\

National Income
A

Summary
• A flow refers to change in quantity of a variable over time. It is measured with reference to a
specified period (length of time); e.g., per day per week, per month, per year, per decade, etc.,
For example, income is a flow. These are basically four kinds of incomes which can be received
during the production of goods and services. These are:
(i) Wage (ii) Interest (iii) Rent (iv) Profit
• In a macro-economy, every economic decision of a sector is in response to that of another.
The system of inter-relationships between the major sectors of economic activity is called
circular flow of income and product. In simple words, the continuous flow of money income
and flow of goods and services across different sectors of the economy is called circular
flow of income.
• There are three phases of circular flow of income: (1) production phase, (2) distribution
phase, and (3) expenditure phase. In production phase, goods and services are produced by the
producing sector (i.e., firms). Firms make use of factor inputs (e.g., land, labour, capital and
enterpreneurship, etc., in the process of production.
• Firms make factor payments to the households for rendering factor services. In other words,
households get factor payments in the form of rent, wage, interest and profit. Thus, in second
phase of circular flow, there is generation of income. In the third phase, factor incomes are spent
on the purchase of final goods (goods for final consumption and final investment).
Circular flow models are important because they:
(i) show interdependence between sectors,
(ii) provide knowledge of structure of the economy,
(iii) facilitate the estimation of national income,
(iv) gives information on important macro variables, and
(v) give information about injections and withdrawals.
• National Income: National Income is the sum of total of factor incomes earned by the normal
residents of a country in an accounting year. When goods and services produced in a Y~.ar are
valued at current prices, i.e., prices prevailing in that particular
Production
year, we get national income at current prices. It is called nominal
national income. If goods and services produced are valued at
constant prices, it is called national income at constant prices or
real national income.
• The three flows: production, income and expenditure, become
circular. They have been shown in the following diagram.

L
Goyal', ISC Ecanam;c, Que,tfon Bank wUh MTP C/a" I 2 Jo, Seme,te,-2 Exam;nat;on 63
 • There are three phases of fl ow of income' namely production phase~
. as a f lofo go dsw~
. di .b u· base _ as a flow of income, and expenditure phase _ as a fl 0
. anct Sf¼.. .
mcome or stn u on P b d b ow of -, vie.
.
Accordingly, national mcome Of · =
a country can e measure . . . y three d Iu.erent llleth expendi14te'•s·
(i) Product method (ii) Income meth~d . (m) Expenditure tnethoct Ods: .
• Each method is important in its own ways as it refers to conceptually different act· .
.
'd d'ffierent ways to look at th e same nat10na1 mcome
· u IV1fIes ;h
economy an d prov1 es 1 . . · -11.owever it "1 lhe
noted that all the three methods given t~e same value of nations mcome. , illJJ.st be

- - - - - - - - - - , [ Question Bank )

A. Multiple Choice Questi~ns

1. National income is equal to
(a) Domestic product plus factor incomes earned from abroad
(b) Domestic product plus net factor incomes earned from abroad
( c) Domestic product minus factor incomes to abroad
( d) Domestic product plus export minus import
2. GNP exceeds NNP by
(a) Amount of total taxes (b) Government expenditure
( c) Transfer payments (d) Difference between gross and net inv trn
3. Net export is calculated as es ents
(a) Export + Import (b) Export - Import
( c) Import - Export (d) None of these
4. National income can be calculated by three methods. By which method, we get the maximum
value of national income?
(a) Expenditure method (b) Income method
( c) Value-added method (d) All of these
5. National income includes
(a) Transfer income (b) Factor income (c) Both (a) and (b) (d) None of these
6. A growing country is one with
(a) Rising GNP at constant prices
(b) Constant GNP at constant prices
( c) Rising GNP at current prices
(d) None of these
7. Which one of the following items is excluded in calculating national income?
. (a) Services of a rental TV set (b) ~10,000 won in a lottery
( c) Imputed value of owne_r-occupied house
(d) Salary of a housemaid
8. Expenditure method focusses on measurement of national income at
(a) Phase of production of goods and services (b) Phase of income distribution
(c) Phase of income disposition (d) All of these
9. Which of the following is not an economic activity and not included in national income?
(a) Medical services rendered by a dispensary (b) A housewife doing household work .
·
(c) A lower domg h"is pracfice (d) A maid working full-time WI'th a farnily
· a/iOII
64 Goyal's /SC Economics Question Bank with MTP Class 12 for Semester-2 Exanun
1o. National Income is the sum of factors incomes accruing to:
(a) Nationals (b) Economic territory
(c) Residents (d) None of these
11. With a rise in real national income, welfare of the people
(a) Rises (b) Falls
(c) Remains unchanged (d) None of these
12. Which one of the following is included in circular flow?
(a) Real flow (b) Money flow (c) Both (a) and (b) (d) None of these
13. Which one is included in the three-sector model?
(a) Family (b) Government (c) Firm (d) All of these
14. Which one is included in the four-sector model?
(a) Family, firm, industry (b) Family, firm, government
(c) Family, firm, government, foreign sector (d) None of these
15. Which is the equilibrium condition of circular flow in the four-sector model?
(a) C + I (b) C +I+ G
(c) C + I + G + (X - M) (d) None of these
16. The market price of all final goods of a country in a year is known as
(a) GDPMP (b) GDPpc (c) NNPpc (d) None of these
17. Which one is included in national income?
(a) Rent, wage, interest (b) Rent, wage, salary
(c) Rent, profit, interest (d) Rent, wage, salary, interest, profit
18. To include the value of goods or services more than one time, the calculating National Income
is called
(a) Single counting (b) Double counting
(c) Multiple counting (d) None of these
19. Total national income divided by total population is known as
(a) Private income (b) Disposable income_
(c) Personal income (d) Per capita income
20. Which one of the following is an intermediate expenditure?
(a) Expenditure on maintenance by a firm (b) Purchase of furniture by a firm
(c) Purchase of tractor by a farmer °(d) None of these
21. Basis of the difference between the concepts of market price and factor cost is
(a) Direct taxes (b) Indirect taxes (c) Subsides (d) NIT
22. Which of the following items is not included while estimating national income by income method?
(a) Rent (b) Mixed income
(c) Fixed investment (d) Undistributed profits
23. Product method of calculating national inco,me is also known as
(a) Income method (b) Value-added method
(c) Expenditure method (d) None of these

Goyal's !SC Economics Question Bank with MTP Class 12 for Semester-2 Examination 65
 24. Which sector contributes the most to India's economy?
(a) Service sector (b) Manufacturing sector
(c) Agricultural sector (d) Small-scale industries
25. Depreciation can never be:
(a) Zero (b) Positive
(c) Negative (d) None of these
ANSWERS
1. (b) 2. (d) 3. (b) 4. (d) 5. (b) 6. (a) 7. (b) 8. (c)
. ~1. (a) · U. (c) 9. (b) 10. (c)
13. (d) 14. (c) 15. (c) 16. (a) 17. (d) 18. (b) 19. (d)
21. (d) 22. (c) 23. (c) . 20. (a)
24: (a) 25. (c)

Fe. Fill in t he
I u~
Blanks _

[1 Mark]
1. Measurement of national income at constant price constitutes its _ _ _ _ _ _ value. (Nominal
value/Real value)
Ans. Real value

2. Value added by a finn is the difference between _ _ _ _ and _ _ _ _ . (Sales and Inter-
mediate consumption/Sales and profits)
Ans. Sales and Intermediate consumption

3. GNP at MP = _ _ _ _ . (GDPMP - NFIA/GDPMP - Depreciation)

Ans. GDPMP - Depreciation

4. Production enterprises are divided in _ _ _ _ _ _ sectors. (Two/Three)

Ans. Two

5. As a result of double counting, national income is _ _ _ _ . (Over-estimated/Under-estimated)

Ans. Over-estimated

C. Very Short Answer Type Questi~ns

[1 Mark]
1. When will GDP of an economy be equal to GNP?
Ans. GDP and GNP will be equal when the net factor income from abroad is zero.
2. Expenditure on the construction of a flyover by the government. Is this item included in the
national income?

Ans. Yes, it is included in the national income as it is a part of gross domestic capital formation ..
3. Under what circumstances, net exports is negative?
Ans. It happened when imports exceed exports.
4. What is real gross domestic product (GDP)?
Ans. When gross domestic product (GDP) of a given year is estimated on the basis of price of the
base year.

5. Why do exports form a part of national income?

Ans. Exports are produced within the country's domestic territory; therefore, they form a part of
national income.

6. Why are imports not included in the estimation of national income?

Ans. Imports are not produced within the domestic territory of the country, therefore they are not
included in the estimation of national income.
66 Goyal's ]SC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 What is circular flow of income?
7.
Circular flow of income implies the flow of income and flow of goods across different sectors
}\OS,
of the economy.
s. What are the three phases of circular flow of income?
/\OS, The three phases of circular flow of income:
(a) Production phase (b) Distribution phase (c) Expenditure phase
9. What is the role of households in a two-sector economy?
,'\ns. The role of households in a two-sector economy:
(i) Households provide factor services to the firms.
(ii) They spend their entire income on goods and services produced by firms.
10. Why is nominal gross domestic product?
,'\ns. Gross domestic product, when measured at current prices, is called gross domestic product
(GDP).
11. Define value added.
Ans. Value added refers to the difference between total value of output of a production unit and
value inputs purchased by it from other production units.
12. Define value of output.
Ans. It refers to the market value of output produced by a firm is an accounting year.
13. What is net factor income from abroad?
Ans. It refers to the difference between the factor income received by normal residents of the country
from the rest of the world and the factor income paid to the rest of the world.
14. When does NFIA become positive or negative?
Ans. Net Factor Income from Abroad (NFIA) is positive when the income earned by the normal
residents of the country from abroad is more than the income earned by foreigners in India and
vice-versa.
15. What are final goods?
Ans. Final goods refer to those goods which are used either for final consumption or for investment.
These are included in the national income.
16. What are intermediate goods?
Ans. Intermediate goods refer to those goods which are used either for resale or for further production.
17 · Define depreciation.
Ans. Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, and expected
obsolescence.
l8. Give two examples of intermediate goods?
Ans. Cloth purchased by tailor, machine purchased by a dealer of machines.
19· What are retained earnings?
Ans. Retained earnings refer to that part of the profit which is kept as reserve after paying the corporate
tax and dividends out total profits.
28 · What is real flow?

Ans. Real flow refers to flow of factor services from households to firms and the corresponding flow
~ oods and services from firms to households.
Goya/'s ISC E . .
conom ics Question Bank with MTP Class 12 for Semester-2 Examination 67

111111
 1. "Flow of income is circular in a two-sector economy". Comment.
Ans. The given statement is correct, i.e. flow of income is circular in a two-sector economy. Toe
income received by households from firms for their factor services is spent by them on purchase
of goods and services produced by the firms. Thus, income goes back from where it had come.
This flow of income continues as production is a continuous process.
2. Explain the concept of 'leakages' and 'injections' in the circular flow of income.
Ans. A leakage means withdraw of part of income (money) from circular flow of income. For instance,
savings and taxes by households and firms as well as import payments are forms of leakage.
Injections are addition of money to the circular flow of income, e.g., investments, government
expenditure, export payments.
3. What is the role of government in a three-sector economy?
Ans. Role of Government:
(i) Government collects taxes from households and firms.
\
(ii) It makes transfer payments to households and gives subsidies to the firms.
(iii) It saves and borrow money from the money market.
4. Mention the situations in which fowling equations will hold true: \
(i) NDPFc = NDPMP (ii) GNPFC < GDPFc
Ans. (i) When undistributed and corporate taxes taken together are ·zero.
(ii) When NFIA is negative.
I
5. What is the difference between rent and royalty.
Ans. Rent: Rent is a factor income earned from lending the services of land and building.
/ Royalty: Royalty is income received by the landlord from granting leasing rights to sub-soil assets.
6. Does increase in GDP mean increase in welfare of people?
Ans. Although the GDP is an important indicator of economic growth, a country's good GDP doesn't
necessarily translate to good welfare and well-being. Let's see why. First, if a country's GDP rises,
it may not consequently increase the well-being of its people. The GDP rise may be distributed
among a handful of companies.
7. How can a country increase its GDP?
Ans. The GDP of a country tends to increase when the total value of goods and services that domestic
producers sell to foreign countries exceeds the total value of foreign goods and services that
domestic consumers buy. When the situation occurs, a country is said to have a trade surplus.
8. Name the four sectors of the economy.
Ans. The four sectors of the economy are:
(i) Household sector (ii) Producer sector
(iii) Government sector (iv) External sector
9. Only final goods and services are to be considered in the estimation of GDP, to avoid double
counting? Is it true or false, explain with reason.
Ans. True. Only final goods and services are to be considered to avoid double counting in the
estimation of GDP. 'Because, final goods and services do not require further value addition. These
are outside the boundary line of production.
Goyal's JSC Economics Question Bank with MTP Class 12 for Semester-2 Examination
68
 _ State the two basic p~ciples of circular flow of income and product.
10
;\OS• ,ri..,e
1u
circular flow of mcome. and product works on two b as1c
· pnnc1p
· · 1es:
(i) Money flows are opposite to real flows (in terms of goods and services).
(ii) Flow of income across different sectors always implies the identity between payments and
receipts.
. "Lower capital formation leads to lower rate of GDP growth. 11 Comment.
11
;\nS, Lower capital formation implies slower rise in production capacity of the economy. When
production capacity rises at a slow rate, output is bound to rise at a slow rate. Slow rise in
output implies a slow rise in GDP.
l2, The government claims that demonetization of ~500 and ~1,000 notes will lead to GDP growth.
Do you agree?
Ans. Demonetization will shrink the shadow economy (black money economy). Unaccounted GDP
would now become accounted GDP. Accordingly, GDP growth would look to be higher than
before, even when real output in the economy remains the same.
13. What is meant by expenditure method?
Ans. Expenditure method is that method which measures national income in terms of the expenditure
(consumption expenditure + investment expenditure) on the purchase of final goods and services
produced in the economy during the period of an accounting year.
14. How is net export different from net factor income from abroad?
Ans. Net exports refer to the difference between exports and imports during an accounting year.
Net Export = Exports - Imports.
Net factor income from abroad refers to: Factor income earned by our residents from rest of the
world - Factor income earned by non-residents from the domestic territory of our country.
15. Draw a diagram to show the circular flow of income in a two-sector model with leakage and

injection.
Ans. The following diagram shows the circular flow of income in two-sector model. Savings are
leakages and investment is injection.
Factor Service

1,abour, Capital and Enterp .

1\_:a~c\, d. ( rise)
"
~sufl\1'tio1l_
Expen
_ _ iture
___ goods an d seJt.
on _
Co lees)

Savings
Firms
Households Savings Financial Market Investment
'--....----~-.....I L-------- L-~--__,,---'

Factor Payments
(Rem, wages, interest and nroflt)
r
Goods and Services
69
Goyaf's ISC Economics
. Question Bank with MTP Class 12 for Semester-2 Examinatton
. .
 16. State whether the following statements are true or false. Give reason for your answer.
(i) Nominal GDP can never be less than real GDP. . .
(ii) Gross domestic capital formation it always greater than gross fixed capital_ formation.
Ans. (i) The statement is false. Nominal GDP can be less than real GDP when pnce of goods and
service prevailing during the base year is greater than the price of goods and services
prevailing during the current year.
(ii) The statement is false. Gross domestic capital formation = Gross fixed capital formation +
Change in stock.
17. Explain, how the following are treated in national income:
(i) Wheat grown by a farmer for self-consumption.
(ii) Earnings of the shareholders from the sale of shares.
(iii) Services rendered by family members to each other.
Ans. (i) Wheat grown by a farmer but used entirely for family's consumption is a part of the
contribution by him to the value of goods produced. Therefore, this is included in national
income.
(ii) Income from sales of shares will not be included as such transactions do not contribute to
current flow of goods and services. These financial assets are mere paper claims and involves
a change of title only.
(iii) Services rendered by family members to each other are not included in the estimating national
income because family mentioners are not paid for their services. Moreover, it is difficult to
the market value of their services.
18. Draw a diagram to show the circular flow of income in a three-sector model.
I Ans. The following diagram shows the three-sector modal.
r
Government

Savings
Financial Market
Borrowings Borrowings

19. Define leakages and write example with different type of economies.
Ans. Leakages: Leakages refer to withdrawal of money from the circular flow. When households
and firms save a part of their incomes, it leads to a leakage from the circular flow of income.
Leakage or withdrawal refers to that part of income, which does not pass through the circular
flow of income. As a result, it is not available for spending on currently produced goods and
services. It means leakages reduce the flow of income.

70 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 Example of leakages in different types of economies:
I. Two-sector economy (without financial mark t)
. e - + No leakage
2 Two-sector economy (with financial market)
· - + Savmgs
.
3. Three-sector economy Savings + Taxes
4. four-sector economy~ Savings+ Taxes+ Imports

20· From the following data, calculate GNP MP and NNP FC bY expend"1ture method.

in Crores)
(i) Mixed income of self-employed 450
(ii) Compensation of employees 550
(iii) Private final consumption expenditure 1000
(iv) Net factor income from abroad (-20)
(v) Net indirect taxes 150
(vi) Consumption of fixed capital 170
(vii) Net domestic capital 380
(viii) Net exports (-30)
(ix) Profits 400
(x) Rent 150
(xi) Interest 200
(xii) Government final consumption expenditure 550
Ans. Expenditure method:
GDPMP = Private final consumption expenditure + Government final consumption expenditure
+ Gross domestic capital formation + Net export
= 1000 + 550 + (380 + 170) + (-30) = <2,070

NNPFC = GDPMP - Depreciation+ NFIA- NIT

= 2,070 - 170 + (-20) - 150 = <1 ,730
~1. Distinguish between nominal GDP and real GDP. Which of these is the indicator of economy
welfare?
Ans. Differences between:
Basis Nominal GDP Real GDP
(i) Meaning It is the money value of all final It is the money value of all final
goods and services produced in goods and services produced in
the domestic territory measured at the domestic territory of a country
current prices. measured at base year prices.

(ii) Cause of change Nominal GDP is affected by: Real GDP is affected only by
(a) Change in prices and change in physical output.
(b) Change in physical output of
goods and services.
(iii) Comparison It cannot be compared with base It is comparable with the base
year GDP. year GDP.
-
Real GDP is the indicator of economic welfare because it shows the availability of goods and
services to the people of the country.
Goya/'s !SC E . 71
conom1cs Question Bank with MTP Class I 2 for Semester-2 Examination
 22. All machines are not capital goods. Justify.
Ans. The end-use of the machine determines whether it a capital good or not. Capital goods are those
fixed assets of the producers which are used in the process of production for several years and
which are of high value.
Therefore, only those machines which are used in the process of production are considered to be
capital goods. Those machines which are used by the households are not capital goods. Example:
Computer used at home is a durabl~-use computer coaching class is a capital good.
23. Profits earned by a company in India, which is owned by a non-resident is included in national
income of India? Is it true?
Ans. No. Because this is the income which does not belong to the normal residents of India. Profits
earned by a company in India, which is owned by a non-resident is a part of domestic factor
income of India, because the company is generating profit within the domestic territory of India.
But these profits are a part of income from domestic product occuring to rest of the world.
Therefore, these are not reflected in the estimation of national income. These are deducted from
domestic income to national income.
24. Explain the components of compensation of employees for calculation of national income by
income method.
Ans. Compensation of employees refer to amount paid to employees by employer for rendering
productive services. It includes three 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 free residence, free
car, free medical and educational facilities, etc. An imputed value of these benefits should
be included in national income.
(iii) Employee'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, retirement pension, etc. The aim of such contributions is to
ensure safety and security of life of the employees.
25. "Income is a flow and flow of income is circular". Explain it.
Ans. Income is a flow concept as it is estimated per unit of time period. For example, national income
is measured per year, income of a household is measured per month, etc. Thus, it is measured
periodically.
Flow of income is circular. It flows in a circular way across the different sectors of the
economy. In a two-sector economy, income received by the owners of factors of production (i.e.,
households) is spent by them on the purchase of goods and services produced by the production.
Thus, income goes back and where it had come.
This flow of income is circular forever because producers would always require .factor services
from the households and the households would always depend upon the producers for the supply
of goods and services for the satisfaction of their demand.
26. What is inter-relationship between: (i) Gross versus Net and (ii) Market Price versus Factor Cost.
Ans. (i) Gross versus Net: A 'gross' aggregate includes depreciation. So, net aggregate can be found
by subtracting depreciation from it (i.e., gross aggn;gate) like-wise, we can obtain any gross
aggregate by adding depreciation to net aggregate.
- - - -- - - ----:;:;---;;--;;:;::;--:::--~ -=-----=--- - - - -- -- -- - - -- -- -
72 Goyal's !SC Economics Question Bank with MTP Class J2 f or Semester-2 Examination
 Examples:
NDP = GDP - Depreciation
GNP = NNP + Depreciation
(ii) Market Price :ersus ~ac_tor Cost: A 'market price' aggregate includes net indirect taxes.
So, by subtracting net mdirect taxes, we can obtain the aggregate at factor cost. Similarly,
by adding net indirect taxes to factor cost, we get market price.
Examples:
GDPFc = GDPMP - Net indirect taxes
GDPMP = GDPFc + Net indirect taxes

27 . Distinguish between GDPMP and NNPFc·

Ans. Differences betwe~n: -

Gross Domestic Product at Market National Income

Price (GDPMp) (NNPFc)
(i) GDPMP is a territorial concept as it includes NNPFC is a ·national concept as it includes
value of final goods and services produced the net value of final goods and services
within domestic territory of a country. produced by the normal residents in the
entire world.
(ii) It includes contributions of all the producers It considers the producers who are normal
(residents and non-residents) within the residents of the country.
domestic territory of the country.
(iii) It is estimated at market price. It is estimated at factor cost.
(iv) It is inclusive of deprecation. It does not include depreciation.
28. Calculate the gross value added at market prices (GVAMp) from the following data:
S.No Particulars Amount (in~ lakhs)
(i) Depreciation 20
(ii) Domestic sales 200
(iii) Change in stock (-10)
(iv) Exports 10
(v) Single use producer goods 120
(vi) Net indirect taxes 20
Ans. GVAMP (Gross value added at market prices)
= Domestic sales + Exports + Change in stock - Single use of producer goods
= 200 + 10 + (-10) - 120
= 210 - 130
= tso lakhs
E. Long Answer Type Questions [4 Marks]
1. The growth of gross domestic product is not a real indicator of economic welfare. Discuss two
reasons to justify the given statement.
Ans. (a) Externalities:
(i) Externalities refer to benefits or harms of an activity caused by a firm or an individual,
for which they are not paid or penalized.
· TI
conomics Question Bank with MTP Class 12 f or Semester-2 Examination

t
 #
(ii) Externalities occur outside the market i.e., they affect p~ople not directly involved in \

I
the production and/or consumption of a goods and services. They are also known as
spill-over effects. Externalities are not taken into account while calculating GDP.
(iii) For example, setting up industry in a town may add up to domestic product but While
calculating GDP the pollution and its impact on society are not taken into account.
(iv) The industrial growth and urbanization create pr~blems_ like the industrial clum~s dis-
eases and crime. The damage to physical and social environment has an adverse impact
upon the health and welfare of the community. Thus despite an increase in GDP, no
accurate conclusion can be drawn on the welfare level. \
(b) Distribution of GDP:
(i) GDP shows the total value of goods and services produced in a country. However it
does not exhibit how the GDP is distributed among the people. For example, GDP of
India is rising but it is not being equally distributed among all the strata of people. The \
\
major share of increase is being grabbed only by the upper-middle class and share of
poor of the poorer is decreasing.
(ii) If with every increase in the level of GDP, distribution is getting more unequal, welfare
level of society may not rise.
(iii) No doubt, the GDP is a useful measure of the overall productive activities in a country,
yet no welfare implications, on its basis, it can be derived, unless it is fairly divided
among all the sections of the society.
2. From the following data, calculate GNPMP and national income by using value-added method:
in crores)
(i) Gross value of output in primary sector (at FC) 950
(ii) Gross value of output in secondary sector (at FC) · 470
(iii) Gross value of output in tertiary sector (at FC) 500
(iv) Value of intermediate goods in primary sector 360
(v) Value of intermediate goods in secondary sector 200
(vi) Value of intermediate goods in tertiary sector 175
(vii) Depreciation 20
(viii) Indirect tax 35
(ix) Subsidy 10
(x) Net factor income from abroad 4
Ans. GVO primary (FC) = 950
GVO secondary (FC) = 470
GVO tertiary (FC) = 500
Value of intermediate goods in primary sector = 360
Value of intermediate goods in secondary sector = 200
Value of intermediate goods in tertiary sector = 175
Depreciation = 20
Indirect tax = 35
Subsidy= 10
NFIA = 4

74 Goyal's !SC Economics Question Bank with MTP Class J2 for Semester-2 Examination
 4 I

GVApc == Gross value of output in each sector - Intermediate product in each sector
== (950 - 360) + (470 - 200) + (500 - 175)
== t 1185 crores
== GVApc + Indirect tax - Subsidy + NFIA
== 1185 + 35 - 10 + 4
== t 1214 crores
National income (NNPFc) = GVAFc - Depreciation + NFIA
== 1185 - 20 + 4
== t 1169 crores

3_ With the help of a diagram, show the circular flow of income in a two sector model with savings
and investment.
Ans. Two-sector economy with savings and investment in the figure we have considered two-sector
economy with households and firms. It is assumed that household sector and producing sector do
not save at all. However, in reality, households save a portion of their income for many reasons
like precautionary purposes, transaction purposes, etc. On the other way, they borrow money
from capital market for both development and non-development purposes.
vices (Land, Labour, Can.
ctor ser ~1ta1, E
~'3: (Factor Market) lJtel]JI'.·
lsej
• ctor services (Wages, R.e
\ tor iaJ lJt, llJte
'(('>er:> rest
~~':l , l}o
~"'.)
Savings Savings
Capital Market Firms
Borrowings Investment
(Product Market)

Goods and Services

Factor Payments

Similarly, firms also save some part of their receipts for the expansion of business, transaction
Purposes, speculative purposes, precautionary purposes, etc. Moreover, the firms also collect loans
(i.e., investment) from both banks and non-banking financial institutions to generate capital in their
business. Thus, inclusion of saving (leakage, i.e., outflow of income) and investment (injection, i.e.,
inflow of income) in the two~sector economy with capital market as shown in figure have made the
two-sector economy more ·meaningful and modernized.
4
· (a) Does increase in domestic income always le~d to increase in national income? If not, give an
illustration in support of your answer. Also, write two suggestions to accelerate the growth
of domestic income.
Ans. No. Increase in domestic income may not always lead to increase in national income.
Example: National income = Domestic income + Net factor income from abroad.
Let us assume that domestic income increases from 160 crores to 200 crores. But net
Go
factor inc ome fr om abroad decreases from 60 crores to 15 crores. Thus, domes1·tc income
'Yal's ISC E' -;:;;;;;~:-;~~--=---------------------------~rs°
uestzon Bank with MTP Class 12 for Semester-2 Examination

1111111........
 increases by 40 crores 200 crores - 160 crores = 40 crores). But net factor in
from abroad decreases by ~45 crores ~15 crores - ~60 crores = (-) ~45 crores). Soc°llle
tha
the sum total of domestic income and net factor income from abroad decreases by 5 er t,
. . . ores
40 crores - 45 crores) = (-) 5 crores. This leads to a f:aII m nationa1 mcome 5 crore
Suggestions: S,

(i) The government must make substantial investment in infrastructural development. This
is expected to induce domestic investment across all production activities. Accordingly,
growth of domestic income will accelerate.
(ii) The government should remove red-tapism (administrative-hurdles), and promptly
grant green clearances (clearances related to environment) for FDI (Foreign Direct
Investment). If FDI picks up, growth of domestic income will accelerate.
(b) From the following data, calculate the GDP at both (a) Market price, and (b) Factor cost.
Items
in crores)
(i) Gross investment
90
(ii) Net exports
10
(iii) Net indirect taxes
5
(iv) Depreciation
15
(v) Net factor income from abroad
(-5)
(vi) Private consumption expenditure 350
(vii) Government purchases of goods and services 100
Ans. (a) GDPMP = Gross investment + Net exports + Private consumption expenditure +
Government purchases of goods and services
= 90 crores + IO crores + 350 crores + I00 crores
GDPMP = ~550
(b) GDPFc = GDPMP - Net indirect taxes
= ~550 crores - ~5 crores
= 545 crores
5. Explain the precautions that should be taken while estimating national income by expenditure
method.
Ans. Precautions regarding calculation of national income by expenditure method.
(i) Expenditure only on final goods and services should be included in the national income
estimation while intermediate consumption expenditure should not be included.
(ii) Similarly, expenditure on the purchase of second hand goods should not be included in the
national income estimation of the current accounting year. This is because they have already
been included in the national income of the accounting year in which they were originally
purchased.
(iii) Expenditure on shares and bonds is not included. This is because there are more financial
assets and do not reflect any production activity of the goods and services.
(iv) Imputed value of the goods and services produced for self-consumption are included.
(v) Expenditure on transfer payments by the government should not be included. This is because
such payments are not related to any production activity is an economy.

76 Goyal's !SC Economics Question Bank with MTP Class J2 for Semester-2 Examination
p l

_ Explain the circular flow of a income in four-sector economy.

6
,Ans, Circular flow of inco~e in _a four-sector economy consists of - households, firms, government
and foreign sector. This vanous money flows in each sector are:
(i) Household sector: Households provide factor services to the firms, government and foreign
sector. In return, it receives factor payments. Households also receive transfer payments from
the government and the foreign sector. Households spend their income on:
(a) Payment for goods and services purchased from firms.
(b) Tax payments to government
(c) Payment for imports
(ii) Firms: Firms receive revenue from households, government and the foreign sector for sale
of their goods and services. Firms also receive subsidies from the government. Firms make
payments for:
(a) Factor services to households
(b) Taxes to the government
(c) Imports to the foreign sector.
(iii) Government: Government receives revenue from firms, households and the foreign sector
for sale of goods and services, taxes, fees, etc.
(iv) Foreign sector: Foreign sector receives revenue from firms, households and government
for export of goods and services. It makes payments for import of goods and services
from firms and the government. It also makes payment for the factor services to the
households.

Payments received on government account

Payments made on government account

I Rest of world I
JII.

"'
t:
0
Payments 0.
.§
I Government
I ...
,.8
-s
_1 I
trJ
"'i:::
-[
Cl.l

]I
... "'i::: g. <I)
0 Vl

.~ s
<I)
:>-.
&.
xl
"'§ "'
<I)
a (1)
o:s
o:s
,,
0
,,
(1) Vl

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l Households
'~ JII.
l Savings
' I Financial Market I Saving
I
·~
Finns
l
I

Loans Loans

Factor Payments

- Consumption Expenditure

77
Goya/'s !SC E . . .
conom1cs Question Bank with MTP Class 12 for Semester-2 Exammatton
 7. What precautions are needed to be considered while estimating national income by incorne
method.
Ans. Following precautions are needed to be considered while estimating national income by incorne
method:
(i) Transfer income: (e.g., scholarships, donations, charity, old-age pensions, etc.) are not
included in the national income because such receipts are not connected with any productive
activity and there is no value addition.
(ii) Income from sale of second-hand goods will not be included: In national income as their
original sale has already been counted. If they are included again, it would lead to double
counting.
However, any brokerage or commission received by brokers or commission agents on sale
of such goods, will be included as it is an income received for rendering productive service.
(iii) Income from sale of shares, bonds and debentures will not be included: as such
transactions do not contribute to current flow of goods and services. There financial assets
are mere paper claims and involves a change of title only.
(iv) Windfall gains: (e.g., income from lotteries, horse race, etc.) are not included as there is
no productive activity connected with them.
(v) Payments out of past savings: (e.g., death duties, gift tax, interest tax, etc.), are not included
in the national income because they are paid out of wealth or past savings and do not add
to current flow of goods and services.
8. What is the significance of value-added method and what precautions are required to take?
Ans. Significance: Value added or income generated is very significant in computation of national
income because:
(a) It is not the value of output but net value added at factor cost by the various producing units
which is taken into account while calculating national income.
(b) It is net value added at factor cost by an enterprise which is distributed among factors of
production as remuneration for their contribution in the production process.
(c) And finally value added approach avoids the problem of double counting.
Precautions: The following precautions are required to be taken while measuring national income
by production methods:
(a) Intennediate goods will not be included, as they are already included in the value of final
goods.
(b) The sale and purchase of second-hand goods should not be included in national income.
These goods should not be treated as fresh production, but commission or brokerage, if any
earned by brokers of such goods is included because it facilitates a fresh production activity.
(c) The value of production for self-consumption will be included because it contributes to current
output. Its imputed value will be added, as it is not sold in the market. However, production
for sell-consumption resulting fonn leisure time activities (e.g., growing vegetables in kitchen
garden) will not be taken into account.
(d) Imputed rent of owner-occupied houses will be industry as these house-rendered productive
services.

(e) Own-account production of fixed capital by households, firms and the government should
be included.

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 (f) Domestic services (e.g., services of hou . . 111111
. . . sew1ves, kitchen d .
national mcome, however, production of h . gar enmg, etc.) are not included i
. . . sue services b 'd . n
(a) Change m stock will be mcluded as •t . Y pai servants will be included
o . . ' I is a part of current production .
9_What are the ways of avo1dmg double counting? ·

j\ns, There are two ways of avoiding double count·mg:

(i) Final Output Method: According to th' h
Is met od, for avoiding d bl .
value of final goods is included in natio . ou e countmg, only the
. 1
na mcome. In the Table 19 1 l
- an illustration), the bread sold to the . · examp e (value added
consumers 1s the fi I d 0
outputs, i.e., t6,000 will be included in naf . na goo · nly the value of final
IOna1 mcome· the value of h t fl
(i.e., ~2,000, t3,000, and t4 500 == t 9 ) ' . w ea , our and bread
' ' 500 are the value of mtermedi t d Th
of the final output can be calculated by deduct' th . a _e goo s. e valve
mg e va1ue of mtermed1ate goods from the
value of output as under: Value of final output = V: 1 f .
goods = t15,500 - t9,500 == t6,000. a ue o output - Value of mtennediate

(ii) Value Added Method: Under this method value added tn'b · .
. _ . , or con uhon of each production
umt 1s considered. The sum total of value added by all th d · · · ·
. . e pro ucmg umts within the domestic
temtory of the country 1s equal to final product.
In our example Table 19.1
(a) Value added by farmer== t2,000
(assuming that the farmer incurs no intermediate cost)
(b) Value added by miller= t3,000 - ~2,000 = ~1,000
(c) Value added by baker= t4,500 - t3,000 = ~1,500
(d) Value added by retailer== t6,000 - ~4,500 == ~1,500
Total value added== t2,000 + tl,000 + ~1,500 + ~1,500 = ~6,000
which is equal to the value of final product sold to final consumers.
10. What are the components of final expenditure?
Ans. The components of final expenditure:
(i) Private final consumption expenditure (personal consumption expenditure): It refers to
the expenditure on the purchase of goods and services by households and private non-profit
institutions serving households. It includes the following:
(a) Expenditure on consumer goods: These goods include consumer durable goods. Such
as T.V. sets, computers, cars, etc., non-durable goods such as vegetable butter milk, etc.
Consumer services such as transport services, medical services, educational services.
(b) Imputed value of production for self-consumption.
(c) Imputed rent of owner-occupied houses.
(ii) Government final consumption expenditure .(government expenditure on goods ao d
services): Government here means general government. It spends on the purchase of goods
and services for the satisfaction of collective wants such as defence, law and order, education,
health care, etc. The cost of goods and services produced by the government mainly consiS ts
of two items:
(a) Compensation of employees
(b) Intermediate consumption
.
conomics Question Bank with MTP Class J2 for Semester-2 Examination

111111
 (iii) Gross domestic capital formation: It refers to the expenditure incurred by the producers
on the purchase of final goods. These are two components:
(a) Gross domestic fixed capital formation
(b) Inventory investment
'
(iv) Net export (X - M): Net export is the difference between export (X) and import CM) of
a country during the period of orie year. Exports refer to. expenditure, by foreigners on
purchase of domestic goods whereas imports refer to expenditure by residents on foreign
goods. Hence exports are a part of domestic product.

[4 M_arks]
Passage 1
Read the passage very carefully and answer the questions that follow.
Atmanirbhar Bharat 3.0 takes overall economic support to 15% of GDP: Nirmala Sitharaman.
Economists said the new package included the March allocation as well as liquidity measures announced
by the Central Bank worth ~6.5 lakh crores. Finance Minister, Nirmala Sitharaman announced a third
set of measures under the government's Atmanirbhar Bharat package, aimed at rescuing the economy
out of a historic contraction caused by Corona-19 Virus Pandemic. The latest steps including incentives
on Job creation and measures for the ailing economy's key real estate and infrastructure sectors - are
estimated to cost the government ~2,65,080 crores.
(i) Write different ways to increase injection in the economy.
[2]
Ans. Injections in the economy are done by increased investments in
(a) Employment generation sectors,
(b) Infrastructure sectors and
(c) Reality development sectors.
(ii) How do injections impact on the process of production on income generation? [1)
Ans. Injections cause positive impact on the process of production on income generation
(iii) Briefly explain the concept of circular flow of income. [11
Ans. A flow refers to change in quantity of a variable over time. It is measured with reference to a
specified period (length of time); e.g., per day per week, per month, per year, per decade, etc.,
For example, income is a flow.

Passage 2
Read the passage very carefully and answer the questions that follow.
The latest increase in indirect taxes on commodities like diesel, petrol and alcohol by the central and
various state governments is likely to lead to a further rise in the tax burden on India's Gross Domestic
Product (GDP), In Financial Year 2019, indirect taxes (net of subsidies) accounted for nearly IO¾
of GDP, up form 9.3% a year ago and a low of 6% in Financial Year 2010. This, say economists,
will negatively impact household disposable income and may hit consumer demand and savings and
investments by the household.

A faster rise in tax burden led to a steady decline in the portion of gross domestic product that accrues
to the household. Household disposable income was equivalent to around 85% of GDP in Financial
Year 2019 down form 85.5% a year ago and a high of 90% in Financial Year 2009.

- -----------;:G;,-o:~-;;atr-'s-;J.~S~C~E~co;;-;n:o;:m;;;i;:::cs-:7:Qi:°:u::es;::fl-;:..o::n-,Bo.a:=n-:;.k:-:w-:-:1~·1h;:-;-M-;,T'.:;:;:'P~C:;;la-s-:--s-J;--;2;----fi-;:o-r---;S;-e-m----:e~st;-::e-::-
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 ,.
the saJJle period,
. India's GDP at current . prices
. grew at a Compound Annual Growth Rate (CAGR)
IJlf11~11 while pnvate f final
¾ consumption expenditure grew at a CAGR 0 f 11.7% and household savings
0
0 ta CAGR o 8.6 o.
few a .
"ID gene ral , household
. held-up. the consumptions
. . . by cutting back of savmgs . .
and mcrease . borrowmgs
m .
that sb owed up m a boom m retail credit m the economy ' " says Dh . s·nh
ananJay I a, Head Research
S stematix Group. -
y (i) How does increase in indirect taxes affect the spending of disposable income of households? (1)
.AJ!S· The increase in ind irect taxes on goods will cause decrease in disposable income of households.
(ii) What is subsidy? How does it help the society? 121
,\llS, Subsidies are financial assistance by government to an enterprise:
(a) As compensation for selling goods below open market price,
(b) To encourage exports and
(c) To encourage employment.
(iii) How will net indirect taxes be calculated? (1]
Ans, Net indirect taxes will be calculated by taking differences between indirect taxes and subsidies.

Passage 3
Read the passage very carefully and answer the questions that follow.
Toe Prime Minister pledged to ~ake a self-reliant India or Atmanirbhar Bharat in May while announcing
a comprehensive economic package to arrest to economic slowdown. Since then the government has
passed some key labours and farm reforms, among others. But much more is required to May in India
a self-reliant and competitive economy in the medium to long term.
The bigger medium-term problem is the slowdown of aggregate demand - Private Final Consumption
Expenditure (PFCE), investment and exports. The largest component of GDP, PFCE, has not only de-
clined as a share of GDP-68% in 1990 to 56% of GDP in 2019 - but also in terms of growth rates in
recent years. The consumption of the top socio-economic declines has stagnated and the consumption
demand of the rest of the demography - mostly in agriculrure, small-scale manufacturing and self-em-
ployed - is not increasing due to low income growth. The investment slowdown is mostly due to a
fall in household investment in the construction sector (almost 5% of GDP), affecting not only major
industries like steel, cement and power but also income, employment and demand.
(i) Briefly explain the concept of Private Final Consumption Expenditure (PFCE). [1)
Ans. It is the expenditure incurred on final consumption of goods and services by the resident
households and non-profit instirutions serving households. ·
(ii) How can the GDPMP be calculated? Write all three ways or methods. Ill
Ans. The GDPMP can be calculated by measuring the final expenditure by households, producers,
government and row in domestic territory.
121
(iii) Write the causes of slowdown of aggregate demand.
Ans. The cause of slowdown of aggregate demand:
(a) Fall in consumption demand,
(b) Fall in investment demand and
(c) Fall in exports.
81
Goya/'s ISC E . . .
conomzcs Question Bank with MTP Class 12 for Semester-2 Examinatt0n