National Income and Related Aggregates

NATIONAL INCOME AND RELATED
AGGREGATES
1. “Circular flow of income in two sector economy is based on the axiom that one’s expenditure is other’s
income “Do you agree with the given statement? Support your answer with valid reason.
ANS- Yes, I agree with the given statement. In a two-sector economy (households and firms), Households provide
the firms with factor services and in return receive Goods and Services produced by the firm. The firm pays the
households for their factor inputs through Factor Payments. The households spend this amount on purchasing the
Goods and Services which the firm earns. Therefore, the Household’s expenditure is the firm’s income.
2. Macroeconomics is the study of aggregates while Microeconomics is not. Comment.

ANS- Both Microeconomics and Macroeconomics deal with aggregates. But in Microeconomics, we only
deal with aggregates in Market Demand. Macroeconomics is a branch of economics that studies how an
overall economy—the market systems that operate on a large scale—behaves. Macroeconomics studies
economy-wide phenomena such as inflation, price levels, rate of economic growth, national income,
gross domestic product (GDP), and changes in unemployment.
3. Do you think the general price level is of any relevance at micro level?
ANS- Yes, general price level is relevant at micro level. Though it is a macro level concept, it is relevant at micro
level also because all the micro factors are linked with macro.
4. What may happen if savings are encouraged in an economy?

ANS- If the savings are utilised and Investments are financed from saving, it’s an advantage for
the economy. If people save more, it enables the banks to lend more to firms for investment.
An economy where savings are very low means that the economy is choosing short-term
consumption over long-term investment. If the savings are kept stagnant, then it is a
disadvantage for the economy because the circulations amount reduces.
5. What do you think is the significance of agents in the economy? Support your answer with example.
ANS- Agents of the economy in a two-sector economy are the firms and households. These agents ensure
in the smooth flow of circular income. Households are the owners of factors of production and
consumers of good and services that are produced by the firms.
6. Distinguish between depreciation of fixed capital and capital loss.

ANS-
Depreciation of fixed asset Capital loss
It is the fall in the value of a fixed asset It is the loss in the value of fixed asset due
due to normal wear and tear over to natural calamities, thefts, accidents,
passage of time or foreseen unforeseen obsolescence.
obsolescence.
Provision for depreciation is made since No provision is made since its unexpected.
its an expected loss.
It does not hamper the production It affects the production process.
process
7. State two basic principles of circular flow of income.

ANS- Two basic principles of circular flow of income:
(a) Money Flows are opposite to real flows (money flow is the exchange of money while real is the exchange
of goods and services for factory inputs)
(b) Flow of income across different sectors always implies the identity between payments and receipts.
8. All machines are not capital goods. Justify

ANS- Some commodities like tv’s and home laptops, although are durable just like capital goods, cannot be
considered as capital goods because they undergo wear and tear and also need repairs, replacement and
maintenance. Laptops used at home are consumer goods but laptops in a business are capital goods.
9. Only net investment not gross investment shows change in stock of capital Defend or refute.
ANS- Yes, Net investment shows the change in stock of capital and not Gross Investment since Gross
Investment is the expenditure on fixed assets and unsold stock during the year and these assets undergo
depreciation over the year which reduces their value. Therefore, by subtracting Depreciation from Gross
Investments, we get Net Investments which is the actual change in stock of capital.
10. ‘Lower capital formation leads to lower rate of GDP’. Comment.

ANS- Lower Capital formation leads to slow rise in production capacity of the economy. When production
capacity rises at a slow rate, output rises at a slow rate and hence lower rate of GDP growth.
11. Purchase of shares of Tata Motors Company by the households in India is not to be treated as investment in
the economy. Justify
ANS- The statement is false. Purchase of shares leads to investment in the business for expansion and in turn is an
income for the individual. Therefore, purchase of shares is an investment in the economy.
12. ‘The government of India has launched a scheme of ‘cash transfer ‘to the people below poverty line. Would
you consider these transfers as a part of domestic income of the country?
ANS- Lower Capital formation leads to slow rise in production capacity of the economy. When production
capacity rises at a slow rate, output rises at a slow rate and hence lower rate of GDP growth.
OBJECTIVE TYPE QUESTIONS

1. Giving reasons, classify the following into intermediate goods and final goods:
a) Purchase of rice by a grocer
b) Purchase of air conditioner for use in shop.
c) Cloth used for making a sofa-set by the carpenter
d) Machine purchased by a dealer.
ANS-
(a) Intermediate Good - Since it is used by the grocer to sell it to the consumer.
(b) Final Good – since it’s not used to sell again.
(c) Final Good - since the cloth is not used to produce another good
(d) Intermediate good - since it is bought to sell it to others.
2. How do you treat the following while estimating domestic product of India?
a) Rent received by an Indian resident from his property in Singapore
b) Salaries received by Indian residents working in Russian Embassy in India
c) Profit earned by a foreign company or foreign bank in India
d) Compensation of employees to the residents of Japan working in Indian Embassy in Japan
e) Profit earned by a branch of State Bank of India located in Japan.
ANS-
(a) NO, it’s not part of domestic income since the property is in Singapore.
(b) NO, since Russian Embassy is not part of Domestic income of india.
(c) Yes, since the company/bank is located in India
(d) Yes, since the Indian embassy is part of Domestic territory of India
(e) NO, since the bank is located in Japan
3. Are the following stocks or flows? Give reason.

a) Investment
b) Subsidy
c) Monetary expenditure
d) A hundred rupee note
e) Services of a tutor
f) Machinery of a sugar mill
g) Production of cement
h) Wealth of a country
i) Bank deposits
j) Distance between Delhi and Mumbai
k) Number of birth
l) Interest on capital
ANS-
(a) Flow - Investments are calculated over a period of time
(b) Flow – Calculated over a period of time (One year how much subsidy is given)
(c) Flow - over a period of time
(d) Stock - measured at a point of time
(e) Flow - since they are paid on a monthly/yearly basis
(f) Stock – since asset
(g) Flow - period of time
(h) Stock - measured at a point of time
(i) flow – over a period of time
(j) Stock – the distance is fixed, doesn’t change
(k) Flow – over a period of time (if specific date is given then stock)
(l)Flow
4. Which of the following are normal residents of India? Justify.

a) Foreign Workers working in WHO.
b) The German working as director in IMF office located in India.
c) Ambassador in India from rest of the world.
d) Ambassador of India in rest of the world.
e) The foreign technical experts working in India for a period of less than one year.
ANS-
(a) No, they will be normal residents of the country to which they belong.
(b) No
(c) No
(d) Yes, since he belongs to India.
(e) No
5. Giving reasons, classify the following into injections and leakages:

a) Subsidy
b) Entertainment tax
c) Tourists buying Indian handicraft items
d) Government expenditure on motor bikes for police
e) Corporate fund
f) Import of raw materials
ANS-
(a) Leakage - since it reduces the flow of income
(b) Leakage
(c) Injection - since it increases the flow of income
(d) Injection – since Government is the consumer
(e) Leakage – Since it’s a saving. (When fund is used in the expansion of the company, it’s an Injection.)
(f) Leakage
NUMERICALS
1. GNPmp = GDPmp + NFIA
= 50,000 + 2,400
= 52,400.
2. GNPfc = GNPmp - NIT

= GNPmp – Indirect Tax + Subsidy
= 97,000 – 12,000 + 9000
= 94,000
3. NDPfc = GNPmp – depreciation – NFIA – NIT

= GNPmp – depreciation – NFIA – Indirect Tax + Subsidy
= 78,300 – 4500 – 1620 – 9300 + 1200
= 62,880
4. (a) NNPfc = GNPmp – depreciation – NIT

= 17,450 – 2400 – 3600 + 300
= 11,750
(b) NDPfc = GNPmp – depreciation – NFIA – NIT

= NNPfc – NFIA
= 11,750 – 1600
= 10,150
5. (a) GDPmp = GDPfc +NIT

= 25,515 + 1575
= 27,090
(b) GNPmp = GDPmp + NFIA

= 27,090 + 40
= 27,130
(c) NNPmp = GNPmp – depreciation

= 27,130 – 1000
= 26,130
(d) NNPfc = NNPmp – NIT

= 26,130 – 1575
= 24,555
(e) NDPmp = NNPmp – NFIA
= 26,130 – 40
= 26,090
(f) NDPfc = NDPmp – NIT

= 26,090 – 1575
= 24,515
6. Subsidies = GDPfc – NNPfc – depreciation + Indirect Tax + NFIA

= 55,000 – 55,500 – 2500 + 4,400 + 1300 – 600
= 2100
7. GNPfc = NDPmp + Consumption of fixed Capital + NFIA – NIT

= NDPmp + Consumption of fixed Capital + Income from Abroad – Income to Abroad –
Indirect Tax + subsidy
Factor Income to Abroad = NDPmp + Consumption of fixed Capital + Income from Abroad –
Indirect Tax + subsidy – GNPfc
= 3,700 + 480 + 400 – 100 +80 – 4,280
= 280
8.(a) NDPfc = GDPmp – consumption of fixed capital – NIT

= GDPmp – depreciation – Indirect Tax + Subsidy
= 70,150 – 3,100 – 5,200 + 4000
= 65,850
(b) NNPfc = GDPmp – consumption of fixed capital + income from abroad – income to abroad –
Indirect Tax + Subsidy
= NDPfc + income from abroad – income to abroad
= 65,850 + 800 – 300
= 66,350
9. NDPmp = GDPfc – depreciation – income from abroad + income to abroad + Indirect Tax
-Subsidy
Depreciation = GDPfc – income from abroad + income to abroad + Indirect Tax – Subsidy –
NDPmp
= 75,920 – 500 + 700 + 10,600 – 1,770 – 80,000
= 4950
10. NDPfc = GNPmp – consumption of fixed capital – income from abroad + income to abroad -
indirect tax + subsidy
Indirect Tax = GNPmp – consumption of fixed capital – income from abroad + income to abroad +
subsidy – NDPfc
= 58,350 – 1,625 – 625 + 665 + 1,540 – 55,915
= 2390

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NATIONAL INCOME AND RELATED

2. Macroeconomics is the study of aggregates while Microeconomics is not. Comment.

4. What may happen if savings are encouraged in an economy?

6. Distinguish between depreciation of fixed capital and capital loss.

7. State two basic principles of circular flow of income.

8. All machines are not capital goods. Justify

10. ‘Lower capital formation leads to lower rate of GDP’. Comment.

OBJECTIVE TYPE QUESTIONS

3. Are the following stocks or flows? Give reason.

4. Which of the following are normal residents of India? Justify.

5. Giving reasons, classify the following into injections and leakages:

2. GNPfc = GNPmp - NIT

3. NDPfc = GNPmp – depreciation – NFIA – NIT

4. (a) NNPfc = GNPmp – depreciation – NIT

(b) NDPfc = GNPmp – depreciation – NFIA – NIT

5. (a) GDPmp = GDPfc +NIT

(b) GNPmp = GDPmp + NFIA

(c) NNPmp = GNPmp – depreciation

(d) NNPfc = NNPmp – NIT

(f) NDPfc = NDPmp – NIT

6. Subsidies = GDPfc – NNPfc – depreciation + Indirect Tax + NFIA

7. GNPfc = NDPmp + Consumption of fixed Capital + NFIA – NIT

8.(a) NDPfc = GDPmp – consumption of fixed capital – NIT

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