National Income Accounting Important Questions for class 12 economics National Income and Its Related Concepts
1. National Income It is defined as the sum total of factor incomes accruing to normal residents of a country with a given period of time, generally a financial year
2. Normal Residents of a Country These are the residents of a country or are those ‘individuals’ or ‘institutions’ who normally reside in a country and their economic interest lies in that country. For becoming a normal resident, an individual or an institution has to reside/operate for more than one year in that country.
3. Persons or Entities Who are Not Normal Residents of a Country International organisations (such as UN, WHO, IMF, World Bank, etc), foreign tourists and visitors for any purpose, crew members of foreign cargo, ships and airplanes, officials, diplomats and sport persons visiting on a tour are not considered as normal residents of a country. As their centre of economic interest does not lie in that country.
4. Domestic Territory of a Country In terms of National Income accounting, domestic territory of a country refers to the areas of operation generating domestic income. It includes two things:
(i) Territory within the political boundaries of a country.
(ii) All ships, aircraft, vessels owned and operated by the resident of the country and generating income of the country.
5.Domestic Income The sum total of all factor incomes generated during an accounting year within the domestic territory of a country is termed as domestic income or domestic product of a country.
6.Difference between Domestic Income and National Income
7. Gross Domestic Product (GDP) It is the total value of all the final goods and services by all the enterprises (both resident and non-resident) within the domestic territory of a country in a particular year. GDP is considered as one of the best indicators of judging the economic performance of a country.
8. Gross National Product It is defined as the total value of all final goods and services produced in a country in a particular year, plus the income which is earned by its citizens who are located abroad and minus the income of non-residents located within the country, it includes depreciation.
9. Net National Product at Factor Cost (NNPFC) It is the sum total of factor incomes (rent + interest + profits + wages) earned by normal residents of a country during the period of an accounting year. It is net of depreciation.
10.Net National Product at Market Price (NNPMP) It refers to market value of final goods and services produced during the year inclusive of Net Factor Income from Abroad but exclusive of depreciation
11. Nominal Gross Domestic Product It refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the current year prices. It is also called GDP at current price.
12. Real Gross Domestic Product It refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.
13. GNP Deflator It shows the change in GNP with the change in price levels.
14. GDP is not Appropriate Indicator for Welfare GDP may be a good a indicator of economic growth but not economic welfare or economic development, because of:
(i) Ignorance of distribution of income among the population.
(ii) Welfare is not a component of GDP calculation.
(iii) Non-monetary transactions are ignored.
(iv) Externalities (good and bad impact of personal activities on others).
15. Some Important Terms
Some important terms are described below:
(i) Net Factor Income from Abroad (NFIA) This is the difference between the income earned from abroad for rendering factor services by the normal residents of the country to the rest of the world and the income paid for the factor services rendered by non-residents in the domestic territory of a country. .
(ii) Factor income These are incomes received by the owners of factors of production for rendering their factor services to the producers i.e. wages to the labour , rent to land, interest to capital and profit to the entrepreneur.
(iii) Transfer payments These are all those unilateral payments (one way payments) corresponding to which there is no value addition in the economy, e.g. gifts, donations, etc.
(iv) Private income It is the total income from all sources (factor income as well as current transfers) that accrues to the private sector during the period of one year. Private Income = Factor Income from Net Domestic Product Accruing to Private Sector + Net Factor Income from Abroad -(-Interest on National Debt + Net Current Transfers from Rest of the World + Current Transfer from Government.
(v) Personal income It is the income actually received by the individual households from all sources in the form of current transfer payment and factor incomes. Personal Income = Private Income – Corporation Tax – Retained Earnings or Corporate Savings.
(vi) Personal disposable income It is the amount, which is actually available to the households and the non-corporate businesses after the deduction of all tax obligations to the government.
Personal Disposable Income = Personal Income – Direct Personal Taxes
– Miscellaneous Receipts of the Government
(vii) National Disposable Income (NDI) It is defined as the maximum, the country can afford to spend on consumption goods or services during an accounting year without having to finance its expenditure by disposing of assets or by increasing its liabilities.
National disposable income can be ‘gross’ or ‘net’.
Net National Disposable Income = NNPFC + Net Indirect Taxes
+ Net Current Transfers from Rest of the World
Gross National Disposable Income = Net National Disposable Income + Depreciation
(viii) Private sector It refers to all those businesses and enterprises which are owned and controlled by the private individuals.
(ix) Public sector It refers to all those departmental and non-departmental businesses and enterprises which are owned or controlled by government, e.g.
(а) Departmental Post offices, Railways, Tourism Corporation of India, etc.
(b) Non-departmental Indian Aviation, Indian Oil, etc.
Previous Years Examination Questions
1 Mark Questions
1. Give one example of ‘externality’ which reduces welfare of the people. (Delhi 2013)
Ans. When the activities of one result in harm to others with no payment made for the harm done, such activities are called negative externalities, e.g. factories produce goods but at the same time creates water and air pollution. Production of goods increases welfare but at the same time pollution reduces the welfare
2. What is Nominal Gross Domestic Product? (Delhi 2011)
Ans. Nominal Gross Domestic Product refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the current year prices. It is also called GDP at current price.
3. What is meant by Real Gross Domestic Product? (Delhi 2011 c)
Ans. Real Gross Domestic Product refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.
4. Define domestic product. (All India 2011,2010)
Ans. The value of all factor incomes generated during an accounting year within the domestic territory of a country is termed as domestic product or domestic income of a country.
5. What is transfer payment? (All India 2011)
Ans. Transfer payments are all those unilateral payments corresponding to which there is no value addition in the economy, e.g. gifts, donations, etc.
3 Marks Questions
6. Define externalities. Give an example of negative externality. What is its impact on welfare? (Delhi 2014)
Ans. Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid.
Examples of negative externalities are:
(i) River pollution created by an oil refinery has disastrous effects on aquatic life.
(ii) It reduces the overall welfare of the society and creates negative externality.
7. What are externalities? Give an example of a positive externality and its impact on welfare of the people. (All India 2014)
Ans. Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid. These externalities can be positive as well as negative. A positive externality exists when an individual or firm making a decision does not receive the full benefit of the decision, e.g. Immunisation prevents an individual from getting a disease, but has the positive effect of the individual not being able to spread the disease to other.
It enhances the overall walfare of the society and creates positive externalities.
8. Explain how ‘non-monetary exchanges’ are a limitation in taking domestic product as an index of welfare? (Foreign 2014; All India 2011)
Ans. The non-monetary exchanges which take place in the informal sectors are not included in the calculation of GDP since money is not being used. For example, Service of a housewife, kitchen gardening, etc. This results in an under estimation of GDP. Hence, GDP calculated in the standard manner may not give us a clear indication of the productive activity and actual welfare of the country.
9. Calculate Gross National Disposable Income from the following data (All India 2013)
Ans. Gross National Disposable Income (GNDI) = Net Domestic Product at Factor Cost (NDPFC)
+ Consumption of Fixed Capital
+ Net Indirect Taxes (Indirect Taxes – Subsidies)
– Net Factor Income to Abroad
+ Net Current Transfers from Rest of the World
GNDI = 3,000 + 200 + (300 – 100) – 150 + 250 = 3650-150
GNDI = Rs. 3500 lakh
10.Calculate Net National Disposable Income from the following data (Delhi 2013)
11. Explain how ‘distribution of Gross Domestic Product’ is a limitation in taking Gross Domestic Product as an index of welfare. (Delhi 2011)
Ans. If the Gross Domestic Product of a country is rising sharply, it may not necessarily indicate the welfare. This is because the rise in GDP may be concentrated in the hands of few individuals or firms leading to increase inequality of income and wealth, i.e. the gap between the income of rich and poor widens which does not indicate increase in the welfare.
12. How can externalities be a limitation of using Gross Domestic Product as an index of welfare? (Delhi 2011 c)
Ans. Increase in Gross Domestic Product is due to increased economic activities like industrialisation and urbanisation. With increase industrialisation certain problems for society also increase like pollution of air, water and soil and deforestation. Urbanisation also results in housing problems, increase in road accidents, etc. On the whole welfare decreases and this decrease in welfare is ignored while calculation of GDP. So, we can say that externalities can be a limitation of using GDP as an index of welfare. .
13.Give the meaning of factor income to abroad and factor income from abroad. Also give an example of each. (All India 2009)
Ans. Factor income to abroad It is the income earned by a non-resident factor of production working in domestic market, e.g. the earnings of a person from Bangladesh who is-working in India is factor income to abroad.
Factor income from abroad It is the income earned by residents of a country from rest of the world, e.g. an Indian citizen working in US, earns his salary and this is treated as factor income from abroad.
14.Distinguish between domestic product and national product. When can domestic product be more than the national product? (All India 2009)
Ans. The sum total of all factor incomes generated or produced during an accounting year within the domestic territory of a country is termed as domestic income or domestic product of a country. On the other hand, the sum total of all factor incomes earned by the normal residents of a country, irrespective of the fact that in which part of the world this income is generated, during an accounting year is called National Income or national product of a country.
National Product = Domestic Product + Net Factor Income from Abroad.
If Net Factor Income from Abroad (i.e. income paid to abroad is more than income received) is negative, the domestic product is more than the national product
15. Calculate personal income (All India 2009)
Ans. Personal Income = Personal Disposable Income + Personal Taxes + Miscellaneous Receipts of Government Administrative Departments (2)
= 200 + 30 + 50
= Rs. 280 crore
16. Calculate personal income (All India 2009)
Ans. Personal Income = Personal Disposable Income + Personal Tax + Miscellaneous Receipts of Government Administrative Departments = 200 + 40 + 50
= Rs. 290 crore
17.Calculate private income (Delhi 2009 c)
Ans. Private Income = Personal Disposable Income + Personal Taxes + Corporate Profit Tax + Retained Earnings of Private Corporations (2)
= 150 + 50 + 25+5
= Rs. 230 crore
18. Calculate private income (Delhi 2009 c)
Ans. Private Income = Personal Disposable Income + Personal Taxes + Corporate Profit Tax + Retained Earnings of Private Corporations
= 150 + 60 + 25 + 5
= Rs. 240 crore
4 Marks Questions
19. Distinguish between Real Gross Domestic Product and Nominal Gross Domestic Product. Which of these is a better index of welfare of the people and why?
(All India 2013)
or
Distinguish between Real and Nominal Gross Domestic Product. (All India 2010)
Ans. (i) Nominal GDP is the market value of all final goods and services produced in a geographical region usually a country, on the other hand, Real GDP is a macroeconomic measure of the value of output, economically adjusted for price changes. The adjustment transforms the Nominal GDP into an index for quantity of total output.
(ii) Nominal values of GDP from different time periods can differ due to changes in quantities of goods and services and/or changes in general price levels. Values for Real GDP are adjusted for difference in price levels while figures for Nominal GDP are not adjusted.
Real GDP is a better index of welfare of the people, when Real GDP rises, flow of goods and services tends to rise, other things remaining constant. This means greater availability of goods per person, implying higher level of welfare.
20. Calculate Gross National Disposable Income and personal income from the following data (All India 2010)
21. Calculate Net National Disposable Income and personal income from the following data (Delhi 2010 c)
22. Calculate ‘Gross National Disposable Income’ and ‘personal disposable income’ from the following data (Delhi 2010 c)
23. Explain why subsidies are added to and indirect taxes deducted from domestic product at market price to arrive at domestic product at factor cost? (Delhi 2010 c)
Ans. Subsidies by government are grants that decrease the price of a commodity, whereas indirect taxes are paid by a firm and households that increase the final price of a commodity. Hence, to derive Gross Domestic Product at Factor Cost from Gross Domestic Product at Market Price, we deduct indirect taxes and add subsidies. Also subsidies are the income received while indirect taxes are paid.
24.Calculate Net National Disposable Income and personal disposable income from the following data (All India 2010 c)
6 Marks Questions
25. Calculate
(i) Net National Product at Factor Cost and
(ii) Gross National Disposable Income from the following data
(Delhi 2010)
Ans. Income Accruing to Private Sector
= Personal Disposable Income + Personal Tax + Retained Earnings of Private Corporate Sector + Corporation Tax – National Debt Interest – Current Transfer Payments by Government – Net Current Transfers from Rest of the World + Net Factor Income to Abroad
= 1000 + 90 +10 + 30 – 20-40-(-10)+(-10)
= Rs. 1070 crore
NDPFC = Income Accruing to Private Sector+ Saving of Non-departmental Enterprises + Income from Property and Entrepreneurship Accruing to the Government Administrative Departments .
= 1070 + 50 + 70
= Rs. 1190 crore
26. Calculate
(i) Net National Product at Factor Cost and
(ii) Gross National Disposable Income from the following data (Delhi 2010)
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