Maharashtra State Board Class 12th HSC Economics : Chapter - 7 National Income

12th HSC Economics 

Chapter -7 National Income

    

Sr. No.	Name of Chapter
1.	Introduction to Micro and Macro Economics
2.	Utility Analysis
3 A	Demand Analysis
3 B	Elasticity of Demand
4	Supply Analysis
5	Form of Markets
6	Index Numbers
7	National Income
8	Public Financial in India
9	Money Market and Capital Market in India
10	Foreign Trade of India

Most Likely Questions: 

Economics

1.	Choose the Correct Option	Solution	5 Marks
2	Complete the Correction	Solution	5 Marks
3	Give Economic Term	Solution	5 Marks
4	Find the Odd Word	Solution	5 Marks
5	Complete the following Statements	Solution	5 Marks
6	Assertion and Reasoning Questions	Solution	5 Marks
7	Identify and Explain the Concepts	Solution	6 Marks
8	Distinguish Between	Solution	6 Marks
9	Answer in Brief	Solution	12 Marks
10	State with Reasons, Do you Agree/ Disagree	Solution	12 Marks
11	Table, Diagram, Passage Based Questions	Solution	8 Marks
12	Answer in Detail	Solution	16 Marks

Q. 1. Complete the following statements :

1) While estimating national income, we include only value of final goods and services in order to .........

a) make computation easier

b) avoid double counting

c) maximize national welfare of the people

d) evaluate the total economic performance of a  nation

2) NDP is obtained by .........

a) deducting depreciation from GNP

b) deducting depreciation from GDP

c) including depreciation in GDP

d) including depreciation in GNP

3) In India, national income is estimated using .........

a) output method

b) income method

c) expenditure method

d) combination of output and income method

Q. 2. Complete the Correlation :

1) _________ : C + I + G + (X-M) :: GNP : C + I + G + (X-M) + (R-P).

Ans: GDP

2) Output method : ________ :: Income method : Factor cost method

Ans: Product / Inventory Method

3) Theoretical difficulty : Transfer payments ::  ________: Valuation of Inventories

Ans: Practical difficulty

Q. 3. Choose the correct option :

1) Wrongly matched pair : 

a) National Income Committee	1949
b) financial year	1st April to 31st March
c) Income method	National Income = Rent + Wages + Interest + Profit + Mixed income + Net Income from abroad
d) Expenditure method	National Income = Rent  + Wages + Interest + Profit

Options : 

1) a 

2) b 

3) c 

4) d

Ans: d) Expenditure method – National Income = Rent  + Wages + Interest + Profit

Q. 4. Identify and Explain the following concepts :

1) Vrinda receives monthly pension of Rs.5,000/- from the State Government.

Ans:

Concept: Transfer payment.

Explanation : Pension is a part of money income earned by an employee during his service period with the entrepreneur.
Such income is paid by Government to an employee after his retiement so as to make employee survive during his retirement period.
Thus, transfer income is not included in National Income. It is just an government expenditure.

2) Viru kept aside 100 kgs. out of 500 kgs. of wheat produced in his farm for his family.

Ans:

Concept: Production for self-consumption. 

Explanation : In above case, Viru’s total production is 500 kgs but he keep aside 100 kgs for his self consumption.
This 100 kg will not be shown by him as his income and hence it will not be included in national income accounting.
Such output kept for self consumption is called as theoretical difficulty in measurement of national income.

3) Sheetal purchased wheat flour for her bakery from the flour mill.

Ans:

Concept: Intermediate goods.

Explanation : In the above case, wheat flour is not the final product.
Wheat flour will be used by Sheetal to produce cake or pastry or biscuits which will be final product for her.
So, in above case wheat flour is considered j! (8) as intermediate goods. Intermediate goods are excluded while calculating NI by Final ( Ans. Goods approach method and included while calculating by Value Added approach method.

4) Shobha collected data regarding the money value of all final goods and services produced in the country for the financial year 2018-2019.

Ans:

Concept: National Income.

Explanation : National Income estimate ( measures the column of commodities and ) services turned out during a given period, counted without duplication.
NI is the macro concept. It is flow concept.

5) Rajendra has a total stock of 500 gel pens in his shop which includes the 200 gel pens produced in the previous financial year.

Ans:

Concept: Flow Concept

Explanation : National Income accounting considers the production of goods and services in a current year. The production of previous year is ignored.
Thus, out of total inventory, of Mr Rajendra, only 300 pens will be taken into consideration while calculating NI for the current year.

Q. 5. Answer the following :

1) Explain the two sector model of circular flow of national income.

Ans: 

There are two sectors, households and firms. It divides the diagram into two parts. The upper half represents the factor market and the lower half represents the commodity market. 

Explaines circular flow of income and expenditure in a two sector model.

In the above figure, the factors of production flow from the households to the firms. The firms use these factors to produce goods and services required by the households. Thus, goods flow from the households to the firms and from the firms back to the households. It is called product flows. 

 In the same way, money flows from the firms to the households in the form of factor payments such as rent, wages, interest and profit. Households use this income to purchase goods and services. Thus, money flows from the firms to the households and from the households back to the firms. It is called money flows. 

 In the circular flow of income, production generates factor income, which is converted into expenditure. This flow of income continues as production is a continuous activity due to never ending human wants. It makes the flow of income circular

2) Explain the importance of national income.

Ans:

Meaning : 

 Modern economy is a money economy. Hence, national income of a country is expressed in terms of money. The total income of the nation is called national income. 

 In real terms, national income is the flow of goods and services produced in an economy during a year. 

Importance of National Income : The following points explain the importance of the National Income :

1) For the Economy : National income data are important for the economy of a country. In present times, the national income data are regarded as accounts of the economy, which are known as ‘Social Accounts’. It tells us how the aggregates of a nation's income, output and product result from the income of different individuals, products of industries and transactions of international trade. 

 2) National policies : National income data forms the basis of national policies such as employment policy, industrial policy, agricultural policy etc. These figures enable us to know the direction in which the industrial output, investment and saving etc., change. National Income also helps to generate economic models like growth model, investment models etc. Thus, proper measures can be adopted to bring the economy to the right path. 

 3) Economic planning : For economic planning, data pertaining to national income is very essential. This includes data related to a country's gross income, output, savings, investment and consumption which can be obtained from different sources.

 4) Economic Research : National income data are also used by the research scholars of economics. They make use of various data of the country's input, output, income, savings, consumption, investment employment etc., which are obtained from social accounts. 

 5) Comparison of Standard of Living : National income data helps us to compare the standards of living of people in different countries and of people living in the same country at different times. 

 6) Distribution of Income : National income statistics enables us to know about the distribution of income in the country from the data related to wages, rent, interest and profits. We understand the disparities in the incomes of different sections of the society   

3) Explain the features of national income.

Ans:

Modern economy is a money economy. Hence, national income of a country is expressed in terms of money. The total income of the nation is called national income. 

 In real terms, national income is the flow of goods and services produced in an economy during a year.

1) Macro Economic concept : National income represents income of the economy as a whole rather than that of an individual. Hence it is a macro economic concept. 

 2) Value of only final goods and services : In order to avoid double counting in national income, the value of only final goods and services produced in the economy are considered. The value of intermediate goods or raw materials is not considered. For example, while estimating the production of shirts, there is no need to take the value of cotton, as it is already included in the price of the shirts. 

 3) Net aggregate value : National income includes net value of goods and services produced and does not include depreciation cost. (i.e. wear and tear of capital assets) 

4) Net income from abroad : National income includes net income from abroad i.e. difference between export value and import value (X-M) and net difference between receipts from abroad and payments made abroad (R-P). 

5) Financial year : National income is always expressed with reference to a time period. In India, it is from 1st April to 31st March. 

6) Flow concept : National income is a flow concept as it shows flow of goods and services produced in the economy during a year. 

7) Money value : National income is always expressed in monetary terms. It represents only  those goods and services which are exchanged for money.

4) Explain the concept of Green GNP.

Ans:

It is defined as, “Green GNP is an indicator of sustainable use of natural environment and equitable distribution of benefits of development.” Gross National product does not take into consideration the cost in terms of (i) Environmental pollution,  (ii) Depletion of natural resources caused by production of output. Mere increase in GNP will not reflect improvement in quality of life, when it increases environmental pollution or reduce available resources for future generations. 

So Green GNP has been introduced while measuring economic welfare. Following are the characteristics of Green GNP : 

 1) Sustainable economic development, i.e. development which should not cause environmental degradation (pollution) and depletion of natural resources. 

 2) Equitable distribution of benefits of its development. 

3) Promotes economic welfare for a long period of time. Measurement : Green GNP = GNP - (Net fall in stock of natural capital + pollution load.)

Q. 6. State with reasons, whether you agree or disagree with the following statements :

1) There are many theoretical difficulties in the measurement of national income.

Ans. 

I Agree with this statement.

Reasons:

 1) Transfer payments : Individuals get pension, unemployment allowance etc. but whether these transfer payments should be included in national income or not, is a major problem. On one hand they are a part of individual income and on the other hand, they are part of Government expenditure. Hence, these transfer payments are not included in national income. 

2) Illegal income : Illegal incomes like income from gambling, black marketing, theft, smuggling etc. are not included in national income. 

3) Unpaid services : For the purpose of calculating national income, only paid goods and services are considered. However, there are a number of unpaid services which are not accounted for in the calculation of national income. For example, services of housewives and the services provided out of love, affection, mercy, sympathy, charity etc. are not included in national income. 

4) Production for self consumption : The products kept for self consumption by the farmers and other allied producers do not enter the market. Hence, it is not accounted for in the national Income.

5) Income of foreign firms : According to IMF, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes the production work.

6) Valuation of Government Services : Government provides a number of public services such as law and order, defence, public administration, education, health services etc. The calculation of these services at market price is difficult, as the real value of these services is not known. Therefore, it is difficult to calculate national Income. 

7) Changing price level : Difficulties in calculating national income also arise due to changes in price levels. For example, when the price level rises, the national income may show an increase even though the production may have decreased. Also, when the price level falls, the national income may show a decrease even though there may be an increase in production

2) Under output method, value added approach is used to avoid double counting.

Ans. 

I agree with this statement.

Reasons: (1) According to output method, the value added at each stage of production process is included. The difference between the value of final outputs and inputs at each stage of production is called value added.

(2) Thus, GNP is obtained as the sum total of the values added by all different stages of the production process, till the final output is reached in the hands of consumers, to meet the final demand.

(3) This can be illustrated with the help of the following table:

Production Stage	Value of Output (₹)	Value of Input (₹)	Value of Added (₹)
Sugar cane (Farmer)	30	0	30
Sugar (Manufacturer)	50	30	20
Retailer (Merchant)	60	50	10
Total Value			60

In the given example, a farmer produces and sells sugar cane for 30 to the sugar manufacturer. Sugar manufacturer sells sugar for 50 to the retailer. Retailer sells sugar for₹60 to the consumer. So the value added by farmer (30), manufacturer (20), and retailer (10) i.e. total of 60 is included in national income.

Q. 7. Answer in detail :

1) Explain the practical difficulties involved in the measurement of national income.

Ans: 

Practical Difficulties or Statistical Difficulties : 

 In practice, a number of difficulties arise in the collection of statistical data required for estimation of national income. Some of the practical difficulties are as follows : 

 1) Problem of double counting : The greatest difficulty in calculating national income is of double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. For example, flour used by a bakery is an intermediate product and that by a household is final product. 

 2) Existence of non-monetized sector : In India, especially in rural areas, there exists the non-monetized sector. Agriculture, still being in the nature of subsistence farming, a major part of production is partly exchanged for other goods and services. It is excluded while counting national income. 

 3) Inadequate and unreliable data : Adequate and correct data on production and cost data relating to crops, fisheries, animal husbandry, forestry, construction workers, small enterprises etc., are not available in a developing country. Besides this, data on unearned incomes, consumption and investment expenditure of rural and urban population are also not available. This does not reveal the actual size of national income. 

 4) Depreciation : Depreciation refers to wear and tear of capital assets, due to their use in the process of production. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. Thus, it is difficult to make correct deductions for depreciation. 

 5) Capital gains or losses : Capital gains or capital losses, which accrue to the property owners by increase or decrease in the market value of their capital assets or changes in demand, are not included in the national income because these changes do not result from current economic activities. 

 6) Illiteracy and ignorance : Due to ignorance and illiteracy, small producers do not keep an account of their production. So they cannot give information about the quantity or value of their output. 

 7) Difficulties in the classification of working population : In India, working population is not clearly defined. For instance, farmers in India are not engaged in agriculture round the year. Obviously, in the off season, they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes from a particular occupation.

8) Valuation of inventories : Raw materials, intermediate goods, semi-finished and finished products in the stock of the producers are known as inventories. Any mistake in measuring the value of inventory, will distort the value of the final production of the producer. Therefore, valuation of inventories requires careful assessment.  

2) Explain the income method and expenditure method of measuring national income.

Income Method : 

This method of measuring national income is also known as factor cost method. This method estimates national income from the distribution side.  

According to this method, the income payments received by all citizens of a country, in a particular year, are added up, that is, incomes that accrue to all factors of production by way of rents, wages, interest and profits are all added together, but income received in the form of transfer payments are ignored. The data pertaining to income are obtained from different sources, for instance, from income tax returns, reports, books of accounts, as well as estimates for small income. 

 GNP can be treated as the sum of factor incomes, earned as a result of undertaking economic activity, on the part of resource owners and reflected in the production of the total output of goods and services during any given time period. 

 Thus, GNP, according to income method, is calculated as follows: NI = Rent + Wages + Interest + Profit + Mixed Income + Net export + Net receipts from abroad. NI = R + W + I + P + MI + (X–M) + (R–P)

Expenditure Method : 

 This method of measuring national income is also known as Outlay Method. 

 According to this method, the total expenditure incurred by the society, in a particular year, is added together. Income can be spent either on consumer goods or on capital goods. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals, firms as well as the government of a country during a year. 

Thus, gross national product is found by adding up NI = C + I + G + (X–M) + (R–P) 1) Private Final Consumption Expenditure (C) : 

1) Private Final Consumption Expenditure (C) by households on non-durable goods, such as food, which are used immediately; expenditure on durable goods such as car, computer, television set, washing machine etc., which are generally used for a longer period of time; and expenditure on services like transport services, medical services, etc. 

2) Gross Domestic Private Investment Expenditure (I) : It refers to expenditure made by private businesses on replacement, renewals and new investment (I). 

3) Government Final Consumption and Investment Expenditure (G) : 

i) Government's final consumption expenditure refers to the expenditure incurred by government on various administrative services like, law and order, defence, education, health etc. 

ii) Government's investment expenditure refers to the expenditure incurred by government, on creating infrastructural facilities like construction of roads, railways, bridges, dams, canals, which are used by the business sector for production of goods and services in any economy (G). 

4) Net Foreign Investment/Net Exports : It refers to the difference between exports and imports of a country during a period of one year. 

5) Net Receipts (R-P) : The difference between expenditure incurred by foreigners on domestic goods and services (R) and expenditure incurred abroad by residents on foreign goods and services (P).