National Income Accounting - Class 12 Economics - Chapter 2 - Notes, NCERT Solutions & Extra Questions
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Extra Questions - National Income Accounting | Macroeconomics | Economics | Class 12
The monthly per capita expenditure incurred by workers for an industrial center during 1980 and 2005 on the following items are given below. The weights of these items are $75, 10, 5, 6,$ and 4 respectively. Prepare a weighted index number for the cost of living for 2005 with 1980 as the base.
Items | Price in 1980 | Price in 2005 |
---|---|---|
Food | 100 | 200 |
Clothing | 20 | 25 |
Fuel and Lighting | 15 | 20 |
House rent | 30 | 40 |
Miscellaneous | 35 | 65 |
To calculate the weighted index number for the cost of living in 2005 with 1980 as the base, we'll use a weighted average of the price increase for each item, where the weights reflect the importance of each item in the total expenditure.
Step 1: Compute the Price Relative for Each Item
The price relative ($R$) is calculated by dividing the price in 2005 ($P_1$) by the price in 1980 ($P_0$), and then multiplying by 100 (to convert it into a percentage): $$ R = \left(\frac{P_1}{P_0}\right) \times 100 $$
Step 2: Table with Computed Values
Here's the extended table with item prices, weights, and their calculated price relatives:
Items | Price in 1980 ($P_0$) | Price in 2005 ($P_1$) | Weight ($W$) | Price Relative ($R$) |
---|---|---|---|---|
Food | 100 | 200 | 75 | $\frac{200}{100} \times 100 = 200$ |
Clothing | 20 | 25 | 10 | $\frac{25}{20} \times 100 = 125$ |
Fuel and Lighting | 15 | 20 | 5 | $\frac{20}{15} \times 100 = 133.33$ |
House rent | 30 | 40 | 6 | $\frac{40}{30} \times 100 = 133.33$ |
Miscellaneous | 35 | 65 | 4 | $\frac{65}{35} \times 100 = 185.71$ |
Step 3: Calculate the Weighted Index Number
The Weighted Index Number for 2005 with 1980 as the base is calculated using: $$ \text{Weighted Index Number (Cost of Living, CPI)} = \frac{\sum (W \times R)}{\sum W} $$ where:
$W$ is the weight,
$R$ is the price relative for each item.
Step 4: Calculation:
$$
\text{CPI} = \frac{(75 \times 200) + (10 \times 125) + (5 \times 133.33) + (6 \times 133.33) + (4 \times 185.71)}{100} \
= \frac{15000 + 1250 + 666.65 + 799.98 + 742.84}{100} \
= \frac{17259.47}{100} \
= 172.59
$$
Conclusion:The cost of living index for the year 2005 with 1980 as the base is 172.59. This indicates that, on average, a person would need about 172.59% of the amount of money they used in 1980 to maintain the same standard of living in 2005, considering the weight and price changes of the specified items.
A manufacturer sells a washing machine to a wholesaler for Rs. 20,000. The wholesaler sells it to a trader at a profit of Rs. 1,500, and the trader, in turn, sells it to a consumer at a profit of Rs. 2,000. If the rate of VAT is 8%, the VAT received from the manufacturer and wholesaler are:
A) Rs. 160, Rs. 1,200 respectively
B) Rs. 1,600, Rs. 120 respectively
C) Rs. 1,200, Rs. 160 respectively
D) Rs. 120, Rs. 1,600 respectively
The correct answer is Option B, Rs. 1600, Rs. 120 respectively.
Detailed Calculation:
For the Manufacturer: The manufacturer sells a washing machine for Rs. 20,000, inclusive of a VAT at $8%$. The VAT charged by the manufacturer is calculated as: $$ \text{VAT charged} = \frac{8}{100} \times 20,000 = \text{Rs. 1600} $$ Since the manufacturer did not pay any tax on the purchase (as it is the originating sale), the whole of Rs. 1600 is the VAT received from the manufacturer.
For the Wholesaler:
The wholesaler buys the washing machine at Rs. 20,000 and sells it to the trader for a profit of Rs. 1,500, making the selling price: $$ \text{S.P.} = 20,000 + 1,500 = \text{Rs. 21,500} $$
Tax paid by the wholesaler (on purchase from the manufacturer) is $8%$ of Rs. 20,000: $$ \text{Tax paid} = \frac{8}{100} \times 20,000 = \text{Rs. 1600} $$
Tax charged to the trader (on selling at Rs. 21,500) is $8%$ of Rs. 21,500: $$ \text{Tax charged} = \frac{8}{100} \times 21,500 = \text{Rs. 1720} $$
Therefore, the VAT received from the wholesaler is: $$ \text{VAT received} = \text{Tax charged} - \text{Tax paid} = Rs. 1720 - Rs. 1600 = \text{Rs. 120} $$
Summary:
VAT received from the manufacturer is Rs. 1600.
VAT received from the wholesaler is Rs. 120.
Market price of the final goods and services, including depreciation, produced within the domestic territory of a country during an accounting year is called:
A) GDP at market price
B) GNP at market price
C) GDP at factor cost
D) GNP at factor cost
The correct answer is A) GDP at market price.
GDP at market price refers to the total market value of all final goods and services, including depreciation, that are produced within the domestic territory of a country during a specific accounting year.
Interest earned on investments is part of an ______ for an investment retailer.
Operating income
Operating expense
Non-operating income
Non-operating expense
The correct option is C Non-operating income.
Interest earned on investments is part of a non-operating income for an investment retailer.
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What are the four factors of production and what are the remunerations to each of these called?
The four factors of production and their corresponding remunerations are:
- Human Labor: Remuneration for this factor is called wage.
- Capital: This includes tools, machinery, and buildings used for production. The remuneration for capital is interest.
- Entrepreneurship: This involves the skills and risk-taking ability of an individual who brings the other factors of production together. The remuneration here is profit.
- Land: This includes all natural resources used in production. The remuneration for land is rent.
Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
In a closed economy without government or external trade, every expenditure by households (the aggregate final expenditure) is an income for the producers (businesses). This is because the expenditure paid for goods and services by households constitutes revenue for businesses, which is then used to pay for the factors of production—namely labor, capital, entrepreneurship, and land.
These factor payments, such as wages (labor), interest (capital), profits (entrepreneurship), and rent (land), form the total income for the households who own these resources. Thus, the cycle of expenditure and income continues, equating the aggregate final expenditure with the aggregate factor payments in the economy. This concept is central in understanding the circular flow of income in a simple economy where the two sectors (households and firms) are interconnected, and the money flows continuously between them.
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.
Stocks and flows are fundamental concepts in economics that describe different types of economic variables:
- Stocks are quantities that are measured at a particular point in time. They represent accumulations of resources or assets.
- Flows are quantities measured over a period of time. They represent the movement of goods, services, or resources between one point and another.
In the context of net investment and capital:
- Capital is a stock because it represents the total amount of accumulated assets, machinery, buildings, and equipment available at any given moment.
- Net investment is a flow because it measures the addition to the capital stock over a specific time period. Net investment accounts for the newly acquired assets minus those that have depreciated.
Comparing these concepts to the flow of water into a tank:
- The capital is like the amount of water currently in the tank, representing a stock measured at a precise moment.
- Net investment is analogous to the flow of water into the tank over time, adjusting for any water that might have evaporated (analogous to depreciation).
In this analogy, the water level in the tank at any given time (capital) depends on the net amount of water added (net investment) minus any loss (depreciation).
What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Planned versus Unplanned Inventory Accumulation:
-
Planned Inventory Accumulation occurs when a firm intentionally produces more goods than are sold, expecting to increase its inventory for various strategic reasons. For instance, a company might anticipate higher future demand or prepare for an upcoming season.
-
Unplanned Inventory Accumulation happens when a firm unexpectedly produces more goods than are sold, leading to an increase in inventory. This typically occurs if sales are less than forecasted, resulting in surplus goods.
Relation between Change in Inventories and Value Added of a Firm:
The change in inventories is considered as part of the firm’s investment and relates to the value added as follows:
$$ \text{Change in Inventories} \equiv \text{Production of the firm during the year} - \text{Sales of the firm during the year} $$
And it is integrated into the value added calculation with:
$$ \text{Value Added} \equiv \text{Production of the firm} - \text{Intermediate goods used by the firm} $$
This shows that any change in inventories (increase or decrease) influences the gross value added, as inventories adjust the effective output available either for future sales or as a result of past production exceeding current sales.
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.
The three identities for calculating the Gross Domestic Product (GDP) of a country are:
-
Product Method: $$ \text{GDP} \equiv \sum_{i=1}^{N} GVA_i $$ This method calculates GDP by summing the gross value added (GVA) by all the firms in the economy, where GVA for each firm is the value of its output minus the value of intermediate goods.
-
Expenditure Method: $$ \text{GDP} \equiv C + I + G + (X - M) $$ The expenditure method sums all the final expenditures made within an economy including consumption (C), investment (I), government spending (G), and net exports (exports (X) minus imports (M)).
-
Income Method: $$ \text{GDP} \equiv W + P + \text{In} + R $$ This approach calculates GDP by adding up all the incomes earned by factors of production in the economy, including wages (W), profits (P), interest (In), and rent (R).
All three methods should give the same GDP value because they are just different ways of measuring the same economic activity. The product method measures the total production value added, the expenditure method measures the total spending on this production, and the income method measures the total income generated from this production. Since these are interconnected aspects of economic activity, each method should naturally sum to the same total GDP.
Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was ( – ) Rs 1,500 crores. What was the volume of trade deficit of that country?
Budget Deficit
A budget deficit occurs when a government's expenditures exceed its revenues during a specific period, usually a fiscal year. The government needs to borrow money or utilize fiscal reserves to cover the shortfall.
Trade Deficit
A trade deficit happens when a country's imports of goods and services exceed its exports. It indicates that a country is buying more from abroad than it is selling to other countries.
Calculation of Trade Deficit
The given excess of private investment over saving indicates a net outflow of capital, represented as ( \text{Rs } 2,000 ) crores. The budget deficit is ( -\text{Rs } 1,500 ) crores.
Using the macroeconomic identity for an open economy:
[ \text{Private Saving (S)} + \text{Government Saving (T - G)} + \text{Foreign Saving (M - X)} = \text{Investment (I)} ]
where:
- ( T - G ) is the government saving, negative due to the budget deficit,
- ( S - I = -2,000 ) (excess of investment over saving),
- ( T - G = -1,500 ) (budget deficit),
- ( M - X ) is the trade deficit (difference between imports ( M ) and exports ( X )).
Rearranging gives: [ M - X = I - (S + (T - G)) ]
Given that ( S - I = -2,000 ) so ( I - S = 2,000 ), substituting into the equation:
[ M - X = 2,000 - (-1,500) = 3,500 ]
Thus, the volume of trade deficit is ( \text{Rs } 3,500 ) crores.
Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.
To find the aggregate value of depreciation, we use the relationships between GDP, Net Factor Income from Abroad (NFIA), Net National Product at market prices (NNP_MP), Indirect Taxes – Subsidies (NIT), and National Income (NI), which is equal to Net National Product at factor cost (NNP_FC).
Given:
- GDP at market prices (GDP_MP) = Rs 1,100 crores
- Net Factor Income from Abroad (NFIA) = Rs 100 crores
- Net indirect taxes (NIT = Indirect Taxes – Subsidies) = Rs 150 crores
- National Income (NNP_FC) = Rs 850 crores
We have the following relationships:
- Gross National Product at market prices (GNP_MP) = GDP_MP + NFIA
- Net National Product at market prices (NNP_MP) = GNP_MP - Depreciation
- National Income (NNP_FC) = NNP_MP - NIT
From 1: [ \text{GNP}_{\text{MP}} = 1100 + 100 = 1200 , \text{crores} ]
From 3, substituting NNP_MP: [ 850 = \text{NNP}_{\text{MP}} - 150 ] [ \text{NNP}_{\text{MP}} = 850 + 150 = 1000 , \text{crores} ]
Now using 2: [ 1000 = \text{GNP}_{\text{MP}} - \text{Depreciation} ] [ 1000 = 1200 - \text{Depreciation} ] [ \text{Depreciation} = 1200 - 1000 = 200 , \text{crores} ]
Therefore, the aggregate value of depreciation is Rs 200 crores.
Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
To find the value of transfer payments made by the government and firms to the households, we can use the following formula for Personal Income (PI):
[ PI = NI - UP - CT + Tr ]
Where:
- ( PI ) is Personal Income,
- ( NI ) is Net National Product at factor cost (National Income),
- ( UP ) is Undistributed Profits,
- ( CT ) is Corporate Taxes which are zero in this scenario as there are no interest payments implying no taxes,
- ( Tr ) is Transfer payments to the households from the government and firms.
Given:
- ( NI = Rs , 1900 , \text{crores} ),
- ( UP = Rs , 200 , \text{crores} ),
- ( CT = Rs , 0 , \text{crores} ).
The formula can be rearranged to solve for ( Tr ):
[ Tr = PI + UP - NI ]
Also, Personal Disposable Income (PDI) is given by:
[ PDI = PI - PT - NP ]
Where:
- ( PT ) is Personal Tax Payments,
- ( NP ) is Non-Tax Payments (which are zero in this question).
Given:
- ( PDI = Rs , 1200 , \text{crores} ),
- ( PT = Rs , 600 , \text{crores} ).
Solving for ( PI ):
[ PI = PDI + PT + NP = Rs , 1200 + Rs , 600 + Rs , 0 = Rs , 1800 , \text{crores} ]
Now, plug ( PI ) into the rearranged transfer payment formula:
[ Tr = Rs , 1800 + Rs , 200 - Rs , 1900 = Rs , 1100 , \text{crores} ]
Thus, the value of transfer payments made by the government and firms to the households is ( Rs , 100 , \text{crores} ).
From the following data, calculate Personal Income and Personal Disposable Income.
Rs (crore) | |
---|---|
(a) Net Domestic Product at factor cost | 8,000 |
(b) Net Factor Income from abroad | 200 |
(c) Undisbursed Profit | 1,000 |
(d) Corporate Tax | 500 |
(e) Interest Received by Households | 1,500 |
(f) Interest Paid by Households | 1,200 |
(g) Transfer Income | 300 |
(h) Personal Tax | 500 |
In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 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.
Here's how Raju's daily activities contribute to various economic measures:
(a) Gross Domestic Product (GDP):
- Since GDP accounts for the total market value of the goods and services produced within a country, Raju contributes:
- His revenue from haircuts of Rs 500 (including the sales tax).
- GDP Contribution: Rs 500
(b) NNP at Market Price:
- Net National Product (NNP) at market price is GDP minus depreciation.
- Raju's revenue is Rs 500, depreciation is Rs 50.
- NNP at Market Price: Rs 500 - Rs 50 = Rs 450
(c) NNP at Factor Cost:
- NNP at factor cost is NNP at market price minus net indirect taxes (taxes minus subsidies).
- Given no subsidies are mentioned, assuming sales tax as the only indirect tax.
- Net Indirect Taxes = Sales tax - Subsidies = Rs 30 - Rs 0 = Rs 30
- NNP at Factor Cost: Rs 450 - Rs 30 = Rs 420
(d) Personal Income:
- Personal income includes all earnings going to the employee or self-employed minus corporate taxes, undistributed profits, and net interest payments made by households.
- Raju’s personal income is his take-home earnings plus tax payments he makes from his income.
- Personal Income: Rs 200 (take-home) + Rs 20 (income tax) = Rs 220
(e) Personal Disposable Income (PDI):
- Personal disposable income is the personal income minus personal taxes.
- Personal Disposable Income: Rs 220 (Personal Income) - Rs 20 (income tax) = Rs 200
The value of the nominal GNP of an economy was Rs 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 Rs 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?
To calculate the GNP deflator in percentage terms, we use the formula:
$$ \text{GNP Deflator} = \left( \frac{\text{Nominal GNP}}{\text{Real GNP}} \right) \times 100 $$
Given:
- Nominal GNP = Rs 2,500 crores
- Real GNP = Rs 3,000 crores
Substitute these values into the formula:
$$ \text{GNP Deflator} = \left( \frac{2500}{3000} \right) \times 100 $$
Calculating this:
The GNP deflator for the year is approximately 83.33%.
Since the GNP deflator is less than 100%, it indicates that the price level has fallen between the base year and the year under consideration. This is because the real GNP (evaluated at base year prices) is higher than the nominal GNP (evaluated at current year prices), suggesting that prices have decreased.
Write down some of the limitations of using GDP as an index of welfare of a country.
GDP has several limitations when used as an index of welfare for a country:
-
Distribution of Income: A rise in GDP does not necessarily indicate an improvement in general welfare if the income distribution is highly unequal. A significant portion of the population may see no improvement in their standard of living.
-
Non-monetary Exchanges: GDP does not account for non-monetary exchanges and informal activities, such as domestic chores or barter transactions. These contribute to welfare but are not captured in GDP measurements.
-
Neglect of Externalities: GDP measurements often ignore negative externalities like pollution, which can decrease welfare. Positive externalities, which can enhance welfare without directly affecting economic output, are also not considered.
-
Quality of Goods and Services: Improvements in quality or declines in the costs of goods and services can affect welfare but may not be fully reflected in GDP.
-
Leisure and Human Development: GDP does not measure factors such as leisure time, work-life balance, or broader human development aspects that contribute to overall welfare.
These limitations suggest that while GDP can be a useful economic indicator, it may not fully or accurately reflect the welfare or well-being of a nation’s population.
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Comprehensive Class 12 Notes on National Income Accounting
Introduction to National Income Accounting
National income accounting is a fundamental concept in macroeconomics that involves measuring a country’s economic performance. It plays a crucial role in understanding the economic health of a nation, informing policy decisions, and planning for future growth.
Basic Concepts of Macroeconomics
National income accounting helps us answer key questions about what generates economic wealth and how resources are utilised to produce goods and services. It distinguishes between various types of products and economic activities.
Economic Wealth and Resource Utilization
Economic wealth isn't merely about possessing resources. It's about how these resources are transformed into goods and services, which generate income and wealth.
Production Flow and Economic Cycles
The flow of production involves utilising both natural and man-made resources to produce various commodities. These goods are then sold to consumers, continuing the economic cycle.
Final Goods vs. Intermediate Goods
- Final goods: Items for direct consumption or investment, like food and capital goods.
- Intermediate goods: Items used in the production process of other goods, like raw materials.
Methods of Calculating National Income
Product or Value Added Method
This method calculates the annual value of goods and services produced. The term "value added" refers to the net contribution made by each firm, defined as the value of production minus the value of intermediate goods used.
flowchart TD
A[Total Production] --> B{Wheat Producers}
A[Total Production] --> C{Bakers}
B --> D[Total Value: £100]
C --> E[Total Value: £200]
subgraph Calculation
D --> F[Net Contribution: £100]
E --> G[Net Contribution: £150]
end
F --> H[Aggregate Production: £250]
G --> H[Aggregate Production: £250]
Expenditure Method
The expenditure method involves adding all the final expenditures made by households, firms, government, and foreign entities on a country’s goods and services.
Income Method
The income method sums up all the incomes earned by factors of production, including wages, profits, rent, and interest.
Circular Flow of Income
The circular flow of income depicts the movement of money between households and firms in an economy. Households provide factors of production (labour, capital, land, etc.) to firms, and in exchange, they receive income. This income is then used to purchase goods and services produced by firms, continuing the cycle.
Components of National Income
Gross Domestic Product (GDP)
GDP is the total value of all final goods and services produced within a country's borders in a specific time period.
- Nominal GDP: Measured using current prices.
- Real GDP: Measures inflation-adjusted values, reflecting the true volume of production.
Gross National Product (GNP)
GNP includes the total income earned by a country's residents, regardless of where the production occurs.
Net National Product (NNP)
NNP is GNP adjusted for depreciation, representing the net output available for consumption or further investment.
Personal and Disposable Income
- Personal Income (PI): The total income received by households, including transfer payments like pensions and scholarships.
- Personal Disposable Income (PDI): Personal income minus personal taxes and non-tax payments, depicting the income available for spending and saving.
Price Indices
GDP Deflator
The GDP deflator measures the change in prices of all new, domestically produced, final goods and services in an economy.
Consumer Price Index (CPI)
The CPI measures the average change over time in the prices paid by consumers for a market basket of consumer goods and services.
Advanced Topics in National Income Accounting
Planned and Unplanned Inventory Investments
Inventory investments can be planned or unplanned, reflecting the stock of unsold goods. Planned inventory changes reflect expected business decisions, while unplanned changes occur due to unexpected changes in demand or production.
Externalities
Externalities are the uncompensated impact of one party’s activities on another party. They can be positive or negative and are not reflected in GDP.
Limitations and Challenges
Distribution of GDP
Not all segments of the population benefit equally from a rise in GDP. The distribution of income is a crucial factor in assessing economic welfare.
Non-monetary Exchanges
Many economic activities, such as domestic work or barter exchanges, are not captured in GDP calculations, leading to an underestimation of actual economic activity.
Issues with GDP as a Welfare Measure
GDP does not account for externalities or income distribution, meaning it can overestimate welfare.
National Income Accounting in India
India’s national income accounting has evolved significantly. The Central Statistics Office (CSO) now emphasises measures like Gross Value Added (GVA) at basic prices over GDP at factor cost to provide a more accurate picture of economic activity.
Conclusion
National income accounting offers detailed insights into the economic activity within a country. By understanding these metrics, policy makers and economists can make informed decisions to enhance economic welfare and address the challenges of distribution and externalities.
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