Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc. of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Chapter 3: National Income and Related Aggregates: Basic Concepts. These solutions, however, should be only treated as references and can be modified/changed.
Introduction
National income is a crucial economic concept that represents the total value of all goods and services produced over a specific period within a country. It is a measure of a nation’s economic activity, and it is generated through the production process. The four primary inputs or factors of production—land, labour, capital, and entrepreneurship—contribute to this process.
Land refers to all natural resources, such as soil, rivers, forests, and minerals. Labor involves human efforts, both mental and physical, aimed at earning income. Capital includes all man-made goods used for further production of wealth, such as machinery, buildings, and raw materials. The entrepreneur organizes these factors, taking on the risks and uncertainties involved in production.
National income can be measured at current prices, also known as nominal national income, which is the money value of all final goods and services produced in a year at the prices prevailing in that year. Alternatively, it can be measured at constant prices, or real national income, which is the money value of all final goods and services produced in a year at fixed prices, typically those of a base year.
The concept of economic territory is also significant in understanding national income. Economic territory refers to the geographical area administered by a government within which persons, goods, and capital circulate freely. A resident, in this context, is a person or institution that ordinarily resides in a country and whose center of economic interest lies in that country.
Production can be for self-consumption, where the producers consume the entire output they produce, or for exchange, where goods and services are produced for sale in the market to earn a profit.
Understanding these concepts is crucial for policymakers and economists as they provide insights into the economic health of a country, guiding decisions on fiscal and monetary policies.
Video tutorial
Textual questions and answers
A. Very short-answer questions
1. What is GDP at market price?
Answer: GDP at market price refers to the market value of all the final goods and services produced within the domestic territory of a country during a year.
2. What are the factors of production?
Answer: The factors of production are:
- Land – includes all natural resources like soil, forests, rivers, etc.
- Labour – refers to human physical and mental efforts aimed at earning income.
- Capital – includes all man-made production inputs like machinery, tools, buildings, etc.
- Entrepreneur – refers to the person who organizes and manages the other factors of production and bears risks.
3. “Indian ships are moving between the UK and Pakistan”. Does this come under the domestic territory of India?
Answer: Yes, Indian ships moving between the UK and Pakistan regularly are considered part of the domestic territory of India.
4. National Income is often estimated as ____________
Answer: The sum of money value of net flow of all the final goods and services produced by normal residents within and outside the country during a period of account.
5. Under which category will ‘the financial help to victim’ come?
Answer: Financial help to victim will come under the category of transfer payments.
6. How is GNP at market price estimated?
Answer: GNP at market price is estimated as: GNP at market price = GDP at market price + Net factor income from abroad.
7. “National income is equal to GNPfc + Depreciation”. Is this true?
Answer: No, this statement is false.
8. What is the difference between transfer income and factor income?
Answer: The difference between transfer income and factor income are:
- Factor income is earned by providing productive service, while transfer income is received without providing any good or service in return.
- Factor income is earned, while transfer income is received.
- Wages, rent, interest and profit are examples of factor incomes. Gifts, donations, subsidies are examples of transfer incomes.
- Factor income is included in national income, while transfer income is excluded.
9. What is the impact of externality-positive or negative?
Answer: Externalities can have both positive and negative impacts.
- Negative externalities like pollution, cause harm to others which reduces welfare.
- Positive externalities like public parks, provide benefits to others which increase welfare.
10. “Domestic product refers to value addition only by the resident producers”. True or false.
Answer: True.
11. “National income is always greater than the domestic income”. True or false.
Answer: False.
12. Is it possible for NIT to be zero?
Answer: Yes, it is possible for Net Indirect Taxes (NIT) to be zero.
13. Define externalities.
Answer: Externalities refer to benefits or harm which a firm or an individual causes to others but for which they are not paid or penalised.
B. Short-answer questions-I
1. What is depreciation (or consumption of fixed capital)?
Answer: Depreciation refers to the fall in value of fixed assets due to normal wear and tear, and expected obsolescence.
2. What are factor incomes?
Answer: Factor incomes are payments made to factors of production (land, labor, capital, enterprise) for their contribution in the production process, like rent, wages, interest and profit.
3. What are transfer payments?
Answer: Transfer payments refer to unilateral payments received without making any contribution to production, like scholarships, pensions, donations, etc.
4. What are non-market activities?
Answer: Non-market activities refer to production of goods and services which are not exchanged through money, like household services, hobbies, barter exchanges, etc.
5. Define capital loss.
Answer: Capital loss refers to the fall in value of fixed capital due to natural calamities, wars, thefts etc. It is not considered as depreciation.
6. Define GNP and MP.
Answer: GNP stands for Gross National Product which measures the total value of final goods and services produced by normal residents of a country.
MP stands for Market Price which is the price at which a commodity is sold in the market.
7. What is meant by Nominal GDP?
Answer: Nominal GDP is the value of goods and services produced in a year calculated at current market prices prevailing that year.
8. What is meant by Real GDP?
Answer: Real GDP is the value of goods and services produced in a year calculated at constant prices of the base year.
9. What is meant by Inventory?
Answer: Inventory refers to the stock of unsold goods which a producer has at the end of an accounting period. Change in inventory is included in national income.
10. Define National Income. From the following, select the ones which are included in national income.
Answer: National income is the sum of factor incomes like rent, wages, interest and profit earned by normal residents of a country.
(i) old age pension
Answer: ot included, it is a transfer payment
(ii) money sent by an NRI to his family in India
Answer: Included, it is a factor income
(iii) transfer payments from rest of the world
Answer: Not included, it is a transfer payment
(iv) gifts received
Answer: Not included, it is a transfer payment
11. Which among the following makes GDP an inappropriate index of welfare?
(i) Non-monetary transactions
Answer: Yes, it is not included in GDP.
(ii) Externalities
Answer: Yes, positive and negative externalities are not accounted in GDP.
(iii) Composition and distribution of GDP
Answer: Yes, mere rise in GDP does not mean rise in welfare if income is unequally distributed.
12. What is barter system?
Answer: Barter system refers to the exchange of one commodity for another without the use of money. It is a feature of subsistence economies.
C. Short-answer questions-II
1. How is national income at current price different from national income at constant price?
Answer: National income at current prices (or nominal national income) refers to “the money value of all the final goods and services produced in a year measured at current prices, i.e., prices prevailing in that particular year.” In contrast, national income at constant prices (Real National Income) refers to “the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year.”
2. What is the significance of difference between current price and constant price?
Answer: The difference between current and constant prices is significant in economic analysis. Current prices reflect the value of goods and services at the prices prevailing in the year they’re produced, influenced by inflation or deflation. Constant prices, however, measure the value of goods and services using a fixed price level from a base year, eliminating the effect of price changes. This allows for a more accurate comparison of economic output over time, as it reflects changes in physical output, not price levels. Thus, it’s a better indicator of real economic growth.
3. Define real national income. Give advantages of calculating real national income.
Answer: Real national income refers to “the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year.” The key advantages are: (i) “Real GDP (i.e., at constant prices) truly reflects performance and level of economic growth in an economy whereas Nominal GDP (i.e., at current prices) does not.” (ii) “Real national income enables us to make year-to-year comparison of changes in the volume of output of goods and services.” (iii) “Real national income is also helpful in making international comparisons of economic performance of different countries.”
4. What do you mean by self-consumption? Give suitable examples.
Answer: Self-consumption means producers consume their own output. Examples are – farmer consuming own produce, teacher teaching his son, nurse bringing up her own child.
5. Briefly discuss the factors of production.
Answer: Factors of production are inputs needed for production. They are:
- Land: It refers to all natural resources which are gifts of Nature.
- Labour: Human efforts done mentally or physically with the aim of earning income are known as labour!
- Capital: All man-made goods which are used for the further production of wealth are included in capital.
- Entrepreneur: An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved in production.
6. If Real GDP is Rs 200 and price index (with base=100) is 110, calculate Nominal GDP.
Answer: Nominal GDP is calculated as:
Nominal GDP = Real GDP x Price Index/100
Here, Real GDP is given as Rs 200
The price index (with base year 100) is given as 110
Substituting the values:
Nominal GDP = Real GDP x Price Index/100
= 200 x 110/100
= 200 x 1.1
= Rs 220
Therefore, the Nominal GDP is Rs 220
7. If Real GDP is Rs 400 and Nominal GDP is 450, calculate the price index (base = 100).
Answer: The price index is calculated using the formula:
Price Index = (Nominal GDP/Real GDP) x 100
Here,
Real GDP is given as Rs 400
Nominal GDP is given as Rs 450
Substituting the values:
Price Index = (Nominal GDP/Real GDP) x 100
= (450/400) x 100
= 112.5
Therefore, the price index with base year 100 is 112.5
8. Case of Demonetisation will lead to GDP growth. Discuss.
Answer: Demonetisation refers to the decision by the government to ban high value currency notes and replace them with new notes. In November 2016, the Indian government decided to demonetise Rs 500 and Rs 1000 notes.
- It helped to curb black money and expand formal economy – This can lead to higher tax revenue and productive usage of funds, boosting GDP growth.
- It promoted digital payments and less cash economy – This improves transparency and formalization of informal sectors, aiding GDP growth.
- It reduced real estate prices temporarily – Lower prices revived investment and construction activities, augmenting GDP growth.
- It boosted bank deposits and lending capacity – More funds with banks for advancing loans spurred production and GDP growth.
9. “Sale of petrol and diesel cars is rising, particularly in big cities”. Analyse its impact on GDP and welfare.
Answer: The rising sale of petrol and diesel cars, especially in urban areas, has a dual impact on the economy:
Impact on GDP:
- Increased car sales add to domestic production and growth in automotive sector, thereby raising GDP.
- It creates positive production externality – ancillary industries like oil refineries, rubber, steel, etc also benefit.
- Additional revenue for government through taxes on car sales.
Impact on welfare:
- Negative consumption externality – air and noise pollution, traffic jams reduce quality of life.
- More spending on fuel imports – negative impact on BoP and exchange rate.
- Excludes poor who can’t afford – worsens equity.
10. Given nominal income to be 375 and price index (with base = 100) 125, calculate real income.
Answer: Real income is calculated using the formula:
Real income = Nominal income/Price index x 100
Here,
Nominal income is given as 375
Price index (with base 100) is given as 125
Substituting the values:
Real income = Nominal income/Price index x 100
= 375/125 x 100
= 300
Therefore, the real income is Rs 300.
11. Differentiate between transfer payments and factor payments.
Answer: Transfer payments and factor payments differ in the following ways:
| Factor Payment/Income | Transfer Payment/Income |
| It is received in return for rendering productive service | It is received without providing any good or service in return. |
| It is an earned income (earning concept). | It is an unearned income (receipt concept). |
| It comprises rent, wages, interest and profit. | It comprises gifts, subsidies, donations old-age person, scholarships, old-age pension, etc. |
| It is bilateral payment. | It is unilateral payment. |
| It is included in national income. | It is not included in national income. |
D. Long-answer questions-I
1. How will you treat school fees paid by students in estimating national income?
Answer: School fees paid by students will be treated as consumption expenditure and included in estimating national income. This is because school fees represent the payment made by households (students) to acquire education services. Education services are final goods produced by educational institutions. So the school fees paid represent final expenditure incurred on consumption of education services. This final consumption expenditure by households is a component of national income as per the expenditure method.
2. How are the following treated in estimating National Income (NI)? Give reasons.
(i) Services of owner occupied houses
Answer: Services of owner occupied houses will not be included in estimating national income as they represent non-monetary, imputed services for which no payments are made. There is no market transaction involved.
(ii) Sale of shares
Answer: Sale of existing shares on the stock exchange will not be included in national income. This is because sale of existing shares represents transfer of asset ownership. It does not add to current flow of goods and services.
(iii) Production for self-consumption
Answer: Production for self-consumption will be included in national income by imputing its market value. Though no monetary transaction is involved, it adds to production of goods.
(iv) Old-age pension
Answer: Old-age pension will not be included in national income as it is a transfer payment made without any current productive activity. It is an unearned income for the recipient.
(v) Wealth tax (or gift tax)
Answer: Wealth tax or gift tax will not be included in national income. These are capital transfers that do not affect current production. They only represent transfer of existing asset ownership.
3. Are the following a part of a country’s NDP at MP? Give reasons.
(i) Indirect taxes
Answer: Indirect taxes will be included in NDP at market price as they form a part of the price paid by buyers for goods/services.
(ii) Net exports
Answer: Net exports (X-M) will be included in NDP as they represent sale of domestically produced goods/services to foreign buyers.
(iii) Net factor income from abroad
Answer: Net factor income from abroad will not be included in NDP as it represents factor earnings of residents from rest of the world. NDP is a domestic product concept.
(iv) Consumption of fixed capital (depreciation)
Answer: Consumption of fixed capital (depreciation) will be included in NDP at market price as it covers the gross product/income flow. Depreciation is deducted from NDP at MP to arrive at NDP at factor cost.
4. What do you mean by domestic territory of a country? Discuss the cases which fall this category.
Answer: The domestic territory of a country, in national income accounting, is used in a wider sense than just the political frontiers of a country. According to the United Nations, “Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.” This includes:
- Territory lying within the political frontiers of a country, including territorial waters and airspace.
- Ships and aircraft owned and operated by the residents between two or more countries. For instance, Indian ships moving between the UK and Pakistan regularly or passenger planes operated by Air India between Russia and Japan are parts of domestic territory of India.
- Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation.
- Embassies, consulates and military establishments of the country located abroad. For example, Indian embassies in Russia, America and other countries will form parts of domestic territory of India because Indian laws are applicable in Indian embassies.
5. Distinguish between domestic product and national product.
Answer: Domestic product refers to the income generated within the economic (domestic) territory during a year. On the other hand, national income is obtained by adding Net Factor Income from Abroad (NFIA) to the domestic income. In other words, National income = Domestic income + NFIA. The implication of this concept is that income generated within economic (domestic) territory during a year is called domestic income. Distinction can be made between GDP and GNP. Simply put, GNP is GDP plus net factor income from abroad. Put in symbols: GNP = GDP + Net factor income from abroad.
6. Explain the concept of Green GNP.
Answer: Green GNP is defined as “GNP which is an indicator of a sustainable use of natural environment and equitable distribution of benefits of development.” This concept denotes the following characteristics:
- Sustainable economic development, i.e., development which should not cause environmental degradation (pollution) and depletion of resources.
- Equitable distribution of benefits of development.
- Promote economic welfare for a long period of time.
Green GNP is calculated as GNP minus the net fall in stock of national capital. The concept of Green GNP has been introduced with economic welfare because GNP (or GDP) does not take into consideration the cost in terms of environmental pollution and depletion of natural resources caused by production of output. Mere increase in GNP will not reflect improvement in quality of life if it increases environmental pollution or reduces available resources for future generations.
7. What causes increase in inventory stock?
Answer: The value of output can be expressed as the sum of sales and change in stock because output is either sold or accumulated as unsold stock. This suggests that an increase in inventory stock could be due to the production of goods and services that have not yet been sold. In other words, when the production of goods and services exceeds the sales, the surplus is accumulated as unsold stock, leading to an increase in inventory stock
8. State the meaning of NFIA. What are the sources of NFIA?
Answer: Net Factor Income from Abroad (NFIA) is the difference between factor income received from the rest of the world and factor income paid to the rest of the world. Net factor income from abroad is the difference between the factor income earned from abroad by normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e., India).
Income from outside can be earned mainly in three ways, namely:
- Income from work: It is the income earned by the residents of a country from abroad for the services they render to rest of the world. It includes wages, salaries, employers’ contribution to social security schemes, etc.
- Income from property and entrepreneurship: It is the income earned by the residents of a country from abroad for the use of their property and entrepreneurship. It includes rent, interest, profit, dividends, royalties, etc.
- Retained earnings of resident companies abroad: It is the part of profits of resident companies abroad which is not distributed among shareholders but retained for reinvestment.
9. Distinguish between the value of output and the value added with an example.
Answer: Value of output refers to the market value of all the goods and services produced by an enterprise during an accounting year. For example, if a shoe making enterprise produces 1,000 pairs of shoes annually and sells them at Rs 175 per pair, the value of its output will be Rs 1,75,000 (= 1,000 × 175).
On the other hand, value added refers to the addition made in the value of intermediate inputs by a firm by virtue of its productive activities. It is the difference between value of output and value of intermediate inputs. For instance, let us presume that a bakery buys intermediate inputs (milk, flour, sugar, etc.) worth Rs 2,000 and sells its output for Rs 2,500. In this case, value added by the bakery in production of biscuits is Rs 500 (= 2,500 – 2,000). This is the contribution of the bakery in the production of biscuits.
The difference between value of output and value added is intermediate consumption which is included in value of output but excluded from value added. Intermediate consumption means expenditure incurred on secondary inputs like raw material, power, etc., by a producing unit.
10. What is the relationship between Nominal GDP and Real GDP?
Answer: The relationship between Nominal GDP and Real GDP is significant in understanding the economic growth of a country. Real GDP, measured at constant prices, truly reflects the performance and level of economic growth in an economy, whereas Nominal GDP, measured at current prices, does not. This is because Nominal GDP is affected by changes in both physical output and prices, and can increase without an increase in physical output, causing only a money illusion without causing an increase in the flow of goods and services. On the contrary, Real GDP is affected by only one factor, namely change in physical output, because prices are fixed or constant. Thus, Real GDP can increase only when there is an increase in physical output during a year. An increase in Real GDP leads to a rise in the standard of living of the people as a greater quantity of goods and services is available.
11. Explain the meaning and types of transfer payments.
Answer: Transfer payments are payments received without providing any good or service in return. They are considered unearned income. Examples of transfer payments include old-age pensions, scholarships to students, unemployment allowances to unemployed people, flood relief, pocket money, etc. These payments are received without making a contribution to production.
Transfer payments can be further classified into two types: current transfers and capital transfers.
Capital Transfers: These are transfer payments that affect the asset base of both the paying party and the receiving party. They lead to a reduction in assets or wealth or capital of the payer and an addition in the assets or wealth or capital of the receiver.
Current Transfers: These are transfer payments that do not affect the asset base or wealth of the paying and receiving parties, but rather have an impact on the current income of the parties. They lead to a reduction in the current income of the paying party and an addition to the current income of the receiving party.
E. Long-answer questions-II
1. Differentiate between national income at current price and national income at constant price. What are the advantages of real national income?
Answer: National income at current prices, also known as nominal national income, is the money value of all the final goods and services produced in a year measured at current prices, i.e., prices prevailing in that particular year. In determining national income at current prices, not only physical output produced during the year is important, but also the prices prevailing in that year are equally important.
On the other hand, national income at constant prices, also known as Real National Income, is the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year. It is change in volume of physical output produced during the year which affects national income at constant prices because prices remain fixed (constant).
The advantages of Real National Income/GNP are:
- National income measured at constant prices truly reflects the real change in physical output of a country whereas national income at current prices does not. It is useful in finding out the real development capacity of the economy.
- Real national income (or for that matter GNP) enables us to make year-to-year comparison of changes in the volume of output of goods and services.
- Real national income is also helpful in making international comparisons of economic performance of different countries.
2. How do GDP and welfare go together?
Answer: Gross Domestic Product (GDP), particularly real GDP, is often considered as an index of welfare of the people. Welfare refers to the sense of material well-being among the people. This well-being depends on the greater availability of goods and services per person for consumption. Higher per capita availability of goods and services means a higher level of standard of living and a rise in economic welfare.
However, this generalization may not always be correct due to several reasons:
Distribution of GDP: A mere rise in GDP may not lead to a rise in economic welfare if its distribution results in the concentration of income in the hands of very few individuals or firms.
Non-monetary exchanges or transactions: Many non-monetary activities in the economy done out of love and affection are not evaluated in monetary terms due to lack of authentic data.
Externalities: These refer to benefits or harm which a firm or an individual causes to others but for which they are not paid or penalized.
Composition of GDP: If the increase in GDP is due to more production of war materials like tanks, weapons, etc., it will not increase economic welfare.
Rate of population growth: If the rate of population growth is higher than the rate of growth of real GDP, this will lead to a fall in per capita availability of goods and services.
3. Briefly discuss the various aggregates of national income and their inter-relationships.
Answer: National income and related aggregates are basically measures of the value of production activity of a country. There are four variants of national income – two of domestic and two of national, but each can be expressed at Market Price (MP) as well as at Factor Cost (FC). The result is eight aggregates:
- Gross Domestic Product (GDP) at Market Price (MP)
- Net Domestic Product (NDP) at Market Price (MP)
- Gross National Product (GNP) at Market Price (MP)
- Net National Product (NNP) at Market Price (MP)
- Gross Domestic Product (GDP) at Factor Cost (FC)
- Net Domestic Product (NDP) at Factor Cost (FC)
- Gross National Product (GNP) at Factor Cost (FC)
- Net National Product (NNP) at Factor Cost (FC)
Out of the above-mentioned eight aggregates, it is only Net National Product at Factor Cost (NNPFC) which is called National Income. Similarly, NDP at FC is called Domestic Income. National income at the level of production is called national product and at the level of distribution of income is called national income. Thus, product aggregates and income aggregates are used interchangeably because they are values of the same physical products.
These different aggregates are inter-related and can be moved from one to another using certain formulas. For instance, GDP can be calculated from GNP by subtracting Net factor income from abroad (NFIA): GDP = GNP – NFIA. Similarly, GDP at MP can be calculated from NNP at FC by adding Depreciation and Net indirect taxes and subtracting NFIA: GDP at MP = NNP at FC + Dep. – NFIA + Net indirect taxes.
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