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Class 12 Economics Chapter 1 National Income and Related Concepts
Selected Questions & Answers
A. Very Short Answer Type Questions: (Marks for each – 1)
1. What is meant by intermediate goods? H. S. ’15, ’18
Ans: Goods which are not supplied for final consumption are called“intermediate goods.”
2. Who is the author of the book ”An Enquiry into the Nature andCause of the Wealth of Nations?”
Ans: Adam Smith.
3. What are final goods? H. S. ’14, ’18
Ans: In an economy, those goods or services which are used for final consumption are called “final goods.”
4. What is transfer payment?
Ans: Payments which are made without acquiring any productive servicein return are called “transfer payments.
5. What is meant by national income at current prices?
Ans: The annual estimate of national income calculated on the basis ofcurrent price indices is called “national income at current prices.”
6. What is meant by national income at constant prices?
Ans: National income calculated on the basis of the price index of a base year is called “national income at constant prices.”
7. What is disposable personal income? H. S. ’18
Ans: The part of personal income that remains after paying taxes to thegovernment is called “disposable personal income.”
8. What is meant by depreciation expenditure or replacement expenditure?
Ans: The expenditure incurred for repairing or replacing capital goods iscalled “depreciation expenditure” or “replacement expenditure.”
9. What is gross investment?
Ans: The total amount of capital goods used in a production enterprise iscalled “gross investment.”
10. What is allowance for depreciation?
Ans: The amount deducted from gross investment to account for thecurrent wear and tear of capital is called “allowance for depreciation.”
11. What is meant by Gross Domestic Product?
Ans: The sum total of the monetary value of goods and services producedwithin a country during a financial year is called “Gross Domestic Product.”
12. Is accidental loss of capital goods included in depreciation?
Ans: No.
13. What is Gross National Product?
Ans: The total value of all goods and services produced in a country duringa year is called Gross National Product.
14. What is meant by national income at factor cost?
Ans: The total remuneration earned in a year by the factors of production—land, labour, capital and organization—used in the production sector of acountry is called “national income at factor cost.”
15. What is the value added of a business enterprise?
Ans: In the case of a firm, value added is obtained by deducting the value of intermediate goods from the total value of output. This is called the “value added of a business enterprise.
16. Among whom is the value added of a business enterprise distributed?
Ans: The value added of a business enterprise is distributed among land, labour, capital and the entrepreneur. In this process, value addition plays anactive role in each segment of the enterprise.
17. Why is value added calculated while estimating national income?
Ans: National income is the aggregate of goods and services produced ina given year. The sum total of value added by all production enterprises in acountry during a year is called Gross Domestic Product. Therefore, value added is calculated to estimate Gross Domestic Product while determining national income.
18. Fill in the blanks:
(a) In a year, the total production of final goods in an economy may be either consumption or ———.
Ans: Investment.
(b) Depreciation is the ——— of fixed capital.
Ans: Consumption.
(c) Depreciation is also called the ——— of fixed capital.
Ans: Consumption.
(d) Gross National Product = Gross Domestic Product + ———.
Ans: Net factor income from abroad.
(e) Net National Product = Gross National Product – ———.
Ans: Depreciation of capital.
19. Write True or False:
(a) The value added of a business enterprise is a flow variable.
Ans: True.
(b) Inventory is a stock variable, but change in inventory is a flowvariable.
Ans: True.
(c) Inventory is treated as capital.
Ans: True.
20. Under what condition can a country’s GDP be equal to GNP?H. S. ’19
Ans: A country’s GDP is equal to GNP when net factor income from abroad is zero.
21. Mention any two assumptions in the circular flow of income. H.S. ’19
Ans: To explain the circular flow of income, certain assumptions are taken.
If these assumptions are removed, it becomes difficult to explain the process.
Two such assumptions are—
(a) There is no saving out of income.
(b) There is no international trade
B. Short Answer Type Questions: (Marks for each–2)
1. What is net value added?
Ans: The value obtained after deducting depreciation from gross value added is called “net value added.”
2. What are carry-over goods (closing stock)?
Ans: The stock of unsold finished or semi-finished goods or raw materials carried forward by a production enterprise from one year to the next is called“carry-over goods” or closing stock.
3. Why is the value of intermediate goods not included in the calculation of GDP?
Ans: While calculating GDP, the value of final goods is taken into account.
The value of intermediate goods is already included in the value of final goods.
Therefore, to avoid double-counting, the value of intermediate goods is not included separately.
4. In the equation (I – S) + (G – T) = M – X, what does the term M -X indicate?
Ans: M – X indicates trade deficit. M represents imports (outflow of expenditure to foreign countries) and X represents exports (inflow from foreign countries). It shows the excess of imports over exports.
5. Which part of the equation (I – S) + (G – T) = M – X indicates a deficit budget?
Ans: The term (G – T) indicates a deficit budget. It shows the excess of government expenditure (G) over tax revenue (T).
6. What is GDP deflator?
Ans: GDP deflator is the ratio of nominal GDP to real GDP multiplied by 100. It measures the overall price level of goods and services produced in an economy.
7. Distinguish between gross investment and net investment. H. S.’15
Ans: Gross investment refers to the total expenditure on capital goodssuch as machinery, factories, roads, bridges, ports and warehouses used for production. Net investment is obtained by deducting depreciation from gross investment.
8. Explain the concept of circular flow of income in a two-sector economy.
Ans: In a two-sector economy consisting of households and firms, the factors of production render services to firms and earn income in return.
Households spend their entire income on the goods and services produced by firms. There is no saving. Thus, total consumption expenditure of house holdsequals total production expenditure of firms. Income flows continuously in a circular manner between households and firms year after year.
9. What are consumer goods? H. S. ’18
Ans: Goods and services which cannot be used again after a single use for satisfying human wants are called “consumer goods.”
10. What is autonomous consumption expenditure? H. S. ’18
Ans: Autonomous consumption expenditure refers to the minimum level of consumption expenditure that a consumer incurs even when there is no disposable income, in order to maintain basic living.
11. What is depreciation? Or, explain the concept of depreciation inthe context of national income accounting. H. S. ’15, ’17
Ans: Depreciation refers to the wear and tear of capital goods due torepeated use in the production process. The expenditure incurred for repairing or replacing worn-out capital goods is called depreciation or replacement cost.
If old machinery is not replaced, production will decline. Therefore, an allowance for depreciation is made and it is deducted while calculating national income.
12. Define investment goods. H. S. ’18
Ans: Goods which are used in the production of other goods and services, such as machinery and equipment, are called “investment goods” or “capital goods.”
13. What is national income? H. S. ’16
Ans: The monetary value of all final goods and services produced withina country during a specific financial year is called “national income.”
14. What is investment? H. S. ’15
Ans: Investment refers to the increase in fixed capital goods such as machinery, factories, roads and bridges during a given period, which leads to an increase in production and employment.
15. What is GDP deflator? H. S. ’18
Ans: GDP deflator is the ratio of nominal GDP to real GDP.
16. Explain the concept of circular flow of income in a two-sector economy. H. S. ’18
Ans: In a two-sector economy, factors of production provide services to firms and earn income. The entire income is spent on goods and services produced by firms. There is no saving. Thus, total consumption expenditure equals total production expenditure, and income flows circularly between households and firms.
17. Suppose the Net National Product (NNP) at market price of a country is 1600 crore. If indirect taxes are 100 crore and subsidies are 40 crore, find the national income of the country. H. S. ’16
Ans:
National Income = NNP at Market Price – Indirect Taxes + Subsidies
= 1600 – 100 + 40
= 1540 crore.
18. What is meant by the problem of double counting in national income accounting? H. S. ’16
Ans: Double counting refers to the inclusion of the value of intermediate goods more than once while calculating national income. For example, the price of silk cloth includes the price of silk yarn used in its production. If both the price of cloth and the price of yarn are counted separately, the value of yarn will be counted twice. As a result, national income will be overestimated.
Therefore, double counting creates a problem in obtaining the correct measure of national income.
C. Medium Answer Type Questions: (Marks for each–4)
1. Explain the concepts of value added, gross value added, and net value added.
Ans: Value added is obtained by deducting the value of intermediate goods used by a firm from the value of its output. The value added so obtained is distributed among rent, owners of capital, labourers, and entrepreneurs. When depreciation is included in value added, it is called gross value added. On the other hand, when depreciation is deducted from gross value added, the remaining amount is called net value added.
2. A firm produces goods worth 500 per year. The value of intermediate goods used in production is 250. Depreciation is 20. Find gross value added and net value added.
Ans:
Gross Value Added = Value of Output – Value of Intermediate Goods
= 500 – 250
= 250
Net Value Added = Gross Value Added – Depreciation
= 250 – 20
= 230
3. What is Net National Product at factor cost?
Ans: Net National Product at factor cost is the sum total of rent, wages, interest and profit paid to the factors of production for their contribution tothe production of goods and services in a country during a year. In other words, it is the total cost incurred on production in terms of factor payments. It includes wages and salaries, supplementary labour income, profits of corporate and non-corporate enterprises, all types of rent, all types of interest and net factor income from abroad, but excludes transfer payments.
4. What is National Disposable Income?
Ans: National Disposable Income is the Net National Income at market price plus net current transfers received from the rest of the world. This concept indicates the maximum amount of goods and services that an economy can use without reducing its capital stock. There are two concepts of national disposable income:
(a) Gross National Disposable Income
(b) Net National Disposable Income
5. How can Gross National Product be derived from Gross Domestic Product?
Ans: Gross Domestic Product is the market value of all final goods and services produced within a country during a financial year. Gross National Product is obtained by adding net factor income from abroad to Gross Domestic Product. Thus, GNP = GDP + Net Factor Income from Abroad.
6. Distinguish between consumer goods and capital goods. H. S. ’15
Ans: The differences between consumer goods and capital goods are:
(a) Goods purchased by consumers to satisfy their wants are called consumer goods. On the other hand, goods used in the production process are called capital goods.
(b) Consumer goods generally lack durability for repeated productive use, whereas capital goods can be used repeatedly in the production process and possess durability.
7. Distinguish between stock and flow in the context of national income.
Ans: Stock refers to a quantity measured at a particular point of time. Forexample, the amount of machinery or equipment available for production at a given date is a stock. Flow refers to a quantity measured over a period of time. For example, national income, production and expenditure during a year are flow variables.
8. Distinguish between Consumer Price Index and Wholesale Price Index.
Ans: The differences between Consumer Price Index (CPI) and Wholesale Price Index (WPI) are:
(a) CPI is constructed on the basis of retail prices of goods, whereas WPI is constructed on the basis of wholesale prices.
(b) CPI is used to measure the cost of living of a particular class of people,
whereas WPI is used to measure changes in the general price level in the economy.
(c) In daily life, CPI has greater importance than WPI.
9. Explain the income method of calculating Gross Domestic Product. H. S. ’15, ’17
Ans: According to the income method, Gross Domestic Product is calculated by summing up the incomes earned by the factors of production.
The factors of production are land, labour, capital and entrepreneurship. These factors earn rent, wages, interest and profit respectively. Therefore, GDP = Rent + Wages + Interest + Profit.
If the total number of households in a country is M and Ri, Wi, Ii and Pi represent rent, wages, interest and profit received by the ith household, then GDP is obtained by summing these factor incomes for all households.
10. From the following data, find Personal Income and Personal Disposable Income. H. S. ’15
(1) Factor Income = 9000
(2) Net Factor Income from Abroad = 150
(3) Undistributed Profit = 500
(4) Corporate Tax = 600
(5) Interest received by households = 1200
(6) Interest paid by households = 1000
(7) Transfer Income = 400
(8) Personal Tax = 600
Ans:
National Income = Factor Income + Net Factor Income from Abroad= 9000 + 150
= 9150
Personal Income = National Income – Undistributed Profit – CorporateTax + Transfer Income
= 9150 – 500 – 600 + 400
= 8450
Personal Disposable Income = Personal Income – Personal Tax= 8450 – 600
= 7850
D. Essay-Type Questions and Answers: (Marks for each–6)
1. Name the four factors of production and discuss their characteristics.
Ans: The four factors of production are land, labour, capital and organization (entrepreneur).
(1) Land: Land is a free gift of nature. Its total supply cannot be increased or decreased. The fertility and quality of land differ from place to place. It has no geographical mobility. As a factor of production, land earns rent.
(2) Labour: Labour is an important factor of production. Labour cannot be stored. The bargaining power of labourers is generally limited. Working conditions, working hours and recreation affect labour efficiency. In return for their services, labourers receive wages.
(3) Capital: Capital is a man-made factor of production. Its supply can be increased or decreased. Capital consists of productive assets used for further production. It is created through saving and can be employed to increase production. For its contribution to production, capital earns interest.
(4) Entrepreneur (Organization): The entrepreneur is a vital factor of production. The entrepreneur organizes and coordinates all other factors of production and controls the entire production process. The entrepreneur bears risks and uncertainties and earns profit as a reward.
2. Explain the concept of circular flow of income in a simple economy consisting of households and firms.
Ans: In a simple two-sector economy consisting of households and firms, firms produce goods and services. To produce these goods and services, firms use factors of production such as land, labour, capital and entrepreneurship provided by households. In return, households receive factor payments in the form of rent, wages, interest and profit. Households spend this income on thepurchase of goods and services produced by firms. Thus, the income earned by households flows back to firms in the form of consumption expenditure.
Firms, in turn, pay factor incomes again. In this way, national income circulates continuously between households and firms. Since the same amount of money circulates in the economy, the total value of goods and services produced in ayear can be measured in three ways:
(a) By measuring total expenditure.
(b) By measuring the total value of goods and services produced by all firms.
(c) By measuring the total income paid to factors of production.
3. Why can GDP not be used as an indicator of a country’s welfare? H. S. ’18
Ans: GDP cannot be regarded as a proper indicator of a country’s welfare for the following reasons:
(a) If GDP is concentrated in the hands of a limited number of individuals or firms, the income of the rest of the population may remain low. In such a case, an increase in GDP does not necessarily imply an increase in social welfare.
(b) Many economic activities are not measured in monetary terms, such as household services. Therefore, GDP does not reflect the true level of welfare.
(c) Externalities are not included in GDP calculations. For example, smoke emitted by factories may pollute the environment and reduce welfare, while a beautiful garden may provide satisfaction. Since such external effects are not accounted for in GDP, it cannot be treated as a comprehensive measure of welfare.
