Please refer to National Income Accounting Class 12 Economics Exam Questions provided below. These questions and answers for Class 12 Economics have been designed based on the past trend of questions and important topics in your class 12 Economics books. You should go through all Class 12 Economics Important Questions provided by our teachers which will help you to get more marks in upcoming exams.
Class 12 Economics Exam Questions National Income Accounting
Class 12 Economics students should read and understand the important questions and answers provided below for National Income Accounting which will help them to understand all important and difficult topics.
Question. Why is GDP MP called Gross?
Ans. GDP MP is final products valued at market price. This is what buyers pay. But this is not what production units actually receive. Out of what buyers pay, the production units have to make provision for depreciation and payment of indirect taxes like excise, sales tax, etc. This explains why GDP MP is called ‘gross’. It is called gross because no provision has been made for depreciation. However, if depreciation is deducted from the GDP, it becomes Net Domestic Product (NDP).
Question. Why is GDP MP called ‘at Market Price’?
Ans. Out of what buyers pay, the production units have to make payments of indirect taxes, if any. Sometimes production units receive subsidy on production. This is in addition to the market price which production units receive from the buyers. Therefore, what production units actually receive is not the ‘market price’ but “market price is-indirect tax+ subsidies”. This is what is actually available to production units for distribution of income among the owners of factors of production.
Question. Are the following included in national income of a country? Give reason.
(a) Vegetables grown for self-consumption
(b) Cooking done by housewife .
Ans. (a) Yes, because there is production taking place.
(b) No, because it is done out of love.
Question. Define economic territory.
Ans. Economic territory is the geographical territory administered by a government within which person, goods and capital circulate freely.
Question. Are the following included in compensation of employees? Give reason.
(a) Old age pension
(b) Retirement pension
Ans. (a) No, as old age pension is a transfer payment
(b) Yes, because it is the payment for services rendered in the past.
Question. Explain how are the following treated while estimating national income:(i) Royalty income
(ii) Commission on sale of second-hand goods
(iii) Purchase of car by a household.
Ans. (i) Royalty income is similar to rent and amounts to productive income and therefore, will be included in the national income.
(ii) Commission on sale of second-hand goods is the income of the person for his productive services to various parties and therefore, will be included in the national income.
(iii) Purchase of car by a household is included in the national income because it is private final consumption expenditure which is a part of national income.
– Explain the concepts of injections and leakages in an open economy.
Ans. Injection is an addition to the circular flow of income. It increases the size of circular flow.
Leakages are withdrawals from a circular flow of income. It reduces the size of circular flow. For stability in the circular flow of income,
Leakages = Injections … denotes = identity
or S+ T+ M = I + G+ X
or [Saving+ Taxes + Imports] = [Investment+ Government Purchases + Exports]
Question. Give examples of factor income earned from abroad by Indian residents.
Ans. Examples of factor income earned from abroad by Indian residents are:
(i) Profits earned by State Bank of India located in England come under the category of net factor income earned from abroad by Indian residents.
(ii) Compensation of employees paid to Indian employees working in the Embassy like American and Japanese Embassies located in India come under the category of factor income earned from abroad by Indian residents.
(iii) Rent received by State Bank of India on the building rented to a foreign embassy in New Delhi.
(iv) Interest income received by Indians on the bonds they purchased from foreign countries.
( v) Compensation of employees paid to Indian employees working in the office of the World Bank located in India.
Question. Are the following items included in estimating a country’s national income? Give reasons.
(i) Expenditure on purchase of an old house
(ii) Brokerage on sale of shares
(iii) Meals given to the beggars.
Ans. (i) Expenditure on purchase of an old house will not be included in the national income because it has no relationship with the production of goods and services during the year.
(ii) Brokerage on sale of shares is included in the estimation of national income because it is the income of the agent for his services to various parties.
(iii) Meals given to the beggars is not included in the national income because it is an expenditure without any productive return. It does not amount to any flow of income and production.
Question. Are the following items included in estimating a country’s national income? Give reasons.
(i) Contribution to provident fund by employer
(ii) Production for self-consumption by farmer
(iii) Income from smuggling.
Ans. (i) Contribution to provident fund by employer is a part of wages or compensation to employees which is given to the employees for their contribution in the production process. Therefore, it is included in the national income.
(ii) Production for self-consumption by farmer is included in the estimation of national income because it results in production of final goods. It results in a flow of income.
(iii) Income from smuggling is not included in the estimation of national income because it is an illegal income and it is without any economic production of goods and services.
Question. Are the following items included in estimating a country’s national income? Give reasons.
(i) Receipt of scholarship from government
(ii) Sale of shares
(iii) Construction of a new house.
Ans. (i) Receipt of scholarship from government is not a factor income but a transfer payment and therefore, it is not included in the national income.
Question. Give advantages of real GDP.
Ans. The advantages are:
(i) It is useful in determining the effect of increased production on the real development of the economy.
(ii) It helps to make yearly comparison of the changes in the growth of output of goods and services.
(iii) It is useful in making international comparisons of economic performance.
Question. What are externalities? Give an example of a positive extemality and its impact on welfare of the people
Ans: Externalities refer to positive or negative side effects borne by people, who are neither producers nor consumers. Positive externality generates external benefits. For example:
(i) If a person uses CNG, then pollution level falls, (ii) If a person takes a vaccine for an infectious flu, then others in the society benefit. Impact: it raises welfare of the people.
Question. Define externalities. Give an example of negative extemality. What is its impact on welfare? (A/2014)
Ans: Externalities are spillovers. They are positive or negative side effects borne by the third party (other than producer and consumer).
Externalities can be of two types
1. Positive externality,
2. Negative externality.
Negative externality have negative effect on the wellbeing of the third party. They generate external cost.
Examples:
1. Pollution of lakes and rivers creates external cost for the fishing industry.
2. A smoker causes discomfort to non-smokers.
Impact: Negative externality reduces the welfare of society.
Qustion. Write down some of the limitations of using GDP as an index of welfare of a country.
Ans. (i) The national income figures give no indication of the population, skill and resources of the country. A country may be having a high national income but it may be consumed by the increasing population, so that the level of people’s well-being or welfare remains low.
(ii) Similarly, a high National Income may be due to greater area of the country or due to the concentration of some resources in one particular country. A typical example of the latter is the Arab states who have a high national income due to their oil resources but mass of people is one of the most backward in the world.
(iii) National income does not consider the level of prices in the country. People may be having incomes but due to the high prices they might not be able to enjoy a high standard of living.
(iv) High national income of a country may be due to large contributions made by a few industrialists. While these exceptional few cases enjoy a high standard of living, the level of economic well-being of the people may be indeed low. Thus, if a small section of the population owns a large share in the GNP leaving a smaller percentage of the GNP to be shared by a greater number of people, economic growth will not reach the poorest of the poor sections of an economy.
( v) Another factor not taken into account by national income is the level of unemployment in the country. People cannot be said to be enjoying a high standard of living if the level of unemployment is high. Economic well-being of the people will remain low unless unemployment is removed.
( vi) National income does not show the composition of output. If product mix has more of war goods like explosives, guns, bombs, then destruction will increase and welfare will reduce. Similarly, increase in the national income may be purely due to an increase in the goods which are not socially desirable such as drugs like smack, brown sugar, etc. This will surely not enhance economic welfare of the people. Moreover, if the share of wage goods in total national product does not increase, economic growth will not lead to economic welfare of the masses.
( vii) With rise in national income or economic activity, there will be rise in industrialisation and urbanisation. This will raise pollution of air, water and noise. There will be more accidents, shortage of water, housing problems, etc. In other words, with rise in national income there will be ecological degradation which will reduce welfare of the people. Thus, we conclude that GNP and economic welfare are not positively related. An increase in GNP does not bring about a corresponding increase in economic welfare.
Qustion- What are the important features of a capitalist economy?
Ans. Features of capitalist economy are:
(a) Private ownership of land and capital.
(b) Profit is the only motive.
(c) Free play of the market forces of demand and supply.
(d) Government looks after growth, stability and social justice in the economy.
Qustion. Describe the four major sectors in an economy according to the macroeconomic point of view.
Ans. Four sectors of an economy are:
(a) Households-The families or individuals who supply factors of production to the firms and buy goods and services from the firms.
(b) Firms-Economic units which carry out production of goods and services with the help of factors of production.
(c) Government-The state which maintains law and order in the country, imposes taxes and fines, makes laws and works for well-being of the citizens of the economy.
(d) External Sector-It refers to the economic transactions of the domestic country with the rest of the world.
Question. Define budget deficit and trade deficit. T he excess of private investment over saving of a country in a particular year was f 2,000 crores . T he amount of budget deficit was (-) f 1,500 crores . What was the volume of trade deficit of that country?
Ans. Budget deficit. It measures the amount by which the government expenditure exceeds the tax revenue earned by it.
Budget Deficit = G – T
Trade deficit: It measures the amount of excess imports expenditure over the export revenue earned by the country.
Trade Deficit = M – X
given G – T = (-) f 1500 crores
1- S = ₹ 2000 crores
Trade deficit = [I- S] + [G – TJ
= [2000] + [- 1500]
= ₹ 500 crores.
Qustion. Suppose the GDP at market price of a country in a particular year was f 1,100 crores. Net Factor Income from Abroad was f 100 crores. The value of lndirect taxes – Subsidies was f 150 crores and National Income was f 850 crores. Calculate the aggregate value of depreciation.
Ans. National Income (or NNPFc) = GDP MP – Depreciation + Net factor income from abroad
– Net Indirect taxes
850 = 1100 – Depreciation + 100 – 150
Depreciation = 1100 + 100 – 150 – 850
Depreciation = ₹ 200 crores.
Qustion· Describe the Great Depression of 1929.
Ans. The Great Depression took place in 1929 which adversely affected the developed economies of Europe and North America. It continued for 10 years. There was extreme fall in aggregate demand due to fall in income, which led to a vicious circle of poverty.
Qustion. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
Ans. The sum of final expenditures in the economy must be equal to the income received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents.
Qustion. Net National Product at Factor Cost of a particular country in a year is ₹ 1,900 crores . T here are no interest payments made by the households to the firms/ government, or by the firms/ government to the households . T he Personal Disposable Income of the households is ₹ 1,200 crores . T he personal income taxes paid by them is f 600 crores and the value of retained earnings of the firms and government is valued at f 200 crores. What is the value of transfer payments made by the government and firms to the households?
Ans. PDI = NNP”fi.C – Value of retained earnings of the firms and the government + Value of transter payments – personal taxes
1200 = 1900 – 200 + Value of transfer payments – 600
Value of transfer payments = 1200 + 200 + 600 – 1900
= ₹ 100 crores.
Qustion. In a single day Raju, the barber, collects ₹ 500 from haircuts; over this day, his equipment depreciates in value by ₹ 50. Of the remaining f 450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹220 for improvement and buying of new equipment. He further pays ₹ 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.
Ans. (a) GDP = ₹ 500
(b) NNP MP = GDP – Dep. = 500 – 50
= ₹ 450
(c) NNPFc = NNP – Sales tax = 450 – 30
= ₹ 420
(d) PI = NNPFc – Retained earnings
= 420 – 220
= ₹ 200
(e) PDI = PI – Income tax = 200 – 20
= ₹1 80
Qustion. Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.
Ans. The main differences between stock and flow are:
(a) Stock is related to a point of time whereas flow is related to a period of time.
(b) A stock is a quantity measurable at a particular point of time whereas a flow is a quantity which is measured over a specific period of time.
(c) Stock has no time dimension whereas flow has time dimensions.
(d) National capital is a stock variable whereas national income is a flow variable. Net investment is a flow whereas capital is a stock. Amount of water in a tank at a particular point of time is a stock concept, whereas amount of water flowing into it is a flow concept.
Qustion. What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Ans. Planned Inventory. It refers to changes in the stock of inventories which has occured in a planned way. In a situation of planned inventory accumulation, firm will plan to raise its inventories.
Unplanned Inventory. It refers to change in the stock of inventories which has occured in an unexpected way. In a situation of unplanned inventory accumulation, due to unexpected fall in sales, the firm will have unsold stock of goods.
Gross value added of a firm ( GVA) = Gross value of output produced by the firm ( Q)
– Value of intermediate goods used by the firm (Z)
or GVA = Value of sales by the firm (V) + Value of change in inventories (.A) – (Z).
Question. Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP.
Ans. National Income = National Product = National Expenditure. Each one will give the same result. The only difference is that with product methods, M is calculated at production or creation level with income method M is measured at distribution level and with expenditure method, NI is measured at disposal level.
Qustion. The value of the nominal GNP of an economy was f 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was f 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Ans. GNP deflator = Nominal GNP/Real GNP x 100
= (2500/3000) X 100 = 83.3%
No, the price level has not risen between the base year and the year under consideration. In fact, it has fallen.
Qustion. What are the four factors of production and what are the remunerations to each of these called?
Ans. Four factors of Production Remuneration Paid
Land Rent
Labour Wages
Capital Interest
Enterprise Profit
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