MACRO-ECONOMICS

INDEX

Chapter’s name Page no.

2-44
National income
45-47
Money
48-51
Banking
52-72
Aggregate demand and supply
73-82
Government budget
83-88
Foreign exchange
89-95
Balance of payment
 National income
Q1. What do you mean by macroeconomics?
Ans .Macro Economics: - Macroeconomics is the study of aggregate economic variables of an economy.

Q2. What do you mean by circular flow of income?

Ans Income flows from the firm to the households in the form of factor payments and then from household
to firms in the form of consumption expenditure this flow is known as circular flow of income.

Q3. Explain the phases of circular flow of income with the help of diagram
[Link] of Circular Flow of Income
There are 3 different phases (generation, distribution, and disposition) in circular flow of income, as shown
in the given diagram:
➢ Generation Phase: In this phase, firms produce goods and services with the help of factor services
(land , labour , capital and enterpreneur)
➢ Distribution Phase: This phase involves the flow of factor income (rent, wages, interest, and profit)
from firms to the households.
➢ Disposition Phase: In this phase, the income received by factors of production, is spent on the goods
and services produced by firms.
➢ At the end income generated in the production units is spent on goods and services produced
by the firms.

generation
phase

circular
flow
disposition
distribution
phase

Q4. Write down the difference between stock and flow

Basis Stock Flow
1. Meaning Stock variable refers to that Flow variable refers to that
variable, which is measured at a variable, which is measured over
particular point of time a period.

2. Time Dimension It does not have a time It has a time dimension as its
dimension. magnitude can be measured over
a period
3. Nature of concept It is a static concept. It is a dynamic concept
4. Nature of concept 1. Population of India as on 1. Number of births during 2022
31.3.22

Q6. What the different types of circular flow of income

Ans There are two different types of circular flow of income
➢ Real Flow
 1. it determines the magnitude of growth process in the economy
2. As seen in the diagram household provide factor services to the
firm and in return firm provides goods and services to them
3. It includes only exchange of goods and services without the
involvement of money

➢ Money flow :-
1. it involves exchange of money between the two sectors
2. As seen in the diagram firm makes factor payments to the
household their factor services and household make
consumption expenditure on the purchase of goods and services.

Q7 differentiate between real and money flow

Basis Real Flow Money flow
1. Meaning It is the flow of goods and It is the flow of money between
services between firms and firms and households.
households.
2. Kind of exchange It Involves exchange of goods It involves exchange of money
and services
3. Difficulty in exchange There may be difficulties of There are no difficulties of barter
barter system in exchange of system in exchange of goods and
goods and factor services. factor services.
4. Alternative Name It is also known as Physical Flow It is also known as Nominal Flow

Q8 explain circular flow in two sector model and in simple economy

Ans8 CIRCULAR FLOW IN A SIMPLE ECONOMY (TWO-SECTOR ECONOMY)
A simple economy consist of two sectors (household and firm)
Household are the owners of factor of production and consume good and servicesFirm produce goods and
services and sell them to the household
Assumptions:
1. There are only 2 sectors in the economy: Households and Firms. It means there is no government and
foreign sector.
2. Household sector supplies factor services only to firms and the firms hire factor services only from
households.
3. Firms produce goods and services and sell their entire output to the households.
4. Households receive factor income for their services and spend the entire amount on consumption of goods
and services.
5. There are no savings in the economy, i.e. neither the households save from their incomes, nor the firms
save from their profits

Two-Sector economy (Diagram)

 ➢ The outer loop of diagram shows the real flow, i.e. flow of factor services from households to firms
and corresponding flow of goods and services from firms to households.
➢ The inner loop shows the money flow, i.e. flow of factor payments from firms to households and the
corresponding flow of consumption expenditure from households to firms.
➢ In this the factor payment made by the firm to the household is spent by the household in the form of
consumption expenditure.

Q9 Explain what are the leakages and injections

Ans9 Leakages refer to withdrawal of money from the circular flow. When households and firms save a part
of their incomes, it leads to a leakage from the circular flow of income. Leakage or withdrawal refers to that
part of income, which does not pass through the circular flow of income. As a result, it is not available for
spending on currently produced goods and services. It means, leakages reduce the flow of Income.

Injections refers to the introduction of income into the circular flow. When households and firms borrow
money from external sources like financial institutions, it adds to their income. Such additional income does
not result in immediate expenditure. So, injections increase the flow of income

Q10 What do you mean by closed and open economy

Ans Closed Economy is an economy which has no economic relations with rest of the world. Open
Economy is an economy which has economic relations with rest of the world.

Q11. What are the four sector of the economy?

Ans a. household
1. Household it includes consumer of goods and services
2. They are the owners of factors of production
3. They receive income in return in form of rent , wages , interest and profit

b. Producing sector (firms)

1. It includes all producing firms the in the economy
2. They hire factors of production from household

c. Government
1. As welfare agency it is involved in maintaining in law and order
2. As a producer they produce goods and services in public sector enterprise

d. Foreign sector (rest of world )

1. This sector includes export of goods and services with the rest of world

Important 1.1
Q1 ‘Circular flow of income in a two sector economy is based on the axiom that one’s expenditure is
other’s income’. Do you agree with the given statement? Support your answer with the valid reasons.
Ans yes, it is true. In two sector economy firm produce goods and services with help of factors of
production which is provided by household and return they made factor payments to the household. The
factor income earned by the household will be used to buy the goods and services. So the aggregate
consumption expenditure will be equal to aggregate goods produced by the firm
Practice
1. in a two sector economy national product is equal to national income. Comment
2. classify the following as stock or flow
(a) amount of bank deposits as on 31.3.2023
 (b) losses
(c) national income
(d) money supply
(e) profit
(f) wealth
ans 1 hint factor income = consumption exp
ans 2 (a) stock (b) flow (c)flow (d) stock (e) flow (f) stock

[Link] do you mean by Domestic territory/Economic territory ?

Ans Domestic territory means the political frontiers of a country
It also includes the following:
1. Ships and aircrafts operated by residents of the country across different parts of the
world
For example, Indian ships moving between Japan and Korea regularly or passenger planes operated
by Air India between England and Canada are a part of the domestic territory of India.
2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the
residents of the country in the international waters or engaged in extraction in areas in which the country
has the exclusive right of exploitation. For example, the fishing boats operated by Indian ocean are part of
the domestic territory of India.
3. Embassies, consulates and military establishments of the country located abroad.
For example, the Indian embassy in the united states of America is a part of the domestic territory of India
and the embassy of USA in India is a part of the domestic territory of united states of America.

Q13. Domestic Territory does not include

Ans Embassies, consulates, and military establishments of a foreign country. For Example, Japanese
Embassy in India is a part of domestic territory of Japan.

International organisations like UNO , WHO etc. are located within geographical boundaries of a country

Q14. What do you mean by Normal Resident ?

Ans Normal resident of a country refers to an individual or an institution who ordinarily resides in the
country and whose centre of economic interest also lies in that country. Normal residents include both,
individuate and institutions. 'Centre of Economic Interest' implies two things:
1. The resident lives or is located within the Domestic Territory

2. The resident carries out basic economic activities of earnings, spending and accumulation from
that location.

Q15. Who are not included under the category of Normal residents:
[Link] tourists and visitors who visit a country for recreation, holidays, medical treatment, study, sports,
conferences, etc.
2. Foreign staff of Embassies, officials, diplomats, and members of the armed forces of a foreign country,
located in the given country.
3. International organizations like UNO, WHO, etc. are not considered as normal residents of the country in
which they operate. They are treated as the normal residents of international area.
4. Employees of international organizations are considered as residents of the countries to which they belong
and not of the international area. For Example, an American working in UNO office located in India will be
treated as normal resident of America.
[Link] members of foreign vessels, commercial travellers, and seasonal workers, provided their stay is less
than one year.
6. Border workers who live near the international border and cross the border on a regular basis to work in
the other country. They are treated as normal residents of the country where they live, and not where they
work
if the employees are working for more than one year in such International Institutions, then they become the
normal resident a country in which such institutions are located

Citizenship Resident ship

It is a legal concept based on the place of birth of It is an economic concept based on the basic
the person or some legal provisions allowing a economic activities performed by a person.
person to become a citizen. It means, Indian An individual is a normal resident of a country if he
citizenship can arise in two ways: ordinarily resides in the country for a period more
1. When a person is born in India, he acquires than one year and his centre of economic interest
automatic citizenship of India. also lies in that country.
2. A person born outside India applies for
citizenship and Indian Law allows him to
become Indian Citizen

❖ American living in India for more than one year is a normal resident of India. However, he is not a
citizen It means, a person can be a citizen of one country and at the same time, a resident of another
country

Practice
A. How will you treat the following while estimating domestic product (or domestic factor income) of
India?
(1) Rent received by an Indian resident from his property in Singapore
(2) Salaries received by Indian residents working in Russian embassy in India
(3) Profits earned by a foreign company or a foreign bank in India (
(4) Salaries paid to Koreans working in Indian embassy in Korea
(5) Compensation of employees to the resident of Japan working in Indian embassy in Japan
(6) Profits earned by a branch of State Bank of India in Japan
Ans (1)NO (2)NO (3)YES (4)YES (5)YES (6) NO

Q16. Explain goods and also types of goods.

Ans Are those goods, which are used either for final consumption or for investment.
On the basis of end use of goods these are classified into two types of goods i.e final good and intermediate
goods
Final good:
(1) It includes final consumer goods and final production goods.
(2) They are not meant for resale. So, no value is added to these goods.
(3) Their value is included in the national income. Features of final goods are

(4) The value of final goods is included in the calculation of national income.
(5) Final goods are consumed by consumers (called consumption goods) or used as investment by
producers (called capital goods). So final good = consumption expenditure + investment expenditure
(6) They remain outside the production boundary.

Intermediate goods are those goods, which are used either for resale or for further production. Example for
intermediate good is- milk used by a tea shop for selling tea.
Features of intermediate goods are:
(a) The value of intermediate goods is not added in national income (to avoid the problem of double
counting).
 (b) These goods are not consumed by consumers.
(c) They remain within the production boundary.
(d) Intermediate goods have derived demand
Production boundary is an imaginary line drawn around the production sector of an economy. Within the
line firms purchase each other's goods for further production

Important points 1.2

➢ Durable goods purchased by government (trucks , aircrafts , vehicles etc) are include under
intermediate goods as they are not meant for consumption purpose but are used for defense services
➢ Goods used in the same year is classified as intermediate but if they remain for more than 1 year then
they are treated as final goods. Example
• Coal used by manufacturing firm treated as intermediate good as it is used for further production in
the same year
• Unsold coal with trader at the year end it is treated as final good because it is treated as investment
for trader.
• All Producer Goods are not Capital Goods It must be noted that all goods used by producer
(known as producer goods) are not capital goods. Producer goods include two types of goods:
Single-use Producer Goods: It includes raw material like coal, wood, etc. They are not capital goods
as they cannot be repeatedly used in the production process. Capital Goods: It includes fixed assets
like plant and machinery, which can be repeatedly used in the production process. So, it can be said
that all capital goods are producer goods, but all producer goods are not capital goods
• How to Classify Goods as: Intermediate Goods and Final Goods?
The distinction between intermediate goods and final goods is made based on the use of product and
not based on product itself. A commodity can be an intermediate good as well as a final good,
depending upon its nature of use. For Example: Sugar is an intermediate good when it is used for
making sweets. However, if it is used by the consumers, then it becomes a final good. Similarly, milk
is an intermediate good when it is used in dairy shops for resale. However, it becomes a final good
when it is used by the households. So, it must be noted that distinction is made based on end use. If
end use of a good is consumption or investment, then it is a final good. However, if the good is used
for resale or further production (in the same year), then it is an intermediate good.

Basis Final Goods Intermediate Goods

1. Meaning Final goods refer to those goods Intermediate goods refer to
which are used either for those goods which are used
consumption or for investment. either for resale or for further
production in the same year.
2. Nature They are included in both They are neither included in
national and domestic income. national income nor in
domestic income.
3. Demand They have a direct demand as They have a derived demand
they satisfy the wants directly. as their demand depends on
the demand for final goods.
4. Value addition They are ready for use by their They are not ready for use, i.e.
final users i.e. no value must be some value must be added to
added to the final goods. the intermediate goods
5. Production Boundary They have crossed the production They are still within the
boundary. production boundary.
 1. Example Milk purchased by households Milk used in dairy shop for
for consumption, car purchased resale, coal used in factory for
as an investment further production

Q17 What do you mean by consumption goods?

Ans:- these are those which are bought by consumers as final or ultimate goods to satisfy their wants.
Consumption goods can further be sub-divided into following categories:
1. Durable goods: It refers to those goods which can be used again and again over a considerable period.
For Example, television, refrigerators, etc.
2. Semi-durable goods: Goods which can be used for a limited period are termed as semi-durable goods.
These goods have a life span of around one year. For Example, clothes, crockery, shoes, etc.
3. Non-durable goods: Goods which are used up in a single act of consumption are known as nondurable
goods. These goods cannot be used more than once, i.e. they lose their identity in single act of consumption.
For Example, milk, bread, food grains, paper, etc.
4. Services: Services refer to non-material goods which directly satisfy the human wants. They are
intangible activities, i.e. they can neither be seen nor touched. For Example, services of teachers, doctors,
banks, etc.

Q18. What do you mean by Capital goods?

Ans18 :- 1. capital goods are those final goods, which are used and help in the process of production of other
goods and services. E.g.: plant, machinery etc.
[Link] are used in future for productive purposes and have expected lifetime of several years.
3. They do not lose their identity in the production process, i.e. they do not get merged in the process of
production.
[Link] need repairs or replacement over time as they depreciate over a period.
[Link] have derived demand as their demand is derived from the demand for other goods, which they help
to produce
Basis Consumption Goods Capital Goods
2. Satisfaction of Human These goods satisfy human wants Such goods satisfy human wants
wants directly. So, such goods have indirectly. So, such goods have
direct demand. derived demand.
3. Production Capacity They do not promote production They help in raising production
capacity capacity
4. Expected Life Most of the consumption goods Capital goods generally have an
(except durable goods) have expected life of more than one
limited expected life year

Q19. What do you mean by Factor Income

Ans It refers to income received by factors of production for rendering factor services in the production
process.
• It is received for providing factor services of land, labour, capital, and enterprise.
• Factor income of normal residents of a country is included in the National Income. Examples: Rent,
wages, interest, and profit.

*Factors of Production are the primary inputs, which are needed to produce goods and services. They are
broadly categorized under four heads: (I) Land; (ii) Labour; (iii) Capital; and (iv) Entrepreneur.

Q20. What do you mean by transfer Income ?

Ans 20 It refers to income received without rendering any productive service in return.
 • It is a unilateral (one-sided) concept.
• It is not included in National Income as it does not reflect any production of goods and services.
• It can be received either within the domestic territory of a country or from abroad. Examples: Old
age pension, scholarship, unemployment allowance, pocket money, etc.

Taxes received by the government are the transfer incomes of the government as they are received
without providing any productive service in return. Similarly, subsidies paid by the government are
transfer payments of the government

Basis Factor Income Transfer income

1. Meaning It refers to income received by It refers to income received
factors of production for without rendering any productive
rendering factor services in the service in return
production process.
2. Nature It is included in both National It is not included in both National
Income and Domestic Income Income and Domestic Income
3. Nature It is an earning concept. It is a receipt concept.
4. Recipient It is a receipt concept. It is generally received by
households and government
5. Example Rent, Wages, Interest and Profit Scholarship, Old age pension,
Unemployment allowance, etc

Q21. What do you mean by investment and what are the different types of investment
Ans Investment means addition made to the stock of physical capital such as buildings, plants, machines,
tools, and equipment’s, etc. during a given period. It is also called capital formation. It raises the productive
capacity of the economy.
Types of Investment
Gross Investment. It refers to total addition made to stock of physical capital over a period. It
includes depreciation.
Net Investment. It is defined as net addition made to stock of physical capital over a period. It
does not include depreciation. Net Investment = Gross investment – depreciation.

Q22. What do you mean by Depreciation ?

Ans It means loss of value or fall in the value of fixed assets due to normal wear and tear in the process of
production and expected obsolescence. It is also called consumption of fixed capital.
Reasons for the depreciation
1. Normal wear and tear: - continuous use can reduce the productive capacity and value
2. Passage of time: - the value of assets is also decreased by the passage of time
3. Expected obsolescence: - it is also affected due to the change in technology

Basis Depreciation Capital loss

1. Meaning It refers to fall in assets like wear It refers to loss in assets due to
and tear/expected obsolescence unforeseen obsolescence
 2. Provision for loss Provision is made for the No provision is made in this
replacement of asset capital loss
3. Production process It does not affect the production It directly affects the production
process process

Q23 What do you mean by NET INDIRECT TAX (NIT) and also explain its two
components ?
Ans Net indirect tax refers to the difference between indirect taxes and subsidies.
Net Indirect Tax = Indirect taxes - Subsidies
two components of NIT:
Indirect Taxes refers to those taxes which are imposed by the government on production and sale of goods
and services. Sales tax, excise duty, custom duty, etc. are some of the indirect taxes, Indirect tax increases
the price of the product in the market.
(ii) Subsidies refer to the financial assistance given by the government to an enterprise on the production of
a certain commodity. In India, LPG cylinder is sold at subsidized rates. They are often granted to promote
exports or to encourage firms for setting up the industries in the backward areas. Subsidies may also be
referred as 'Economic Assistance

Q24. What do you mean by Factor Cost Vs Market Price Factor Cost (FC)
It refers to amount paid to factors of production for their contribution in the production process. In the given
Example, Rs. 500 is the 'Factor Cost'.
Market Price (MP): It refers to the price at which product is sold in the market. In the given. It includes the
indirect taxes and excludes the subsidies. Market Price = Rs. factor Cost + (Indirect Taxes - Subsidies)
Market Price = Rs. factor Cost + Net Indirect Taxes

Q25. What do you mean by Net factor income from abroad

Ans It is the difference between the income received from abroad by the normal residents of a country for
rendering factor services and the income paid for the factor services rendered by non-residents within the
domestic territory of a country.
NFIA = Factor income from abroad by the normal resident - Factor income of non-resident in the domestic
territory
Components of Net factor income from abroad
• Net compensation of employees
• Net income from property and entrepreneurship (other than retained earnings of resident companies of
abroad)
• Net retained earnings of resident companies abroad

Formulas
• NNP MP = GNP mp - depreciation
• NDP Mp = GDPmp – depreciation
• NDP Fc = NDP mp – Net indirect taxes (indirect tax – subsidies)
• GDP Fc = NDP fc + depreciation
• NNP Fc = GDP mp - depreciation + Net factor income from abroad – Net indirect taxes
• (NNP FC is the sum of factor income earned by normal residents of a country during the accounting
year)
• NNP fc = NDP fc + Net factor income from abroad.

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)
[Link] of calculation of national income
METHODS OF NATIONAL INCOME
3. Value added method (product method / inventory method / net output method / industrial origin
method / commodity method )
4. income method ( distributive method / factor payment method )
5. Expenditure method ( income disposal method )

[Link] added method (GDP at mp)

In this method we first find out Gross Value Added at Market Price (GVAmp) in each sector and then take
their sum to arrive at GDP mp

Output method
(GVAmp) = Value of output method – intermediate consumption

Sales + change in stock It is including purchase of raw

material
closing stock – opening
To household From household
domestic stock Domestic
To government From government
sales (inventory investment) Purchases
To firms From firms
Exports Imports

Sum of GVA mp by all the sectors = GDP mp

GVAmp = GVAmp of primary +secondary + tertiary sector

Precautions of Value-Added Method

1. Intermediate Goods are not to be included in the national income: since such goods are already
included in the value of final goods. If they are included again, it will lead to double counting.
2. Sale and Purchase of second-hand goods is not included: as they were included in the year in which
they were produced and do not add to current flow of goods and services. However, any commission or
brokerage on sale or purchase of such goods will he included in the national income as it is a productive
service.
 3. Production of Services for self-consumption (Domestic Services) are not included: Domestic services
like services of a housewife, kitchen gardening, etc. are not included in the national income since it is
difficult to measure their market value. These services are produced and consumed at home and never
enter the marketplace and are termed as non-market transactions.
4. Production of Goods for self-consumption will be included: in the national income as they contribute to
the current output. Their value is to be estimated or imputed as they are not sold in the market.
5. Imputed value of owner-occupied houses should be included: People, who live in their own houses, do
not pay any rent. But they enjoy housing services like those people who stay in rented houses. Therefore,
value of such housing services is estimated according to market rent of similar accommodation. Such an
estimated rent is known as imputed rent.
6. Change in stock of Goods (inventory) will be included: Net increase in the stock of inventories will be
included in the national income as it is a part of capital formation.
7. sale and purchase of shares , debentures and bonds are not included in the national income because
there is change of ownership title only. But commission on this sale and purchase will be included as it is
a productive service.

2) Income distribution method

The components of NDPfc are:
Compensation of employees is defined as: the total remuneration in cash or in kind, payable by an
enterprise to an employee in return for work done by the latter during the accounting period. The main
components of compensation of employees are
(1) Wages and salaries (a) in cash (b) in kind
(2) Social security contributions by the employers.
Rent is defined as the amount receivable by a landlord from a tenant for the use of land.
Royalty is defined as the amount receivable by the landlord for granting the leasing rights of sub-soil assets.
Interest is defined as the amount payable by a production unit to the owners of financial assets in the
production unit. The production unit uses these assets for production and in turn makes interest payment,
imputed or actual.
Profit is a residual factor payment by the production unit to the owners of the production unit
 Income method (NDPfc)
Components of income method
Compensation of operating surplus mixed income of

Employees self employed

Wages and salaries in cash Income from income from Income of self
1. Basic pay Property entrepreneurship employed
2. Dearness allowance [Link] PROFIT
C.A, doctors, Teacher
3. House rent allowance [Link] (Profit = dividend +
etc.
4. Bonus and incentives [Link] corporation tax+corporate
5. Sick leave allowance Savings / undistributed
Compensation in kind Profits or retained
1. Free housing earnings
2. Medical facilities
3. Free uniforms
4. Free education
5. Conveyance fee
Employer’s contribution

1. Provident fund
2. Life insurance
3. Pension on retirement

In this method employee’s contribution is not Included in this method

Precautions of Income Method:

1. Transfer Incomes (like scholarships, donations, charity, old age pensions, etc.) are not included in the
National income because such receipts are not connected with any productive activity and there is no
value addition.
2. Income from sale of second-hand goods will not be included in national income as their original sale
has already been counted. If they are included again, it would lead to double counting. However, any
brokerage or commission received by brokers or commission agents on sale of such goods, will be
included as it is an income received for rendering productive service.
3. Always Avoid Capital Gains Capital gains refer to income from sale of second-hand goods (old car)
and financial assets (bonds, debentures, etc.). Any income arising from such transactions is not a factor
income as these transactions are not productive transactions and do not add to the current flow of goods
and services in the economy.
4. Windfall gains (like income from lotteries, horse race, etc.) are not included as there is no productive
activity connected with them.
5. Imputed value of services provided by owners of production units will be included: Imputed value of
owner-occupied houses, interest on own capital, production for self-consumption, etc. will be included as
these are productive activities and add to the flow of goods and services
6. payment out of past savings are not included like death duty , gift tax because they are paid out of
wealth and do not add to current flow of goods and services.

3. Expenditure Method (GDP at mp)

In this method we take the sum of final expenditures on consumption and investment. This sum equals GDP.
These final expenditures are on the output produced within the economic territory of the country. Its main
components are

a. Private final consumption expenditure :- it includes expenditure incurred by household

final consumption expenditure + private non-profit consumption expenditure on (durable except
houses , semi-durable , non- durable and goods and services) , any expenditure by residents during
foreign travel will added in this but expenditure by non-resident in domestic market will be excluded
b. Government final consumption :- it includes the expenditure incurred by the general
government on various administrative services like defence , law and order and these expense are
done for social welfare not for profit motive
c. Gross domestic capital formation/gross investment:- it refers to the addition to capital
stock of economy there are two components
(i) Gross fixed capital formation:- it includes expenditure on assets, these are further divide into
three categories

gross business fixed

investment expenditure on purchase of new machine/equipments
gross residential
construction investment expenditure on purchase/ construction of new house by houshold

gross public investment

it includes expenditure on flyovers , roads by government

(ii) Inventory investment (change in stock) :- (closing-opening) it includes the change in stock of raw
material , semi-finished goods and finished goods lying with the producer , it does not include the
current year consumption
d. Net exports :- it is the difference between exports and imports of a country during a one year
(exports-imports)
Purchase of raw material does not include the purchase of capital goods

Expenditure method (GDP at mp)

Private final + government final + gross domestic + net exports

Consumption consumption capital formation (X-M)
Expenditure expenditure

It includes Expenses by Gross fixed capital + change in stock Exports – imports

expenditure Defense Formation
by household Law and order Two components
and Inventory
Education
expenditure of Gross fixed investment
non-profit capital formation (closing stock-
institutions (gross business opening stock)
fixed capital
It includes exp formation +
incurred by gross residential
normal construction
residents +gross public
whether in investment)
domestic
territory or
abroad

Precautions of Expenditure Method

[Link] on Intermediate Goods will not be included in the national income as it is already included
in the value of final expenditure. If it is included again, it will lead to double counting of expenditures.
[Link] Payments are not included as such payments are not connected with any productive activity
and there is no value addition.
[Link] of second-hand goods will not be included as such expenditure has already been included
when they were originally purchased. Such goods do not affect the current flow of goods and services.
However, any commission or brokerage on such goods is included as it is a payment made for productive
service.
[Link] of financial assets (shares, debentures, bonds etc.) will not be included as such transactions do
not contribute to current flow of goods and services. These financial assets are mere paper claims and
involves a change of title only. However, any commission or brokerage on such financial assets is
included as it is a productive service.
[Link] on own account production (like production for self-consumption, imputed value of owner-
occupied houses, free services from general government and private non-profit institutions serving
households) will be included in the national income since these are productive services.
 NOMINAL GDP AND REAL GDP
1. Nominal GDP or GDP at Current Price: When GDP of a given year is estimated based on price of the
same year, it is called nominal GDP.
2. Real GDP or GDP at Constant Price: When GDP of a given year is estimated based on price of Base
Year, it is called real GDP.

Real GDP is more than Real GDP Is equal to Nominal Real GDP is less than Nominal
Nominal GDP GDP GDP
Price level in base year is more Price level in both the years is Price level in base year is less
than price level in current year same than price level in current year

Which is better: Nominal GDP or Real GDP?

Real GDP is better as compared to Nominal GDP because of following reasons:
➢ Real GDP helps in determining the effect of increased production of goods and services as it is
affected by 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 prices also.
➢ Real GDP is a better measure to make periodic comparison in the physical output of goods and
services over different years.
➢ Real GDP facilitates international comparison of economic performance across the countries.
Therefore, Real GDP is better than Nominal GDP as it truly reflects the growth of an Economy.
Determination of Nominal GDP and Real GDP Nominal GDP and Real GDP can be determined in the
following manner:

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Real GDP = x 100
𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥

𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑥 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥

Nominal GDP =
100

Basis National Income at Current Price National Income at Current Price

1. Meaning It refers to money value of final goods It refers to money value of final goods
and services produced by normal and services produced by normal
residents of a country in a year, residents of a country in a year,

measured at current year prices. measured at prices of base year.

2. Index of Economic It is not a good tool for measuring the It is a better tool for measuring the
Growth economic growth of a country. economic growth of a country.
3. Causes of change It is affected by change in both price It is affected by change in the quantity
and quantity only.
4. Comparison It is not a suitable tool for comparing It is generally used for comparing the
the national incomes of different years. national incomes of different years
5. Calculation Current Price (P1) x Current Quantity Base Year Price (P0) x Current
(Q1) Quantity (Q1)
6. Alternative name It is also known as Nominal National It is also known as Real National
Income. Income.

GDP Deflator
Nominal GDP is affected by both changes in price and physical output. On the other hand, Real GDP is
affected by change in physical output only. To eliminate the effect of price changes and to determine the real
change in physical output, we can use 'GDP Deflator'.
GDP deflator measures the average level of prices of all the goods and services that make up GDP.

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
GDP deflator/price index= x 100
𝑟𝑒𝑎𝑙 𝑔𝑑𝑝

GDP and Welfare GDP is often considered as an index of welfare of the people. Welfare means sense of
material well-being among the people. It depends on greater per head availability of goods and services. So,
higher GDP is generally taken as greater welfare of people.

Q28. Why GDP IS NOT AN appropriate indicator for welfare ?

[Link] of GDP: It is possible that with rise in GDP, inequalities in the distribution of income
may also increase, i.e. the gap between rich and poor increases. GDP does not take into account changes in
inequalities in the distribution of income. So, welfare of the people may not rise as much as the rise in GDP.
2. Change in prices: If increase in GDP is due to rise in prices and not due to increase in physical
output, then it will not be a reliable index of economic welfare.
3. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For
example, non-market transactions like services of housewife, kitchen gardening, leisure time activities, etc.
are not included in GDP, due to non availability of data. However, such activities influence the economic
welfare.
4. Externalities: Externalities refer to benefits or harms of an activity caused by a firm or an individual,
for which they are not paid or penalised. Activities which result in benefits to others are termed as positive
externalities and activities which result in harm to others are termed as negative externalities.
• Example and Impact of Negative Externality: Environmental Pollution caused by industrial plants. Such
pollution reduces the welfare through negative effect on health.
• Example and Impact of Positive Externality: Use of public parks by the people for pleasure for which no
payments are made by the public. It increases welfare through positive effect on health.
Such external effects do not form part of market transactions. GDP does not take into account externalities,
positive or negative.

5. Rate of population growth: GDP does not consider the changes in the population of a country. If
rate of population growth is higher than the rate of growth of GDP, then it will decrease the per capita
availability of goods and services, which will adversely affect the economic welfare.
6. Composition of GDP: Higher GDP will promote welfare only if increased output comprises of goods
of mass consumption and essential goods. Increase in production of war goods does not lead to any direct
increase in the welfare of people. So, composition of GDP also affects [Link] c

Important questions 1.3

Q1When will the domestic income be greater than the national income?
Ans: When the net factor income from abroad is less than net factor income to abroad.
Q2What is national disposable income?
Ans. It is the income, which is available to the whole economy for spending or disposal NNP MP + net
current transfers from abroad = NDI
Q3What must be added to domestic factor income to obtain national income?
Ans. Net factor income from abroad.
Q7Write down the limitations of using GDP as an index of welfare of a country

Q8‘Machine purchased is always a final good’ do you agree? Give reason for your answer
 Whether machine is a final good or it depends on how it is being used (end use). If machine is bought by a
household, then it is a final good. If machine is bought by a firm for its own use, then also it is a final good.
If the machine is bought by a firm for resale then it is an intermediate good.
Q9What is double counting? How can it be avoided?
Ans Problem of Double Counting
While estimating national income by value added method, sometimes the value of a product is counted more
than once It is called double counting. It leads to over estimation of national income, For example, suppose a
farmer produces 5 quintals wheat. He sells this wheat to the baker at a price of ₹1000 per quintal, The value
of wheat becomes ₹5000 (i.e., 1000x5). Baker converts this wheat into breads and sells the same to a
grocer for ₹10,000, The grocer sells these breads to ultimate consumers for ₹ 12000.
Here we take an unrealistic assumption that farmer uses no intermediate inputs.

The total value of all these transactions or gross output is ₹ 27000 (5000+10000+12000) in which value of
wheat has been counted three times and value of breads two times.
It is the case of double counting .
Counting the value of commodities at every stage of production more than one time is called double
counting. It can be avoided by
a) taking value added method in the calculation of the national income.
Value added = value of output – intermediate consumption
[Link]. Production unit value of output -intermediate consumption Value added
1. Farmer 5,000 - 5,000
2. Baker 10,000 - 5,000 5,000
3. Grocer 12,000 - 10,000 2,000
Total 27,000 - 15,000 12,000

So there is no scope of double counting in this method

b) By taking the value of final commodity only while calculating N.I. in this example value of grocer i.e.
12,000 is the final product it is because he sells entire output to consumers

Q10State whether following is true or false. Give reason for your answer
a) Capital formation is a flow True because it is measured over a period.
b) Bread is always a consumer good. False, it depends upon the end use of bread. When it is purchased by
a household it is a consumer good. When purchased by restaurant for making sandwich, it is an intermediate
(producer) good.
c) Nominal GDP can never be less that real GDP False. Nominal GDP can be less than the real GDP
when the prices in the base year is more than the current year.
d) Gross domestic capital formation is always greater than gross fixed capital formation. False, gross
domestic capital formation can be less than gross fixed capital formation if change in stock is negative.

Q11Why are exports included in the estimation of domestic product by the expenditure method? Can
the gross domestic product be greater than the gross national product? Explain

Expenditure method estimates expenditure on domestic product 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. Domestic product can be greater than national product, if the factor income paid to
the rest of the world is greater than the factor income received from the rest of the world i.e., when net factor
income received from abroad is negative.

Q12 How will you treat the following while estimating domestic product of India?
a) Rent received by resident Indian from his property in Singapore. No, it will not be included in
domestic product as this income is earned outside the economic territory of India.
b) Salaries of Indians working in Japanese Embassy in India It will not be included in domestic product
of India as embassy of Japan is not a part of economic territory of India.
c) Profits earned by branch of American bank in India. Yes, it is included as part of domestic product
since the branch of American bank is located within the economic territory of India.
d) Salaries paid to Koreans working in the Indian embassy in Korea Yes, it will be part of domestic
product of India because the income is earned within the economic territory of India. Indian embassy in
Korea is a part of economic territory of India

Income method
ITEMS INCLUDED ITEMS EXCLUDED
1. Wages received by Indian employees 1. Profit earned by foreign banks in India.
working in American embassy in India 2. Windfall gains and lottery income
2. Medical facilities to government employees 3. Money received from a relative working in
3. Income of actors, singers’ artists, salary of foreign country
defence personnel 4. Capital gains
4. Commission received by a dealer of old 5. Death duty, gift tax or wealth tax
machinery or on any second-hand goods are 6. Income from sale of assets
also included because it is productive 7. Unemployment allowance
services 8. Old age pension
5. Interest received by a household from a 9. Scholarship
commercial bank 10. Gifts to red cross society
6. Free meals to workers 11. Gambling income \
7. Undistributed profit ad corporation tax 12. Money received from a worker working
8. Allowance of a member of parliament abroad by his family for a period of more
9. NFIA than one year
10. Money received from a worker working
abroad by his family for a period of less
than one year
11. Payment of retirement of pension
12. Income form self-consumed output
13. Free services provided by owners of
production units

Value added method

ITEMS ARE INCLUDED ITEMS ARE EXCLUDED
1. Services of free government dispensary 1. receipt from sale of land
2. mineral wealth of a country extracted in the 2. mineral wealth of a country extracted in the
current year previous year.
3. domestic services by paid staff 3. increase in prices of stocks with trader
4. depreciation 4. Sale of shares
5. Rent paid by tenant 5. Purchase of rented house by tenant

6. Own account production of fixed capital 6. Gifts from abroad

[Link]-consumed output 7. Value of intermediate goods
8. Final goods [Link] of second-hand goods

Expenditure method
ITEMS ARE INCLUDED ITEMS ARE EXCLUDED
1. School fees paid by students 1. Purchase of vegetables
 2. Payment of electricity bill by a household 2. Inventories
3. Change in stock 3. Expenditure on purchase of shares of a
4. Government expenditure on defence company
5. Payment of bus fare by a traveller 4. Scholarship paid to students
6. Expenses of foreign visitors in India 5. Expenditure on purchase of an old house
7. Expenditure on road construction 6. Expenditure on electricity by a factory
8. Government expenditure on street lighting 7. Gifts from rest of the world
9. Expenditure on marriage of a daughter by 8. Payment of loan instalment taken for
father marriage
10. Free meals given to employees 9. Payment of pocket money to children by
father
10. Expenditure on earthquake/flood victims
11. Expenditure on providing meals to workers
12. Expenditure on improvement of fixed
capital assets.

Important questions 1.4

Question1:- How are the following treated in estimating national income from expenditure method?
Give reasons.
1. Purchase of car by a household
2. Purchase of raw material by a production unit
3. Expenditure by government on scholarships to students
Solution.
(1) Purchase of car by a household is included in the national income because it is private final consumption
expenditure which is a part of national income.
(2) Purchase of raw materials by a production unit is not included in the national income because raw
material is an intermediate good but if included in national income, will result in double counting.
(3) Expenditure by government on scholarships to students is not included in the national income because it
is a transfer payment and no productive service is rendered by the students in exchange.

Question2 Are the following items included in estimating a country's national income? Give reasons.
1. Sale of an old house
2. Services of owner-occupied house.
3. Expenditure on purchase of an old house
4. Brokerage on sale of shares
5. Meals given to the beggars
6. Contribution to provident fund by employer
7. Production for self-consumption by farmer
8. Income from smuggling
9. Free meals given to workers
10. Commission received by a lottery ticket

11. Free clothes given to workers

12. Growing vegetables in a kitchen garden of the house.
13. Expenditure on purchase of shares
14. Insurance premium paid by employees
15. Expenditure on advertisement by a firm
16. Value of wood purchased for manufacturing a table
 17. Cash relief to earthquake victims
18. Purchases of goods by foreigners from India
19. Value of machine purchased by a factory
20. Contribution to provident fund by employees
21. Purchases of goods by Indian residents from foreign countries.

Solution.
1. Receipt from sale of an old house is not included in the estimation of national income because
receipt from sale of an old house is just transfer of ownership title
2. Services of an owner-occupied house amount& to generation of economic service and, therefore,
imputed value of rent of such house will be included in the national income.
3. No, because it has no relation with the production of goods and services during the year
4. Yes, it is income earned of the agent by providing services
5. No, there is no productive activity.
6. Yes, it is a part of Compensation of employee
7. Yes, because it result in production of final goods
8. No, because it is illegally activity
9. Yes, it is a part of compensation of employees
10. Yes, it is income earned by the agent for his\her services
11. Yes, it is part of compensation of employee
12. No, it is for personal purpose not for market.
13. No, it is just transfer of ownership
14. No, it is payment done by employee (hint according to income method)
15. No, it is part of intermediate consumption expenditure
16. No, it is a part of intermediate consumption
17. No, it a transfer income
18. Yes, it a part of net factor income from abroad
19. Yes , it is for their own use not for resale purpose
20. No, it is the part of his\her own saving does not result in any productive activity
21. No , is a part of factor income to abroad

Question3 :- Are the following items included in estimating a country's national income?
Give reasons.
1 Waterpump purchased by a farmer
2 Expenditure of the Government on the construction of a new bridge.
3 Money received from a worker working abroad by his family.
4 Government expenditure on defence.
5 Receipt of scholarship from government
6 Construction of a new house.
7 Service of housewife.
8 Increase in the prices of stocks lying with a trader.
9 National debt interest.
10 Rent received by Indian residents on buildings rented out to foreign embassies in India.
11 Free medical facilities to employees.
12 Wages received by the Indian employees working in Pakistan Embassy
13 Subsidised lunch served to workers in a factory.
14 Durable use goods purchased by a household.
Solution:-

1 yes, it is a part of private final consumption expenditure

2 yes, is a part of government final consumption expenditure
3 no, it is transfer payment
4 yes , it is a part of government expenditure
 5 no, it is a transfer payment
6 yes, it is included because it is part of gross domestic capital formation
7 no, because it is difficult to calculate monetary value
8 no, it does not amount to any flow out of sale and purchase of goods
9 no, it is a transfer payment
10 yes, it is a part of factor income
11 yes , it is a part of compensation of employee
12 yes , because it the income received by the normal resident of india
13 Subsidised lunch served to workers in a factory is a part of national income because there is output as
well as sale, though at a subsidised price
14 Yes , it is part of private final consumption expenditure

Question 4:- How are the following treated in estimating national income? Give reasons.
1. School fees paid by students
2. House rent allowance paid to the teachers by school.
3. Examination fees paid by students.
4. Payment of bonus to school employees.
5. Expenditure on providing police services by the government
6. Addition to stocks during a year
7. Purchase of taxi by a taxi driver

Solution.
1. It is included in national income as part of the final consumption expenditure of the households.
2. It is included in national income because it is a part of compensation of employees.
3. It is included in national income (in the expenditure method) because it is a part of the private
consumption expenditure of the households.
4. It is included in national income because it is compensation of employees, while calculating NI by
income method.
5. Included because it is a governments final consumption expenditure.
6. Included, as this investment is a final expenditure.
7. Included, because it is a final expenditure.

Question 5 :- Giving reason explain how should the following be treated in estimating
gross domestic product at market price
(1) Fees to a mechanic paid by A&TM.
(2) Interest paid by an individual on a car loan taken from a bank.
(3) Expenditure on purchasing a car for use by a firm.
Solution.
(1) Not included, because it is an intermediate cost to the firm.
(2) Not included Sause the loan is taken to meet consumption expenditure. Interest paid on such a loan is not
a factor payment.
(3) Included became it is an investment expenditure

Practical questions
Q1. Calculate NVA at mp
1. Sales 90
2. Closing stock 25
3. Opening stock 15
4. Indirect taxes 10
5. Depreciation 20
6. Intermediate consumption 40
 7. Purchase of raw material 15
8. Rent 5

Ans:- sales + (closing-opening) – intermediate consumption – depreciation = 40

Q2. Calculate NVA at FC

1. Durable producer goods (with life span of 10 years) 10
2. Single use producer goods 5
3. Sales 20
4. Unsold goods 2
5. GST 1

Ans :- sales + unsold – single use producer goods – GST – dep = 1 (hint dep = cost / estimated life )

Q3. Calculate NVA at fc

1. Total sales 1,000
2. Decrease in stock 70
3. Production for self consumption 120
4. Purchase of raw materials 300
5. Exports 150
6. Electricity charges 50
7. Income tax 20
8. Goods and service tax 70
9. Subsidy 40

Ans:- total sales + production for self consumption – decrease in stock – purchase of raw material – electricity charges
– (GST – subsidy ) = 670
(hint :- income tax is direct tax and to calculate intermediate consumption add (iv) (vi) )

Q4. Calculate national income by income method and expenditure method

1. Final consumption expenditure
Private sector 350
Government sector 100
2. Mixed income of self employed 35
3. Gross domestic fixed capital formation 70
4. Opening stock 15
5. Compensation of employees 250
6. Closing stock 25
7. Imports 20
8. Rent 75
9. Consumption of fixed capital 10
10. Net indirect tax 25
11. Interest 25
12. Net factor income from abroad -5
13. Exports 10
14. Profit 100

Ans:- mixed income + compensation of employees + rent + interest + profit + net factor income from abroad =480
= expenditure of private and government + gross domestic fixed capital formation (closing – opening) + net exports –
consumption of fixed capital + net factor income from abroad – net indirect tax

Q5. Calculate (a) domestic income (b) compensation of employees

1. Net factor income from abroad -20
2. Net exports 10
3. Net indirect tax 50
4. Rent and royalty 20
5. Consumption of fixed capital 10
 6. Private final consumption expenditure 400
7. Corporate tax 10
8. Interest 30
9. Net domestic capital formation 50
10. Dividends 22
11. Government final consumption expenditure 100
12. Undistributed profits 5
13. Mixed income 23
Ans :- domestic income 2 +6+9+11-3 = 510
(b) compensation of employees
= NDPfc – rent and royalty – interest – corporate tax – dividends – undistributed profits – mixed income = 400

Q6. Calculate GDP at mp by income method and closing stock

1. Private final consumption expenditure 450
2. Rent 120
3. Government final consumption expenditure 50
4. Indirect taxes 60
5. Interest 150
6. Mixed income of self employed 20
7. Consumption fixed capital 30
8. Opening stock 10
9. Gross fixed capital formation 300
10. Compensation of employees 200
11. Net exports -10
12. Net factor income from abroad -10
13. Subsidies 10
14. profit 250

Ans:- GDPmp by income method

2+5+14+6+10+7+4-12=820 crore
Closing stock = GDPmp – private final consumption – government final consumption – gross fixed capital formation
+ opening stock – net exports = 40

[Link] national income

1. Rent 60
2. Interest 40
3. Profits net of corporate profit tax 20
4. Corporate tax 5
5. Net factor income received from abroad -5
6. Compensation of employees 600
7. Indirect taxes 80
8. Subsidies 10
9. Dividend 7

Ans:- 1+2+3+4+5+6=720
Note profits calculated as (3rd + 4th ) . ignore dividend

Q8. Calculate (a) GDPmp (b) subsidies

1. Government consumption expenditure 7000

2. Indirect taxes 9000
3. NNP at fc 61,700
4. Mixed capital of self employed 28,000
5. Gross fixed capital formation 13,000
6. Net addition to stocks 10,000
7. Compensation of employees 24,000
8. Depreciation 4,000
 9. Final consumption expenditure 44,000
10 Exports of goods and services 4800
11 Imports of goods and services 5600
12 NFIA -300

Ans:- GDP at mp
1+5+6+9+10-11= 73,200
Subsidies
Nnp at fc +depreciation – NFIA +indirect tax – GDP mp

Q9. Calculate national income by expenditure , national income by income method

1. Government final consumption expenditure 500
2. Change in stock 350
3. Consumption of fixed capital 50
4. Exports of goods and services 200
5. Private final consumption expenditure 900
6. Gross fixed capital formation 800
7. Subsidies 50
8. Imports of goods and services 350
9. Net property and entrepreneurship income from rest of world -60
10. Indirect taxes 200
11. Saving of the private corporate sector 30
12. Net compensation of employees from rest of world -10
13. Operating surplus 550
14. Compensation of employees 800
15. Corporation tax 20
16. Mixed income of self employee 850
Ans :-
Expenditure method
= 5 +1+6+2+4-8-3-10-7+9+12 = 2130
Income method
= 13+14+16+9+12 = 2130

Q10. Calculate gross domestic at mp and national income

1. Value of output
Primary sector 800
Secondary sector 200
Tertiary sector 300
2. Cost of intermediate inputs
Primary sector 400
Secondary sector 100
Tertiary sector 50
3. Indirect taxes paid by all sectors 50
4. Consumption of fixed capital of all sectors 80
5. Factor income received by the residents from the rest of world 10
6. Factor income paid to the non-residents 20
7. Subsidies received by all sectors 20

Ans :- 1300-550-80-50+20-10=630
1. any expenses incurred by employees will be excluded from COE as it is considered as a part of
intermediate consumption
2. it does not include any facility which is provided by employer such as uniform / vechiles to be used for
work only
3. any contribution by thirty party like insurance company does not include in national income
4. interest paid by bank to individual/household is to be included in national income
5. interest paid by government on public debt or interest paid by consumers will not be included
6. interest paid by one firm to another firm will be not be included national income
7. goods purchased for self consumption is to be included in national income
8. production of services for self consumption is not be included in national income like kitchen gardening
payment made to the services of maid , drivers , private tutors to be included in national income
9. GDPMP=Value of output –Intermediate consumption
NNPFC= GDPMP (-) Depreciation(-) Net Indirect Taxes(+) Net factor income from abroad
10. NDPFC compensation of employees+ operating surplus+ mixed income.
NNPFC = NDPFC + Net factor income from abroad.
GDPMP = Private final expenditure+ government expenditure + investment expenditure + net exports.
NNPFC = GDPMP-Depreciation +NFIA-Net Indirect taxes

Important questions 1.5

Q1. Mention any three items that are excluded from GNP?
Ans. Three items excluded from GNP are:
(i) Purely financial transactions, like sale and purchase of securities, bonds or transfer payments.
(ii) Transfer of second- hand goods.
(iii) Non- market transactions, like services of housewife, kitchen gardening, leisure time activities.

Q2. Are the following a part of a country’s net domestic product at market price’? Explain.
(i) Net indirect taxes.
(ii) Net Exports.
(iii) Net factor income from abroad.
(iv) Consumption of fixed capital.
Ans. (i) Yes, net indirect taxes will be included because market price = Factor cost + Net indirect taxes.
(ii) Yes, net exports (a component of expenditure method) will be included as it includes goods and
services produced within the domestic territory of a country.
(iii) No, it will not be included as NDP at MP is confined to domestic product only.
(iv) No, it will not be included because Net Product = Gross Product – Consumption of Fixed Capital.

Unsolved Practicals:
Practicals on Value added Method
Q1. Calculate Value added by firm A and firm B.
Particulars Rs. in crore

(i) Sales by firm A to Households 4,000

(ii) Sales by firm A to Government 5,000
(iii) Purchase by firm A 5,500
(iv) Sales by firm B 2,000
(v) Purchase by firm B 1,200

Value added by firm A= Rs.3,500 crore; Value added by firm B= Rs.800 crore

Q2. Calculate Value Added by firm A and firm B.

Particulars Rs. in crore

(i) Sales by firm A 100

(ii) Purchases from firm B by firm A 40
(iii) Purchase from firm A by firm B 60
(iv) Sales by firm B 200
(v) Closing stock of firm A 20
(vi) Closing stock of firm B 35
(vii) Opening stock of firm A 25
(viii) Opening stock of firm B 45
(ix) Indirect taxes paid by both the firms 30
Value added by firm A= Rs. 55 crore; Value added by firm B= Rs.130 crore

Q3. Calculate net value added at factor cost from the following data:
Particulars Rs. in crore

(i) Purchase of machinery to be used in the production unit 100

(ii) Sales 200
(iii) Intermediate costs 90
(iv) Indirect taxes 12
(v) Change in stock 10
(vi) Excise duty 6
(vii) Stock of raw material 5
Net value added at factor cost= Rs. 108 crore
Q4. Calculate NDP at FC.
Particulars Rs. in crore

(i) Subsidies 1
(ii) Sales 100
(iii) Closing stock 10
(iv) Indirect taxes 5
(v) Intermediate consumption 30
(vi) Opening stock 20
(vii) Consumption of fixed capital 15
NDP at FC= Rs.41 crore

Q5. Calculate ‘Value of Output’ from the following data

Particulars Rs. in lakhs
 (i) Subsidy 10
(ii) Intermediate consumption 150
(iii) Net additions to stocks (-) 13
(iv) Depreciation 30
(v) Excise duty 20
(vi) Net value added at factor cost 250
Value of output= Rs. 440 lakhs
Q6. Calculate value of output and gross value added at market price.
Particulars Rs. in crore

(i) Opening stock 1,000

(ii) Closing stock 800
(iii) Purchase of raw materials 200
(iv) Sales 10,000
(v) Indirect taxes 250
(vi) Subsidies 50
Value of output= Rs.9,800 crore; Gross value added at MP= Rs.9,600 crore

Q7. Calculate sales from the following data.

Particulars Rs. in lakhs

(i) Net value added at factor cost 300

(ii) Net addition to stocks (-) 20
(iii) Sales tax 30
(iv) Depreciation 10
(v) Intermediate consumption 100
(vi) Subsidy 5

Sales= Rs.455 lakhs

Q8. Calculate Net Value Added at Factor Cost

Particulars

(i) Consumption of Fixed Capital (Rs.) 600

(ii) Import duty (Rs.) 400
(iii) Output sold (units) 2,000
(iv) Price per unit of output (Rs.) 10
(v) Net change in stocks (Rs.) (-) 50
(vi) Intermediate cost (Rs.) 10,000
(vi) Subsidy (Rs.) 500
Rs. 9,450

Q9. Calculate Net Value Added at Market Price.

Particulars

(i) Output sold (units) 800

(ii) Price per unit of output (Rs.) 20
(iii) Excise (Rs.) 1,600
(iv) Import duty (Rs.) 400
(v) Net change in stocks (Rs.) (-) 500
(vi) Depreciation (Rs.) 1,000
 (vi) Intermediate cost (Rs.) 8,000

Rs. 6,500

Q10. Find Net Value Added at Market Price.

Particulars Rs. in lakhs

(i) Fixed Capital good with a life span of 5 years 15

(ii) Raw materials 6
(iii) Sales 25
(iv) Net change in stock (-) 2
(v) Taxes on production 1
Rs. 14 lakhs
Q11. Calculate sales from the following data.
Particulars Rs. in lakhs

(i) Subsidies 200

(ii) Opening stock 100
(iii) Closing stock 600
(iv) Intermediate consumption 3,000
(v) Consumption of fixed capital 700
(vi) Profit 750
(vii) Net Value Added at Factor Cost 2,000
Rs. 5,000 lakhs

Q12. Suppose firm a sold timber produced in its forest to firm B for Rs.1,000 and firewood to consumers for
fuel or Rs.500. Firm B converted logs into slippers and partly sold to furniture making firm C for Rs.800 and
the remaining to private consumers for Rs.700. Firm C sold furniture worth Rs.1,000 to private consumers
and the remaining to a government office for Rs.500. Calculate:
(i) Values Added by Firm A, Firm B and Firm C.
(ii) Total value of output
Ans (i) Value added by Firm A= Rs.1,500; Value added by Firm B= Rs.500; Value added by Firm C=
Rs.700 (ii) Total Value of output= Rs.

Q13. You are given the following information about four producers A, B, C and D in an economy. A sells
Rs.300 worth of his output to B, Rs.200 worth of his output to C and Rs.500 worth of output to households. The
sales of B to A, C and D are worth Rs.400, Rs.200 and Rs.300 respectively. C sells to A, B and D output worth
Rs.100 each. Sales by C to households are worth Rs.900. D sells to households output worth Rs.700. His exports
are worth Rs.300 while stock worth Rs.200 remains unsold with D. Estimate the Value Added by:
(i) A, B, C and D separately
(ii) All of them together
(i) Value added: Firm A= Rs.500; Firm b= Rs.500; Firm C= Rs.800; Firm D= Rs.800. (ii) Rs.2,600

Q14. Suppose firm A sold raw material to firm B for Rs.1,000 and to firm C for Rs.600. Firm B sold its product
partly to private consumers for Rs.800 and the remaining product was exported for Rs.600. Firm C part of its
product to the government for Rs.500 for public consumption and the remaining product worth Rs.500 was
unsold stock left with it. (Assume that firm A buys no raw material). (i) Find the Value Added by Firm A, Firm
B and Firm C. (ii) Total Consumption Expenditure. (iii) Saving and Investment.
(i) Value Added: Firm A= Rs.1,600; Firm B= Rs.400; Firm C= Rs.400
(ii) Total Consumption Expenditure= Rs.1,300; (iii) Savings and Investment= Rs.1,100
Q15. In an economy, the following transactions take place and the final sale is for private consumption. A, B, C
and D are four industries. A sells to B for Rs.20,000. B whose value added is Rs.40,000, sells half of its output to
C and another half to D. C sells all its output to D, whose value added is Rs.30,000. D sells all its output to final
product for Rs.1,30,000. What is the value added by C?
Value added by C= Rs.40,000

Practicals on Income Method:

Q16. Calculate National Income:
Particulars Rs. in crore

(i) Mixed income of self employed 200

(ii) Old age pension 20
(iii) Dividends 100
(iv) Operating surplus 900
(v) Wages and Salaries 500
(vi) Profits 400
(vii) Employer’s contribution to social security schemes 50
(viii) Net factor income from abroad -10
(ix) Consumption of fixed capital 50
(x) Net Indirect Taxes 50
National Income= Rs.1,640 crore
Q17. Calculate NNP at FC:
Particulars Rs. in crore

(i) Net current transfers from rest of the world 80

(ii) Wages and Salaries 600
(iii) Net Indirect Taxes 75
(iv) Net factor income from abroad -20
(v) Rent and Interest 160
(vi) Corporation Tax 40
(vii) Mixed income of self employed 280
(viii) Undistributed Profits 60
(ix) Dividend 20
(x) Consumption of fixed capital 120
NNP at FC= Rs.1,140 crore
Q18. Calculate GNP at MP:
Particulars Rs. in crore

(i) Employee Contribution 600

(ii) Rent and Interest 350
(iii) Profit 200
(iv) Indirect tax 160
(v) Consumption of fixed capital 200
(vi) Mixed income of self employed 850
(vii) Subsidies 40
(viii) Net current transfers from rest of the world 850
(ix) Net factor income from abroad (-) 100
GNP at MP= Rs.2,220 crore

Q19. Calculate GNP at MP:

 Particulars Rs. in crore

(i) Indirect tax 200

(ii) Consumption of fixed capital 100
(iii) Factor income to abroad 250
(iv) Factor income from abroad 320
(v) Rent 250
(vi) Dividend 220
(vii) Mixed income 120
(viii) Saving of private corporate sector 200
(ix) Interest 100
(x) Subsidies 200
(xi) Compensation of employees 500
(xii) Corporate Tax 400
GNP at MP= Rs.1,960 crore

Q20. Calculate Gross National Product at Market Price from the following data:
Particulars Rs. in crore

(i) Compensation of employees 2,000

(ii) Interest 500
(iii) Rent 700
(iv) Profits 800
(v) Employer’s contribution to social security schemes 201
(vi) Dividends 300
(vii) Consumption of fixed capital 100
(viii) Net Indirect taxes 250
(ix) Net exports 70
(x) Net Factor income to abroad 150
(xi) Mixed income of self- employed 1,500
GNP at MP= Rs.5,700 crore

Q21. From the data given below, prove that ‘Net Value at Factor Cost’ is equal to ‘Income Generated’.
Particulars Rs. in crore

(i) Opening stock 200

(ii) Closing stock 400
(iii) Purchase of raw materials 300
(iv) Sales 1,200
(v) Corporate tax 100
(vi) Undistributed profits 50
(vii) Dividends 50
(viii) Rent 150
(ix) Interest 100
(x) Depreciation 200
(xi) Indirect taxes 150
(xii) Subsidies 50
(xiii) Wages and Salaries 350
Net Value Added at Factor Cost= Income Generated= Rs.800 crore

Q22. On the basis of following data, prove that ‘Net Value Added at Factor Cost’ is equal to “Income
Generated’.
 Particulars Rs. in crore

(i) Addition to stock 1,000

(ii) Sales 10,000
(iii) Net Indirect Taxes 800
(iv) Purchase of raw materials 1,650
(v) Expenses on Power 850
(vi) Consumption of Fixed Capital 500
(vii) Rent 700
(viii) Compensation of Employees 3,500
(ix) Interest 1,000
(x) Dividend 1,500
(xi) Corporate gains tax 300
(xii) Undistributed profits 200
Net Value Added at Factor Cost= Income Generated= Rs.7,200 crore
Practicals on Operating Surplus:
Q23. Calculate Operating Surplus.
Particulars Rs. in crore

(i) Bonus to Employees 25

(ii) Mixed income 175
(iii) Profit 100
(iv) Dividend 40
(v) Corporate Tax 30
(vi) Rent 80
(vii) Royalty 40
(viii) Interest 130
(ix) Employee’s contribution to social security schemes 30
Operating Surplus= Rs.350 crore

Q24. Calculate the value of operating surplus.

Particulars Rs. in crore

(i) Value of output 800

(ii) Intermediate consumption 200
(iii) Compensation of employees 200
(iv) Indirect taxes 30
(v) Depreciation 20
(vi) Subsidies 50
(vii) Mixed Income 100
Operating Surplus= Rs.300 crore

Q25. Calculate the Operating Surplus.

Particulars Rs. in Crore

(i) Compensation of employees 200

(ii) Indirect taxes 200
(iii) Consumption of fixed capital 100
(iv) Subsidies 50
(v) Gross Domestic Product at MP 600
Operating Surplus= Rs.150 crore
Q26. Calculate Operating Surplus and Compensation of Employees.
Particulars Rs. in crore

(i) Indirect taxes 250

(ii) Depreciation 200
(iii) Royalty 20
(iv) Profit 200
(v) Subsidies 50
(vi) Gross Domestic Product at MP 1,800
(vii) Interest 50
(viii) Rent 100
(ix) Net Factor Income from Abroad (-) 40
Operating surplus= Rs.370 crore; Compensation of Employees= Rs.1,030 core

Practicals on Expenditure Method:

Q27. Calculate GNP at MP.
Particulars Rs. in crore

(i) Personal Consumption Expenditure 27,500

(ii) Government Consumption Expenditure 3,000
(iii) Gross Domestic fixed capital formation 2,500
(iv) Import of goods and services 500
(v) Net Factor Income from Abroad (-) 250
250
(vi) Subsidy
300
(vii) Fall in stock 450
(viii) Export of goods and services
(ix) Depreciation 1,000
(x) Net Indirect taxes 1,000
GNP at MP= Rs.32,400 crore

Q28. Calculate NDP at FC.

Particulars Rs. in crore

(i) Private Final consumption expenditure 400

(ii) Gross Domestic capital formation 100
(iii) Change in stocks 20
(iv) Net Indirect taxes 60
(v) Net Factor Income from abroad 10
(vi) Net Exports (-) 20
(vii) Consumption of fixed capital 20
(viii) Government final consumption expenditure 100
NDP at FC= Rs.500 crore

Q29. Calculate National Income.

 Particulars Rs. in crore

(i) Private Final consumption expenditure 2,000

(ii) Government final consumption expenditure 700
(iii) Gross Domestic capital formation 200
(iv) Net Exports 300
(v) Net Factor Income from abroad 400
(vi) Consumption of fixed capital 200
(vii) Net Indirect taxes 50
National Income= Rs.3,350 crore

Q30. Calculate National Income from the following data:

Particulars Rs. in crore

(i) Private Final consumption expenditure 900

(ii) Profit 100
(iii) Government final consumption expenditure 400
(iv) Net Indirect taxes 100
(v) Gross Domestic capital formation 250
(vi) Change in stock 50
(vii) Net Factor Income from abroad (-) 40
(viii) Consumption of fixed capital 20
(ix) Net Imports 30
National Income= Rs.1,360 crore

Miscellaneous Practicals
Q31. Calculate National Income by Income and Expenditure Method.
Particulars Rs. in crore

(i) Compensation of employees 1,200

(ii) Net Factor Income from abroad (-) 20
(iii) Net Indirect tax 120
(iv) Profits 800
(v) Private Final consumption expenditure 2,000
(vi) Net Domestic capital formation 770
(vii) Consumption of fixed capital 130
(viii) Rent 400
(ix) Interest 620
(x) Mixed income of self- employed 700
(xi) Net Exports (-) 30
(xii) Government final consumption expenditure 1,100
National Income= Rs.3,700 crore

Q32. From the following data, calculate “National Income” by (a) Income Method and (b) Expenditure
Method:
Particulars Rs. in crore

(i) Interest 150

(ii) Rent 250
(iii) Government final consumption expenditure 600
 (iv) Private Final consumption expenditure 1,200
(v) Profits 640
(vi) Compensation of employees 1,000
(vii) Net Factor Income to abroad 30
(viii) Net Indirect taxes 60
(ix) Net Exports (-) 40
(x) Consumption of fixed capital 50
(xi) Net Domestic capital formation 340
(a) Rs.2,010 crore; (b) Rs.2,010 crore

Q33. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore

(i) Compensation of employees 600

(ii) Government final consumption expenditure 550
(iii) Net Factor Income from abroad (-) 10
(iv) Net Exports (-) 15
(v) Profit 400
(vi) Net Indirect taxes 60
(vii) Mixed income of self- employed 350
(viii) Rent 200
(ix) Interest 310
(x) Private final consumption expenditure 1,000
(xi) Net Domestic capital formation 385
(xii) Consumption of fixed capital 65
National Income= Rs.1,850 crore

Q34. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore

(i) Government final consumption expenditure 100

(ii) Interest, rent and profits 920
(iii) Gross capital formation 620
(iv) Net Exports (-) 10
(v) Change in stock 100
(vi) Net Factor Income from abroad (-) 10
(vii) Subsidies 20
(viii) Private final consumption expenditure 800
(ix) Indirect tax 120
(x) Consumption of fixed capital 60
(xi) Mixed income of self- employed 60
(xii) Compensation of employees 370
National Income= Rs.1,340 crore

Q35. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore
 (i) Government final consumption expenditure 7,351
(ii) Indirect tax 8,834
(iii) Gross fixed capital formation 13,248
(iv) Mixed income of self- employed 28,267
(v) Subsidies 1,120
(vi) Change in stock 3,170
(vii) Rent, Interest and profits 9,637
(viii) Consumption of fixed capital 4,046
(ix) Private final consumption expenditure 51,177
(x) Import of goods and services 5,674
(xi) Exports of goods and services 4,812
(xii) Net Factor Income from abroad (-) 255
(xiii) Compensation of employees 24,420
National Income= Rs.62,069 crore

Q36. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore

(i) Rent 1,500

(ii) Net Factor Income from abroad 50
(iii) Wages and Salaries 25,000
(iv) Indirect tax 1,000
(v) Government final consumption expenditure 11,200
(vi) Subsidies 300
(vii) Royalty 200
(viii) Net Exports (-) 200
(ix) Interest 6,400
(x) Corporate Tax 200
(xi) Profit after tax 4,000
(xii) Households final consumption expenditure 26,000
(xiii) Change in stock 100
(xiv) Net domestic fixed capital formation 600
(xv) Final consumption expenditure of private non- profit 300
institutions serving households
National Income= Rs.37,350 crore

Q37. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore

(i) Government final consumption expenditure 50

(ii) Rent 150
(iii) Opening stock 20
(iv) Interest 80
(v) Profit 70
(vi) Private final consumption expenditure 480
(vii) Gross fixed capital formation 90
(viii) Closing stock 35
(ix) Net exports (-) 5
(x) Net indirect taxes 60
(xi) Compensation of employees 200
(xii) Consumption of fixed capital 20
 (xiii) Mixed income of self- employed 50
(xiv) Net Factor Income from abroad 20
National Income= Rs.570 crore

Q38. Calculate National Income by Income and Expenditure Method.

Particulars Rs. in crore

(i) Opening stock 50

(ii) Profit 60
(iii) Closing stock 10
(iv) Interest 500
(v) Consumption of fixed capital 20
(vi) Private final consumption expenditure 460
(vii) Mixed income 100
(viii) Net exports (-) 10
(ix) Net Factor Income from abroad (-) 5
(x) Compensation of employees 300
(xi) Net capital formation 500
(xii) Net indirect taxes 20
(xiii) Government final consumption expenditure 100
(xiv) Rent 70
National Income= Rs.1,025 crore

Q39. Calculate NNP at FC by Income and Expenditure Method.

Particulars Rs. in crore

(i) Mixed income of self- employed 100

(ii) Gross fixed capital formation 300

(iii) Private final consumption expenditure 900
(iv) Net exports (-) 50
(v) Subsidies 50
(vi) Government final consumption expenditure 150
(vii) Rent 60
(viii) Indirect taxes 250
(ix) Interest 200
(x) Change in stocks 50
(xi) Compensation of employees 400
(xii) Profit 340
(xiii) Consumption of fixed capital 50
(xiv) Net Factor Income from abroad 50
NNP at FC= Rs.1,150 crore

Q40. Calculate GNP at MP by Income and Expenditure Method.

Particulars Rs. in crore

(i) Net exports 15

(ii) Private final consumption expenditure 600
(iii) Consumption of fixed capital 30
(iv) Operating Surplus 190
(v) Net Indirect taxes 105
(vi) Net Factor income from abroad (-) 5
 (vii) Wages and Salaries 520
(viii) Rent 60
(ix) Employer’s contribution to social security schemes 100
(x) Government final consumption expenditure 200
(xi) Net capital formation 100
GNP at MP= Rs.940 crore

Q41. Calculate GNP at MP by Income and Expenditure Method.

Particulars Rs. in crore

(i) Net capital formation 200

(ii) Private final consumption expenditure 1,000
(iii) Operating Surplus 360
(iv) Wages and Salaries 900
(v) Employer’s contribution to social security schemes 50
(vi) Rent 100
(vii) Government final consumption expenditure 300
(viii) Consumption of fixed capital 50
(ix) Net Indirect taxes 200
(x) Net Factor income from abroad (-) 10
(xi) Net exports 10
GNP at MP= Rs.1,550 crore
Q42. Calculate Gross National Product at Factor Cost from the following data by (a) Income Method
and (b) Expenditure Method.
Particulars Rs. in crore

(i) Wages and Salaries 800

(ii) Mixed Income of self- employed 160
(iii) Operating Surplus 600
(iv) Undistributed profits 150
(v) Gross capital formation 330
(vi) Change in stocks 25
(vii) Net capital formation 300
(viii) Employer’s contribution to social security schemes 100
(ix) Net Factor income from abroad (-) 20
(x) Exports 30
(xi) Imports 60
(xii) Private final consumption expenditure 1,000
(xiii) Government final consumption expenditure 450
(xiv) Net Indirect taxes 60
(xv) Compensation of employees paid by the government 75
Note: Consumption of Fixed Capital is calculated as the difference between (v) and (vii) item.
GNP at FC= Rs.1,670 crore
Q43. Calculate GDP at MP by Income Method and National Income by Expenditure Method.
Particulars Rs. in crore

(i) Mixed income of self- employed 260

(ii) Rent, Interest and Profit 290
(iii) Interest on National Debt 40
(iv) Government final consumption expenditure 220
(v) Imports 170
(vi) Exports 140
 (vii) Private final consumption expenditure 1,530
(viii) Change in stock 100
(ix) Compensation of employees 730
(x) Net Factor Income from the rest of the world (-) 10
(xi) Consumption of fixed capital 120
(xii) Subsidies 30
(xiii) Gross fixed capital formation 400
(xiv) Indirect taxes 850
GDP at MP by Income Method= Rs.2,220 crore; NNP at FC by Expenditure Method= Rs.1,270 crore

Q44. Calculate GDP at MP by Income Method and National Income by Expenditure Method.
Particulars Rs. in crore

(i) Compensation of employees 13,000

(ii) Indirect taxes 3,700
(iii) Gross fixed capital formation 8,100
(iv) Interest, Rent and Profit 5,000
(v) Government final consumption expenditure 3,600
(vi) Mixed income of self- employed 16,000
(vii) Change in stock 1,000
(viii) Imports of goods and services 1,800
(ix) Exports of goods and services 1,700
(x) Private final consumption expenditure 27,000
(xi) Subsidies 300
(xii) Net Factor Income from abroad (-) 250

(xiii) Consumption of fixed capital 2,200

GDP at MP by Income Method= Rs.39,600 crore; and by Expenditure Method= Rs.33,750 crore

Q45. Calculate GDP at MP by Income Method and National Income by Expenditure Method.
Particulars Rs. in crore

(i) Compensation of employees 490

(ii) Private final consumption expenditure 1,120

(iii) Net Factor Income from the rest of the world (-) 10
(iv) Net fixed capital formation 180
(v) Consumption of fixed capital 80
(vi) Indirect taxes 180
(vii) Current transfers from government to households 20
(viii) Change in stock 60
(ix) Mixed income of self- employed 560
(x) Government final consumption expenditure 150
(xi) Subsidies 20
(xii) Exports 100
(xiii) Imports 110
(xiv) Rent, Interest and Profit 290
GDP at MP by Income Method= Rs.1,580 crore; and Expenditure Method= Rs.1,330 crore

Q46. Calculate GDP at Factor Cost by Income and Expenditure Method.

Particulars Rs. in crore
 (i) Personal Consumption Expenditure 730
(ii) Wages and Salaries 700
(iii) Employer’s contribution to social security schemes 100
(iv) Gross business fixed investment 60
(v) Profit Gross capital formation 100
(vi) Gross residential construction investment 60
(vii) Government purchases of goods and services 200
(viii) Gross public investment 40
(ix) Rent 50
(x) Inventory investment 20
(xi) Exports 40
(xii) Interest 50
(xiii) Imports 20
(xiv) Net Factor income from abroad (-) 10
(xv) Mixed Income 100
(xvi) Depreciation 20
(xvii) Subsidies 10
(xviii) Indirect taxes 20
Note: Gross Domestic Capital Formation is calculated as: Gross business fixed investment + Gross
residential construction investment + Gross public investment + Inventory investment
GDP at FC= Rs.1,120 crore

Q47. Calculate National Income by Income and Output Method.

Particulars Rs. in crore

(i) Value of output of primary sector 1,000

(ii) Value of output of secondary sector 800

(iii) Value of output of tertiary sector 600

(iv) Intermediate consumption of primary sector 400
(v) Intermediate consumption of secondary sector 300
(vi) Intermediate consumption of tertiary sector 100
(vii) Emoluments of employees 500
(viii) Rent 40
(ix) Consumption of fixed capital 80
(x) Indirect taxes 30
(xi) Net factor income from abroad 10
(xii) Subsidies 10
(xiii) Interest 50
(xiv) Rent, Rates and Interest 200
(xv) Mixed Income 300
Note: ‘Emoluments of employees’ is another name for compensation of employees.
National Income= Rs.1,510 crore

Q48. Calculate National Income by Income Method and Production Method.

Particulars Rs. in crore

(i) Value of output of primary sector 300

(ii) Value of output of secondary sector 200
(iii) Value of output of tertiary sector 100
(iv) Intermediate consumption of primary sector 100
(v) Intermediate consumption of secondary sector 50
 (vi) Intermediate consumption of tertiary sector 50
(vii) Emoluments of employees 150
(viii) Net factor income from abroad (-) 10
(ix) Operating surplus 140
(x) Consumption of fixed capital 40
(xi) Net Indirect tax 20
(xii) Interest 20
(xiii) Mixed income 50
(xiv) Rent 10
National Income= Rs.330 crore

Q49. Calculate GDP at MP by Value Added Method and Income Method.

Particulars Rs. in crore

(i) Intermediate consumption of primary sector 500

(ii) Intermediate consumption of secondary sector 400
(iii) Intermediate consumption of tertiary sector 300
(iv) Value of output of primary sector 1,000
(v) Value of output of secondary sector 900
(vi) Value of output of tertiary sector 700
(vii) Rent 10
(viii) Employee Compensation 950
(ix) Profits 285
(x) Net factor income from abroad (-) 20
(xi) Interest 5
(xii) Depreciation 40
(xiii) Net Indirect taxes 10
(xiv) Mixed income 100
GDP at MP= Rs.1,400 crore

Q50. Calculate (a) Gross Domestic Product at Market Price and (b) Factor Income from Abroad from the
following data:
Particulars Rs. in crore

(i) Profits 500

(ii) Exports 40

(iii) Compensation of employees 1,500

(iv) Gross National Product at Factor Cost 2,800
(v) Net current transfers from rest of the world 90
(vi) Rent 300
(vii) Interest 400
(viii) Factor income to abroad 120
(ix) Net Indirect taxes 250
(x) Net domestic capital formation 650
(xi) Gross fixed capital formation 700
(xii) Change in stock 50
(a) Rs.3,050 crore; (b) Rs.120 crore
(a) Rs.2,340 crore; (b) Rs.1,320 crore
Q53. From the following data relating to an economy, calculate National Income by Expenditure, Income and
Value Added Method.
 Particulars Rs. in crore

(i) Interest 40
(ii) Value of Output:
Primary Sector 1,000
Secondary Sector 500
Tertiary Sector 450
(iii) Compensation of Employees 245
(iv) Net factor income from abroad (-) 5
(v) Private final consumption expenditure 515
(vi) Intermediate Cost:
Primary Sector 630
Secondary Sector 310
Tertiary Sector 265
(vii) Rent and Royalty 25
(viii) Government final consumption expenditure 75
(ix) Gross domestic fixed capital formation 130
(x) Opening stock 40
(xi) Profit 30
(xii) Closing stock 70
(xiii) Net exports (-) 5
(xiv) Net Indirect taxes 80
(xv) Consumption of fixed capital 40
(xvi) Mixed income of self- employed 285
National Income= Rs.620 crore

Items included / excluded in National Income:

Q1. Construction of a new house.
Q2. Winning of a lottery prize.
Q3. Increase in the prices of stocks lying with a trader.
Q4. National Debt Interest OR Interest on public debt
Q5. Rent free house is given to an employee by an employer.
Q6. Profit earned by foreign banks in India.
Q7. Purchases by foreign tourists OR Food purchased by a foreign tourist at a hotel in New
Delhi.
Q8. Rent received by Indian residents on their buildings rented out to foreigners in India.
Q9. Payment of fees to a lawyer engaged by a firm.
OR
Expenditure by a firm on payment of fees to a chartered accountant.
Q10. Free medical facilities by the employer OR Free boarding and lodging provided to a domestic servant.
Q11. Gifts received from abroad. OR Gifts received from employer.
Q12. Profits of Reliance Industries from its chemicals business in Australia.
Q13. Salaries received by Indian residents working in Russian Embassy in India.
Q14. Subsidized lunch served to workers in a factory.
OR
Firm incurred expenditure on medical treatment of employee’s family.
Q15. Old age pension.
Q16. purchased by a household OR Purchase of a car by a household.
Q17. Profits earned by an Indian Bank from its branches abroad.
Q18. Earnings of shareholders from the sale of shares.
Q19. Expenditure on advertisement by a firm OR Commodities used in scientific research.
Q20. Petrol used in police vehicles.
Q21. Financial help received by flood victims.
Q22. Purchase of a machine by a factory. OR Purchase of taxi by a taxi- driver.
Q23. Royalty
Q24. Commission on sale of second- hand goods. OR Brokerage payment on sale of shares.
Q25. Dividend received by an Indian from his investment in shares of a foreign company.
Q26. Purchase of raw materials by a production unit. OR
Milk purchased by a sweet shop to make milk cake.
Q27. Earnings of a self- employed doctor having a clinic at his own residence.
Q28. Money received from sale of second hand goods.
Q29. Imputed rent of self occupied houses.
Q30. Contribution to provident fund by employer.
OR
Value of interest foregone on loans provided by employer to employee.
Q31. Wheat grown by a farmer but used entirely for family’s consumption.
Q32. Expenditure on the construction of a flyover by the government.
Q33. Commission received by a dealer from the buyer and seller of a house.
Q34. Growing vegetables in a kitchen garden of the house.
Q35. Services rendered by family members to each other.
Q36. Expenditure by government in providing free education. OR Expenditure on free services provided by
government OR Free treatment of the poor in hospitals. OR Expenditure on providing police services by the
government. OR Government expenditure on street lighting.
Q37. Insurance premium paid by employees OR Fees received from student.
Q38. Mineral wealth of a nation.
Q39. Value of wood purchased for manufacturing a table OR Expenditure on the purchase of cold drinks by a
school canteen from the manufacturer OR Transport expenses by a firm.
[Link] of equipments for installation in a factory.
Q41. Payment of interest tax OR Payment of Death duty.
Q42. Entertainment tax received by the government.

Q43. Salaries paid to Russians working in Indian Embassy in Russia.

Q44. Capital gains to Indian residents from sale of shares of a foreign company.
Q45. Harish works in USA and sends money to his family in India.
Q46. Destruction of building due to an earthquake.
Q47. HP uses its own new laptops in its office for self- consumption.
Q48. Purchase of a truck to carry goods by a production unit.
Q49. Direct purchase made abroad by government.

Q50. Earnings from a part time job in McDonalds by a student

Q51. Receipt from sale of property, inherited from a relative.
Q52. Entertainment allowance to an employee for entertaining business quests.
Q53. Expenditure on the purchase of shares of a new company OR Sale of bonds by a company.
OR Purchase of shares by a domestic firm.
Q54. Goods lying within the production boundary.
Q55. Money received by a family in India from relatives working abroad.
Q56. Dividend received by a foreigner from investment in shares of an Indian company.
Q57. Expenditure by father on marriage of his daughter.
Q58. Expenditure on the purchase of an old house OR Purchase of house by the tenant OR
Purchase of rented factory building by the factory owner.
Q59. Insurance money received from Oriental Insurance due to destruction of factory due to fire.
Q60. Interest paid by banks on deposits by individuals OR Payment of interest by a government firm
OR Payment of interest by a firm OR Payment of interest by a firm to a bank.
Q61. Interest received on loans given to a friend for purchasing a car OR
Interest payment on loan taken by an individual to buy a motor cycle OR
Payment of interest on loan taken by an employee from the employer OR
Payment of interest by an individual to a bank.
Q62. Interest received on loan given to a foreign company in India.
Q63. Interest received on debentures.
Q64. Expenditure on improvement of fixed capital asset OR Expenditure on construction of a house.
OR Expenditure on adding a floor to the building.
Q65. Scholarship given to Indian studying in India by a foreign company. OR
Expenditure by the government on scholarships to students.
Q66. Value of bonus shares received by shareholders of a company.
Q67. Purchase of uniforms for nurses by a hospital.
Q68. Expenditure on maintenance of building OR Expenditure on maintenance by a firm.
Q69. Payment of interest on borrowings by general government.
Q70. Family members working free on farm owned by family.
Q71. Payment of bonus by a firm. OR Bonus paid to employees.
Q72. Purchase of a tractor by a farmer.
Q73. Expenditure on fertilizers by a farmer.
Q74. Purchase of furniture by a firm OR Purchase of refrigerator by a firm for own use. OR
Purchase of machinery by a factory for own use.
Q75. Expenditure on education of children by a family.
Q76. Payment of electricity bill by a school OR Electricity consumed by a firm.
Q77. Payment of excise duty by a firm.
Q78. Festival gift from an employer.
Q79. Contribution to provident fund by employees.
Q80. Addition to stocks during a year.
Q81. Payment of a corporate tax by a firm.
Q82. Sale of an old house.
Q83. Receipts from sale of land.
Q84. Dividend received by shareholders.

Answers
1. Yes, it will be included in the national income as it is a part of capital formation and leads to production of goods
and services in the economy.
2. No, it will not be included in the national income as it does not add to the flow of goods and services in the
economy.
3. No, it will not be included in the national income as it does not amount to any flow of goods.
4. No, it is not included in the national income as it is the interest paid on loans taken by government to meet its
consumption purposes.

5. Yes, it is included in the national income by Income Method since it is a part of ‘wages in kind’ paid to
employees.
6. No, it is not included in the national income as it is a part of the factor income paid abroad. It is subtracted from
domestic income to get national income.
7. Yes, purchases by tourists are ‘exports’ and, therefore, they are included in the national income through the
Expenditure Method.
8. Yes, it will be included in the national income as it is a part of the factor income from abroad.
9. It is an intermediate expenditure for the firm because it involves purchase of services by one production unit
(firm) from another production unit (lawyer). So, it is deducted from the value of output of the firm to arrive at the
value added. So, it is not included in national income.
10. Yes, it will be included in the national income as these free services are part of compensation to employees.
11. No, it will not be included in national income as gifts received are transfer incomes.
12. Yes, it will be included in the national income as it is a part of the factor income from abroad.
13. Yes, it will be included in the national income as it is a part of factor income from abroad.
14. Yes, it is a part of the compensation of employees and therefore, it will be included in the national income.
15. No, it will not be included in the national income as it is a transfer payment made by the government and a
transfer income for the receiver.
16. Yes, it will be included in the national income as it is a part of the private final consumption expenditure.
17. Yes, they will be included in the national income as they are a part of the factor income from abroad.
18. No, it will not be included in the national income as it is financial claim and does not contribute to any productive
activity.
19. No, it will not be included in the national income as it is a part of intermediate consumption expenditure.
20. No, it will not be included in national income as petrol is an intermediate good in this case. It is used for the
provision of the final product (maintenance of law and order by the police).
21. No, it will not be included in the national income as it is a transfer income.
22. Yes, it will be included in the national income as it is a part of the gross domestic capital formation.
23. Yes, it will be included in the national income as royalty is a productive income.
24. Yes, it will be included in the national income as it is the income of a middleman for his productive services to
various parties.
25. Yes, it will be included in the national income as it is factor income from abroad.
26. No, it will not be included in the national income as it is a part of the intermediate consumption expenditure.
27. Yes, it will be included in the national income as it is a mixed income.
28. No, it will not be included in the national income because receipts from the sale of second hand goods are by
virtue of transfer of an already existing object.
29. Yes, it will be included in the national income as people living in such houses enjoy housing services similar to
those in rented houses.
30. Yes, it will be included in the national income as it is a part of the compensation to employees.
31. Yes, it is included in the national income because it adds to the current flow of goods and services. Therefore, its
imputed value should be included.
32. Yes, it will be included in the national income as it is a part of gross domestic capital formation.
33. Yes, it will be included in the national income as it is the income of the dealer for his productive services.
34. No, it will not be included in the national income as it is difficult to estimate the value of production (it is a non-
market transaction).
35. No, it will not be included in the national income as it is difficult to determine the value of services provided by
family members to each other.

36. Yes, it will be included in the national income as it is a part of the government final consumption
expenditure.
37. Yes, it is included in the national income as it is a part of the private final consumption expenditure.
38. It is a part of national wealth and is not included in the national income. However, that part of mineral wealth
which has been extracted during the current year will be included in national income under the product method.
39. No, it will not be included in the national income as it is a part of intermediate consumption expenditure.
40. Yes, it will be included in the national income as it is a part of capital formation.

41. No, it will not be included in the national income as it is a compulsory transfer payment to the government.
42. No, it will not be included in the national income as it is an indirect tax and a compulsory transfer payment
received by the government.
43. No, it is not included in the national income as it is a part of the factor income paid abroad. It is subtracted from
domestic income to get national income.
44. No, capital gains will not be included in the national income as they do not add to the current flow of goods and
services in the economy.
45. No, it will not be included in the national income as it is a transfer payment.
46. No, it will not be included in the national income as it will not affect national product directly.
47. Yes, it will be included in the national income as it adds to current flow of goods and services. Therefore, imputed
value of laptops should be included.
48. Yes, it will be included in the national income as it is a part of the gross domestic capital formation.
49. Yes, it will be included in the national income as it is a part of the government final consumption
expenditure.
50. Yes, it is included in the national income as it is a income received for productive services.
51. No, it will not be included in the national income as receipt from sale of such property is by virtue of transfer of an
already existing object.
52. No, it will not be included in the national income as it is an intermediate consumption expenditure of the business.
53. No, it will not be included in the national income as it is a financial claim and does not contribute to an productive
activity.
54. No, such goods will not be included in the national income as goods lying within the production boundary are
intermediate goods.
55. No, it will not be included in the national income as it is a transfer payment.
56. No, it is not included in the national income as it is a part of factor income paid abroad. It is subtracted from
domestic income to get national income.
57. No, it will not be included in the national income as it does not add to current flow of goods and services.
58. No, it will not be included in the national income because payment for purchase of second hand goods is due to
transfer of an already existing object.
59. No, it is not included in the national income because it is a transfer receipt.
60. Yes, it will be included in the national income as such interest is paid on loan taken for productive purpose. It is a
factor payment by a producer.
61. No, it will not be included in the national income because it is a non- factor receipt as the loan is not used for
production but for consumption.
62. Yes, it will be included in the national income as it is a part of factor income from abroad.
63. Yes, it will be included in the national income as such interest received is a factor income because debenture is a
sort of loan taken by a production unit.
64. Yes, it will be included in the national income as it is a part of capital [Link] must be noted that any
expenditure on repairs of fixed assets will not be included in national income.
65. No, it will not be included in the national income as it is a transfer payment.
66. No, it will not be included in the national income as such bonus shares are mere paper claims and do not
contribute to the production of goods and services.
67. No, it will not be included in the national income as it is an intermediate cost for the hospital.
68. No, it will not be included in the national income as it is a part of intermediate consumption expenditure.
69. No, it will not be included in the national income because it is a non- factor payment as general government
borrows only for consumption purpose.
70. Yes, imputed salaries of these members will be included in national income.

71. Yes, it will be included in the national income as it is a part of the compensation to employees.
72. Yes, it will be included in the national income as it is a part of the capital formation or investment by the farmer.
73. No, it will not be included in the national income as it is intermediate cost for the farmer and deducted from value
of output while arriving at national income.
74. Yes, it will be included in the national income as it is a part of the capital formation or investment by the firm.
75. Yes, it is included in the national income as it is a part of the private final consumption expenditure.
76. No, it will not be included in the national income as it is an intermediate cost and will be deducted from the value
of output while arriving at national income.

77. No, it will not be included in the national income as it is an indirect tax paid by the firm.
78. No, it will not be included in the national income as it is merely a transfer payment.
79. No, it is not included in the national income because such contribution is made by the employees from
compensation of employees only. So, it is not separately included in the estimation of national income.
80. Yes, it will be included in the national income as it is a part of the gross domestic capital formation.
81. No, it will not be included in the national income as it is a transfer payment to the government.
82. No, it will not be included as it does not result in any production. Its value is already included when it was newly
constructed.
83. No, it will not be included as land is a free gift of nature and cannot be produced.
84. Yes, it will be included as it is a part of the profits of production units, which is distributed to the owners.