# Plus Two Economics Chapter Wise Questions and Answers Chapter 2 National Income Accounting

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## Kerala Plus Two Economics Chapter Wise Questions and Answers Chapter 2 National Income Accounting

### Plus Two Economics National Income Accounting One Mark Questions and Answers

Question 1.
GNP – depreciation is called
(a) GDP
(b) NNP
(c) PCI
(d) PI
(b) NNP

Question 2.
The GDP deflator is equal to
i) Real GDP-Nominal GDP

iii) $$\frac{{ No minal GDP }}{\text { Real GDP }} \times 100$$

Question 3.
NFIA is included in:
(a) NNPFC
(b) NDPFC
(c) GDPFC
(d) All the above
(a) NNPFC

Question 4.
Which among the following in a flow concept?
(a) export
(b) wealth
(c) capital
(d) foreign exchange reserve
(a) export

Question 5.
When does net factor income from abroad become negative?
(a) NDP < NNP
(b) NNP < NDP
(c) NDP = NNP
(d) none of the above
(b) NNP < NDP

Question 6.
When does GDP and GNP of an economy become equal?
(a) When net factor income from abroad is positive
(b) When net factor income from abroad is negative
(c) When net factor income from abroad is zero
(d) None ofthe above.
(c) When net factor income from abroad is zero

### Plus Two Economics National Income Accounting Two Mark Questions and Answers

Question 1.
Same job is done by a servant and housewife, whose service is included in the national income calculation? Why?
Service of a servant is included in the national income calculation, whereas, the service of housewife is not included in the national income. This is because the housewife is not paid for the service she does.

Question 2.
From the following, classify the material into final goods and intermediary goods. Wheat, Bench, Bread, Wood, Rubber, Tyre.

 Final Goods Intermediary goods Bench Wheat Bread Wood Tyre Rubber

Question 3.
Distinguish between real flow and money flow?
Flow of goods and services from firms to households is called real flow. Factors of production receive reward for their services in the form of money. Households use this money to buy goods and services produced by firms. This flow of money from firms to households and back to firms is called money flow.

Question 4.
Some variables are given below. Classify them into Stock and Flow

1. Wealth
2. Income of a household
3. Consumption
4. Capital
5. Money Supply
6. Capital formation
7. Inventories
8. Saving of a household

a. Stock

• Wealth
• Inventories
• Capital
• Money supply

b. Flow

• Income of a household
• Consumption
• Capital formation
• Saving of a household

Question 5.
GDP = C + I + G + (X – M) = C + S + T Derive the Budget Deficit and Trade Deficit equations from the above identity.
GDP = C + I + G + (X – M) = C + S + T
Budget deficit = G – T
Trade deficit = M – X

### Plus Two Economics National Income Accounting Three Mark Questions and Answers

Question 1.
“Transfer payments are not included in the national income calculation”. Do you agree? Justify your answer.
Yes. Transfer payments like pension, old age pension, etc. are not included in the national income. This is because they are transfer earnings not generated by any economic activity. These payments are usually made by the government out of tax revenue collected from the public. Since these generated incomes are already included in national income calculation there is no need to include transfer payment in the national income calculation again.

Question 2.
State whether the following are included or excluded in the national income.

1. purchase of second hand goods
2. operating surplus
3. production for self-consumption
4. interest
5. windfall gains and loses

1. Purchase of second hand goods – excluded
2. operating surplus – included
3. old age pension – excluded
4. Production for self consumption – excluded
5. interest – included
6. windfall gains and loses – excluded

Question 3.
Provide appropriate term.

2. GNP
3. NNP
4. NNPFC

Question 4.
Point out any 3 uses of national income accounting.
The uses of national income accounting are given below.

1. It shows the distribution of national income among the various factors of production.
2. National income statistics indicate the contribution of different sectors in the economy.
3. Structural changes in the economy can be assessed by the national income accounting.

Question 5.
Classify the following under proper heads.
Flow of teacher services, Flow of subsidies and taxes, Flow of factor rewards, flow of finished goods, Flow of consumption expenditure, Flow of import goods.

 Real Flow Money Flow Flow of teacher services Flow of subsidies and taxes Flow of finished goods Flow of factor rewards Flow of import goods Flow of consumption

Question 6.

• Does not includes prices of imported goods
• Weights are different
• It includes all goods and services
• Includes prices of imported goods
• Weights are constant
• Does not include all goods and services

a. Consumer price index

• Includes prices of imported goods
• Weights are constant
• Does not include all goods and services

b. GDP deflator

• Does not include prices of imported goods
• Weights are different
• It includes all goods and services

Question 7.
Assume that there are three goods produced in an economy and they are sold at different prices in dif-ferent years. Calculate GDP Deflator.

Question 8.
Calculate Depreciation, Net Indirect Tax and NNPFC from the below data.
GDPMP = 11300
NDPMP = 10300
NDPFC = 10000
NFIA = 1500
1. Depreciation = GDPMP – NDPMP
= 11300 – 10300
= 1000

2. Net Indirect tax = NDPMP – NDPFC
= 10300 – 10000 = 300

3. NNPFC = NDPFC + NFIA
= 10000 + 1500
= 11500

### Plus Two Economics National Income Accounting Five Mark Questions and Answers

Question 1.

1. GNP, NNP, CSO, GDP
2. Salary, bonus, GPF, free housing, saving
3. Smuggling, production of wheat, sale of second-hand goods, services of housewives
4. Services of teacher, services of engineer, services of lawyer, services of housewife
5. Unemployment allowances, scholarships, old age pension, support price.

1. C.S.O. Others are national income concepts.
2. Saving. Others come under compensation to employees
3. Production of wheat. Others are excluded from national income
4. Services of housewife. Others are included in the national income calculation.
5. Support price. Others are transfer payments.

Question 2.
Match the following.

 A B NNP GDP – net factor income from abroad GNP Personal income – direct taxes Value added GNP-depreciation GDP at market prices value of output – intermediate consumption Disposable income GDP at factor cost – net indirect tax

 A B NNP GNP – depreciation GNP GDP – net factor income from abroad Value added Value of output- intermediate consumption GDP at market prices GDP at factor cost – net indirect tax Disposable income Personal income – direct taxes

Question 3.
Categorize the following into stocks and flows, wealth, salary, food grain stock, foreign exchange reserves, export, gross domestic saving, capital, change in money supply, quantity of money, capital formation.

 Stock Flow Wealth Export Foreign exchange reserves Salary Food grain stock Gross domestic saving Capital Change in money supply Quantity of money Capital formation

Question 4.
The phase of circular flow of income in a two sector economy is given below.

1. Complete the diagram.
2. Explain the process of circular flow

1.

2. Circular flow of income:
The concept that the aggregate value of goods and services produced in an economy is going around in a circular way. Either as factor payments, or as expenditures on goods and services, or as the value of aggregate production.

Question 5.
Suppose that in a two sector economy the value of finished goods is equal to ₹100 crore and the income generated as factor rewards is also equal to ₹100 crore. The households spend only ₹80 crore.

1. What will happen to the circular flow?
2. Which system can be introduced to correct the circular flow?
3. Name the leakages and injections.

1. There will be a mismatch between the real flow and money flow in the circular flow. In other words, the flow will be broken.
2. As a corrective measure, the financial system can be introduced.
3. The leakages is the difference between the income generates and household spending.

This is saving. The injection are the savings that the households, firms and the government take from the financial institutions as borrowings.

Question 6.
1. Estimate the NI of India and Pakistan from the data given below.

2. Which method is used here?
3. What are the other methods of measuring national income?

1. National income of India = ₹2885 crore
National income of Pakistan = ₹1860 crore
2. The method used here is the product method or value added method.
3. Income method and expenditure method are the other two method of measuring national income.

Question 7.
What do you mean by GDP deflator? How far GDP deflator differs from Consumer Price Index?
The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. GDP deflator differs from Consumer Price Index. The major points of difference are given below.

1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services.

2. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported goods.

3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.

Question 8.
Write down some of the limitations of using GDP as an index of welfare of a country.
GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes. So we may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country. But there are at least three reasons why this may not be correct. They are discussed below.

1. Distribution of GDP – how uniform is it:
If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may, in fact, have fallen.

In such a case the welfare of the entire country cannot be said to have increased. If we relate welfare improvement in the country to the percentage of people who are better off, then surely GDP is not a good index.

2. Non-monetary exchanges:
Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges.

This is a case of underestimation of GDP. Hence GDP calculated in the standard manner may not give us a clear indication of the productive activity and well-being of a country.

3. Externalities:
Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual welfare.

This was an example of negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy.

Question 9.
Assume that GDP in the year 2007 was ₹1,200 which rose to ₹1,800 in 2008. Calculate GDP deflator.
GDP deflator = Current year GDP / Base year GDP x 100
= 1800/1200 × 100
= 1.5 × 100
= 1.5 (in percentage terms 150)

Question 10.
Relate and complete the identities/equations in column A with column B.

Question 11.
Estimate the Gross National Product at market price and GNP at factor cost through the expenditure method.

 Item Amount (in Crores) Inventory investment 15 Net factor income from abroad 10 Personal consumption expenditure 475 Gross residential construction investment 48 Exports 25 Government purchase of goods and services 175 Gross public investment 15 Gross business fixed investment 38 Imports 12 Net indirect tax 8

GNPMP = private consumption expenditure + govt, final consumption expenditure( gross fixed capital formation + change in stock or inventory investment) + net export + net factor income from abroad
= 475 + 175 + 101 (i.e., 48 + 15 + 38) + 15 + 13
= ₹779 crores.
GNPC = GNPUD – net indirect taxes
= 779 – 8 = ₹771 crores

Question 12.
Suppose that in a two sector economy, the value o finished goods is equal to ₹200 crore and the income generated as factor rewards is equal to ₹200 crore. The households spend only ₹180 crore. The remaing 20 crore economy saved then.

1. Is ₹20 (saving) included in the circular flow?
2. Which system can be introduced to correct the circular flow?
3. Is saving leakage or injection.

1. No, saving (₹20) is excluded in the circular flow.
2. Financial system can be introduced to correct the circular flow.
3. Yes, saving is a leakage.

Question 13.
Fill in the blanks

1. GNPMP – ……….. = NNPMP
2. NNPMP – ………… = NNPFC
3. GDPFC+ – ………… = GDPMP
4. GDP + -………….. = GNP

1. GNPMP – depreciation = NNPMP
2. NNPMP – net indirect tax = NNPFC
3. GDPFC + net indirect tax = GDPMP
4. GDP + net factor income from aborad = GNP

Question 14.
Write down the 3 identities of calculating the GDP of a country by the 3 methods. Also briefly explain why each of those should give us the same value of GDP.
Gross National Product (GNP) equals Gross National Income equals Gross National Expenditure, i.e.
GNP = GNI = GNE
These are equal because national income is a circular flow of income. Aggregate expenditure is equal to aggregate output which in turn, is equal to aggregate income. However each method has some different items, yet they show exactly identical results.

Their identity can be shown in the following manner:
Reconciling Three Methods of Measuring Gross

Question 15.
The economic recession of 2008 affected the market economics in general and the US in particular. Thou-sands of Indians working abroad lost their job especially in IT and banking sectors and they returned to India. Evaluate its consequences on Indian economy with regard to the following macro variables.

1. The value of GNP
2. Gneral unemployment level
3. Foreign exchange rate

1. The value of GNP decreases due to reduction in NFIA.
2. General unemployment level increases.
3. Foreign exchange rate increases.

### Plus Two Economics National Income Accounting Eight Mark Questions and Answers

Question 1.
Given below some macro economic indicators. Derive the equations of the following terms:

1. GNP
2. NNP
3. NNP at factor cost
4. Personal income
5. Personal disposable income
6. Private Income
7. National Disposable Income

1. GNP = GDP + Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy

2. NNP = GNP – Depreciation

3. NNP at factor cost = National Income (NI) = NNP at market prices – (Indirect taxes – Subsidies)

4. Personal income (PI) = NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

5. Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax payments.

6. Private Income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world

7. National Disposable Income = Net National Product at market prices + other current transfers from the rest of the world

Question 2.
Prepare a seminar report on the topic ‘Measurement of National Income’.
Measurement of National Income Respected teachers and dear friends,
The topic of my seminar paper is ‘measurement of national income or the methods of measuring national income’. The concept of national income occupies an important place in economic theory.

National income is the aggregate money value of all goods and services produced in a country during an accounting year. In this seminar paper, I would like to present various methods of measuring national income.

Content:
National income can be measured in different ways. Generally there are three methods for measuring national income. They are

2. Expenditure method
3. Income method

The term that is used to denote the net contribution made by a firm is called its value-added. We have seen that the raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’.

Therefore the value-added of a firm is the value of production of the firm – value of intermediate goods used by the firm. The value-added of a firm is distributed among its four factors of production, namely, labor, capital, entrepreneurship, and land.

Therefore wages, interest, profits, and rents paid out by the firm must add up to the value-added of the firm. Value-added is a flow variable.

2. Expenditure Method:
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. The aggregate value of the output in the economy by expenditure method will be calculated.

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.

3. Income Method:
As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods).

This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings, and rents.
That is GDP = W + P + In + R

Conclusion:
Thus it can be concluded that there are three methods for measuring national income. These methods are value-added method, income method and expenditure method. Usually in estimating national income, different methods are employed for different sectors and sub sectors.

Question 3.
From the following data, calculate personal income and personal disposable income (₹in Crores).

1. NDPFC – 8,000
2. net factor income from abroad – 200
3. Undistributed profit – 1,000
4. Corporate tax – 500
5. Interest received by households – 1,500
6. Interest paid by households – 1,200
7. Transfer income – 300
8. Personal Tax – 500

Personal income = NDPfc + Net factor income from abroad – undistributed profits – corporate taxes + transfer payments + net interest received from households.
= 8000 + 200-1000 – 500 + 300 (1500 -1200)
= 7,300 crores
Personal disposable income = Personal income – personal tax
= 7,300 – 500 = 6,800 crores

Question 4.
Production generates income. Prove this statement with the help of a simple two sector model of circular flow of income.
circular flow of income:
It is a pictorial representation of interdependence or interrelationship between the various sectors of the economy. It is a concept associated with income earning and spending. The circular flow of income in a simple economy works on the basis of certain assumptions.
They are as follows:

1. Households and firms are the only two sectors in an economy (2 sector model)
2. Households supply factor services to firms.
3. Firms hire factor services households
4. Household spends their entire income on consumption and thereby no savings are left with them.
5. Firms sell their entire products to the households
6. There is no government in the economy.
7. The economy is not related to any other economies or the economy is a ‘closed’ system. As a result, there is no export or imports from the economy.

In such an economy, there would be two types of markets.
They are:

1. product-market for goods and services
2. factor markets for buying and selling various factor services.

The relationship between the sectors of an economy can be explained with the help of a diagram.

The households own the factors of production such as land, labour, capital, and organization. The households sell these factors of production to the firms for producing goods and services are known as real flow. The rewards for factors of production are rent to land, interest to capital, wage to the labour and profit to the entrepreneur is known as the money flow.