MP Board Class 12th Economics Important Questions Unit 6 National Income and Related Aggregates
Micro Economics National Income and Related Aggregates Important Questions
Micro Economics National Income and Related Aggregates Objective Type Questions
Choose the correct answers:
Macro-economics is the study of:
(a) Principle or Theories of national income
(b) Consumer’s theory
(c) Production theory
(d) None of these.
(a) Principle or Theories of national income
Out of the following which is not a flow:
From the following which method is used for measuring national income:
(a) Production method
(b) Income method
(c) Expenditure method
(d) All of the above.
(d) All of the above.
Which of the following is included in the primary sector:
(d) All of the above.
(d) All of the above
Total national income divided by total population is known as:
(a) Private income
(b) Personal income
(c) Personal spendable income
(d) Per capital income.
(d) Per capital income
Production enterprises are divided in:
(a) Two sectors
(b) Three sectors
(c) Four sectors
(d) Five sectors.
(b) Three sectors
Fill in the blanks:
- Agriculture is included in sector.
- Pigou has divided welfare into parts.
- Chinese product is included in area of the economy.
- National income in India is calculated by
- The total value of all final goods and services produced with in the domestic territory of a country during an accounting year is known as
- is an index of economic development of the country.
- Central statistical organisation
- National income.
State true or false:
- As compared to developed countries, India’s per capital income is quite less.
- Black money has given birth to parallel economy in the country.
- Major contribution in India’s national income is from the secondary sector.
- Electricity, LPG and water supply are included in the primary sector.
- Income from gifts are included in the national income.
- Sale of second hand goods are not included in the national income.
Match the following:
Answer the following in one word/sentence:
- Which sector contributes maximum in N.I.?
- Difference between final stock and initial stock is known as.
- National income is studied under which economics?
- Increase in national income indicates.
- How many times national income is calculated in a year?
- Money value of which goods and services are added in the GNP in a year.
- Change in stock
- Economic progress
- One time
National Income and Related Aggregates Very Short Answer Type Questions
What is Micro-economics?
Micro-economics studies economic actions of individuals e.g., a person, particular firm, individual household, a producer, a unit etc.
What is Macro-economics?
Macro-economics is that part of economic theory which deals with the aggregate units of the economy, e.g.,all firms, all industries etc.
What is an Economic unit?
Economic unit or Economic agent means those individuals or institutions which take economic decisions. They can be consumer who decide what and how much to consume. They may be producer of goods and services who decide what and how much to produce. They may be entities like the government corporation banks which also take different economic decisions like how much to spend, what interest rate to charge on the credits, how much to tax.
What are consumption goods?
Objects that satisfy human needs directly and which are not used for production of other commodities are called consumption goods, e.g., milk, vegetables, wheat, rice etc.
What are capital goods?
Capital goods are those goods that are used in producing other goods, rather than being bought by consumers. These goods, are used in production for a long period of time, e.g., machinery, plot, etc.
What are final goods?
Final goods are those goods which are out of production line and are ready for use by the user. These goods cannot be resold and are included in estimating national income. There goods cannot be used as raw materials for production of other goods.
What are intermediate goods?
Intermediate goods are those goods which are within the production line and are not ready for use by the user. These goods can be used as raw material for production of other goods, and are not included in the estimation of national income.
Explain the concept of Flow and Stock.
Stock is related to a point of time. That is, the stock is a quantity measured at a certain point of time which may have accumulated in the past. Flow is an amount to be measured in a specific period of time. Flow is a price fluctuation because they are measured per unit time period, e.g., Interest on capital, Sale of rice, etc.
What do you understand by Gross Investment?
Gross Investment refers to the amount invested in the purchase or construction of new capital goods. Capital stock consists of fixed assets and unsold stock. So, gross investment is the expenditure on purchase of fixed assets and unsold stock during the accounting year.
What is Depreciation?
Depreciation is the permanent and continuing decrease in the quality, quantity or value of assets. Depreciation may be defined as reduction of recorded cost of a fixed asset in a systematic manner, e.g., building, office equipment, machinery, etc. In order to calculate national income depreciation is deducted from gross national product.
What do you mean by circular flow of income?
Circular flow of income refers to the cycle of generation of income in the production process, its distribution among the factors of production and finally, its circulation from households to the production units in the form of consumption expenditure on goods and services produced by these units.
What are the principles on which circular flow of income depend?
The circular flow of income involves two basic principles:
- In any exchange process, the seller receives the same amount which the buyer spends.
- Goods and services flow in one direction and the money payment to acquire them, flow in the return direction giving rise to a circular flow. Thus, product flows from the seller to the buyer is necessarily a complement of money (income) flow from the buyer to the seller.
What is National income?
The national income means the total value of goods and services produced in a year in a country from all the economic activities, in terms of money. According to Prof. Marshall, “ National income is the labor and capital of a country acting on its natural resources, producing annually, a certain net aggregate of commodities, material and immaterial, including services of all kinds.” According to Prof. Pigou, “ National income is that part of the objective income of the community, including of course, income derived from abroad, which can be measured in money.”
What are the different methods of measuring national income?
Different methods of measuring national income are:
- Production method
- Income method,
- Expenditure method
- Combined method,
- Social accounting method.
National Income and Related Aggregates Short Answer Type Questions
Write difference between National Income and Per Capital Income.
What is national Income and Per Capital Income? Write difference between them.
National income refers to total value of goods and services produced by the people of a country in a given year. Per capital income is the average income of the normal resident of a country in a particular year.
Differences between National Income and Per Capital Income:
- National income means the total value of goods and services provided in a year from all the economic activities.
- National income includes per capital income in it.
- Active participation of various factors of production is required. .
- National income is related to macro-economics.
- It is an absolute concept.
Per Capital Income:
- The income from various sources of a person is known as per capital income.
- Per capital income is a part of national ‘income.
- Active cooperation of the various sources of income is required.
- Per capital income is related to micro-economics.
- Per capital income is a relative concept.
Describe the four major sectors in an economy according to the macro-economics point of view.
There are four major sectors:
- Household : By a household we mean a single individual who takes decisions relating to her own consumption or a group of individuals for whom decision relating to consumption are jointly determined.
- Firms : In macro – economics production units which is organized under capitalist principles are called firms.
- Government : The role of government includes framing laws, enforcing them and delivering justice.
- External sector : External sector means the other countries of the world which are engaged with our trade. It consists of import and export.
What is the difference between Micro-Economics and Macro – Economics?
What do you mean by Stock and Flow? Write three differences between Stock and Flow.
Stock means that quantity of an economic variable which is measured at a particular point of time whereas, flow is that quantity of an economic variable which is measured during a period of time.
Differences between Stock and Flow:
- Stock is measured at a particular point of time.
- Stock has no dimension.
- Stock is a static concept.
- Flow is measured during a period of time.
- Flow has time dimension like how, day,month, year.
- Flow is a dynamic concept.
Distinguish between National Income and National Wealth.
Differences between National Income and National Wealth:
- It refers to the money value of the aggregate of goods and services produced during a particular period of time.
- National income is measured over a period of time.
- It is a flow variable.
- National income is a flow because it is occurring continuously.
- Increase and decrease of national income affect the standard of life of people.
- National wealth is the aggregate of wealth possessed by all the individuals in the country as well as collective or social wealth of the society.
- National wealth is measured at a point of time.
- It is a stock variable.
- National wealth is a stock which is accumulated at a particular time.
- Its increase and decrease affect the production capacity of goods.
Describe the Great depression of 1929.
The ‘Great Depression of 1929’ and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amount. Demand for goods in the market was low. Many factories were lying idle, workers were thrown out of jobs. In USA from 1929 to 1933 unemployment rate rose from 3 percent to 25 percent. Over the same period aggregate output in USA fell by about 33 percent.
How are micro-economics and macro-economics interdependent?
Interdependence of macro-economics and micro-economics can be studies as follows:
1. Macroeconomics depend on micro-economics:
Macro-economics and microeconomics depend on each other. Both are interdependent, macro economics contributes to the micro-economics. For example, the theory of investment belongs to micro-economics. It is derived from the behavior of the individual entrepreneur. The theory of aggregate investment function can also be derived from micro-economics theory of investment. Thus, we can say, that macro-economics depends on micro-economics.
2. Microeconomics depend on macro-economics:
Microeconomics depend upon macro-economics to a certain extent. For example, the rate of interest is a subject which belongs to micro-economics, but it is influenced by macro-economics aggregates. Thus, micro-economics depend upon macro-economics.
Macro and micro-economics both are interdependent On each other. Neither is complete without the other. We must study macro-economics because it deals with average variables, such as national income and national output. We must study micro-economics because national output and national income are eventually the result of decision of millions of business firms and individuals. Thus, we can conclude that both are complementary to each other.
Calculate national income from the given data:
- Salary – Rs. 6,000
- Rent – Rs. 2,000
- Profit – Rs. 2,000
- Interest – Rs. 1,000
- Consumption – Rs. 5,000.
N.I. = Salary + Rent + Profit + Interest
= 6,000 + 2,000 + 2,000+ 1,000
N.I. = Rs. 11,000.
Calculate National Income on the basis of the given data by income method: Heads Rs. (in crores)
- Salary and wages = Rs. 18,000
- Interest = Rs. 7,000
- Depreciation = Rs. 4,000
- Rent = Rs. 6,000
- Profit = Rs. 25,000.
National Income = Salary and wages + Interest +Rent +Profit
= Rs. 18,000 + Rs. 7,000 + Rs. 6,000 + Rs. 25,000 = Rs. 56,000.
On the basis of following data find out National Income by income method:
- Salary and wages – 30,000
- Rent – 10,000
- Prof – 50,000
- Interest – 10,000
- Depreciation – 2,000
- Gross domestic investment – 60,000.
National income (N.I.) = Salary and Wages + Rent + Profit + Interest
N.I. = 30,000 + 10,000 + 50,000 + 10,000
N.I. = Rs. 1,00,000.
Calculate National Income from the following data:
- Salary = Rs. 60,000
- Rent = Rs. 20,000
- Profit = Rs. 20,000
- Interest = Rs. 10,000
- Consumption = Rs. 50,000
- Gross Domestic Product = Rs. 8,000.
National Income = Salary + Rent + Interest + Profit
= Rs. 60,000 + 20,000 + 10,000 + 20,000
= Rs. 1,10,000
National Income = Salary + Rent + Interest + Profit
Specify the relation of gross domestic product with welfare.
Gross domestic product refers to money value of goods and services produced within the territorial boundaries of the country in a given year. With the increase in income consumption expenditure of a person increase which in turn increases material welfare. Therefore, it is not appropriate to relate GNP with welfare or their generalization may not be correct due to. following reasons:
1. GDP shows the total goods and services produced in the country. However, it does not exhibit the structure of the product if increase in GDP is mainly due to increased production of war equipment and ammunition. Then such an increase cannot be associated with any improvement in economic welfare.
2. 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.
3. GDP does not consider the changes in population of a country. If rate of population growth is higher than the rate of growth of GDP, then it will decrease per capital availability of goods and services, which will adversely affect the economic welfare.
What do you mean by G.D.P.? Write any four characteristics of G.D.P.
Meaning of G.D.P:
Gross Domestic Product is defined as “the value of all final goods and services produced by all the enterprises located within the domestic territory of a country during an accounting year. It should be noted that goods and services must be produced within the country.” G.D.P. is always money value of goods and services produced within a year.
Special features of G.D.P:
- G.D.P. includes the value of all the goods and services produced within the country in a particular year.
- It includes depreciation value.
- G.D.P. is measured in terms of market price.
- G.D.P. includes the value of new goods only i.e., it excludes the value of second hand goods.
- It includes real capital not financial capital.
- Consumer and capital goods are classified in durable and non-durable goods.
- Goods may be from private sector or public sector.
- To avoid the defect of double counting we include the value of final goods and services.
What precautions should be taken while calculating national income by income method?
Precautions taken while calculating national income by income method:
- Transfer income should not be included.
- Income from illegal activities should not be included.
- Imputed rent should be included as it is the part of rental income.
- Production for self-consumption should be included.
- Money received by sale of shares/bonds etc. should not be included.
- Income from sale of second hand goods should not be included.
- Death duties, wealth tax, gift tax, etc., are not included is national income.
- Corporation tax should not be recorded separately as it is a part of profit.
What are the difficulties in estimating national income by income method?
Estimation of national income by income method passes various difficulties. The major difficulties are:
(i) It is difficult to estimate mixed income. Mixed incomes are earned by an unincorporated sector and it is difficult to get reliable information from such unorganized sector.
(ii) Interest on national debt is not included in national income as per the national income convention on the assumption that government borrowings are used for consumption (unproductive) purposes. However, some economists object to this since, a part of the government borrowing is used for productive purposes.
(iii) Incomes received are generally calculated from income-tax returns. Therefore, income method is of limited used in underdeveloped countries because a very small part of the income earners are tax payers in these countries.
Income method of estimating national income is useful because it provides information about distribution of national income among various factor categories like share of wages profits etc. in national income.
What do you mean by G.D.P. at constant price?
Gross Domestic Product at constant prices: Constant price means base year’s price. Base year is an average standard previous year in which major economic changes have not taken place. Goods and services produced during the year are either valued at constant price of the base year or the value of goods and services at current price is converted into the value at constant price.
Modem economies are inflationary economies where prices of goods and services are increasing at faster rates. It is therefore, advisable that the value of goods and services at current price should be converted at constant price, so that real Gross Domestic Product (G.D.P.) could be understood. Calculation at constant price should be referred as real G.D.P. Formula of conversion of G.D.P. at current price into G.D.P at constant price.
Will a profit maximizing firm in competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give and explanation.
A profit maximizing firm in a competitive market will produce a positive level at output in the same, where marginal cost is falling. Falling MC means that the cost of producing an additional unit of output trends to reduce. Here, price is constant as the firm is working in a competitive market in this case, the difference between firm’s total revenue and TVC (TVC = Σ MC) tends to increase. It means firm’s profit increases with the increase in the level of output. Then a competitive firm increase output when gross profit is rising.
From the following data, calculate Personal Income and Personal Disposable Income.
Items (₹ In cores )
- Net domestic product at factor cost 8,000
- Net factor income from abroad 200
- Disbursed profit 1,000
- Corporation tax 500
- Interest received by households 1,500
- Interest paid by households 1,200
- Transfer income 300
- Personal tax 500.
Personal Income = (a) + (b) + (e – f) + (g) -(d)
= 8000 + 200 +(1500-1200)+ 300 – 500
= 8000 + 200 + 300 + 300 – 500
= 8800 – 500 = ₹ 8,300 Cores.
Personal Disposable Income = Personal Income – Personal Tax
= 8300 – 500 = ₹ 7,800 Croce.
In a single day, Raju, the barber, collects ₹ 500 from hair cuts. Over this day, his equipment depreciates in value by ₹ 50, of the remaining ₹ 450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹ 220 for improvement and buying of new equipment He further pays 120 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.
(a) GDP = ₹500
(b) NNPMP=GDP – DeP
₹500 – ₹ 50 = ₹450
(c) NNfc = NNP – Sales tax
= ₹450 – ₹30 = ₹420
(d) PI = NNPfc – Retained earnings
= ₹ 420 – ₹ 220
= ₹ 200
(e) PDI = PI – Income tax
=₹ 200 – ₹ 20
= ₹ 180.
National Income and Related Aggregates Long Answer Type Questions
State five points of importance of national income.
Write the importance of national income.
Importance of National Income can be explained through the following points:
1. Knowledge about the economic progress of the nation y By collecting the data of the national income of few years the economic progress of any country can be known. Increase in national income is the sign of the progress of the country. By comparing the national income estimates over a period of time, we can know whether economy is growing, or is static or declining.
2. Measure of economic welfare:
The national welfare of a country depends upon its national income. If there is an increase in national income it will bring an increase in economic welfare and a fall in national income will result in fall in economic progress.
3. Formulation of policies:
National income is helpful in the formation of the policies of the country. For example, taxation policy, employment policy etc. National income statics is very useful in formulating the plans and fixing targets.
4. Economic planning:
Economic planning can be easily done on the basis of national income. The national income helps in deciding the area for which planning has to be done. It also helps in deciding the nature of investment. i.e.,the investment should be long-term or short – term.
5. Comparative studies:
The progress of two or more countries can be compared on the basis of the data of national income. It gives the idea of savings, investments, consumption etc. of various countries. Comparative study of the economic progress of various countries can easily be made. We can compare the standards of living and the levels of economic welfare of the people.
Distinction between Gross Domestic Product and Gross National Product. Ans. Differences between Gross Domestic Product and Gross National Product:
Write difference between National Income and Private Income.
Differences between National Income and Private Income:
- It includes income of both the public
- It does not include National income.
- It is not a part of National income.
- National income is the income of residents of india.
- National income = Net Domestic Product at factor cost + Net factor income from abroad.
- It includes the income of private sectors and private sectors. only.
- It includes both factor income and trans-fer income.
- It is a part of private income.
- In private income the income of private idents of India. people are included.
- Private income = Net Domestic Product at factor cost – Income from the domestic product accruing to public sector+ Transfer income + Net factor income from abroad.
What are the causes of low national income in India?
Give reasons for slow growth rate of national income in India.
The following are the causes of low national income in India:
At present our population is more than 100 crores. It is the main cause of low national income.
- Inequality in distribution of national income:
There is a great disparity in the distribution of national income.The main reason is improper tax policy.
- Dependence on agriculture:
Indian economy is mainly agriculture based economy. There is always uncertainty in agricultural product. So, national income is low in India.
A major part of the population in our country is uneducated. So, they are not able to understand the latest methods of production and policies. They are also not able to follow them.
- Old method of production:
The methods of production that are followed in our country are old and outdated due to which we are not able to utilize our resources to the full extent.
Write five suggestions to increase national income in India.
Write suggestions to increase national income.
1. Proper development in the agricultural fields:
Agriculture is the main source of national income in India. So, to increase the national income use of best seeds, fertilizers and tools is very important.
2. Development in the field of technical education:
An educated person can work more efficiently than uneducated one. So, education should be given to maximum number of people.
3. Proper utilization of natural resources:
If natural resources are fully and properly utilized the income of the nation can be increased.
4. Check on population:
Population must be controlled. Special efforts should be made to check population in villages which will increase per capital income.
5. Proper development of transport and communication facilities:
Development of transport and communication should be encouraged. Priority should be given to them. For this proper planning must be done. Development in transport and communication will encourage the export-import also which will increase the national income.
6. Export oriented trade policies:
Trade policies should be made in such a way that it will encourage export. Import should be discouraged so that national income will have a good effect. Five year plans and development programmers must be given stress. Export promotion should be given high priority.
Distinguish between Closed Economy and Open Economy.
Differences between Closed Economy and Open Economy:
- When a country does not have any economic relation with other country it is called closed economy.
- In closed economy GDP and National income is equal.
- It is an imaginary concept.
- In this economy, capital formation is negligible.
- In this economy consumption and investment both are equal to production.
- When a country establishes economic relation with other country it is called open economy.
- There is a difference between GDP and National income.
- It is a real concept.
- In this economy, capital formation and investment both take place.
- In this economy, the total of consumption and investment can be more or may be less than production.
Explain different methods of measuring national income.
The various methods of measuring national income are:
1. Census of production method:
The gross national income is calculated by adding up the aggregate values of productions of all the industries and sectors of the economy and net income from abroad. By deducting depreciation from gross income we get national income.
2. Census of Income method:
By summing up the net incomes of all individuals and firms in a country during a year, we get the national income.
3. Expenditure method:
People don’t spend their entire income. They save a part of it as saving. By summing up all expenses and all incomes of all the people during a year, we get the national income.
4. Combined use of production and income method:
This method is also known as ‘mixed method’. In this method, both production and income methods are used together. In any country if due to certain reasons one method cannot be used, there the mixed method can be used.
5. Social accounting method:
This method was propounded by Prof. Richard Stone. In this method, the entire society was divided into various sections such as; producers, consumers, etc. The average income of some people of each section is calculated and then it is multiplied with the total number of people in each section.
A farmer sold cotton of Rs. 500 to cotton mill by producing himself. Cotton mill prepared garments and sold to garment factory at Rs. 600 garment factory sold it to a store on Rs.1000. Store owner sold it to consumer on Rs. 1200. Find out increased value by each.
Following is the increased price by Farmer, Cotton mill, Ready made garments factory and store:
- Price raised by Farmer = Sale of cotton to cotton mill = Rs. 500.
- Price raised by cotton mill = Sale to garment factory – Sale of cotton from Farmer
= Rs. 600 – 500 = Rs. 100.
- By ready made garment = Sale price of dress to store – Price (Sell) of cotton from factory cotton mill
= Rs. 1000 – 600 = Rs. 400.
- By Store = Last sell price of consumer – Value of dress by ready made factory
= Rs. 1200 – 1000 = Rs. 200.
- Total price rise = Farmer+Cotton mill + Garment factory + Store value
= Rs. 500 + 100 + 400 + 200 = Rs. 1200.
Write the main characteristics of capitalistic economy.
What are the important features of a capitalist economy?
Important features of a capitalist economy:
Following are important features or characteristics of a capitalist economy:
- There is private ownership of means of production.
- Production takes place for selling the output in the market.
- There is sale and purchase of labor services at the price which is called the wage rate.
Explain in short G.D.P. at market price and G.D.P. at factor cost
(A) Gross Domestic Product at market price:
It is also called the current price or prevailing price in the market. In order to calculate G.D.P. at current price final goods and services produced during the year are valued in terms of prevailing price of that year. To measure it we multiply the quantity of produced goods with their prices. It can be explained like this:
Here GDP MP = P1 (Q) + P1 (S)
GDPMP = Gross Domestic Products at market price
P1 = Market price
Q = Quantity of final goods and services
S = Services
Increase in the value of Gross domestic product (G.D.P.) as compared to the value of previous year shows economic development and happy trend. It should be Carly studied whether the increase is due to increase in the quantity of goods and services produced or increase in price. If the increase has caused due to increase production, it should be taken as real increase. We can calculate per capital Gross Domestic Product (G.D.P) if we divide total G.D.P. with the population of the country.
(B) Gross Domestic Product at factor cost:
Gross Domestic Product at factor cost is the estimate of Gross Domestic Product in terms of earnings of factors of production. It is the sum total of earnings received by various factors of production in terms of wages, interest, rent, profits, etc. within the domestic territory of a country in a year.
It measures factor incomes generated with the domestic territory irrespective of whether generated by residents or non-residents. Being gross it marks no provision for the depreciation. As explained above market value of goods and services differs from the earnings of factors of production because of Net Indirect Taxes. Therefore, if we get gross domestic product at factor cost. Thus,
G.D.P. FC = G.D.P MP – Indirect taxes.