chapter 3 notes

G N

D N

PMP PFC

How to define these definition

Gross Net

Product at Market Price Product at Factor cost

Domestic National

Que:-1 Define national income. Or Define National product.

Ans:-1 National Income refers to net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

Ques:-2 Define Domestic Income. Or Define Domestic product.

Ans:-2 Domestic income (NDP_FC) is the net money value of the final goods and services produced within the domestic territory of a country during a period of one year.

Que:-3 Distinguish between domestic income and national income.

Ans:-3 The difference between domestic income and national income are as follows :-

Basis	Domestic Income	National Income
Nature of Concept	It is a territorial concept as it includes the value of final goods and services produced within domestic territory of a country.	It is a national concept as it includes the value of final goods and services produced in the entire world.
Category of Producers	It considers all producers within the domestic territory of the country.	It considers all producers who are normal residents of the country.
NFIA	It does not include NFIA.	It includes NFIA.

Four domestics concepts :-

(1)Gross Domestic Product at Market Price (GDP_MP)

(2)Gross Domestic Product at Factor Cost (GDPFC)

(3)Net National Product at Market Price (NDPMP)

(4)Net National Product at Factor Cost (NDPFC)

Que:-4 Define Gross Domestic Product at Market Price (GDP_MP)

Ans:-4 It refers to gross market value of all final goods and services produced within the domestic territory of a country during a period of one year.

Que:-5 Define Gross Domestic Product at Factor Cost (GDPFC)

Ans:-5 It refers to gross money value of all the final goods and services produced within the domestic territory of a country during a period of one year.

Que:-6 Define Net Domestic Product at Market Price (NDPMP)

Ans:-6 It refers to net market value of all the final goods and services produced within the domestic territory of a country during a period of one year.

Que:-7 Define Net Domestic Product at Factor Cost (NDPFC) Or Define Domestic Income. Or Define Domestic product.

Ans:-7 Domestic income (NDP_FC) is the net money value of the final goods and services produced within the domestic territory of a country during a period of one year.

Relation between Four domestics concepts

Four National concepts

(1)Gross National Product at Market Price (GNPMP)

(2)Gross National Product at Factor Cost (GNPFC)

(3)Net National Product at Factor Cost (NNPFC)

(4)Net National Product at Market price (NNPMP)

Que:-8 Define Gross National Product at Market Price (GNPMP)

Ans:-8 It refers to gross market value of all the final goods and services produced by the normal residents of a country during a period of one year.

Que:-9 Define Gross National Product at Factor Cost (GNPFC)

Ans:-9 If refers to gross money value of all the final goods and services produced by the normal resident of a country during a period of one year.

Que:-10 Define Net National Product at Factor Cost (NNPFC) Or Define national income. Or Define National product.

Ans:-10 National Income refers to net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

Que:-11 Define Net National Product at Market price (NNPMP)

Ans:- 11 It refers to the market value of all the final goods and services produced by the normal residents of a country during a period of one year.

Relation between Four National concepts

Ques:-12 When is the net domestic product at market price less than the net domestic product at factor cost?

Ans:-12 When net indirect taxes are negative i.e., subsidies are more than indirect taxes.

Ques:-13 Why is gross domestic product at factor cost more than the net domestic product at factor cost?

Ans:-13 Gross domestic product at factor cost includes depreciation while net domestic product at factor cost does not include depreciation.

Ques:-14 When will GDP of an economy by equal to GNP?

Ans:-14 GDP and GNP will be equal when the ‘net factor income from abroad’ is zero.

Ques:-15 When will the domestic income exceed the national income?

Ans:-15 When the net factor income from abroad is negative.

Ques:-16 If NDPFC is `1,000 crores and NFIA is (-) 5 crores, how much will be the national income?

Ans:-16 National Income = 1000 + (-5) = 995 crores.

Ques:-17 If the domestic factor income is `200 crores and the national income is `190 crores, how much will be the net factor income from abroad?

Ans:-17 Net factor income from abroad = 190 – 200 = (-) 10 crores

Ques:-18 In which type of economy, domestic income will be equal to national income?

Ans:-18 Closed Economy.

Que:-19 State the difference between Gross Domestic Product at Market Price and National Income

Ans:-19 The difference between Gross Domestic Product at Market Price and National Income is as follows

Basis	Gross Domestic Product at Market Price (GDPMP)	National Income (NNPFC)
Nature of Concept	It is a territorial concept as it includes value of final goods and services produced within domestic territory of a country.	It is a national concept as it includes the value of final goods and services produced in the entire world.
Category of Producers	It considers all the producers within the domestic territory of the country.	It considers the producers who are normal resident of the country.
Net Indirect Taxes	It is at market price, i.e. it includes net indirect taxes.	It is at factor cost, i.e. it excludes net indirect taxes.
Depreciation	It is inclusive of depreciation.	It does not include depreciation.

Que:-20 Write short note on National Income at Current Price or nominal national income

Ans:-20 National Income at Current Price or nominal national income is the money value of final goods and services produced by normal residents of country in a year, measured at the prices of the current year. For example, measurement of India’s National Income of 2013-2014 at the prices of 2013-14.

It does dot show the true picture of economic growth of country as any increase in nominal national income may be due to rise in price level without any change in physical output.

Nominal income = Real Income *Price Index

100

Que:-21 Given Real Income to be 400 and Price Index be 100 , Calculate Nominal Income .

Ans:-21

Ans:-400

Que:-22 Write short note on National Income at Constant Price or Real national income

Ans:-22 National Income at Constant Price or Real national income is the money value of final goods and services produced by normal residents of a country in a year, measured at base year price. Base year is a normal year which is free from price fluctuations.

Presently, 2004-2005** is taken as the base year in India.

If we measure India’s National Income of 2013-2014 at the prices of 2004-2005, then it is termed as ‘National Income at constant price’.

Nominal income = Real Income *Price Index

100

Que:-23 given Nominal Income to be Rs 375 and Price Index 125, Calculate real Income.

Ans:-23

Ans:-Real income :-300

Que:-24 State the difference between National Income at Current Price Vs National Income at Constant Price

Que:-24 State the difference between nominal national income and real national income

Ans:-24 The difference between the real national income and the nominal national income is as follows :-

Basis	National Income at Current Price Or Nominal National income	National Income at Constant Price Or Real National income
Meaning	It refers to money value of final goods and services produced by normal residents of a country in a year, measured at current year prices.	It refers to money value of final goods and services produced by normal residents of a country in a year, measured at prices of base year.
Index of Economic Growth	It is not good tool for measuring the economic growth of a country.	It is a better tool for measuring the economic growth of a country.
Causes of Change	It is affected by change in both price and quantity.	It is a affected by change in the quantity only.
Comparison	It is not a suitable tool for comparing the national incomes of different years.	It is generally used for comparing the national incomes of different years.
Calculation	Current Price (P₁) x Current Quantity (Q₁).	Base Year Price (P₀) x Current Quantity (Q₁).
Alternative Name	It is also known as Nominal National Income.	It is also known as Real National Income.

Que:-25 Why do we measure national income at the price of base year ?

Answer:-25 The need of estimation of national income at constant prices arises because national income at current prices may give a misleading picture of economics performances if the prices are continuously rising or falling

Question :-26 How would we convert national income at current prices into national income at constant prices.

Ans:-26 This can be done by eliminating the effects of price change on national income with the help of a suitable Price Index”. Price Index is an index number which shows the change in price level between two different time periods. It indicates whether a rise or a fall in the national income from one year to another is real or not. It is done with the help of the following formula:

National Income at Constant Price = National Income at Current Price x 100
Current Price Index

For example, if price index for the current year is 150 and national income at current price is 1,50,000 crores, then the national income at constant price will be:

National Income at Constant Price = 1,50,000 x 100 = 1,00,000 crores

150

Que:-27 Distinguish between “real” gross domestic product and “nominal” gross domestic product. Which of these is a better index of welfare of the people and why?

Ans:-27 When GDP of a given year is estimated on the basis of price of Base Year, it is called real GDP. When GDP of a given year is estimated on the basis of price of current Year, it is called nominal GDP.

Real GDP is better as compared to Nominal GDP because of following reasons:

1. Real GDP helps in determining the effect of increased production of goods and services as it is reflected changes in physical output only. On the other hand, Nominal GDP can increase even without any increase in physical output as it is affected by change in prices also.

2. Real GDP is better measure to make periodic comparison in the physical output of goods and services over different years.

3. Real GDP facilitates international comparison of economic performance across the countries. Therefore, Real GDP is better than Nominal GDP as it truly reflects the growth of an Economy.

Que:-28 Write short note on GDP deflator

Ans:-28 it refer to the ratio between GDP at current prices and GDP at constant prices .it is expressed as under .It shows change in GDP due to change in price level .it is the same as price index

Que:-29 The value of the nominal GNP of an economy was Rs 2,500 Crore in a particular year . The value of GNP of that economy during the same year , evaluated at the price of same Base Year , was Rs 3,000 Crore Calculate the value of GNP Deflator of the year in percentage terms .Has the price level risen between the base year and the year under Consideration ?

Answer:-

Ans:-83.33%

Que:-30 GDP as an index of welfare may Understate or Overstate welfare . Explain using Examples of positive and negative externalitiy?

Que:-30 Is it right to take the GDP as an index of welfare, if no why ?

Que:-30 Is gross domestic product a true index of economic welfare of the people? Give two reasons is support of your answer.

Ans:-30 GDP is often considered as an index of welfare of the people. Welfare means sense of material well-being among the people. It depends on greater per head availability of goods and services. So, higher GDP is generally taken as greater welfare of people.

However, this generalization may not be correct due to following limitations or reasons.

Que:-30 Explain how ‘Distribution of GDP’ are a limitation in taking gross domestic product as an index of welfare.

1. Distribution of GDP: It is possible that with rise in GDP, inequalities in the distribution of income may also increase, i.e. the gap between rich and poor increases. GDP does not take into account changes in inequalities in the distribution of income. So, welfare of the people may not rise as much as the rise in GDP.

Que:- 30 Explain how ‘Change in price ’ is a limitation in taking gross domestic product as an index of welfare

Change in prices: If increase in GDP is due to rise in prices and not due to increase in physical output, then it will not be a reliable index of economic welfare.

Que:- 30 Explain how ‘non-monetary exchanges’ are a limitation in taking gross domestic product as an index of welfare.

3. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, non-market transactions like services of housewife, kitchen gardening, leisure time activities, etc. are not included in GDP, due to non availability of data. However, such activities influence the economic welfare.

Que:- 30 How can externalities be a limitation of using gross domestic as an index of welfare?

Externalities: Externalities refer to benefits or harms of an activity caused by a firm or an individual, for which they are not paid or penalized. Activities which result in benefits to other are termed as positive externalities and activities which result in harm to others are termed as negative externalities.

· Example and Impact of Negative Externality: Environmental population caused by industrial plants. Such population reduces the welfare through negative effect on health.

· Example and Impact of Positive Externality: Use of public parks by the people for pleasure for which no payments are made by the public. It increases welfare through positive effect on the health.

Such external effects do not form part of market transactions. GDP does not take into account externalities, positive or negative.

Que:- 30 Explain how ‘Rate of Population’ are a limitation in taking gross domestic product as an index of welfare. [CBSE, All India 2011]

5. Rate of population growth: GDP does not consider the changes in the population of a country. If rate of population growth is higher than the rate of growth of GDP, then it will decrease the per capita availability of goods and services, which will adversely affect the economic welfare.

Que:-31 Write short note on Concept of Green GNP:

Ans:-31 Green GNP measures national income or output adjusted for the depletion of natural resources and degradation of the environment. It will help to attain a sustainable use of natural environment and equitable distribution of benefits of developments. A larger number signifies greater sustainability.

Method of measuring of national income

1. Value Added Method

2. Income Method

3. Expenditure Method

Ques.32 Mention the three methods of measuring national income.

Ans:-32 (i) Value added method (ii) Income method (iii) Expenditure method.

Ques-33 What is the value added method of measuring national income?

Ans:-33 Value added method of measuring the national income by estimating the value added by each producing enterprises within the domestic territory of the country in an accounting year.

Que:- 34 Write short note on value added

Ans:-34 Value added refers to the addition of value to the raw material (intermediate goods) by a firm, by virtue of its productive activities. It is the contribution of an enterprises to the current flow of goods and services. It is calculated as the difference between value of output and value of intermediate consumption.

Value Added = Value of Output-Intermediate Consumption

Que:- 35 Write short note on Value of Output.

Ans:-35 Value of output refers to market value of all goods and services produced during a period of one year.

Que:-36 When is value of output equal to value added?

Ans:-36 Valued of output is equal to value added if there are no intermediate costs.

Que:-37 Explain the production method of estimating national income.

Ans:- 37 The main steps for estimating national income by Value Added Method are:

Step 1: Identify and classify the production units

The first step is to identify and classify all the producing enterprises of an economy into primary, secondary and tertiary sectors.

Que:-37 What aggregate do we get, when we add up the gross value added of all the producing sectors of an economy?

Ans:-37 Gross domestic product at market price.

Step 2: Estimate Gross Domestic Product at Market Price

In the second step, Gross Value Added at Market Price (GVA_MP) of each sector is calculated and sum total of GVA_MP of all sectors give GDP_MP, i.e.

Step 3: Calculate Domestic Income (NDP_FC)

By subtracting the amount of depreciation and net indirect taxes from GDP_MP, we get domestic income, i.e. NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes

Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income

IN the final step, NFIA is added to domestic income to arrive at National Income.

National Income (NNP_FC) = NDP_FC + NFIA.

Que:-38 What are the precautions which must be taken while estimating national income by product method or Value added method.

Que:-38 Discuss in brief the various precautions of value added method.

Ans:-38 Following are some of the important precautions regarding product method or Value added method.

1. Value of the sale and purchase of second hand goods is not included in value added.

2. Commission earned on account of the sale and purchase of second hand goods is included in the estimation of value added. Because, commission is a reward for the services rendered.

3. Value of intermediate goods is not included in the estimation of value added. Because, value of intermediate goods is already reflected in the value of final goods.

4. Imputed value of production for self-consumption is taken into account. Because, these goods are like produced for the market.

5. Imputed rent on the owner occupied house is also taken into account. Because, all houses have rental value, no matter these are self-occupied or rented off.

6. Services for self-consumption is not considered while estimating value added.

Que:-39 Explain the problem of double counting in the estimation of national income by the value added method. [CBSE, Delhi 2003]

Que:-39 How can the problem of double counting be avoided?

Que:-39 What is meant by double counting. Why should it be avoided?

Ans:- 39 The counting of the value of commodity more than once is called double counting. This leads to over estimation of the value of goods and services produced. Thus the importance of avoiding double counting lies in avoiding over estimating the value of domestic product.

Name of the producer

Stage of production

Value of intermediate consumption

Gross value of output

Gross value added at each stage

Farmer

Miller

Baker

Shop-keeper

Wheat

Flour

Bread

Sale

NIL

500

700

900

500

700

900

1,000

500

200

100

2,100

3,100

1,000

Final Goods

Infact, the value of the wheat is counted four times, the value of services of the miller thrice, and the value of services by the baker twice. In other words, the value of wheat and value of services of the miller and baker have been counted more than once.

The counting of the value of commodity more than once is called double counting.

To avoid the problem of double counting two methods are used:

Final output method

Value added method

1. Final output method: According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. In the above example, the value of final goods i.e. bread is Rs. 1,000.

2. Value added Method: Another method to avoid the problem of double counting is to estimate the value added at each stage of production. In the above example, the value added at each stage of production is Rs. 500 + Rs. 200 + Rs. 200 + Rs. 100 = Rs. 1,000.

Que:-40 What is the rationale for not taking into account the value of intermediate goods in the measure of GDP?

Ans:-40 To avoid the problem of double counting.

Que:-41 How can the problem of double counting be avoided?

Ans:-41 There are two alternative ways of avoiding double counting : (i) Take value of final output; (ii) Take value added of each firm.

Some questions based on Value Added method

Formula :-

Que-1 On the basis of the following data about the economy which consists of only two firms, find out (i) value added by firm A and B (ii) Gross Domestic Product .

Items	Rs. (In Lakhs)
Sales by firm A	200
Purchases form B by firm A	80
Purchases from A by firm B	120
Sales by firm B	400
Closing stock of Firm A	40
Closing stock of Firm B	70
Opening stock of Firm A	50
Opening stock of Firm B	90
Indirect taxes paid by both firms	60

Ans-(i) Value added by firm A & B – 110 & 260

(ii) GDPmp = 370 lakhs ; GDPfc=310 lakhs

Que-2 Calculate net value added (NVAmp) at Market prices from the following data:

Items	Rs. (Crore)
Subsidies	1
Sales	100
Closing stock	10
Indirect taxes	5
Intermediate consumption	30
Opening stock	20
Consumption of fixed capital	15

Ans – 45 crores

Que-3 from the following data, calculate (i) Value of output (ii) Net value added at factor cost.

Items	Rs. (Crore)
Excise duty	80
Sales	1000
Operating surplus	60
Opening stock	200
Sales tax	20
Consumption of fixed capital	50
Closing stock	200
Intermediate cost	600
Subsidies	40

Ans-(i) 1,000 crore (ii) 290 crore

Que-4 There are three enterprises, X, Y, Z in the economy, Enterprise Z sold its product at Rs. 2,000 for private consumption, and purchased raw materials and fuel worth Rs. 400 from enterprise X and of Rs. 600 from enterprise Y, Enterprise Y had purchased goods worth Rs. 500 from enterprise X, enterprise Y sold its goods for private consumption for Rs. 1,000.

Find the (i) value added by the three enterprises X, Y and Z and (ii) gross value added.

Ans-(i) 900; 1,100; 1,000; (ii) 3,000

Que-5 On the basis of the following data about an economy which consist of only two firms, find out:

A. Value added by firm A and B

B. Gross Domestic Product at Factor cost (GDPfc).

Items	Rs. (In Lakhs)
Sales by firm A	100
Purchases from firm B by firm A	40
Purchases from firm A by firm B	60
Sales by firm B	200
Closing stock of firm A	20
Closing stock of firm B	35
Opening stock of firm A	25
Opening stock of firm B	45
Indirect taxes paid by both firms	30

Ans-(i) 55 lakhs, 130 lakhs(ii) 155 lakhs

Que-6 An economy has only two firms A and B. On the basis of following information about these firms, find out:

A. Value added by firm A and B.

B. Gross Domestic Product at Market price

Items	Rs. (Lakh)
Exports by firm A	40
Imports by firm A	100
Sales to households by Firm A	180
Sales to Firm B by Firm A	80
Sales to Firm A by firm B	60
Sales to households by firm B	120

Ans-(i) 140 lakhs, 100 lakhs(ii) 240 lakhs

Que-7 From the production statement of an enterprise X for the year 2002-03, find out:

A. Gross Value of output

B. Gross value added at market price

C. Net value added at market prices

D. Net value added at factor cost

Items	Rs. (In Lakhs)
Intermediate consumption	200
Depreciation	50
Indirect tax	75
Subsidy	25
Wages & Salaries	400
Rent	60
Interest	40
Profits	100
Sales	800
Change in stock	100

Ans-(i) 900 lakhs (ii) 700 Lakhs (iii) 650 lakh (iv) 600 lakh

Que-8 From the following data given for a XYZ enterprise for the accounting year 2002-03, calculate:

A. Value of output at market prices

B. Gross value added at market prices (GVAmp)

C. Net Value added at market price (NVAmp)

D. Net Value added at factor cost (NVAfc)

Items	Rs. (Lakh)
Opening stock	400
Closing stock	200
Purchase of raw materials	300
Sales	1600
Corporate tax	100
Undistributed profits	50
Dividends	50
Rent	150
Interest	100
Consumption of fixed capital	200
Indirect taxes	150
Subsidy	50
Wages & Salaries	350

Ans-(i) 1400 (ii) 1,100 (iii) 900 (iv) 800

Que-9 Calculate Net Value added at factor cost (NVAfc) from the following data of an enterprise for the year 2002-03:

Items	Rs. (Crore)
Sales	750
Purchase of raw materials	300
Indirect taxes Consumption of fixed capital	75 125
Closing stock	10
Opening stock	15
Subsidies	0

Ans-245

Que-10 From the following data about firm X for the year 2000-01, calculate the net value added at market price during the year.

Items	Rs. (Lakh)
Sales	90
Closing stock	25
Opening stock	15
Indirect taxes	10
Depreciation	20
Intermediate consumption	40
Purchase of raw materials	15
Rent	5

Ans-40 lakhs

Que-11 From the following data about a firm A for the year 2000-01, calculate the gross value added at factor cost.

Items	Rs. (Lakh)
Opening stock	30
Closing stock	20
Purchase of raw materials	100
Subsidies	20
Sales	250
Intermediate consumption	150
Depreciation	15
Profits	40

Ans-110 lakhs

Que-12 Calculate Gross National Product at market prices (GNPmp) by production method.

Items	Rs. (Crore)
Value of output	800
Consumption of fixed capital	20
Net change in stocks	50
Indirect tax	30
Intermediate consumption of goods	300
Profits	10
Net factor income paid to abroad	(-)20
Wages & salaries	200
Operating surplus	40
Social security contributions by employers	30
Mixed income of self employed	80
Intermediate consumption of services	100

Ans-420 crores

Que-13 Calculate net value added at factor cost (NVAfc) from the following:

Items	Rs. (In lakhs)
Opening stock	10
Consumption of fixed capital	20
Sales	200
Excise duty	15
Purchase of raw materials	80
Closing stock	30
Sales tax	5
Purchase of services from other firms	10

Ans-90 lakhs

Que-14 Calculate NVAfc from the following data:

Items	Rs. (Lakhs)
Indirect taxes	60
Closing stock	100
Sales	1,000
Intermediate cost	420
Opening stock	80
Consumption of fixed capital	50
Subsidies	10

Ans-500 lakhs

Que-15 Calculate NVAmp from the following data:

Items	Rs. (Lakh)
Subsidies	10
Intermediate cost	580
Opening stock	120
Sales	1200
Depreciation	100
Closing stock	100
Indirect taxes	80

Ans-500 lakhs

Que-16 A farmer purchases Rs. 1,000 worth of seeds, Rs. 2,000 worth of fertilizers and pays Rs. 1,500 as water charges to raise a wheat crop. He produces 50 quintals of wheat and sells the same at Rs. 200 per quintal. Calculate the value added by farmer.

Ans-Rs. 5,500

Que-17 An economy has only two firms A and B. On the basis of following information about these firms, find out:

A. Value added by firm A and B.

B. Gross Domestic Product at market prices.

Items	Rs. (Lakh)
Exports by firm A	20
Imports by firm A	50
Sales to households by firm A	90
Sales to firm B by firm A	40
Sales to firm A by firm B	30
Sales to households by firm B	60

Ans-(i) 70 lakhs, 50 lakhs(ii) 120 lakhs

Que-18 From the information given below, calculate:

· Value added by firm A and firm B

· Gross Domestic product at market price

· Net value added at factor cost.

Particulars	` in crores
(i) Sales by firm B to general government (ii) Sales by firm A	100 500
(iii) Total Sales by firm B to households	350
(iv) Change in stock of firm A	20
(v) Closing stock of firm B	40
(vi) Opening stock of firm B	30
(vii) Purchases by firm A	320
(viii) Indirect taxes paid by both the firms	75
(ix) Consumption of fixed capital	120
(x) Sales by firm A to B	200

Ans:- Value added by A :-200 ; value added by B :-260 ;GDPmp :-460 ; NVAFc :-265

Que-19 From the following data about a firm ‘X’ for the year 2000-01, calculate the net value added at market price during that year:

Particulars	` in crores
(i) Sales	90
(ii) Closing stock	25
(iii) Opening stock	15
(iv) Indirect taxes	10
(v) Depreciation	20
(vi) Intermediate consumption	40
(vii) Purchase of raw materials	15
(viii) Rent	5

Ans:-NVA Mp:-40

Que-20 From the following data about firm ‘X’ calculate gross value added at factor cost by it:

Particulars	` in thousands
(i) Sales	500
(ii) Opening stock	30
(iii) Closing stock	20
(iv) Purchase of intermediate products	300
(v) Purchase of machinery	150
(vi) Subsidy	40

Ans:- GVAFC :- 230

Que-21 From the following data, calculate “gross value added at factor cost”.

Particulars	` in thousands
(i) Sales	180
(ii) Rent	5
(iii) Subsidies	10
(iv) Change in stock	15
(v) Purchase of raw materials	100
(vi) Profits	25

Gross value added at factor cost:-105

Que-22 From the following data relating to a firm, calculate its net value added at factor cost:

Particulars	(` in Lakhs)
(i) Subsidy	40
(ii) Sales	800
(iii) Depreciation	30
(iv) Exports	100
(v) Closing stock	20
(vi) Opening stock	50
(vii) Intermediate purchases	500
(viii) Purchase of machinery for own use	200
(ix) Import of raw material	60

Ans:-Net Value Added :-280

Que-23 Calculate value of output from the following data:

Particulars

` lakhs

(i) Net value added at factor cost

(ii) Intermediate consumption

(iii) Excise duty

(iv) Subsidy

(v) Depreciation

100

Ans:- value of output:-200

Que-24 Calculate ‘intermediate consumption’ from the following data:

Particulars	` lakhs
(i) Value of output	200
(ii) Net value added at factor cost	80
(iii) Sales tax	15
(iv) Subsidy	5
(v) Depreciation	20

Intermediate consumption:-90

Que-25 Find Net Value Added at Factor Cost:-

Particulars	` lakhs
(i) Sales	100
(ii) Closing Stock	20
(iii) Excise duty	15
(iv) Opening stock	10
(v) Depreciation	12
(vi) Intermediate Cost	50

Ans:-Net Value Added at Factor Cost:-33

Que-26 Calculate Gross Value Added at Factor Cost:

Particulars Amount
Units of output sold (units)	1,000
Price per unit of output	30
Depreciation	1,000
Intermediate cost	12,000
Closing stock	3,000
Opening stock	2,000
Excise duty	2,500
Sales tax	3,500

Gross Value Added at Factor Cost:-13,000

Que-27 From the following data, calculate Net value added at factor cost.

Particulars	` in crores
(i) Total Sales	1,000
(ii) Decrease in stock	70
(iii) Production for Self Consumption	120
(iv) Purchase of raw materials	300
(v) Exports	150
(vi) Electricity Charges	50
(vii) Depreciation	20
(viii) Excise Duty	70
(ix) Subsidy	40

Ans:-Net value added at factor cost:- 650

Que-28 From the following data, calculate : (a) Value of output; (b) Intermediate Consumption; (c) Net value added at factor cost.

Particulars	` in crores
(i) Purchase of raw materials from domestic market	400
(ii) Increase in the unsold stock	60
(iii) Import of raw material	120
(iv) Domestic Sales	1,200
(v) Replacement of Fixed Capital	50
(vi) Power Charges	20
(vii) Exports	200
(viii) Import of Machinery	40
(ix) Value Added Tax or VAT	10
(x) Subsidy	30
(xi) Goods used for self Consumption	10

Value of Output :-1,470 ; Intermediate Consumption 540; NAVFC :- 900 .

Que-29 From the following data, calculate Net Domestic Product at factor cost.

Particulars	` in crores
	Primary Sector	Secondary Sector	Tertiary Sector
(i) Sales	1,000	1,500	700
(ii) Net Indirect Taxes	50	30	-
(iii) Opening Stock	50	40	20
(iv) Intermediate Consumption	300	750	250
(v) Consumption of Fixed Capital	10	80	60

Ans:-NDPFC :- 1,790

Income method of measuring National Income

1) Compensation of Employees

2) Operating Surplus

3) Mixed income of self employed

Que:-42 State the various components of the ‘Income Method’ or ‘Distributive Share Method’ or ‘Factor Payment Method’ that are used to calculate national income.

Ans:-42 According to this method, all the incomes that accrue to the factors of production by way of wages, profits, rent, interest, etc. are summed up to obtain the national income.

Income method is also known as ‘Distributive Share Method’ or ‘Factor Payment Method’.

Components of Factor Income

The sum total of all the factor incomes earned within the domestic territory of a country is known as ‘Domestic Income (NDP_FC)’. System of National Accounts (SNA0 1993 (joint publication of United National and World Bank) has elaborated the following are the components of Income Method:-

Que:-43 What is meant by compensation of employees? Discuss the three elements of compensation of employees.

Ans:-43 Compensation of Employees (COE) : COE refers to amount paid to employees by employer for rendering productive services. It includes all the payments and benefits, which the employees received, directly or indirectly, from the employer. Compensation of Employees consist of 3 elements:-

(i) Wages and salaries in cash: It includes all monetary benefits, like wages, salaries, bonus, dearness allowances, commission, etc.

(ii) Wages and salaries in kind: It includes all non-monetary benefits, like rent free home, free car, free medical and educational facilities, etc. An imputed value of these benefits should be included in national income.

(iii) Employer’s contribution to social security schemes: It includes contributions made by employer for the social security of employees. For example, contribution to provident fund, gratuity. Labour welfare funds, retirements pension, etc. The aim of such contributions is to ensure safely and security of life of the employees.

Compensation of Employee

Compensation of employees = wages or salary in cash + wages in kind + commission + bonus + dearness allowance + Leave & Sickness allowance + subsidized food + Employer’s contribution to provident fund + Employer’s contribution to social security + Honorarium + Retirement pension

Compensation of employees = National income – rent – interest – profit – mixed income – net factor income from abroad.

Compensation of employees = gross domestic product at factor cost – consumption of fixed capital – operating surplus (rent + interest + profit) – Mixed income

Compensation of employee includes the following:-

1. Salaries & wages paid in cash

2. Payment of Dearness allowance , Bonus & commission

3. All non monetary advantages, free education or free medical care, rent free accommodation.

4. Employer contribution to social security fund & provident fund.

5. Payment of honorarium and retirement pensions to the official

6. Salaries & allowance of the governors , minister & member of parliament

7. Free ration as well as uniform for the defence personnel or other employees

Compensation of employee does not include the following:-

1. Travelling allowance paid by the business enterprises

2. Business expenses undertaken by the employees but refunded by the employers

3. Payment to resident working in foreign countries.

4. Compensation received by an injured worker from the Insurance.

5. Life insurance premium paid by the employee

6. Employee contribution to the provident fund.

7. Old age pension.

Unsolved question

Que:- 1 Calculate compensation of employees from the following data;

Items	(Rs. Crore)
Wages and salaries	500
Value of free medical facilities	10
Employer’s contribution to provident fund	30
Dearness Allowance	40
Value of subsidized food	20
Employer’s contribution to social security	35
Commission received by workers of sales department	15
Bonus	30
Travelling Allowance	20
Compensation received by injured worker from the insurance company	25
Life Insurance premium paid by employees.	20
Employees contribution to the provident fund.	10

Ans- 680 Cr

Que:- 2 Calculate compensation of employees from the following data;

Items	(Rs. Crore)
Medical expenses on employees	5
Contribution to provident fund by employers	10
Wages in cash	125
Dearness Allowance	75
Life Insurance Premiums paid by the employees	2

Ans-215 Cr

Que:- 3 From the data given below estimate the compensation of employees:

Items	(Rs. In Thousands)
Wages and salaries received by the staff in cash	528
Benefit of free housing facilities	162
Subsidy on lunch/dinner to the staff	32
Employer’s Contribution to social security	28
Compensation received by an Injured Worker from the Insurance company	10

Ans- 750 Thousands

Que:- 4 From the data relating to a firm estimate the compensation of employees;

Items	(Rs. In Thousands)
Wages and salaries	45
Commission paid to sales staff	15
Value of free medical facilities	5
Value of subsidized food (element of subsidy)	10
Travelling allowance (towards actual expenses)	25

Ans- 75 Thousand

Que:- 5 Calculate emoluments or compensation of employees;

Items	(Rs. Crore)
Dearness allowances	10
Social security contributions by employees	5
Travel expenses on business tour reimbursed by employers	20
Wages and salaries in cash	460
Free food to employee during lunch	20

Ans- 490 Cr

Que:- 6 Calculate emoluments or compensation of employees;

Items	(Rs. Crore)
Wages and salaries paid in cash	20,000
Free accommodation by employers to employees with an estimated rent of	4,000
Life insurance premium paid by the employees	500
Employer’s contribution to provident fund	2,000
Income tax paid by employees	5,000

Ans- 26,000 Cr

Que:- 7 From the following data estimate compensation of employees;

Items	(Rs. Crore)
Wages and salaries received by workers in cash	720
Employer’s contribution to social security	80
Compensation received by an injured worker From the insurance company	25
Value of free medical facilities	120
Commission received by workers of sales departments	80

Ans- 1,000 Cr

Que:- 8 From the following data about a firm estimate compensation of employees;

Items	(Rs. Crore)
Commission paid to sales staff	12
Travelling allowance paid to staff	18
Employer’s contribution to social security	15
Wages and salaries paid to staff	155
Interest free loan given to staff	20

Ans- 202 Cr

Que:- 9 From the data given below find out the compensation of employees;

Items	(Rs. Crore)
Rent	15
Interest	10
Profit	5
Gross domestic Output at Factor cost	175
Consumption of Fixed capital	15

Ans- 130 Cr

Que:- 10 Calculate compensation of employees from the following data;

Items	( Rs. Crore)
Rent	40
Interest	70
Profit	30
Consumption of fixed capital	100
Gross Domestic Product at factor cost	500
Mixed income of self-employed	100

Ans- 160 Cr

Que:- 11 Find compensation of employees from the following data;

Items	(Rs. Crore)
Net Indirect tax	15
Gross value added to Market price	125
Consumption of fixed capital	10
Operating surplus	50
Mixed income of the self-employed	30

Ans- 20 Cr

Que:- 12 From the following data calculate compensation of employees;

Items	(Rs. Crore)
Value of output	500
Net Indirect Tax	20
Interest	50
Rent and profits	150
Intermediate consumption	200
Consumption of Fixed capital	10
Free medical facilities provided to employees	5

Ans- 70 Cr

Que:-44 Define operating surplus. State its Components.

Ans:-44 It is the total Income from property and entrepreneurship in the form of rent , interest and profit .Profit includes Dividend ,Corporation Tax and Corporation Saving. Its main Component are as follows :-

1. Rent & Royalty: Rent is that part of national income which arises from ownership of land and building. Rental income includes both actual rent (rent of let out land) as well as imputed rent (rent of self-occupied properties). Imputed rent of owner occupied houses in calculated on the basis of market rental value of the house.

Royalty refers to income received for granting leasing rights of sub-soil assets. For example owners of mineral deposits like coal, iron ore, natural gas, etc. can earn income by giving rights of mining to the contractors.

2. Interest: Interest refers to amount received for lending funds to a production unit. It includes both actual interest as well as imputed interest of funds provided by the entrepreneur. ‘Interest income’ includes interest on loans taken for productive services only.

Interest income does not include:-

(i) Interest paid by government on public debt and interest paid by consumers as such interest is paid on loans taken for consumption purposes.

(ii) Interest paid by one firm to another firm as it is already included in the profit of the firm which pays it.

3. Profit: Profits is the reward to the entrepreneur for his contribution to the production of goods and services. It is the residual income, which an entrepreneur earns after paying all the other factors of production.

The profit earned by an entrepreneur is used for 3 purpose:-

(i) Corporate Tax: It is the direct tax paid by an enterprises to the government on the total profit earned by it. It is also known as Profit tax or Business tax.

(ii) Dividend: It refers to that part of profit, which is paid to the shareholders in the ratio of their shareholders. It is also known as distributed profits.

(iii) Retained Earnings / Corporation Saving : It refers to that part of profit, which is kept as reserve to meet unexpected contingencies or for business expansion. It is also known us Undistributed Profits or Savings of Private Sector or Reserve and Surplus.

In short, Profit = Corporate Tax + Dividend + Retained Earnings

Que:-45 Give the meaning of operating surplus.

Ans:-45 Operating surplus refers to the sum total of income from property (rent + royalty + interest) and income from entrepreneurship (profit).

Que:-46 Income from property, rent and entrepreneurial income are respectively `150, `75 and `50. How much is the operating surplus?

Ans:-46 `150 + `50 = `200. (Note: Rent is a part of income from property).

Operating Surplus

Income from property

Income from Entrepreneurship

Profit payable or receivable for entrepreneurial services

Rent

Royalty

Interest

Dividend

Value of output = Price * Quantity

Sale + Change in stock (closing –opening )

Gross Value Added At market price = value of output – intermediate consumption

Operating Surplus = Rent + Royalty + interest + profit (Dividend + Corporate tax + Corporate saving OR Undistributed profit)

Gross value added at factor cost or gross domestic product at factor cost – depreciation – Compensation of employees – mixed income,

Net value added at factor cost – compensation of employees – mixed income.

National income – compensation of employees – mixed income – net factor income from abroad.

Some Questions based on Operating Surplus

Que:-1 Find out operating surplus from the following data;

Items	Rs. Crore
Royalty	75
Rent	175
Interest	100
Dividend	120
Undistributed Profit	80
Corporation Tax	50

Ans-Operating Surplus – 600 Cr

Que:-2 From the following data, find out operating surplus.

Items	Rs. Crore
Mixed Income	100
Profit	140
Wages and salaries	120
Employer’s contribution to social security	30
Interest	70
Rent	90
Dividend	80
Corporation Tax	40
Retirement Pension	20

Ans-Operating Surplus –300 Cr

Que:-3 Calculate the operating surplus from the following data:

Items	Rs. Crore
Royalty	5
Rent	75
Interest	30
Net domestic product at factor cost	400
Profit	45

Ans-Operating Surplus –155 Cr

Que:-4 Given the following data, find out operating surplus:

Items	Rs. Crore
Sales	30,000
Compensation of Employees	6,000
Intermediate Consumption	8,000
Rent	2,500
Interest	2,200
Net Indirect Tax	1,500
Consumption of Fixed Capital	1,200

Ans-Operating Surplus –13,300 Cr

Que:-5 From the following data relating to a firm, estimate operating surplus:

Net Interest	350
Net Rent	50
Profit before Tax	100
Subsidies	20
Dividends	80

Ans-Operating Surplus –500 Cr

Que:-6 Calculate operating surplus from the following data:

Items	Rs. Crore
Value of output	800
Intermediate consumption	200
Compensation of employees	200
Indirect Tax	30
Depreciation	20
Subsidies	50
Mixed Income	100

Ans-Operating Surplus –300 Cr

Que:-7 From the following data, find out operating surplus.

Items	Rs. Crore
Gross value Added at Market price	600
Net Indirect Taxes	20
Depreciation	30
Wages and salaries	200
Employer’s Contribution to social security	50
Rent	100
Dividend	80
Undistributed profits	20

Ans-Operating Surplus –300 Cr

Que:-8 Find out operating surplus from the following data:

Items	Rs. Crore
Intermediate Consumption	140
Value of output	340
Consumption of Fixed Capital	20
Net Indirect Tax	30
Compensation of Employees	120

Ans-Operating Surplus – 30 Cr

Que:-9 Calculate operating surplus of the firm:

Items	Rs. Crore
Value of Gross Output at Market Price	70,000
Purchase of Raw Material	18,000
Consumption of Fixed Capital	3,000
Net Indirect Tax	9,000
Wages and Salaries	25,000
Profit	2,000

Ans-Operating Surplus –15,000 Cr

Que:-10 Calculate operating surplus from the following data:

Items	Rs. Crore
Compensation of Employees	300
Indirect Tax	200
Consumption of Fixed Capital	100
Subsidies	50
Gross Domestic Product at Market price	600

Ans-Operating Surplus – 50 Cr

Que:-11 Find out operating surplus from the following data:

Items Rs. Crore

Compensation of Employees	100
Net Indirect Tax	30
Gross value added at market price	330
Consumption of Fixed Capital	30
Mixed Income of the self-employed	40

Ans-Operating Surplus –130 Cr

Que:-12 Calculate operating surplus from the following data:

Items	Rs. Crore
Net value added at factor cost	300
Consumption of fixed capital	15
Compensation of employees	80
Net Indirect Tax	10
Employer’s contribution to social security schemes	5

Ans-Operating Surplus –220 Cr

Que:-47 What is meant by mixed income?

Que:-47 Briefly discuss the meaning of mixed income.

4. Mixed Income: It is the income generated by own-account workers (like farmers, barbers, etc.) and unincorporated enterprises (like retail traders, small shopkeepers, etc.). It is the term used for any income that has elements of more than one type of factor income. Mixed income arises from productive services of self-employed persons, whose income includes wages, rent, interest and profit and these elements cannot be separated from each other. For example, income of a doctor running a clinic at this residence.

Que:-48 Describe the steps involved in the estimation of national income by income method.

[CBSE, All India 2005]

Ans:-48 The various steps involved in estimating national income by Income Method are:-

Step 1: Identify and classify the production units.

All the producing enterprises employing various factors of production are identified and classified into primary, secondary and tertiary sectors.

Step 2: Estimate the factor income paid by each sector.

The factor incomes paid by each sector are classified under the following heads: (i) Compensation of employees; (ii) Rent and Royalty; (iii) Interest; (iv) Profit; and (v) Mixed Income.

Step 3: Calculate Domestic Income (NDP_FC)

When factor incomes of all the sectors are summed up, we get domestic income (NDP_FC). In short, NDP_FC = Compensation of Employees + Rent and Royalty + Interest + Profit + Mixed Income

Step 4: Estimate net factor from abroad (NFIA) to arrive at National Income.

In the final step, NFIA is added to domestic income to arrive at National Income (NNP_FC), i.e. NNP_FC= NDP_FC + Net factor income from abroad.

Que:-49 What are the precautions which must be taken while estimating national income by income method?

Ans:-49 The following precautions are to be taken while estimating factor incomes:

1. Transfer earning like old age pensions, unemployment allowances, scholarships, pocket expenses etc. should not be included in national income

2. The sale proceeds of shares and bonds are not included in national income. Because such transactions are not related to the flow of goods and services

3. Wind fall gains, like lotteries and capital gains should not be included as there is no value addition corresponding to wind fall gains.

4. Imputed rent of owner occupied houses is included in national income

5. Corporate tax, dividends and undistributed profits are all the components of corporate profits. Once profit is included in the estimation of national income, any of these components should not be separately added.

6. Income tax is paid out of compensation of employees. It should not be separately added in the estimation of national income.

Calculation of National Income By Income Method

Que-1 From the following data calculate National Income by income method.

Items	Rs. (Crore)
Compensation of Employees	800
Private final consumption expenditure	1,200
Profits	500
Rent	200
Govt. final consumption expenditure	800
Interest	150
Net factor income from abroad	20
Net Indirect taxes	190
Mixed income of self employed	630
Net exports	(-) 30
Net domestic capital formation	500
Consumption of fixed capital	150

Ans-2,300 crore

Que-2 From the following data calculate Gross National Product at Market price by income method

Items	Rs. (Crore)
Net domestic capital formation	375
Compensation of employees	600
Net Indirect taxes	150
Profits	450
Rent	200
Private final consumption expenditure	1,100
Consumption of fixed capital	115
Govt. final consumption expenditure	700
Interest	250
Mixed income of self employed	500
Net factor income from abroad	(-) 15
Net exports	(-) 25

Ans-2,250 crore

Que-3 From the following data calculate National Income by income method

Items	Rs. (Crore)
Compensation of employees	1,200
Net factor income from abroad	(-) 20
Net Indirect tax	120
Profits	800
Private final consumption expenditure	2,000
Net domestic capital formation	770
Consumption of fixed capital	130
Rent	400
Interest	620
Mixed income of self employed	700
Net exports	(-)30
Govt. final consumption expenditure	1,100

Ans-3,700 crore

Que-4 Find out Gross Domestic Product at factor cost from the following data:

Items	Rs. (Crore)
Compensation of employees	110
Operating surplus	90
Mixed income of the self employed	100
Consumption of fixed capital	70
Net indirect taxes	10

Ans-Rs. 370 crore

Que-5 Calculate Net Domestic Product at MP from the following data:

Items	Rs. (In Lakhs)
Wages and salaries	500
Net capital formation	100
Exports	50
Imports	60
Gross capital formation	120
Employer’s contribution to social security schemes	20
Net factor income from abroad	(-)10
Rent and interest	250
Profit	400
Indirect taxes	50
Subsidies	10

Ans-1,210 Lakh

Que-6 Given the following data, calculate Net Domestic Product at factor cost or Domestic income

Items	Rs. (Crore)
Wages	10,000
Rent	5,000
Interest	400
Dividend	3,000
Mixed income of the self-employed	400
Undistributed profits	200
Contribution to social security	400
Corporation profit tax	400

Ans-19,800 Crore

Que-7 Calculate Net Domestic Product at Market price from the following data:

Items	Rs. (Crore)
Net indirect taxes	38
Consumption of fixed capital	34
Net factor income from abroad	(-)3
Rent	10
Profit	25
Interest	20
Royalty	5
Wages & Salaries	170
Employer’s contribution to social security schemes	30

Ans-298 crore

Que-8 Calculate GNP at MP from the following data:

Items	Rs. (Crore)
Profits	220
Compensation of employees	350
Interest	100
Consumption of fixed capital	50
Opening stock	30
Subsidies	20
Closing stock	50
Mixed income of self employed	150
Contribution to social security schemes	30
Net factor income from abroad	10
Rent	80
Indirect taxes	90

Ans-1,030 crore

Que-9 From the following data calculate Gross national product at factor cost.

Items	Rs. (Crore)
Gross fixed capital formation	100
Change in stocks	20
Net capital formation	110
Mixed income of the self employed	200
Net factor income from abroad	(-)10
Net exports	(-)20
Compensation of employees	250
Operating surplus	400
Net indirect taxes	50

Ans-850 crore

Que-10 Given the following data calculate Net National Product at Market price

Items	Rs. (Crore)
Indirect taxes	9,000
Subsidies	1,800
Depreciation	1,700
Mixed income	28,000
Operating surplus	10,000
Net factor income from abroad	(-)300
Compensation of employees	24,000

Ans-68,900 crore

Que-11 Calculate National Income or NNP at FC from the following data:

Items	Rs. (Crore)
Mixed income of the self employed	200
Old age pension	20
Dividends	100
Operating surplus	900
Wages & salaries	500
Profit	400
Employer’s contribution to social security schemes	50
Net factor income from abroad	(-) 10
Consumption of fixed capital	50
Net indirect taxes	50

Ans-1,640 crore

Que-12 Calculate Gross Domestic Product at Market price by income method from

The following data:

Items	Rs. (Crore)
Compensation of employees	13,363
Govt. final consumption expenditure	3,801
Indirect taxes	3,864
Gross fixed capital formation	6,305
Mixed income of the self employed	16,112
Interest, rent and profit	5,044
Change in stocks	1,039
Exports of goods and services	1,771
Imports of goods and services	1,816
Private final consumption expenditure	28,163
Net factor income from abroad	(-) 284
Subsidies	337
Consumption of fixed capital	2,217

Ans-40,263 crore

Que-13 Calculate National Income by income method.

Items	Rs. (Crore)
Subsidies	5
Private final consumption expenditure	100
Net factor income from abroad	(-)10
Indirect tax	25
Rent	5
Government final consumption expenditure	20
Net domestic fixed capital formation	30
Operating surplus	20
Wages & Salaries	50
Net exports	(-)5
Addition to stocks	(-)5
Social security contributions by employers	10
Mixed income	40

Ans-110 crore

Que-14 Calculate National Income by income method from the following data:

Items	Rs. (Crore)
Compensation of employees	5,200
Govt. consumption expenditure	1,500
Net indirect taxes	1,400
Operating surplus	2,000
Net exports	(-)400
Gross fixed capital formation	2,500
Private final consumption expenditure	12,000
Net addition to stocks	400
Net factor income from abroad	400
Consumption of fixed capital	1,000
Mixed income of self employed	6,400

Ans-14,000 crore

Que-15 From the following data, calculate national income by income method.

Items	Rs. (Crore)
Govt. final consumption expenditure	7,000
Indirect taxes	9,000
Subsidies	1,800
Mixed income of self employed	28,000
Gross fixed capital formation	13,000
Net addition to stocks	3,000
Operating surplus	10,000
Consumption of fixed capital	4,000
Private final consumption expenditure	51,000
Exports of goods and services	4,800
Imports of goods and services	5,600
Net factor income from abroad	(-)300
Compensation to employees	24,000

Ans-61,700

Que-16 Calculate national income by income method from the following data:

Items	Rs. (Crore)
Compensation of employees	13,300
Govt. final consumption expenditure	3,800
Indirect taxes	3,800
Gross domestic fixed capital formation	6,300
Mixed income of self employed	16,000
Operating surplus	5,000
Net addition to stock	1,000
Export of goods and services	1,700
Import of goods and services	1,800
Private final consumption expenditure	29,000
Net factor income from abroad	300
Subsidies	300
Consumption of fixed capital	2,200

Ans-34,600 crore

Que-17 Find out (a) net domestic product at factor cost and (b) Gross Domestic

Product at Market price by income method from the following data:

Items	Rs. (Crore)
Net factor income from abroad	(-) 10
Govt. final consumption expenditure	220
Private final consumption expenditure	1,540
Subsidies	30
Mixed income of the self employed	860
Imports	170
Consumption of fixed capital	120
Indirect taxes	260
Rent, interest and profits	290
Compensation of employees	730
Exports	140
Change in stocks	100
Net fixed capital formation	280
Interest on national debt	35

Ans-(a) 1,880 crore (b) 2,230 crore

Que-18 Compute national income according to income method:

Items	Rs. (Crore)
Operating surplus	110
Private final consumption expenditure	300
Net factor payment to foreign countries	20
Employees contribution towards social security	20
Remuneration to employees	230
Change in stock	10
Govt. final consumption expenditure	60
Net exports	(-)10
Net domestic capital formation	40
Consumption of fixed capital	30
Net indirect taxes	50

Ans-320 crore

Que-19 From the data given below, calculate GDPmp by income method.

Items	Rs. (Crore)
Govt. final consumption expenditure	7,351
Indirect taxes	8,834
Gross fixed capital formation	13,248
Mixed income of the self employed	28,267
Subsidies	1,120
Change in stocks	3,160
Interest, rent and profit	9,637
Consumption of fixed capital	4,046
Private final consumption expenditure	51,177
Imports of goods and services	5,664
Exports of goods and services	4,812
Net factor income from abroad	(-)255
Compensation of employees	24,420

Ans-74,084 crore

Que-20 Calculate gross domestic product at market price through the income method:

Items	Rs. (Crore)
Mixed income of the self employed	280
Compensation of employees	240
Net factor income from rest of the world	(-)5
Imports	60
Exports	50
Govt. final consumption expenditure	75
Indirect taxes	90
Change in stocks	35
Private final consumption expenditure	510
Consumption of fixed capital	40
Gross fixed capital formation Subsidies	130 10
Interest, rent and profits	100
Interest on national debt	10

Ans-740 crore

Que-21 From the data given below, calculate (i) Gross Domestic Product at market price (ii) Gross Domestic Product at factor cost (iii) National income by income method.

Items	Rs. (Crore)
Mixed income of self employed	28,267
Subsidies	1,120
Rent, interest and profit	9,637
Consumption of fixed capital	4,046
Net factor income from abroad	(-)256
Compensation of employees	24,420
Indirect taxes	8,834

Ans-(i) 74,084 crore (ii) 66,370 crore (iii) 62,068 crores.

Que-22 Find out national income from the following data:

Items	Rs. (Crore)
Rent & royalty	30
Wages & salaries	500
Net factor income from abroad	(-)5
Contribution to social security schemes by employees	60
Operating surplus	120

Ans-615 crore

Que-23 From the following data calculate Gross national product at market price by income method.

Items	Rs. (Crore)
Compensation of employees	400
Profits	250
Mixed income of self employed	300
Rent	80
Interest	70
Private final consumption expenditure	700
Net domestic capital formation	120
Consumption of fixed capital	100
Net exports	(-)10
Govt. final consumption expenditure	350
Net Indirect taxes	60
Net factor income from abroad	(-)10

Ans-1,250 crore

Que-24 From the following data calculate National Income by income method.

Items	Rs. (Crore)
Compensation of employees	600
Govt. final consumption expenditure	550
Net factor income from abroad	(-)10
Net exports	(-)15
Profits	400
Net indirect tax	60
Mixed income of self employed	350
Rent	200
Interest	310
Private final consumption expenditure	1,000
Net domestic capital formation	385
Consumption of fixed capital	85

Ans-1,850 Crore

Que-25 From the following data calculate National Income by income method.

Items	Rs. (Crore)
Private final consumption expenditure	900
Net domestic capital formation	200
Compensation of employees	500
Mixed income of self employed	400
Govt. final consumption expenditure	400
Net factor income from abroad	(-)10
Profits	220
Rent	90
Net exports	(-)25
Interest	100
Net Indirect tax	165
Net current transfers from rest of the world	50

Ans-1,300 crore

Que:-50 Explain in brief the various components of expenditure method.

Que:- 50 What are the various component of income disposal method of estimating of national income.

Ans:-17 Factor income earned by factors of production is spent in the form of expenditure on purchase of goods and services produced by firms. This method is known as ‘Income Disposal Method’.

Components of Final Expenditure

Expenditure is undertaken by all the sectors of an economy: Households, Government, Firms and the Foreign Sector.

1. Private Final Consumption Expenditure (PFCE): It refers to expenditure incurred by households and private non-profit institutions serving households on all types of consumer goods, i.e. durable (except house**), semi-durable goods and services.

2. Government Final Consumption Expenditure (GFCE): It refers to the expenditure incurred by general government on various administrative services like defence, law and order, education etc. Government produces goods and services with the aim of social welfare without any intention of earning profits.

Ques:-50 What is meant by gross domestic capital formation? State its components.

3. Gross Domestic Capital Formation (GDCF) or Gross Investment: It refers to the addition to capital stock of the economy. It represents the expenditure incurred on acquiring goods for investment by the production units located within the domestic territory. There are two components of GDCF:-

(i) Gross Fixed Capital Formation: It refers to the expenditure incurred on purchase of fixed assets.

The expenditure is generally divided into three sub-categories:-

(a) Gross Business Fixed Investment: It includes expenditure on the purchase of new plants, machinery, equipments, etc.

(b) Gross Residential Construction Investment: It includes expenditure on purchase or construction of new houses by households.

(c) Gross Public Investment: It includes expenditure on construction of flyovers, roads, bridges etc. by the government.

(ii) Inventory Investment (Change in Stock): It refers to the physical change in the stock of raw material, semi-finished goods and finished goods lying with the producers. It is included as an investment item because it represents the goods produced but not used for current consumption. It is calculated as difference between the closing stock and the opening stock of the year.

4. Net Exports (X – M): It refers to the difference between exports and imports of a country during a period of one year.

Que-51 What are the precautions which must be taken while estimating national income by expenditure method?

Ans:-51 The following precautions are to be taken while using expenditure method:

1. Final expenditure is to be taken into account to avoid error of double counting.

2. The intermediate expenditure is not included in the calculation of national income.

3. Expenditure on second hand goods is not included because value of second hand goods has already been accounted during the year of their production. These were initially produced and purchased by the final users.

4. Expenditure on shares and bonds is not included in total expenditure as there are mere paper claims and are not related to the flow of final goods and services. Such expenditure do not cause any value addition.

5. Expenditure on transfer payments by the government is not included in total expenditure e.g. old age pension, scholarship. Etc.

Que:-52 Why are exports included in the estimation of domestic product by the expenditure method?

Que:-52 Why do export form a part of national income?

Ans:-52 Exports are produced within the country’s domestic territory, therefore, they from a part of national income.

Que:-53 Why are imports not included in the estimation of national income?

Ans:-53 Imports are not produced within the domestic territory of the country, therefore, they are not included in the estimation of national income.

Que:-54 Under what circumstances, net export is negative?

Ans:-54 When imports exceed exports.

Que:- 55 State the difference between net export and net factor income from abroad ?

Ans:-55 The difference between net export and net factor income from abroad is as follows :-

Basis	Net Exports	Net Factor Income from Abroad
Meaning	It refers to difference between exports and imports of goods and services.	It refers to difference between factor income received from abroad and factor income paid abroad.
Concept	It is a domestic concept.	It is a national concept.
Factor/Non-Factor Services	It includes non-factor services.	It includes factor services.

Que:-56 Discuss the various steps of expenditure method for calculating national income.

Ans:-56 The steps involved in calculating National Income by Expenditure Method are:

Step 1: Identify the Economic Units incurring Final Expenditure

All the economic units, which incur final expenditure when the domestic territory, are classified under 4 groups: (i) Household sector; (ii) Government sector; (iii) Producing sector; (iv) Rest of the world sector.

Step 2: Classification of Final Expenditure

Final expenditures incurred by the above mentioned economic units are estimated and classified under the following heads:

· Private Final Consumption Expenditure (PFCE).

· Government Final Consumption Expenditure (GFCE).

· Gross Domestic Capital Formation (GDCF).

· Net Exports (X – M).

The sum total of four components of final expenditure gives Gross Domestic Product at Market Price (GDP_MP), i.e. GDP_MP = GFCE + GDCF + (X – M)

Step 3: Calculate Domestic Income (NDP_FC)

By subtracting the amount of depreciation and net indirect taxes from GDP_MP, we get domestic income, i.e. NDP_FC= GDP_MP – Depreciation – Net Indirect Taxes.

Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income

In the final step, NFIA is added to domestic income to arrive at National Income.

National Income (NNP_FC) = NDP_FC + NFIA

Que:-57 State the items which are excluded from the estimation of GNP Measurement

Ans:-57 Items that are excluded from GNP measurement: the general types of purely financial transactions are:

1. Buying & Selling of securities:

Buying & Selling of securities such as shares, bonds, debentures etc. are excluded from GNP because there is only a transfer of ownership right. There is no production activity but only exchange of funds for financial claims. Trading in financial instruments does not imply pd. of final goods and services.

2. Government transfer payments:

Government transfer payments such as pension payments, employees social security measures ad hoc assistance due to certain exigencies like floods, drought etc. and subsidies are not included in GNP because there is no pd. of final goods and services in response to transfer payments.

3. Private transfer payments:

Private transfer payments such as pocket money given by parents to their children, elders gifting money to the young ones etc. are excluded from GNP because it is merely a transfer of money from on individual to another. There is no production of final goods and services in response to transfer payments.

4. Transfer of used goods or second hand goods:

Transfer of used goods or sale of second hand goods is not included in GNP because GNP includes the value of final goods and services produced in the current year.Spending on a used goods or second hand goods simply reflects a change in the ownership of a pre-existing output.

5. Non Market goods and services:

Non market goods and services such as growing vegetables in backyard, repairing of electrical appliances himself or herself, services of housewife etc. are consumed without using organized markets. But GNP includes only those transactions that occur through market activities. Barter transactions and production for self consumption by household are not included in the GNP because it is difficult to estimate the value at market prices.

Questions based on expenditure method

Que-1 Calculate GNP at MP by expenditure method from the following data:

Items	Rs. (Crore)
Rent	40
Private final consumption expenditure	800
Net exports	20
Interest	60
Profits	120
Govt. final consumption expenditure	200
Net domestic capital formation	100
Compensation of employees	800
Consumption of fixed capital	20
Net Indirect taxes	100
Net factor income from abroad	(-)20

Ans 1,120 crores

Que-2 From the following information calculate Gross National Product at factor cost by expenditure method:

Items	Rs. (Crore)
Factor income from abroad	10
Compensation of employees	150
Net domestic capital formation	50
Private final consumption expenditure	220
Factor income to abroad	15
Change in stock	15
Employer’s contribution to social security schemes	10
Consumption of fixed capital	15
Interest	40
Exports	20
Imports	25
Indirect taxes	30
Subsidies	10
Rent	40
Govt. final consumption expenditure	85
Profits	100

Ans 340 crores

Que-3 From the following data, calculate Gross Domestic Product at factor cost by expenditure method:

Items	Rs. (Crore)
Compensation of employees	150
Private final consumption expenditure	200
Net domestic capital formation	70
Employer’s contribution to social security schemes.	15
Govt. final consumption expenditure	100
Dividends	60
Rent	40
Corporation tax	10
Net factor income from abroad	(-)10
Undistributed profits	30
Consumption of fixed capital	10
Interest	50
Exports	20
Imports	30
Net Indirect taxes	20

Ans 350 crores

Que-4 Estimate national income by expenditure method from the following data:

Items	Rs. (Crore)
Private final consumption expenditure Govt. final consumption expenditure	210 50

Net domestic capital formation	40
Net exports	(-)5
Wages & salaries	170
Employer’s contribution to provident fund	10
Profit	45
Interest	20
Indirect taxes	30
Subsidies	5
Rent	10
Net factor income from abroad	3
Consumption of fixed capital	25
Royalty	15

Ans 273 crores

Que-5 Find the Gross National Product at market prices from the following data:

Items	Rs. (Crore)
Consumption of fixed capital	60
Govt. final consumption expenditure	200
Net factor income from abroad	(-)10
Private final consumption expenditure	800
Exports	50
Opening stock	30
Imports	60
Closing stock	20
Gross domestic fixed capital formation	230

Ans 1,200 crores

Que-6 Calculate:

Ø Gross National Product at market price

Ø Net National Product at factor cost from the following data:

Items	Rs. (Crore)
Net factor income from abroad	(-)5
Net exports	(-)7
Net Indirect taxes	47
Net change in stock	13
Private final consumption expenditure	265
Govt. final consumption expenditure	50
Consumption of fixed capital	45
Gross domestic capital formation	100

Ans (i) 403 crores; (ii) 311 crores

Que-7 Calculate Net National Product at factor cost from the following data:

Items	Rs. (Crore)
Private final consumption expenditure	290
Govt. final consumption expenditure	50
Subsidies	20
Gross domestic fixed capital formation	105
Indirect taxes	70
Depreciation provision	45
Net factor income from abroad	(-)5
Net addition to stock	15
Net exports	(-)5

Ans 355 crores

Que-8 Find Gross National Product at market prices from the following data:

Items	Rs. (Crore)
Gross domestic capital formation	200
Consumption of fixed capital	50
Closing stock	15
Govt. final consumption expenditure	180
Imports	60
Net factor income from abroad	(-)5
Opening stock	20
Exports	50
Private final consumption expenditure	700

Ans – 1,065 crores.

Que-9 from the following data, calculate Net National Product at factor cost by expenditure method.

Items	Rs. (Crore)
Govt. final consumption expenditure	100
Gross fixed capital formation	310
Operating surplus	800
Change in stock	50
Exports	40
Net factor income from abroad	(-)10
Subsidies	20
Consumption of fixed capital	20
Imports	50
Compensation of employees	300
Mixed income of self-employed	30
Indirect taxes	120
Private final consumption expenditure	800

Ans 1,120 crores

Que-10 From the following data calculate Net National Product at factor cost by expenditure method.

Items	Rs. (Crore)
Govt. final consumption expenditure	100
Interest, rent and profits	900
Royalties	20
Gross capital formation	620
Net exports	(-)10
Change in stock	100
Net factor income from abroad	(-)10
Subsidies	20
Private final consumption expenditure	800
Indirect taxes	120
Consumption of fixed capital	60
Mixed income of self employed	60
Compensation of employees	370

Ans 1,340 crores

Que-11 Estimate national income by expenditure method from the following data:

Items	Rs. (Crore)
Private final consumption expenditure	200
Govt. final consumption expenditure	20
Gross domestic capital formation	40
Net exports	(-) 5
Wages & salaries	165
Employer’s contribution to provident fund	10
Profits	15
Interest	20
Indirect taxes	30
Subsidies	5
Rent	15
Net factor income from abroad	5
Consumption of fixed capital	5

Ans 230 crores

Que-12 Compute Gross Domestic Product at factor cost by expenditure method from the following data:

Items	Rs. (Crore)
Compensation of employees	110
Govt. final consumption expenditure	55
Private final consumption expenditure	200
Operating surplus	90
Gross fixed capital formation	70
Change in stock	65
Mixed income of self employed	100
Consumption of fixed capital	70
Net Indirect taxes	10
Net exports	(-)10

Ans 370 crores

Que-13 Find out Net Domestic Product at factor cost by expenditure method from the following data.

Items	Rs. (Crore)
Net factor income from abroad	(-) 10
Govt. final consumption expenditure	220
Private final consumption expenditure	1540
Subsidies	30
Mixed income of self employed	860
Imports	170
Consumption of fixed capital	120
Indirect taxes	260
Rent, interest and profits	290
Compensation of employees	730
Exports	140
Change in stock	100
Net fixed capital formation	280
Interest on national debt	35

Ans 1,880 crores

Que-14 Calculate national income at factor cost by expenditure method from the following data:

Items	Rs. (Crore)
Compensation of employees	250
Imports	20
Mixed income of self employed	50
Gross fixed capital formation	120
Private final consumption expenditure	550
Consumption of fixed capital	10
Net factor income from abroad	20
Indirect taxes	100
Change in stock	20
Subsidies	20
Operating surplus	350
Exports	10
Govt. final consumption expenditure	60

Ans 670 crores.

Que-15 On the basis of information given below, calculate Gross Domestic Product at Market Price

Items	Rs. (Crore)
Personal consumption expenditure	45,000
Govt. consumption expenditure	5,000
Gross domestic fixed investment	5,000
Increase in inventories	1,000
Exports of goods and services	6,000
Imports of goods and services	7,000
Net Indirect taxes	3,500
Depreciation	4,500

Ans – 55,000

Que-16 From the following transactions find out NNP at FC :

Items	Rs. (Crore)
Household expenditure on consumption	1,00,000
Govt. expenditure on consumption	12,500
Gross capital formation	25,000
Depreciation	6,000
Exports	6,000
Imports	9,000
Net earned income from abroad	750

Ans 1,29,250 crore

Que-17 From the following data, calculate:

GNP at market price

NNP at factor cost

Items	Rs. (Crore)
Gross domestic capital formation	94
Net exports	(-)6
Private final consumption expenditure	260
Net factor income from abroad	(-)3
Consumption of the fixed capital	39
Net change in stocks	11
Net Indirect taxes	43
Govt. final consumption expenditure	47

Ans (a) 392 crores (b) 310 crores

Que-18 From the following data, Calculate:

Ø GNP at market price

Ø NNP at factor cost

Items	Rs. (Crore)
Govt. final consumption expenditure	24
Net Indirect taxes	23
Consumption of fixed capital Gross domestic capital formation	22 24
Net exports	(-)4
Private final consumption expenditure	161
Net factor income from abroad	(-)1
Net change in stocks	3

Ans (a) 204 crores; (b) 159 crores

Que-19 From the following data, calculate:

Ø GNP at MP

Ø NNP at factor cost

Items	Rs. (Crore)
Govt. final consumption expenditure	50
Net exports	(-)7
Gross domestic capital formation	100
Net Indirect taxes	47
Private final consumption expenditure	265
Net change in stocks	13
Net factor income from abroad	(-)5
Consumption of fixed capital	45

Ans (a) 403 crores (b) 311 crores

Que-20 Find out GNP at MP from the following data:

Items	Set I	Set II	Set III
Consumption of fixed capital	60	50	30
Govt. final consumption expenditure	200	180	100
Net factor income from abroad	-10	-5	-10
Private final consumption expenditure	800	700	400
Exports Opening stock	50 30	50 20	25 15
Imports	60	60	35
Closing stock	20	15	10
Gross domestic fixed capital formation	230	200	120

Ans: Set I-1,200 crores; Set-II-1,060 crores; Set-III-595 crores

Que-21 Calculate (i) GDP at MP and (ii) national income from the following data:

Items	Rs. (Crore)
Net exports	30
Private final consumption expenditure	400
Subsidies	5
Net domestic fixed capital formation	50
Govt. final consumption expenditure	100
Net factor income from abroad	-10
Closing stock	10
Consumption of fixed capital	40
Indirect taxes	55
Opening stock	20

Ans (i) 610 crores (ii) 510 crores

Que-22 Calculate national income (NNPfc) from the following data:

Items	Rs. (Crore)
Opening stock	50
Closing stock	60
Consumption of fixed capital	10
Private final consumption expenditure	500
Net exports	-5
Net factor income from abroad	-10
Compensation of employees paid by general government Direct purchase of non durables from abroad by Gen. Govt.	100 10
Net purchase of goods and services by Gen. Govt. in domestic market.	100
Net capital formation	60
Net Indirect taxes	50

Ans 705 crores

Government final compensation expenditure : compensation of employees by general Govt.+ direct purchase of non durable by general Govt . + net purchase of goods /services by general government Govt. in domestic market

Que-23 Calculate (i) GDP at MP and (ii) national income (NNPfc) from the following data:

Items	Set I	Set II
Govt. final consumption expenditure	100	150
Opening stock	50	80
Gross fixed capital formation	120	130
Net factor income from abroad	-10	-10
Indirect taxes	60	70
Closing stock	80	100
Subsidies	10	10
Rent, interest and profits	350	500
Consumption of fixed capital	20	20
Private final consumption expenditure	400	600
Exports	50	60
Imports	40	70

Ans – Set(1) GDPMP :- 660 Crores ;NNPFC:-580 (ii) Set II GDPMP :- 890 Crores ;NNPFC:-800

Que-24 Calculate GNP at Factor cost from the following data:

Items	Rs. (Crore)
Net domestic capital formation	350
Closing stock	100
Govt. final consumption expenditure	200
Net Indirect taxes	50
Opening stock	60
Consumption of fixed capital	50
Net exports	-10
Private final consumption expenditure	1,500
Imports	20
Net factor income from abroad	-10

Ans 2,030 crores

Que-25 Calculate NDP at factor cost from the following data:

Items	Rs. (Crore)
Private final consumption expenditure	400
Gross domestic capital formation	20
Change in stocks	20
Direct purchases abroad by residents households	50
Net Indirect taxes	60
Net factor income from abroad	10
Direct purchase by non residents in domestic market	150
Net exports	-20
Consumption of fixed capital	20
Govt. final consumption expenditure	100

Ans 420 crores

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Macro Economics

chapter 3 notes

Items

Rs. Crore

Que:-3 Calculate the operating surplus from the following data:

Items

Rs. Crore

Items

Rs. Crore

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