ECONOMICS PRACTICE SHEETS BY- CA NITIN GURU

DETERMINATION OF NATIONAL ICOME

Practice Sheet

UNIT 1.1: NATIONAL INCOME ACCOUNTING

Question 1: [MTP March 2021]

How is the measurement of National Income done in India?

Solution 1:
National Accounts Statistics in India are compiled by National Accounts Division in the Central Statistics Office, Ministry
of Statistics and Programme Implementation. The estimates are published both annually and quarterly. This publication
is the key source of macroeconomic data of the country and as per the mandate of FRBM Act 2003, the Ministry of
Finance uses the GDP numbers (at current prices) to determine the fiscal targets. The Ministry has released the new
series of National Accounts by revising the base year from 2004-05 to 2011-12. The revision of National Accounts was
done by CSO in January 2015.

Question 2: [MTP March 2021]

Calculate Personal Income and Personal Disposable Income from the following data (In crores of rupees)

Particular ₹ In crores

(i) National Income 2000

(ii) Undistributed Profits 175

(iii) Net Interest Payment made by households 35

(iv) Corporate Tax 20

(v) Transfer payment to the households from firms 25

and government

(vi) Personal Income Tax 50

(vii) Non-Tax Payments 40

Solution 2:
Personal Income = National Income - Undistributed Profits - Net Interest Payments made by households - corporate
tax + Transfer payments to the households from firms and government
= 2000-175- 35- 20 + 25
= 1795 Crores
Personal Disposable Income = Personal Income – Personal Income Taxes – Non-Tax payments
= 1795 –50 –40
= 1705 crores

Question 3: [MTP MARCH 2021]

Calculate Operating Surplus and Net Value added at Factor Cost from the following data:
Particulars Rs in Crore
(i) Compensation of Employee 600
(ii) Intermediate Consumption 200

(iii) Sales 4500

(iv) Depreciation 200

(v) Rent 300

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 ECONOMICS PRACTICE SHEETS BY- CA NITIN GURU

(vi) Interest 500

(vii) Mixed Income of Self Employed 700

(viii) Purchase of materials 90

(ix) Opening Stock 50

(x) Closing Stock 60

(xi) Excise Tax 70

(xii) Subsidies 20

Solution 3:
GVAmp = Value of Output - Intermediate Consumption
= (Sales + Change in Stocks) – Intermediate Consumption
= 4500 + 10 – 200
= 4,310 crores
GVA mp= 4 ,310 cr
NVAmp = GVAmp -- Depreciation
= 4, 310 – 200
= 4,110 cr
NVA fc = NVA mp – (Indirect Taxes – Subsidies)
= 4,110 – (70- 20)
= 4,060 cr.
NDPfc = NVAfc = Compensation of employees + Operating Surplus + Mixed Income of self employed.
4,060 = 600 + Operating Surplus + 700
Operating Surplus = 2760 cr

Question 4. [MTP April 2021]

What are the Challenges in Computation of National Income in India?

Solution 4:
There are innumerable challenges in the computation of National Income in India. These challenges are more complex
in underdeveloped and developing countries. Some of the challenges are given below:
(a) Inadequacy of data and lack of reliability of available data.
(b) Presence of non- monetised sector.
(c) Production for self-consumption
(d) Absence of recording of data due to illiteracy and Ignorance.
(e) Lack of Proper occupational classification and
(f) Accurate estimation of consumption of fixed capital.

Question 5: [MTP April 2021]

Calculate National Income by Expenditure Method and Income Method with the help of the following data:
Items ₹ In Crores

(i) Compensation of Employees 2000

(ii) Mixed Income of Self Employed 1000

(iii) Net Factor Income of Abroad 50

(iv) GST 100

(v) Subsidies 60

(vi) Private Final Consumption Expenditure 700

(vii) Government Final Consumption Expenditure 800

(viii) Export 200

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(ix) Import 120

(x) Net Domestic Capital Formation 500

(xi) Profit 400

(xii) Interest 300

(xiii) Rent 600

(xiv) Depreciation 200

Solution 5:
By Income Method:
NNPFC = National Income = Compensation of Employees + Operating Surplus (rent + interest + profit) + Mixed Income of
self-employed + Net Factor Income from abroad
= 2000 +(400 +300+600) + 1000+ 50
= 4350 Cr

By Expenditure Method:
GDPmp = Private Final Consumption Expenditure + Government Final Consumption Expenditure
+ Gross Domestic Capital Formation (Net domestic Capital Formation + Net Export
= 700 + 800 + 500 + 80
= 2080 cr
NNPFC or National Income = GDPmp – depreciation + NFIA – Net Indirect Taxes
= 2080 – 200 + 50- 40
= 1890 Cr

Question 6: [MTP April 2021]

Calculate Personal Disposable Income from the following data:
Items ₹ In crores
(i) NNPfc 5000

(ii) Undistributed Profit 200

(iii) Net interest payments made by households 400

(iv) Corporate Tax 600

(v) Transfer Payments to the households from firms and government 500
(vi) Personal Income Taxes 1200
(vii) Non tax Payments 800

Solution 6:
Personal Income = National Income – Undistributed Profit- Net interest payments made by households – Corporate Tax
+ Transfer payments to the households from firms and Government
= 5000 – 200 – 400 – 600 + 500
= 4300 Cr
Personal Disposable Income = Personal Income – Personal Income Taxes – Non-Tax Payments
= 4300 - 1200 – 800
= 2300 cr

Question 7: [July 2021]

Explain the measurement of Net Domestic Product at market price.

Question 8: [July 2021]

Calculate the national income using income and expenditure method from the data given below :
Items ₨ in crores
(i) Government purchase of goods & services 7,000

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(ii) Indirect tax 9,000

(iii) Subsidies 1,800
(iv) Gross business fixed capital 13,000
(v) Inventory Investment 3,000
(vi) Consumption of fixed capital 4,000
(vii) Personal consumption expenditure 51,000
(viii) Export of goods & services 4,800
(ix) Net factor income from abroad (-) 300
(x) Imports of goods & services 5,600
(xi) Mixed income of self-employed 28,000
(xii) Rent, interest and profits 10,000
(xiii) Compensation of employees 24,000

Question 9: [July 2021]

The equation of ‘consumption function’ of an economy is as follows :
C = ₨ 450 + 0.70y
You are required to compute the following :
(1) Consumption when disposable income (y) is ₨ 3,500 and ₨ 5,800
(2) Saving when disposable income (y) is ₨ 3,500 and ₨ 5,500.
(3) Amount induced when disposable income is ₨ 3,200.

Question 10: [Jan 2021]

Given the following equations:
C = 200 + 0.8Y
I = 1200
Calculate equilibrium level of National Income and the Consumption Expenditure at equilibrium level of National
Income.

Solution 10:
Y=C+I
Y = 200 + 0.8 Y + 1200
Y-0.8Y = 1400
0.2Y = 1400
Y = 1400/0.2 = 7000
C = 200+ 0.8 x 7000 = 5800

Question 11: [Jan 2021]

Calculate GNP at market price from the following data using Value Added Method. (Rs in Crores)
Government Transfer Payments 1800
Value of output in Primary Sector 1500
Value of output in Secondary Sector 2700
Value of output in Tertiary Sector 2100
Net factor income from Abroad (-) 60
Intermediate Consumption in Primary Sector 750
Intermediate Consumption in Secondary Sector 1200
Intermediate Consumption in Tertiary Sector 900

Solution 11:
Gross Value Added at Market Price = Value of Output – Intermediate Consumption
= 1500+ 2700 + 2100- 750-1200-900
= 3450 cr
GNP at market Price = Gross Value Added at Market Price + Net factor Income from Abroad

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= 3450 + (-) 60
= 3390 cr

Question 12: [Jan 2021]

Compute GDP at market price and Mixed Income of Self-Employed from the data given below : (Rs in Crores)
Compensation of Employees 810
Depreciation 26
Rent, Interest and Profit 453
NDP at factor cost 1450
Subsidies 18
Net factor Income from Abroad (-) 17
Indirect taxes. 57

Solution 12:
GDP at factor Cost : NDP at Factor Cost + Depreciation = 1450cr + 26cr = 1476cr
GDP at Market Price = GDP at Factor Cost + Net Indirect Taxes
= 1476cr + Indirect Taxes – Subsidies = 1476cr + 39cr = 1515 Cr

NNP at Factor Cost = NDP at Factor cost + Net Factor Income from Abroad
NNP at Factor Cost = Compensation of employees + Operating Surplus + Mixed Income of Self Employed + Net
Factor Income from Abroad

Mixed Income of Self Employed = 1450cr – 1263cr = 187cr

Question 13: [Nov 2020]

Compute the amount of depreciation from the following data (Rs in Crores)
GDP at Market Price (GDPMp) 8,76,532
Net factor income from abroad (-) 232
Aggregate amount of Indirect Taxes 564
Subsidies 30
National Income (NNPFc) 8,46,576

Solution 13:
The amount of depreciation
GDPMP = NNPFC - NFIA + NIT + Depreciation
8,76,532 = 8,46,576 – (-232) + (564-30) + Depreciation
8,76,532= 8,46,576 +232 +534 + Depreciation
8,76,532 = 8,47,342 + Depreciation
8,76,532 – 8,47,342 = 29,190 = Depreciation
Depreciation = 29,190 Crores.

Question 14: [Nov 2020]

Which method is used in India for measurement of National Income? Also, state the method which is considered the
most suitable for measurement of National Income of the developed economies.

Solution 14:
The method used in India for measurement of National Income
In India, the Central Statistics Office under the Ministry of Statistics and Programme Implementation is responsible for
macro-economic data gathering and statistical record keeping.
Since reliable statistical data are not available, it is not possible to estimate Indi a’s national income wholly by one
method. Therefore, a combination of output method and income method is used. The value-added method is used
largely in the commodity producing sectors like agriculture and manufacturing. Thus, in agricultural sector, net value

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 ECONOMICS PRACTICE SHEETS BY- CA NITIN GURU

added is estimated by the production method, in small scale sector net value added is estimated by the income
method and in the construction sector net value added is estimated by the expenditure method also.

The method which is considered suitable for measurement of National Income of developed economies:
Income method may be most suitable for developed economies where data in respect of factor income are readily
available. With the growing facility in the use of the commodity flow method of estimating expenditures, an increasing
proportion of the national income is being estimated by expenditure method.

Question 15: [Nov 2019]

Compute the amount of subsidies from the following data:
GDP at market price (Rs in crores) 7,79,567
Indirect Taxes (Rs in crores) 4,54,367
GDP at factor cost (Rs in crores) 3,60,815

Solution 15:
Gross Domestic Product at Market Price (GDP MP) = Gross Domestic Product at Factor Cost (GDPFC) + (Indirect Taxes –
Subsidies)
Subsidies = GDPFC + Indirect tax - GDPMP
= 360815 + 454367 – 779567
= Rs 35,615 Crores

Question 16: [Nov 2019]

Explain the circular flow of income in an economy.

Solution 16:
Circular flow of income refers to the continuous circulation of production, income generation and expenditure
involving different sectors of the economy. There are three different interlinked phases in a circular flow of income,
namely: production, distribution and disposition as can be seen from the following figure*.

Circular Flow of Income

(i) In the production phase, firms produce goods and services with the help of factor services.

 The circular flow of income describes the flows of money among the different sectors of an economy namely,
household sector, firm sector, government sector, foreign sector and financial sector. It is studied using different

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models as two sector, three sectors, four sectors etc. and therefore cannot be summarized to fit into a three marks
question. The answer given is a simple version of the circular flow which is the basis of national income accounting,
namely, Gross Domestic Product (GDP) = income = production = spending.

(ii) In the income or distribution phase, there is a flow of factor incomes in the form of rent, wages, interest and
profits from firms to the households.
(iii) In the expenditure or disposition phase, the income received by different factors of production is spent on
consumption goods and services and investment goods. This expenditure leads to further production of goods
and services and sustains the circular flow.
It is clear from the figure that income is first generated in production unit, then it is distributed to households in the
form of wages, rent, interest and profit. This increases the demand for goods and services and as a result there is
increase in consumption expenditure. This leads to further production of goods and services and thus make the
circular flow complete. These processes of production, distribution and disposition keep going on simultaneously.

Question 17: [Nov 2019]

Compute NNP at factor cost or national income from the following data using income method:
(Rs in crores)
Compensation of employees 3,000
Mixed income of self-employed 1,050
Indirect taxes 480
Subsidies 630
Depreciation 428
Rent 1,020
Interest 2,010
Profit 980
Net factor income from abroad 370

Solution 17:
NNPFC or NI = Compensation of employees + Operating Surplus (rent + interest+ profit) + Mixed Income of Self-
employed + Net Factor Income from Abroad
= 3,000+ (1,020+2,010+980) +1,050+370 =Rs 8,430 Crores

Question 18: [RTP Nov 2021]

How the concept of National Income helps in analyzing an economy’s aggregate behaviour?

Solution 18:
The estimates of national income show the composition and structure of national income in terms of different sectors of
the economy, the periodical variations in them and the broad sectoral shifts in an economy over time. It is also possible
to make temporal and spatial comparisons of the trend and speed of economic progress and development. Using this
information, the government can fix various sector-specific development targets for different sectors of the economy
and formulate suitable development plans and policies to increase growth.
National income estimates also throw light on income distribution and the possible inequality in the distribution among
different categories of income earners. It is also possible to make comparisons of structural statistics, such as ratios of
investment, taxes, or government expenditures to GDP.

Question 19: [RTP Nov 2021]

From the following data calculate National Income
Personal disposable income (Rs in Crores)
1 Personal Income 8000
2 Mixed Income of self employed 2000

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3 Compensation of employees 1600

4 Net-factor Income from abroad -200
5 Rent 1500
6 Personal Income Taxes 800
7 Profit 1400
8 Consumption of fixed capital 600
9 Direct taxes paid by households 900
10 Non-Tax Payments 1000
11 Net Indirect taxes 700
12 Net Exports Taxes -180
13 Interest 1100

Solution 19:
National Income or NNPFC = Compensation of employees + Mixed Income of Self- employed + Operating Surplus (Rent
+ Interest + Profit) + Net factor Income from abroad
= 1600 + 2000+ (1500 + 1400+1100) + s(-200)
= Rs 7,400crores
Personal disposable Income = Personal Income – Personal Income Taxes- Non- Tax Payments
= 8000-800-1000
= Rs 6200 Crores

Question 20: [RTP Nov 2021]

Calculate from the following data:
(a) Private Income
(b) Personal Income
1 Savings of non-department private enterprises 5000

2 Income from domestic product accruing to private sector 400

3 Saving of private corporate sector 250

4 Current Transfer from government administrative departments 600

5 Current Transfer from of the world 200

6. Corporative Tax 80

7 Direct personal tax 160

8 Net factor Income from abroad -70

Solution 20:
Private Income = Factor Income from domestic product accruing to the private sector
+ Net factor Income from abroad + Current Transfers from government + Other net transfer from the rest of the
world.
= 400+(-70)+ 600 +200
= Rs 1130 cr
Personal Income = National Income – Undistributed Profits- Net interest payment made by households- Corporate Tax
+ Transfer payments to the households from firms and government
= 5000-80
= Rs 4920 cr

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Question 21: [RTP May 2021]

The nominal and real GDP of a country in a particular year are Rs 3000 Crores and Rs 4700 Crores respectively. Calculate
GDP deflator and comment on the level of prices of the year in comparison with the base year.

Solution 21:
Nominal GDP = ₨ 3000 Crores
Real GDP = ₨ 4,700 Crores
GDP Deflator = Nominal GDP x 100
Real GDP
= 3000 x 100 = 63.83
4700

The price level has fallen since GDP deflator is less than 100 at 63.83.

Question 22: [RTP May 2021]

Calculate National Income by Expenditure method and Income method with the help of following data:
Items Rs in Crores
Compensation of employees 1,200

Net factor income from Abroad 20

Net indirect taxes 120

Profit 800

Private final consumption expenditure 2,000

Net domestic capital formation 770

Consumption of fixed capital 130

Rent 400

Interest 620

Mixed income of self-employed 700

Net export 30

Govt. final consumption expenditure 1100

Operating surplus 1820

Employer’s contribution to social security scheme 300

Solution 22:
By Expenditure method
GDPMP = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital
formation (Net domestic capital formation + depreciation) + Net export
= 2000 + 1100 + (770+ 130) + 30= 4030 Crores
NNPFC or NI = GDPMP – Depreciation + NFIA – NIT
= 4030 – 130 + 20 – 120= 3800 Crores

By Income method
NNPFC or NI = Compensation of Employees+ Operating Surplus + Mixed Income of Self-Employed + NFIA
= 1200+ 1820+ 700+ 20= 3740 Crores

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Question 23: [RTP May 2021]

How real GDP is a better measure of economic well-being? Explain.

Solution 23:
Real GDP is calculated in such a way that the goods and services produced in a particular year are evaluated at some
constant set of prices or constant prices. In other words, it is calculated using the prices of a selected ‘base year’. For
example, if 2011-12 is selected as the base year, then real GDP for 2020-21 will be calculated by taking the quantities
of all goods and services produced in 2020-21 and multiplying them by their 2011-12 prices. Thus, real GDP or GDP at
constant prices refers to the total money value of the final goods and services produced within the domestic territory
of a country during an accounting year, estimated using base year prices. Real GDP is an inflation-adjusted measure
and is not affected by changes in prices; it changes only when there is change in the amount of output produced in the
economy. Therefore, Real GDP is a better measure of economic well-being as it shows the true picture of the change
in production of an economy.
The calculation of real GDP gives us a useful measure of inflation known as GDP deflator. The GDP deflator is the ratio
of nominal GDP in a given year to real GDP of that year.
GDP Deflator = Nominal GDP x 100
Real GDP

Question 24: [RTP Nov 2020]

From the following data, calculate NNPFC, NNPMP, GNPMP and GDPMP.

Items In Cr.

Operating surplus 2000

Mixed income of self-employed 1100

Rent 550

Profit 800

Net indirect tax 450

Consumption of fixed capital 400

Net factor income from abroad -50

Compensation of employees 1000

Solution 24:
GDPMP = Compensation of employees + mixed income of self-employed + operating surplus + depreciation + net
indirect taxes
= 1000 crores + 1100 crores + 2000 crores + 400 crores + 450 crores = 4950 crores
GNPMP = GDPMP + NFIA

= 4950 crores + (-50) crores = 4900 crores NNPMP = GNPMP – consumption of fixed capital
= 4900 crores – 400 crores = 4500 crores NNPFC or NI = NNPMP- NIT
= 4500 crores – 450 crores= 4050 crores

Question 25: [RTP Nov 2020]

A sells a used car to B and receives ₹ 60,000. How much of the sale proceeds will be included in national income
calculation?

Solution 25:
National income is a flow measure of output per time period—for example, per year— and includes only those goods
and services currently produced i.e. produced during the time interval under consideration. The value of market
transactions such as exchange of goods which already exist or are previously produced, do not enter into the calculation

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of national income. No part of the used car sales proceeds of Rs 60,000 will be included in national income calculation
because sale of a used car represents transfer of existing asset which was produced during some earlier year and was
accounted in the national income calculation of that year.

Question 26: [RTP May 2020]

Calculate the Operating Surplus with the help of following data-
Particulars Rs (In Crore)
Sales 4,000
Compensation to employees 800
Intermediate consumption 600
Rent 400
Interest 300
Net indirect taxes 500
Consumption of fixed capital 200
Mixed income 400

Solution 26:
GVAMP = Gross Value OutputMP – Intermediate consumption
= (Sales + change in stock) – Intermediate consumption
= 4000-600 = 3400 crore
GDPMP = GVAMP = 3400 crore
NDPMP = GDPMP – consumption of fixed capital
= 3400 – 200
= 3200 crore

NDPFC = NDPMP – NIT

= 3200 – 500
= 2700 crore
NDPFC = Compensation of employees + Operating surplus + Mixed income
2700 = 800 + Operating Surplus + 400
Operating surplus = 1500 crore

Question 27: [RTP May 2020]

Why do pensions and other security payments get excluded while calculating National Income?

Solution 27:
GDP measures what is produced or created over the current time period and excludes all non-production transactions.
Only incomes earned by owners of primary factors of production for services rendered in production are included in
national income. Transfer payments, both private and government, are made without goods or services being received
in return. These payments do not correspond to return for contribution to production because they do not directly
absorb resources or create output. Therefore, transfer incomes such as pensions and other social security payments are
excluded from national income.

Question 28: [RTP May 2020]

How are the following transactions treated in national income calculation? What is the rationale in each case?
(i) Electricity sold to a steel plant.
(ii) Electric power sold to a consumer household.
(iii) A car manufacturer procuring parts and components from the market.
(iv) A computer producer buys a robot produced in the same country and uses it in production of
computers.

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Solution 28:
(i) Being an intermediate good, electricity sold to a steel plant will not be included in national income calculation.
The underlying principle is that only finished goods and services which are directly sold to the consumer for final
consumption would be included.
(ii) Electric power sold to a consumer household would be included in the calculation of GDP since it is a final good
consumed by the end user.
(iii) The value of parts and components procured from the market by a car manufacturer will not be included in
national income calculation because these are intermediate goods used in car production.
(iv) The value of the robot bought by a computer producer for use in the production of computers would be included
in national income calculation because the computer producer is the "final consumer" of the robot and the robot
is not resold in the market after value addition.

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UNIT 1.2: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME

Question 29: [MTP March 2021]

In an economy the equations are given as follows:
C = 200 + 0.80 Yd, I = 400, G = 300, T = 100, TR = 50
Find the equilibrium level of Income.

Solution 29:
Yd = Y-T + TR
Yd = Y- 100 +50
Y = C + I +G
Y = 200 + 0.80 (Y- 100 +50) + 400 +300
Y = 200 + 0.80 Y- 0.80 X 50 + 700
Y = 900 + 0.80 Y- 40
Y- 0.80Y = 860
0.20 Y = 860
Y = 860 ÷ 0.20 = 4350

Question 30: [MTP March 2021]

What is the leakages-injections approach in two sector circular flow Model?

Solution 30:
A leakage is referred to as an outflow of income from the circular flow model. Leakages are that part of income
which is not used to purchase goods and services or what households withdraw from the circular flow. An injection
is an inflow of income to the circular flow. Due to injection of income in the circular flow, the volume of income
increases. Investment is an injection in the circular flow. The Circular flow will be balanced and therefore in
equilibrium when the injections are equal to the leakages.

Question 31: [MTP April 2021]

Explain the three Sector Model of determination of National Income?

Solution 31:
Aggregate demand in three sector model of closed economy consists of three components namely, household
consumption (c), desired business investment demand (I) and the government sector’s demand for goods and services
(G). Thus, in equilibrium
Y = C+I + G
Since there is no foreign sector, GDP and national income are equal. As prices are assumed to be fixed, all variables and
all changes are in real terms. The Three -sector Keynesian model is commonly constructed assuming that government
purchases are autonomous. This is not a realistic assumption, but it will simplify the analysis.
AD = C+I+G AS = C+S+T
Thus, equilibrium is determined at a point where both aggregate demand and aggregate supply are equal.
C+I+G = Y = C+S+T
govt.expenditure is investment for us ,henece data is given is change in
Question 32: investment and ratio is mpc --- [Jan 2021]
Due to Recession in an economy, Government expenditure increases by Rs 6 billion. If Marginal Propensity to
Consume (MPC) in the economy is 0.8, compute the increase in GDP.
hence we need to find mps and then calculate
Solution 32: change in income by calculating mps formula...
Change in Income ÷ Change in Expenditure = 1- MPC = 1– 0.8 = 0.2
Change in Income × 0.2 = Change in Expenditure = 6 bn
Change in Income = 6 ÷ 0.2 = 30 bn Hence the GDP will increase by30 bn.

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Question 33: [Nov 2020]

You are given the following information of an economy:
Consumption Function : C = 200 + 0.60 Yd
Government Spending : G = 150

Investment Spending : I = 240

Tax : Tx = 10+0.20Y

Transfer Payment : Tr =50

Exports : X = 30+0.2Y

Imports : M = 400

Where Y and Yd are National Income and Personal Disposable Income respectively. All figures are in ₹

Find:

(i) The equilibrium level of National Income.

(ii) Net Exports at equilibrium level.
(iii) Consumption at equilibrium level.

Solution 33:
(i) The equilibrium level of national income
Yd = Y + Tr –Tax
= Y + 50 - 10 - 0.2Y
Yd = 40+0.8 Y
Y = C+I+G+(X-M)
Y = 200+ 0.60 (40+0.8Y) +240 +150 + (30 + 0.2 Y - 400)
Y = 200 + 24 +.48 Y +240 +150 + 30 + 0.2 Y – 400
Y = 244 + 0.68 Y
Y- 0.68 Y = 244
0.32 Y = 244
Y = 244 /0.32 = 762.5
(ii) Net exports at equilibrium level
Net Exports = Exports – Imports or (X-M)
= 30 + 0.2 Y- 400
= 30 + 0.2 (762.5) - 400]
= 30 + 152.5 - 400 = - 217.5
Net Exports = - 217.5 Crores
Imports are greater than exports. Therefore, ‘net exports’ are negative.
(iii) Consumption at equilibrium level
C = 200 + 0.60 (40+0.8 Y)
= 200 + 24 + 0. 48 (762.5)
=200 + 24 + 366 = 590
Consumption at equilibrium level of income = 590 Crores

Question 34: [Nov 2020]

Clarify the concept of ‘Average Propensity to Save’ with the help of formula and example.

Solution 34:
The concept of Average propensity to save
Average Propensity to Save (APS) is the ratio of total saving to total income. Alternatively, it is that part of total
income which is saved.
APS = Total Saving = S
Total Income Y

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For example, if saving is Rs 20 Crores at national income of Rs 100 Crores, then:

APS = S/Y =20/ 100 = 0.20, i.e. 20% of the income is saved. The estimation of APS is illustrated with the help of the
following table:
Income Saving (Rs APS = S/Y APS
(Rs Crores) Crores)
0 - 40 - -
100 -20 (-20/100) - 0.20
200 0 (0/200) 0
300 20 (20/300) 0.067
400 40 (40/400) 0.10

Question 35: [Nov 2019]

Explain the consumption function using a suitable table and diagram.

Solution 35:
Consumption function expresses the functional relationship between aggregate consumption expenditure and
aggregate disposable income, expressed as:
C = f (Y)
When income is low, consumption expenditures of households will exceed their disposable income and households
dissave i.e. they either borrow money or draw from their past savings to purchase consumption goods. If the
disposable income increases, consumers will increase their planned expenditures and current consumption
expenditures rise, but only by less than the increase in income. This can be illustrated with the following table and
diagram:
Disposable Income (Yd) (Rs Crores) Consumption (C) (Rs Crores)
0 30
100 100
200 170
300 240
400 310
500 380
600 450
700 520

The specific form of consumption function, proposed by Keynes is as follows:

C = a + bY
where C = aggregate consumption expenditure; Y= total disposable income; a is a constant term which denotes the
(positive) value of consumption at zero level of disposable income; and the parameter b, the slope of the function, (∆C
/∆Y) is the marginal propensity to consume (MPC) i.e the increase in consumption per unit increase in disposable
income.

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Question 36: [RTP Nov 2021]

What is the importance of Keynesian theory in determination of national income?

Solution 36:
Before the ‘General Theory’ by Keynes, economists could not explain how economic depressions happen, or what to
do about them. Keynes’ theory of determination of equilibrium real GDP, employment and prices focuses on the
relationship between aggregate income and aggregate expenditure. There is a difference between equilibrium income
(the level toward which the economy gravitates in the short run) and potential income (the level of income that the
economy is technically capable of producing, without generating accelerating inflation).

Keynes argued that markets would not automatically lead to full -employment equilibrium and the resulting natural
level of real GDP. The economy could settle in equilibrium at any level of unemployment. The stickiness of prices and
wages in the downward direction prevents the economy's resources from being fully employed and thereby prevents
the economy from returning to the natural level of real GDP. Therefore, output will remain at less than the full
employment level as long as there is insufficient spending in the economy.

Question 37: [RTP Nov 2021]

Suppose in an economy
Consumption Function C = 170+0.80 Y
Investment spending I = 200
Government Spending G = 150
Tax Tx = 30+0.30Y
Transfer payments Tr = 60
Exports X = 45
Imports M = 20 + 0.2Y
Calculate:
1. The equilibrium level of national income
2. Consumption of equilibrium level
3. Net Exports of equilibrium level

Solution 37:
C = 170+ 0.80yd
Yd = Y─Tax + Transfer Payment
= Y- (30+0.30Y) + 60 = Y+30-0.30Y = Y (1-0.30) +30 Yd = 0.7Y+30
C = 170+0.80(0.7+30) = 170+ 0.56Y + 24 = 194 +0.56Y
The Equation for Equilibrium Y = C + I + G + X- M
= 194+0.56Y + 200+150 + 45-(20+0.2Y)
= 194+0.56Y+375-0.2Y= 569+0.36Y
Y – 0.36Y = 569 therefore Y = 569 /0.64 = 889.06 C = 194 + 0.56X889.06= 691.87
Net Export = Value of total export- Value of import X = 45- (20+0.2Y) = 45-20-0.2Y =
25-0.2(691.87)
= ─ (113.37)

Question 38: [RTP May 2021]

For an Economy with the following specifications Consumption,
C = 50+0.75 Yd
Investment, I = 100
Government Expenditure, G = 200
Transfer Payments, R= 110
Income Tax = 0.2Y
Calculate the equilibrium of income and the value of expenditure multiplier.

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Solution 38:
The level of disposable income Yd is given by
Yd = Y-Tax + Transfer Payments
Where, Transfer Payment = 110

= Y-0.2 Y+110 = 0.8Y +110

and C = 50+0.75 Yd

= 50+0.75(0.8Y +110) (where Yd = 0.8Y +110)

= 50+ (0.75×0.8Y) + (0.75X110) =132.50+0.6Y

C = 132.50+0.6 Y

Now Y = C+I+G, Where C = 132.50+0.6Y, I = 100, G = 200 (Given)

Y = (132.50+0.6Y) +100+200

= 432.50+0.6Y

Y-0.6Y = 432.50

0.4Y = 432.50
or Y = 432.50/0.4 = 1,081.25 Crores

Expenditure Multiplier = 1 = 1 = 25 (Multiplier in close economy = 1 )

1- b 1-0.6 1-b

(Here b = MPC = ∆C)

∆Y

Question 39: [RTP Nov 2020]

An economy is characterized by the following equation- Consumption C = 60+0.9Yd
Investment I = 10
Government expenditure G = 10 Tax T = 0
Exports X = 20
Imports M = 10 +0.05 Y
Find equilibrium income and trade balance.

Solution 39:
Y = C + I+ G + (X – M)
= 60+0.9(Y – 0) + 10 +10 + (20- 10 -0.05Y)
= 60+ 0.9 Y +30 -0.05 Y
Y = 600
Trade Balance = X – M = - 20. Thus trade balance is in deficit.

Question 40: [RTP Nov 2020]

Explain (with the aid of a diagram) how an increase in the marginal propensity to consume impacts consumption
expenditure.

Solution 40:
An increase in marginal propensity to consume implies that the proportion of income that is spent on consumption
increases with an increase in income. In other words, except for an income level of zero, at each income level, the level
of consumption spending is higher. The vertical intercept is unchanged as autonomous consumption remains
unchanged; but the slope of the consumption curve would be higher and it will spin upwards. For example, if
consumption function 20+ .6Y changes to 20+ .8Y, for an income of 200, consumption rises from 140 to 180.

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Question 41: [RTP May 2020]

Suppose you are given following information-
Consumption function C = 10 + 0.8Yd
Tax T = 50
Investment spending I = 135
Government Spending G = 60
Exports X = 35
Imports M = 0.05 Y
Where Y and Yd are income and personal disposable income respectively.
Find the equilibrium level of income and net exports.

Solution 41:
Here,
C = 10 + 0.8Yd
= 10+0.8 (Y- 50)
Y = C+ I + G + (X - M)
= 10 + 0.8(Y- 50) + 135 + 60 + (35 – 0.05Y)
Y - 0.8Y + 0.05Y = 10 - 40 + 135 + 60 + 35
0.25Y = 200
Y = 800
Net Exports = (X- M) = 35 - 0.05Y
35 - 0.05 x 800 = -5
Thus, Trade is in deficit.

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