tax
q. Sales proceeds of second hand goods