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NATIONAL INCOME

1. What is macro- economic?

● Branch of economics which studies economics activities at the level of economy.

● Aggregate saving, aggregate demand, theory of employment.

2. Difference between Micro and Macro Economics.

Basis Micro Economics Macro Economics
Purpose /objective Study of individual Study of economy as a
economics units of an whole and its aggregates.
economy. The central problem of
The central problem of macroeconomics is
micro economics is price determination of level of
determination and income and employment.
allocation of resources.
Tools Demand and supply of the Aggregate demand and
economy aggregate supply of the
whole economy.
Examples Individual demand, per Aggregate demand, national
capita income etc. income etc.

3. What is GDP?
Ans: The total market value of all final goods and services produced by all productive
enterprises in the domestic territory of a country in a year is the GDP of that country.

4. Write a note on the types of goods.

Intermediate goods : These are the goods which are used either for resale or for
further production in the same year. They include:
a. Goods purchased for resale (like milk purchased by a Dairy shop)
b. Goods used for further production (like milk used for making sweets)
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Intermediate goods are used up in the same year. If they remain for more than one year
then they are treated as final goods.
Intermediate goodss are generally non- durable in nature and they lose their identity in the
production process for the creation of a new commodity.

Final goods: Final goods refers to those goods which are used either for consumption or
for investment purpose. These arethe goods which have crossed the production boundary.
a. Goods purchased by consumer households as they are meant for final consumption
( like milk purchased by the household)
b. Goods purchased by firms for capital formation or investment(like machinery
purchased by firms).
FINAL GOODS ARE NEITHER RESOLD NOR USED FOR ANY FURTHER
TRANSFORMAION IN THE PROCESS OF PRODUCTION.

Difference between Final goods and Intermediate goods

Final goods Intermediate goods

1. These goods are used either for 1. These goods are used either for resale
consumption or for investment. or for further production in the same
year.
2. They are included in both National 2. They are neither included in National
income and Domestic income. income nor in domestic income.
3. They are ready for use by their final 3. Not ready for use (Value addition
used (No value addition required) required)
4. They have crossed the production 4. They are still withing the production
boundary. boundary.
5. They don’t transform themselves 5. They transform themselves
6. They are not bought for resale. 6.They are bought for resale.
7. Example: milk purchased by 8. Examples: milk bought by a sweet
households shop.

Q: What happens if final goods and intermediate goods are not identified correctly?
Ans: distinction between final goods and intermediate goods is needed to estimate the correct
value of Gross Domestic Product(GDP). In the absence of this distinction, GDP mey be over-
estimated and may lead to problem of double counting.
Production Boundary:
It is the line around the production sector. The goods within the production boundary
are intermediate goods.
-----------------------------------------------------------------------------------------------------------------------
Consumer goods and consumption goods:
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These are final goods (Durable goods, semi durable goods, non- durable goods or
perishable goods, services) directly used by the ultimate consumer for satisfaction of
wants. For example: sugar is used by consumer to make cookies in consumer goods.
Consumption goods:.
1. Non- durable goods: goods used up in a single use of consumption, eg: ice-cream.
2. Semi durable goods: goods used for a little longer period of time, eg: tooth paste
3. Durable goods: Can be used for several years eg: television
4. Services: An intangible thing which directly satisfies human wants. Eg: services of
a doctor.
Capital goods/ Investment goods/ Durable use producer goods: These are durable final goods
used by the producers in the production process. they do not change during the production
process. for example fixed assets like machineries, plants and equipment.
Consumer goods Capital goods
These goods satisfy the wants of the Those final goods which help in the
consumer directly. production of other goods and services.
These are purchased by households. These are purchased by firms.
Can be both durable or non- durable and They can only be durable.
also semi- durable.
Eg: refrigerator used by a household Eg: refrigerator that is used by a producer
like confectionery shop.

Change in inventory (Net inventory) is the excess of closing inventory over Opening inventory. It
refers to Net increase / addition to stock of unsold finished goods, or raw materials during a fiscal
year.
Unplanned inventory refers to the unanticipated change in stock due to unexpected fall in sale.
Q: ‘All producer goods are not capital goods.” Explain.
Or
All machines are capital goods. Defend or refute
Ans:
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Questions and answers:

State true or false:
1. Purchase of refrigerator is a capital good: false as it is a durable consumption good
2. Services of lawyers is a consumption good: true as it is directly satisfied human wants.

Whether the following items are intermediate goods or final goods?

1. Wheat flour:
a. Final goods for a household
b. Intermediate goods for bakery

2. Machine:
a. Final goods if used for production.
b. Intermediate goods if it is bought by dealer for resale
3. Books for a library:
Final goods-
4. Cement and brick
Intermediate goods used for construction in construction of building etc.
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18. Wheat used by households: - It is a final product as it is used by the household for final
consumption.
19. refrigerator installed by a firm: It is a final product as it is purchased for investment.
20. Sugar used by a sweet shop: - It is an intermediate product as sugar is used for further
production during the same year.

CONCEPT OF STOCK AND FLOW

Difference between stock and flow
Basis Stock Flow
Meaning Stock variables are Flow variables are measured over a period
measured at a particular of time
point in time
Time Stock has no time Flow has time dimension like per hour, per
dimension day etc
Concept Stock is a static concept Flow is a dynamic concept
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Example Wealth Profit, income, loss account etc

SOME EXAMPLES OF STOCK AND FLOW CONCEPT

1. National income of a country- Flow
2. Profit – flow
3. Losses- Flow
4. Savings – Flow
5. Production- Flow
6. Production of cars in the year 2020- Flow
7. Bank deposit as on 31.03.2029 – Stock
8. Population of India as on 1.1.2020 – Stock
9. Capital – Stock
10. Capital formation – Flow
11. Money supply – Stock
12. Gross Domestic Product – Flow
13. Wealth – Stock
14. Balance in a bank account – Stock
15. Expenditure – Flow
16. Quantity of wheat produced in India in the year 2020 – Flow
17. Raw materials in the godown on 8/7/22- Stock
18. Number of person employed in a factory in the month of August – Flow
19. Number of literate people in Karnataka as on 31/3/22 – Stock
20. Income of a teacher – Flow
21. Machinery – Stock
22. Savings of a household – Flow
23. Income of a household – Flow
24. Exports – Flow
25. Depreciation of a machinery – Flow

Concept of investment
Investment is defined as the addition to capital stock which raises the productive capacity of the
economy.
The two types of investment are:
a. Gross capital formation
b. Net capital formation

Gross capital formation/ investment: The total capital formation in a given period in an
economy is termed as gross investment and before making allowance for depreciation. Gross
capital formation is made up of two components:
1. Gross fixed capital formation
2. Stock investment/Inventory Investment (closing stock – opening
Gross fixed capital formation includes:
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● Residential construction

● Business investment

● Public Investment

Net capital formation/Investment: Gross capital formation-depreciation (consumption of

fixed capital). It is the addition to stock of capital before making allowance for depreciation.
However, if the value of depreciation is zero,Then gross investment will be equal to net
investment. But that can never happen because depreciation can never be zero.

Depreciation or consumption of fixed capital: It is the loss in the value/ continuous fall
in the value of fixed assets during use due to
a. Normal wear and tear
b. Expected obsolescence
c. Change in technology
d. Passage of time
e. Part of capital stock used up every year.
ANNUAL DEPRECIATION is calculated as:
Cost of fixed capital asset – scrap value after its useful life
Estimated useful life of the fixed capital asset (in year)
Example:

1. Capital value of the asset 1,000

2. Estimated life of the asset 20 years
3. Scrap value Nil

= 1,000 – 0/20
= 50
It does not include capital loss due to unexpected obsolescence like natural calamities, theft or
accident.

Net capital formation/Investment: Gross capital formation-depreciation (consumption of fixed

capital). It is the addition to stock of capital before making allowance for depreciation. Thus, it is
greater than net investment because gross investment also includes depreciation. However, if the
value of depreciation is zero,Then gross investment will be equal to net investment. But that can
never happen because depreciation can never be zero.
Consumption of fixed capital Capital loss
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It is loss in the value of fixed assets due to It is loss in the value of fixed assets due to
normal wear and tear and expected natural calamities and unexpected
obsolescence. obsolescence.
It is an expected loss in the value of asset It is an unexpected loss in the value of
asset
Provision for depreciation is by Provision for capital loss is by getting
maintaining depreciation reserve fund. insurance done.

1. INDIRECT TAX AND SUBSIDIES:

Indirect tax is a tax imposed by the government on productionand sale of Goods and Service.
Example: Goods and Service Tax (GST), Exice duty, etc. Indirect tax increases market price
of goods and services.
Subsidies: It is a form of financial or economic assistance given by the government to the
firms and households with a motive of general welfare. Examples: Cash grants, Interest free
loan to the firms, subsidy on the price of cooking gasto the households, fertilizer subsidy
received from the government, etc.
Subsidies reduces the market price of goods and services.
Net Indirect Tax = Indirect Tax - Subsidies

2. FACTOR COST AND MARKET PRICE

Factor Income Vs Transfer Income

Factor income: Income received by the factors of production in return for rendering
productive factor services is called factor income or factor payment. Eg: rent , wage ,
interest, profit.
Market price: It is the price at which a commodity is sold in the market. It is what the
buyer pays.
Transfer Income: The earning for which no contribution is made to the flow of goods
and services eg: gift, donation, scholarship etc. in other words it is income received
without anything provided in return.
Difference between factor income and transfer income
Basis Factor income Transfer income
Meaning It is the income received in It is the income received without
return for rendering factor any corresponding services.
services by the factors of
production.
National These are included in These are not included in National
income national income income.
Received by It is received by factors of It is received by households and
production. governments.
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Examples Example: rent, wage, Example: pension, gift, grant,

interest, profit. financial help to earthquake
victims etc

Classify the following into factor income and transfer income. Give reasons for your
answer:
1. Employer’s contribution to social security schemes.
2. Scholarship given to students by the government.
3. Old age pension given by the government
4. Bonus given to employees by employer.
Examples of transfer payments:

SECTORS OF AN ECONOMY
1. Household
2. Firm
3. Government
4. Rest of the world
BASIC ACTIVITIES OF THE ECONOMY/ PHASES IN ECONOMY:
1. Generation phase or production phase: Here production of goods and services take
place with the help of factor services . value addition take place in this phase.

2. Distribution phase: This phase involves flow of factor income (rent, wage, profit,
interest) from firms to the households.

3. Disposition phase or consumption phase: Factor income is spent on the goods and
services produced by the firm.

The income generated by the production unit reaches back to the production unit and the
circular flow is completed.
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CIRCULARFLOW OF INCOME
Circular flow of income refers to cycle of generation of income in the production process, its
distribution among the factors and its circulation from households to firms in the form of
consumption expenditure.
It implies the flow of income across different sectors of the economy.
Circular flow with two sector economy: There exists only two sectors, Households and Firms.
The households represents the owner of all the factors of production and the consumers of
goods and services. Firms on the other hand produces and sells all the goods and services to
the households.
Assumptions:
1. There are only two sectors in the economy. Households and firms.
2. There are no savings in the economy (neither the household save from their income nor
the firm saves from their profit)
3. There is no government.
4. It is a closed economy.

THE THREE PHASES OF CIRCULAR FLOW OF INCOME:

1. Generation Phase or Production Phase: Here production of goods and services take place
with the help of factor services. Value addition takes place in this phase.
2. Distribution Phase: This phase involves flow of factor income ( rent, wage, interest and
profit) from firms to the households.
3. Disposition Phase or Consumption Phase: Factor income is spent on the goods and
services produced by the firm.
The income generated by the production unit reaches back to the production unit and the
circular flow is completed.
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Conclusion: The total production of goods and services by firms equals the total consumption
of goods and services by households.
Factor income of household = consumption expenditure
Real flow = money flow.

Importance :
1. It helps us to understand the mutual interdependence among different sectors.
2. It represents the equilibrium position of the economy.
3. Helps in estimation of National Income.

LEAKAGES AND INJECTIONS:

Leakages: It refer to the withdrawal of money from the circular flow which happens when
households or firms save a part of their income. Leakages reduces the flow of income.
Injections : when households or firms borrow money from external sources like financial
institution
REAL GDP Vs NOMINAL GDP
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Nominal GDP: It is the monetary value of all goods and services produced in an economy during
a financial year estimated using current market price.
Real GDP: It is the monetary value of all goods and services produced in an economy during a
financial year estimated using base year price.
Price Index/ GDP deflator A price index is a number showing the change in the overall level of
price. It shows a change in general price level of the economy.
Price index/ GDP deflator = Nominal GDP/ Real GDP ×100
Or
Real GDP = Nominal GDP/Price Index×100
Which one is better: Nominal GDP or Real GDP?
Real GDP is better as compared to Nominal GDP because of the following reasons:
1. Real GDP helps in determining the effect of increased production of goods and services as
it is affected by the change in physical output only. On the other hand nominal GDP can
increase even without any increase in physical output as it is affected by change in price
also.
2. Real GDP facilitates international comparison of economic performance across the
countries.
Therefore, Real GDP is better than Nominal GDP.

CONSUMPTION OF FIXED CAPITAL:

Fall in the value of fixed asset due to normal wear and tear, and expected obsolescence is
called consumption of fixed capital. The reasons leading to this are:
a. Normal wear and tear.
b. Expected obsolescence / loss of value due to change in technology.

RESIDENT Vs CITIZENSHIP
Normal residents:
Normal residents of a country refers to an individual or an institution who ordinarily
resides in the country and whose center of economic interest also lies in the country. His
economic activity of earning, spending and accumulation is from that location.
● The resident lives or is located within the economic territory

● The residents carry out the basic economic activities of earnings, spending, and
accumulation from that location.

Citizenship:
Citizenship is a local concept based on the place of birth of a person or some legal
provision allowing a person to become a citizen.

Resident Citizen
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Economic interest lies in the country. Resides in a country according to legal

provisions of that country.
It is am economic concept. It is a legal concept
Dual residentship is not possible Dual citizenship is possible.

People who are not included under the category of Normal residents:
⮚ Foreign tourists: this includes foreigners who visit a country for the purpose of
recreation, medical treatment, study, sports etc
⮚ Foreign staff of embassies, officials, diplomats.

⮚ International organisations like UNO, WHO etc are not considered as normal
residents of the country they operate.
⮚ Crew members of ship / aircrafts of foreign country.

⮚ Armed forces of one country visiting another country.

⮚ Border workers: who lives near the international area and cross the border aily to
work in other country. They are considered as normal residents of the country
where they live and not where they work.

Q: Explain how a person can be a citizen of one country and at the same time a resident of
another country.
● A foreigner living in India for more than one year is a normal resident of India. However, he
is not a citizen or national of India as he doesn’t hold a citizenship of India.
● Similarly, an NRI is a citizen of India, but a resident of the country in which he lives and his
economic interest lies.

Identify the following as Normal residents of India:

a. An Indian citizen living in Singapore for business.
Resident of Singapore as his economic interest lies there.
b. An Indian citizen working in U.S embassy located in India.
Resident of India.
c. A student from Japan for education in India.
Resident of Japan
d. Indian student living in Australia for two years for studies.
Resident of India
e. British employee working in Indian embassy located in London
Resident of England
f. Indians going to Srilanka for watching a match
Resident of India
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g. Foreign tourists visiting India for 6 months.

Not a resident of India
h. Indian employee working in WHO located in India.
Resident of India
i. Indian officials working in the Indian embassy in U.S.A
Resident of India
j. Indians working in UNO in America for less than 1 year.
Resident of India
ECONOMIC TERRITORY

Geographical territory administered by a government within which persons, goods and capital
circulate freely is called economic territory.

In addition to political frontier, domestic territory also includes:

1. Ship and aircraft owned and operated by normal residents between two or more countries.
2. Defense base/ military establishments of a country located abroad.
3. Oil and natural gas rigs operated by the normal residents of a country in the international waters.
4. Fishing vessels, floating platforms
5. Territorial waters and air space
6. Embassies, consulates of a country located abroad.
Domestic territory does not include:
1. Embassies, consulates, and military establishments of a foreign country.
2. International organizations like UNO, WHO etc located within the geographical boundaries of a
country.

Which of the following are covered under domestic territory of India? (Domestic income)
a. Company in India owned by a Japanese _____ Yes
b. An Indian rented his house to an American in America ____No
c. Chinese embassy in India__ No
d. Indian embassy in France ___ Yes
e. Branch of foreign bank in India____ Yes
f. Office of TCS in New York ________ No
g. Salaries to Indians working in American embassy in India ________ No
h. Profit earned by non-resident company in India ____ Yes
i. Rent paid by the embassy of Pakistan in India to a resident Indian___ No
j. Salaries received by US residents working in Us embassy in India___ No
Domestic Income: Money value of all the final goods and services produced within the domestic
territory by residents/non-residents during an accounting year.
National Income: Refers to the money value of all the final goods and services produced by the
normal residents residing within / outside a country, during an accounting year.
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Net Factor Income from Abroad (NFIA): It is the excess of factor income earned from abroad
over factor income paid to abroad.
NFIA= FIFA – FITA
Q: When can NFIA be negative?
NFIA is negative when factor income from abroad is less than factor income factor income to
abroad.

DOMESTIC PRODUCT AND NATIONAL PRODUCT RELATIONSHIP

National product = Domestic product + NFIA
----------------------------------------------------------------------------------------------------------------------------------

Measures of Economic growth:

Limitations of GDP as a measure of economic welfare:
GDP is an important but not a perfect measure of country’s economic well being.
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CONCEPTS:
1. Net factor income from abroad:
It is the difference between the factor income earned from abroad by the normal residents
of a country and income paid for the factor services rendered by non-residents within the
domestic territory of the country. The concept of net factor income from abroad is used to
differentiate between national income and domestic income.

Components of Net Factor Income from Abroad

i. Net compensation of employees
ii. Net income from property and entrepreneurship
iii. Net retained earnings of resident companies abroad

NATIONAL INCOME = DOMESTIC INCOME+NFIA

Relation between national product and domestic product:

Domestic product concept is based on the production units located within domestic economic
territory, operated both by residents and non-residents.

National product concept based on resident and includes their contribution to

production both within and outside the economic territory.
National product= domestic product + residents contribution to production outside the
economic territory(factor income from abroad) – Non- resident contribution to production
inside the economic territory (Factor income to abroad)

Q: Can gross domestic product be greater than gross national product?

Domestic product can be greater than national product if factor income paid to the rest of the
world is greater than the factor income received from the rest of the world is i.e when net-
factor income received from abroad is negative.

DIFFERENCE BETWEEN NATIONAL PRODUCT AND DOMESTIC PRODUCT

NATIONAL PRODUCT DOMESTIC PRODUCT
It is the value of all final goods and services It is the value of all final goods and services
produced by normal residents of a country produced within domestic territory of a
within or outside domestic territory in a country by all producers during a financial
financial year. year.
It includes factor income from abroad It does not includes factor income from
abroad
It does not include factor income to abroad It includes factor income to abroad
National product= domestic product+Factor Domestic product = national product- net
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income from abroad. factor income from abroad

Will the following be included in the domestic factor income of India? Give reasons for
your answer.
a. Salaries of non- residents working in Indian Embassies in Russia.
Yes, it will be included in domestic income because Indian embassy is a part of domestic
territory of India.
b. Salaries to Indian residents working in Indian embassy in Russia.
Yes, it will be included in domestic income because Indian embassy is a part of domestic
territory of India.
c. Salaries to Russian residents working in Indian embassy in Russia.
Yes, it will be included in domestic income because Indian embassy is a part of domestic
territory of India.
d. Salaries to Indian residents working in Russian embassy in India.
No, it will not be included in domestic income because Russian embassy is not a part of
domestic territory of India.
e. Salaries received by Indian working in American embassy in India.
No, it will not be included in domestic income because American embassy is not a part of
domestic territory of India.
f. Salaries paid to non-resident Indians working in Indian embassy in America.
Yes, it will be included in domestic income because Indian embassy is a part of domestic
territory of India.
g. Salaries paid to Koreans working in Indian embassy in Korea.
Yes, it will be included in domestic income because Indian embassy is a part of domestic
territory of India.
h. Salaries paid to Indian working in Japanese embassy in India.
No, it will not be included in domestic income because Japanese embassy is not a part of
domestic territory of India.
i. Profit earned by an Indian company from its branches in Singapore.
No, it will not be included in domestic income because Singapore is not a part of domestic
territory of India.
j. Rent received by an Indian from his building in London.
No, it will not be included in domestic income because rent is earned from outside the
domestic territory of India.
k. Rent paid by the embassy of Japan in India to a resident Indian.
No, it will not be included in domestic income because Japanese embassy is not a part of
domestic territory of India.
2. Factor cost and market price:
Factor cost refers to all factor payments made by the producing unit to the factors of
production for rendering productive services in the production of goods and services.
Market price is the price at which a commodity is sold and purchased in the market.
Subsidies: These are the cash grants given by the government to the enterprises to encourage
production of certain commodities or to promote export or to sell goods at prices lower than
the free market prices.
Indirect tax: It is the amount of burden whose impact falls on one person or a group and the
incidence falls on the other person or a group.
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Net Indirect Tax = ( Indirect tax – Subsidies)

MARKET PRICE = FACTOR COST – NIT
PRODUCT AT FACTOR COST PRODUCT AT MARKET PRICE
It is the income earned by all the factors of It is the market value of all final goods and
production in a financial year. services produced in a financial year in an
economy.
It doesnot include indirect tax It include indirect tax
It does not include subsidies It include subsidies
Product at factor cost= product at market Product at market price= Product at factor
price - NIT coat+NIT

ESTIMATION OF NATIONAL INCOME

1. EXPENDITURE METHOD:
Meaning: Final expenditure of all consumer goods and services, business firms, general
government and foreigners in an economy during a year.
Includes:
i. Private Final Consumption Expenditure: household sector money value of
goods and services purchased by households and non- profit organizations for
current use during a given period Durable goods, Consumer goods, Non- durable
goods.
ii. Government Final Consumption Expenditure:
iii. Gross fixed capital formation:
iv. Net export:
PRECAUTION IN EXPENDITURE METHOD:
i. Expenditure on intermediate goods and services are not included. Intermediate
expenditure is a part of final expenditure hence its inclusion leads to double counting.
ii. Expenditure on second hand goods are not included. Expenditure on these goods were
accounted when they were purchased new.
iii. Expenditures on shares and bonds: Do not include expenditure on financial assets.
Purchasing of financial assets only leads to transfer of money from one person to
another.
iv. Production for self consumption: Include imputed expenditure on own account
produced output used for consumption and investment. The imputed value of owner
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occupied house, self consumed output by farmers etc must be taken into account while
estimating final expenditure.
v. Government expenditure on transfer payment is excluded- Does not lead to any
production of goods and services.
Q: Why are exports included in the estimation of domestic product by the expenditure
method?
Expenditure method estimates expenditure on domestic products, i.e expenditure on final
goods and services produced within the economic territory of the country. It includes
expenditure by residents and non- residents both. Exports, though purchased by non-residents,
are produced within the economic territory, and therefore, a part of domestic product.
Q: Is net export a part of NFIA? Explain.
No, it is not a part of NFIA. Net export , the difference between export and import (X-M),
is a part of expenditure on domestic product. While NFIA is the difference between
income earned from abroad by the normal residents of a country and income earned by
non- residents in the domestic territory of that country. It is not included in the domestic
product rather it is a component of NI. Therefore both are different concept.

NUMERICAL ABILITY ZONE

1. Calculate Net National Product at Factor Cost (NNP at FC)
i. Consumption of fixed capital 1800
ii. Net Indirect Taxes 3700
iii. Imports 2000
iv. Exports 1000
v. Change in stock 2500
vi. Gross Fixed Capital Formation 5000
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vii. Govt. Final Consumption Exp 3000

viii. Private Final Consumption Exp 2500
ix. Net factor income from abroad 600
(Ans: 7100)

2. Calculate: Net domestic product at factor cost

i. Private final consumption expenditure 600
ii. Govt. final consumption expenditure 80
iii. Gross domestic fixed capital formation 30
iv. Export of goods and services 20
v. Imports of goods and services 25
vi. Net addition to stock of goods 20
vii. Net indirect taxes 35
viii. Consumption of fixed capital 10
(Ans= 680)
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3. Calculate Gross domestic product at market price Gross national product at Factor
cost.
i. Personal final consumption expenditure 6,500
ii. Govt. final consumption expenditure 4000
iii. Gross domestic fixed capital formation 3000
iv. Decrease in stock 300
v. Exports of goods and services 900
vi. Subsidies 500
vii. Depreciation 2000
viii. Net factor income from abroad (-) 400
ix. Net indirect taxes 1000
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( Ans= 14100, 12700)

4. From the information given below calculate National Income

i. Private final consumption expenditure 600
ii. Consumption of employees by general government 400
iii. Net purchase of goods and services by general government 500
iv. Exports 100
v. Imports 150
vi. Net factor income from abroad (-)20
vii. Gross fixed capital formation 200
viii. Consumption of fixed capital 60
ix. Change in stock 60
x. Net indirect taxes 20
xi. Subsidies 10
( Ans: 1610)
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5. Calculate national income using expenditure method:

i. Subsidies 5
ii. Private final consumption expenditure 1000
iii. Net factor income from abroad (-) 10
iv. Indirect taxes 25
v. Government final consumption expenditure 200
vi. Net domestic capital formation 300
vii. Net exports (-) 5
viii. Addition stocks (-) 5
(Ans: 1465)
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6. Calculate GDP at MP and NNP at FC by Expenditure method

i. Government final consumption expenditure 4000
ii. Indirect taxes 380
iii. Gross fixed capital formation 600
iv. Change in stock 10
v. Exports of goods and services 30
vi. Imports of goods and services 40
vii. Private final consumption expenditure 19000
viii. Net factor income to abroad (-) 800
ix. Subsidies 80
x. Consumption of fixed capital 1200
(Ans: 23600, 22900)

7. Calculate NNP at MP
i. Government final consumption expenditure 200
ii. Indirect taxes 20
iii. Gross business fixed investment 60
iv. Gross residential construction investment 60
v. Change in stock 20
vi. Exports of goods and services 40
vii. Imports of goods and services 20
viii. Private final consumption expenditure 700
ix. Net factor income to abroad 10
x. Subsidies 10
xi. Consumption of fixed capital 20
(Ans: 1030)
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8. Calculate depreciation:

i. Change in stock 250

ii. Gross fixed capital formation 5000
iii. Net domestic capital formation 4000
( Ans: 1250)

9. Calculate GNP at MP
i. Inventory investment 10
ii. Exports of goods and services 20
iii. Net factor income from abroad -5
iv. Private final consumption expenditure 350
v. Gross residential construction investment 30
vi. Government final consumption expenditure 100
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vii. Gross public investment 20

viii. Gross business fixed investment 30
ix. Imports of goods and services 10
(Ans: 545)
27
 28

GDPmp = Private final consumption expenditure + Government final consumption expenditure +

gross domestic capital formation - Net Imports
GDPmp = 1450 + 200 + (200+50+ (-50) - (-50)
GDPmp = 1900
NDPfc = GDPmp - Dep - NIT
NDPfc = 1900 - 50 - (100-0)
NDPfc = 1750

INCOME METHOD/ FACTOR PAYMENT METHOD/DISTRIBUTED SHARE METHOD

National income can be measured in terms of Payments made to primary factor of production.
Components on income method:
1. Compensation of Employees:- Any human work done mentally or manually with earning
income is called labour. Thus income got in return for doing work in the production process is
called income from work.
i. Includes Wages and Salaries (Both is cash and kind)
ii. Employers Contribution to Social Security Scheme
2. Income of Self Employed(Mixed Income):- Income of self-employed and household enterprises
is called mixed income because the same is mixture of income from his work (compensation of
employees) and income from his property(rent, royalty, interest and profit).
 29

3. Income from property(Operating surplus):- Income from property s earned in two ways, a) by
control of property, Income from ownership of property is called rent and interest and that from
control of property (entrepreneurship) as profit. Broadly, income from property is called
operating surplus which consists of rent , interest and profit.
Compensation of Employees Operating Surplus Mixes Income of Self
Employed
1. Wages and salaries in Income from property ex- Income from own account
cash ex- wages, bonus, Rent, Royalty and Interest. workers like farmers, barber,
commission etc. and incorporated enterprises
like retail trader, small
shopkeeper.
2. Wages and salaries in Income from entrepreneurship
kind ex- rent free
Ex- Profit
home, rent free car,
free medical and a. Corporate Tax
educational facilities b. Dividend undistributed
etc. profit
c. Retained earnings
(saving of Private
corporate sector)
3. Employers
contribution to social
security scheme ex-
GPF, gratuity, labour
welfare funds,
retirement pension etc.

Compensation of employees incude:

Wages and Salary in Cash
a. Wages and salaries in cash
b. Basic pay
c. Dearness allowances
d. House rent allowances
e. Overtime allowances
f. Bonus and commissions

Compensation in kind
a. Free housing
b. Medical facilities
c. Free food
d. Free education for children
e. Festival gift from an employes
 30

Employer’s contribution to social security scheme:

a. Provident fund
b. Life insurance
c. Causality insurance
d. Pension on retirement

PRECAUTION IN CALCULATION OF NATIONAL INCOME IN INCOME METHOD:

1. Transfer Payment should:- Not Be Included:- These payment (old age pension,
unemployment allowances are unilateral and there is no flow of goods and services.
2. Profit on Sale of Fixed Assets/ Windfall Gain:- Not Be Included- such capital gain
(income from lotteries). No inputs are used and no pain is taken or effortless income.
3. Illegal Income:- Not Be Included- like (smuggling, black marketing, theft, dacoity not
included.
4. Death duties, gift tax, and wealth tax:- Not to be Included- because they are paid out of
past savings of the tax payers.
5. Imputed rent of the owners occupied houses:- be included- on the basis of the existing
market price of rent of owner occupied houses.

NUMERICALS:
1. Calculate Net national product at factor cost
i. Consumption of fixed capital 30
ii. Employers contribution to social security scheme 20
iii. Rent 30
iv. Interest 15
v. Profits 35
vi. Royalty 5
vii. Wages and salary 200
viii. Net indirect taxes 40
ix. Net factor income from abroad (-)5
x. Mixed income of self employed 25
(Ans: 325)
 31

2. Calculate GNP at MP
i. Wages and salary 700
ii. Rent 100
iii. Depreciation 50
iv. Net factor income from abroad -10
v. Mixed income 400
vi. Subsidies 100
vii. Profits 400
viii. Employee contribution to social security scheme 300
ix. Interest 40
(Ans: 1580)

3. Calculate National Income

i. Interest 30
ii. Wages and salaries 400
iii. Net factor income from abroad 5
iv. Contribution to SSS by employers 50
v. Operating surplus 130
vi. Rent 25
vii. Profit 35
 32

viii. Mixed income of self employed 70

(Ans: 655)

4. Calculate NNP at MP
i. Compensation of employees 2000
ii. Rent 200
iii. Depreciation 150
iv. Net factor income from abroad 20
v. Mixed income 1000
vi. Net indirect tax 100
vii. Subsidies 20
 33

viii. Profits 400

ix. Employers contribution to SSS 500
x. Interest 10
xi. Royalty 40
(Ans: 3770)

VALUE ADDED METHOD/ OUTPUT METHOD/

PRODUCT METHOD

Value added refers to the difference between value of output and the value of intermediate
consumption of each producing units in the country. Sum total of value added by all the producing
unit within the domestic territory of the country is equal to domestic product.
 34

Steps taken in estimating N.I by product method: -

Measure the national income by estimating the contribution of each individual enterprise at that stage
of production in the domestic territory of the country in an accounting year.
1. Classify all the production units:- locate the domestic territory into distinct industrial sectors i.e
primary , secondary and teritary sectors.
a. Primary sector:- exploits natural resources and produce goods and services it includes all
agricultural and allied activities.
b. Secondary sector:- converts one good into another by creating more utility from it.
c. Tertiary sector:- provides useful services to primary and secondary sector that smoothen their
working. Such as banking , insurance, communication etc.
2. Estimate value of output:- As sum of sales and change in stock of all the 3 sectors.
3. Estimate value of intermediate consumption:- A sum of value of intermediate consumption of all
the 3 sectors.
4. Estimate GVA at MP :- Value of output – Intermediate consumption.
5. Estimate NVA at MP :- deduct the value of depreciation from GVA at MP
6. Estimate NDP at FC:- deduct the value of Net Indirect Taxes from NDP at MP
7. Estimate NNP at FC:- Add the value of Net Factor Income from abroad with NDP at FC to reach
NNP at FC or National Income
Difference between value of output and value added

VALUE OF OUTPUT VALUE ADDED

Market value of all goods and services Difference between value of output and the
produced by a firm in an accounting year. value of intermediate consumption.
= Sales+ change in stock(closing stock- = Value of output – Intermediate consumption
opening stock)
Bigger concept Part of value of output

1. Gross value of output:- Value of output refers to the market value of the total output produced by a
firm during an accounting year
2. Intermediate consumption:- Refers to the money value of raw materials used in the process of
production. Includes value of non-factor such as raw material etc.
 35

How to avoid the problem of Double Counting??

1. Final Output Method:- According to this method the value of intermediate goods is deducted
from the value of output. In other words value of final goods and services only is included in
national income. The value of the final output can be calculated by deducting the value of
intermediate goods from the value of output.
Value of final output= Value of output – Value of Intermediate goods.
Note:- Non- marketed services are not included in national income
Certain goods and services which are not consumed by the household which are not purchased
from market.
Examples:
1. Growing fruits and vegetables in kitchen garden, making paintings for one’s drawing
room etc
2. Free services provided to family members such as father teaching his own daughter.
3. Domestic services by the housewives.
Precautions:-
1. Sale and purchase of second hand goods should not be included because it doesnot enter in
the current year’s production.
2. Commission and brokerage paid/ received on sale of second hand goods should be
included.
3. Domestic services are not included:- However services by paid employee should be
included
4. Own account production of fixed capital:- firms and the government should be included.
5. The value of intermediate goods:- should not be included in the national income
6. Value of production for self- consumption ( farmers) should be included in national
 36

Numerical Ability Zone

1. An economy has two firms A and B. Find out Value Added by firms A and B
Gross domestic product at mp
i. Exports by firm A 600
ii. Imports by firm A 200
iii. Sales to household by firm A 180
iv. Sales to firm B by firm A 90
v. Sales to firm Aby firm B 50
vi. Sales to household by firm B 200
(Ans:- 620, 160, 780)

2. From the following data about a firm X calculate Gross Value Added at Factor Cost
i. Sales 350
ii. Opening stock 30
iii. Closing stock 20
iv. Purchase of machinery 150
v. Purchase of intermediate products 170
vi. Subsidy 40
vii. Depreciation 35
(Ans: 210)
 37

3. Calculate value added by the firm A and B.

i. Sales by the firm B to general government 100
ii. Sales by firm A 500
iii. Purchase by household from firm B 300
iv. Exports by firm B 50
v. Change in stock of firm A 20
vi. Change in stock of firm B 10
vii. Imports by firm A 70
viii. Sales by firm C to firm A 250
ix. Purchase by firm B from Firm A 200
(Ans: 200, 260)
 38

WORKSHEETS

1. Which of the following is not included in the domestic territory of 1

India?
1) Indian embassy in Australia
2) Branch of State bank of India in India
3) Indian consulates in France
4) Branch of State bank of India in France
2. Suppose in an economy GDP at Market Price in a particular fiscal 1
year was ₹4000, National Income was ₹2500 crore, Net Factor
Income paid by the economy to Rest of the World was ₹400 crore
and value of the Net Indirect Taxes is ₹450 crore. Estimate the value
of consumption of fixed capital for the economy from the given data.
Consumption of fixed capital = GDPMP-NDPMP
NDPMP=NNPFC-NFIA+NIT =2500-(-
400)+450=2500+400+450=3350 Consumption of fixed capital
=4000-3350=₹650 crore
3. New Delhi. The Centre on Thursday eased norms to offer 50% of 1
salary for three months as unemployment allowance to lakhs of
workers who are members of the Employees State Insurance
Corporation and lost their jobs due to the corona virus pandemic. The
move as a major relief for industrial workers, who have lost jobs or
are on the verge of losing jobs to the impact of the pandemic and the
lockdown, which had stalled economic activity. There have been
demands from several sections to provide wage relief to workers hit
hard by the pandemic.
Source: m.timesofindia.com, Aug 21, 2020
Unemployment allowance is a -------------- (factor/transfer) income
4. For a closed economy, which one of the following is correct? 1
a) NDP = NNP
b) NDP > NNP
c) NDP < NNP
d) None Of above
5. Assertion (A): The goods which are used either for resale or for 1
further production in the same year are Intermediate goods.
Reason (R): Intermediate goods are included in National Income
Choose the correct option from the following.
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the
correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not
the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true
 39

6. Assertion (A): Goods that meant for final use and will not pass 1
through any more stages for production or transformation is called a
final good.
Reason (R): It will not under go any further transformation at the
hands of any producer, but many such final goods are transformed
during their consumption.
Choose the correct option from the following.
a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not
the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true
7. NVAFC equals: 1
(a) ∑Factor Payments
(b) ∑ Current Transfer Payments
(c) ∑ Capital Transfer Payments
(d) Net Current Transfer from Rest of the World
8. The difference between indirect tax and subsidy is known as ____
(a) Net Factor Income from Abroad
(b) Capital Consumption Allowances
(c) Depreciation
(d) Net Indirect Tax
9. Reeta’s Mother is a teacher. She also teaches Reeta. How will you 1
treat this act of teaching Reeta while calculating National Income and
Domestic Income?
a. It will be included in the National Income but not in Domestic
Income
b. It will not be included in the National Income but in Domestic
Income
c. It will be included both in the National Income and Domestic
Income
d. It will neither be included in the National Income and nor in
Domestic Income
10. Mohan is a farmer. He produces wheat and sells for Rs 750 to a 1
miller who grinds it into flour and sells it to baker for Rs 1360. The
baker sells bread to the consumers for Rs 1795. Calculate the value of
total value added.
a)750
b)1350
c)1795
d)3900
11. In an economy, the value of Net Factor Income from Abroad is Rs. 1
300 crores and the value of Factor Income to Abroad is Rs. 50 crores,
 40

identify the value of Factor Income from Abroad.

a. Rs. 250 crores
b. Rs. 350 crores
c. Rs. 360 crores
d. Rs. 300 crores
12. Statement 1: Normal residents include both individuals and 1
institutions. Statement 2: International organizations are treated as
normal residents. Choose the correct option from the following.
a. Both the statements are true.
b. Both the statements are false 1 Page | 4 c. Statement-1 is true but
Statement-2 is false d. Statement-1 is false but Statement-2 is true
13. If factor cost is > market price, then it means that: 1
a. Indirect Taxes > Subsidies
b. Indirect Taxes =Subsidies
c. Indirect Taxes<Subsidies
d. Indirect Taxes ≥ Subsidies
14. In the production of sugar, sugarcane is an 1
(a) Final Good
(b)capital good
(c) Intermediate Good
(d) none of these
15. Flow of goods and services across different sectors of the economy is 1
called:
a. Real Flow
b. Circular Flow
c. Monetary Flow
d. Inventory Flow
16. Goods purchased for satisfaction of wants are 1
a. Capital Goods
b. Final Goods
c. Consumption goods
d. Intermediate goods
17. Read the following statements- Assertion (A) and Reason (R) 1
Assertion (A) Car purchased by taxi driver to use as a taxi is a
consumer good
Reason (R) Consumer good are those which directly satisfying the
wants of consumers
Select the correct alternative from the following:
A) Both Assertion and Reason are true and Reason is the correct
explanation of assertion
B) Both Assertion and Reason are true and Reason is not the correct
explanation of assertion
C) Assertion is true but Reason is false
 41

D) Assertion is false but Reason is true

18. Assertion (A): Value addition can also take place even when the 1
commodity does not go through any transformation.
Reason(R): It happens when a commodity is purchased for resale.
Choose the correct option from the following.
A. Both Assertion (A) and Reason(R) are true and Reason(R) is
the correct explanation of Assertion (A).
B. Both Assertion (A) and Reason(R) are true and Reason(R) is not
the correct explanation of Assertion (A).
C. Assertion (A) is true but Reason(R) is false.
D. Assertion (A) is false but Reason(R) is true.
19. Assertion (A): Gross Domestic Capital Formation can be less than 1
Gross fixed capital formation.
Reason(R): Change in stock is negative.
Choose the correct option from the following.
A. Both Assertion (A) and Reason(R) are true and Reason(R) is
the correct explanation of Assertion (A).
B. Both Assertion (A) and Reason(R) are true and Reason(R) is not
the correct explanation of Assertion (A).
C. Assertion (A) is true but Reason(R) is false.
D. Assertion (A) is false but Reason(R) is true.
20. Expenditure methods focuses on measurement of national income at: 1
(a) Phase of production of goods and services
(b) Phase of income distribution
(c) Phase of income disposition
(d) all the above