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|Chapter||2. National Income Accounting|
|Category||NCERT Solutions for Class 12|
The NCERT Solutions for Class 12 Macro Economics cover all the questions pertaining to the subject in a very clear and lucid manner. Apart from being highly accurate, these solutions are also very easy to memorize. These solutions are written as per the latest CBSE syllabus and are helpful in clearing doubts. On this solution page, we have provided you with complete overview of the concepts and methods covered in the Chapter 2 of Macro Economics – National Income Accounting.
NCERT Solutions for Class 12 Macro Economics Chapter 2
National Income Accounting Solutions
Q1) What are the four factors of production and what are the remunerations to each of these called?
Answer) The four production factors are:
- Land – The land is a natural resource and the primary factor of production. Land rent is the remuneration paid for the use of land.
- Labour – Labour is the physical or mental work done by an employee that is required for production. The remuneration for labour is paid through wages or salary.
- Capital – Capital is the wealth or monetary investment that is essential for production. Capital can also mean the assisting tools, the machinery and other means of production. The remuneration for capital is called interest.
- Entrepreneurship – Entrepreneurship refers to the task of the individual who brings all the factors of production together and manages them. The remuneration or reward of the entrepreneur is the profit that is gained after the product is sold.
Q2) Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
Answer) The aggregate final expenditure of an economy is the sum of all the spending in the economy. In economics, factor payment denotes the wage, interest, rent and other payments done as a remuneration for the factors or production. The income earned is either spent on goods on services or saved. But, all savings can be counted as investments for future expenditure. Therefore, the aggregate final expenditure of an economy should be equal to aggregate factor payments.
Q3) Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.
Answer) The difference between stock and flow are as follows:
|Stocks are defined at a point in time||Flows are defined over a period of time|
|Stocks are a static concept||Flows are a dynamic concept|
|It does not have a time dimension||It has a time dimension|
|Examples: Wealth, Money supply, etc.||Examples: National Income, Investments, etc.|
The difference between net investment and capital is explained below:
|Capital is tied to liquidity||Investment is tied to equity|
|Capital is a stock variable||Net Investment is a flow variable|
|Capital is on the liabilities side of the balance sheet||Investment is on the assets side of the balance sheet|
Since it is measured over a period of time, flow of water in a tank can be compared to net investment. Stock of water in a tank is measured at a point in time and can be compared to capital.
Q4) What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Planned Inventory Accumulation: Inventory that has been planned In the event of a predicted drop in sales, the company will have unsold stock of goods that it had not budgeted for. As a result, inventories will be built up in advance.
Unplanned Inventory Accumulation: Inventory accumulation that was not intended. In the case where there is an unexpected decline in the sales, the company will have unsold goods that it had not budgeted for. As a result, unanticipated inventory accumulation will occur.
Relationship between Inventory Changes and Value Added–
Change in a firm’s inventories over a year = value added + intermediate products utilised by the firm – the firm’s sale over the year and value added. It is value added in the net contribution made by a firm in the production process = value of production – value of intermediary products consumed.
Q5) Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP.
Answer) The three methods of identifying GDP of a nation are:
- Expenditure Method
- Income Method
- Value added Method or Product Method
1. Expenditure Method:
In the expenditure method, national Income is calculated based on the expenditure done on purchase of final goods and services that are produced in the economy.
The formulae for calculating GDP is:
GDP = C + I + G + (X – M)
C=Consumer spending on goods and services
I=Investor spending on business capital goods
G=Government spending on public goods and services
GDP – Depreciation = Net Domestic Product
NDP – Net Indirect Tax – = NDP
NDP + NFIA = National Income
Where NDP= Net Domestic Product
NFIA = Net Factor Income from Abroad
2. Income Method: Income Method:
This method is used to determine national income generated from the factors of production like capital, labour, land and profits of organisation. Another factor added is mixed income that is income generated from self-employed persons, farming and sole proprietorship firms.
Therefore national income can be calculated as:
Net Domestic Income = Compensation +Interest + Rent + Profit + Mixed income
Net Domestic Income + NFIA (Net Factor Income from Abroad) = Net Domestic Income.
3. Product Method:
In this method which is also known as value added method, the income is measured as per value addition by the products of firms. It is calculated as the summation of Gross Value Added in the primary, secondary and tertiary sectors.
Net Domestic Product = GDP – Depreciation
NDP at Factor Cost = NDPMP – Net Indirect Tax
NDP at factor cost + NFIA = National Income
Where NDP= Net Domestic Product
NFIA = Net Factor Income from Abroad
Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (−) Rs 1,500 crores. What was the volume of trade deficit of the country?
Budget Deficit: Budget deficit is referred to the situation when the expenditure done by government exceeds its income. It is mathematically represented as G − T
G is the expenditure done by government
T is the income earned by the government
Trade Deficit: When a country spends more on importing than on earning revenue through exports, such a situation is referred to as trade deficit. It is represented as M − X
M expenditure on imports
X revenue earned from exports
As per the question,
I − S = Rs.2000 crores.
G – T = (−) Rs.1500 crores.
Therefore, trade deficit can be calculated as
Trade deficit = [I − S] + [G − T]
= 2000 + [−1500]
= Rs.500 crores.
Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes − Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.
Answer) As per the question,
National Income (NNPFC) = Rs. 850crores
(GDPMP) = Rs. 1100crores
Net factor income from abroad = Rs. 100 crores
Net indirect taxes = Rs. 150 crores
NNPFC = GDPFC + Net factor income from abroad – Depreciation – net indirect taxes
Putting these values in the formula,
850 = 1100 + 100 – Depreciation – 150
850 = 1100 – 50 – Depreciation
850 = 1050 – Depreciation
Depreciation = 1050 – 850 = Rs. 200 crores
So, depreciation is Rs. 200 crores.
Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
NNPFC= Rs. 1900 crores
PDI = Rs. 1200 crores
Personal income tax = Rs. 600 crores
Value of retained earnings = Rs. 200 crores
PDI = NNPFC−Value of retained earnings of firms and government + Value of transfer payments – Personal Tax
1200 = 1900 -200 + Value of Transfer payments – 600
1200 = 1100 + Value of transfer payments
Value of transfer payment = 1200 – 1100 = Rs. 100 crores.
Q9) From the following data, calculate Personal Income and Personal Disposable Income.
|(a)||Net Domestic Product at factor cost||8,000|
|(b)||Net Factor Income from abroad||200|
|(e)||Interest Received by Households||1,500|
|(f)||Interest Paid by Households||1,200|
Personal Income = NDPFC + Net factor income from abroad (NFIA) + Transfer Income – Undistributed Profit – Corporate Tax – Net Interest Paid by Households .
NDPFC = Rs. 8000crores
NFIA = Rs. 200 crores
Transfer Income = Rs. 300 crores
Undistributed profit = Rs. 1,000 crores
Corporate tax = Rs. 500 crores
Net interest paid by households = Interest paid – Interest received
= 1200 – 1500
= (-) Rs. 300 crores
So, putting the values in the above formula
PI = 8000 + 200 + 300 – 1000 – 5000 -(- 300)
= 8000 + 200 + 300 – 1000 – 500 + 300
PI = 7300
So, Personal Income = Rs. 7300 crores
Personal Disposable Income = Personal Income – Personal Payments
= 7300 -500
= Rs. 6800 crores.
In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.
Answer a) Gross Domestic Product or GDP = Rs.500 (This is the earning by Raju in a day from haircuts)
Answer b) NNP at market price or NNPMP = GDP – Depreciation
Putting the values of GDP and depreciation we get NNPMP
= 500 − 50
Answer c) NNP at factor cost or NNPFC = NNPMP − Sales tax
Here NNPMP = 450
Sales Tax= 30
Therefore NNPFC is
= 450 − 30
Answer d) Personal Income or PI = NNPFC − Retained earnings
Here NNPFC = 420
Retained earnings = 220
Therefore, Personal Income is
= 420 − 220
Answer e) Personal Disposable Income or PDI = PI − Income tax
Putting values of PI and Income Tax we get PDI is
= 200 − 20
= Rs. 180
The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Answer) It is given that,
Nominal GNP = Rs. 2500
Real GNP = Rs. 3000
GNP deflator = (Nominal GNP/Real GNP) × 100
= 83.33 %
So, (100-83.33)% = 16.67%
No, the price level has fallen down by 16.67%.
Q12) Write down some of the limitations of using GDP as an index of welfare of a country.
Answer) The following are some of the drawbacks of using GDP as a metric:
- GDP distribution: It is possible that when GDP rises, disparities in income distribution may rise as well, widening the gap between rich and poor. GDP does not take into account changes in income distribution inequities. As a result, people’s well-being may not increase at the same rate as GDP.
- Non-monetary transactions: Many economic activities are not measured in monetary terms. Non-market transactions, such as housewife services, kitchen gardening, leisure time activities, and so on, are not included in GDP due to a lack of data. However, such actions have an impact on the economy.
- Change in pricing: If an increase in GDP is due to an increase in prices rather than an increase in physical output, it is not a valid indicator of economic well-being.
- Rate of population growth: GDP does not take into account changes in a country’s population. If the pace of population increase exceeds the rate of GDP growth, the availability of goods and services per capita will decline, negatively impacting economic welfare.
- Externalities: Externalities are the conditions referring to the benefits or harms of an activity that are caused by a firm or an individual and for which they are neither paid nor penalized. Activities which result in benefits to others are termed as positive externalities and activities which result in harm to others are termed as negative externalities.
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