Question 1

State any two precautions to be adopted while estimating National Income by Expenditure Method. Distinguish between 'Final goods' and 'Intermediate goods'.

Accepted Answer

Precautions for Expenditure Method:
1. Exclude intermediate goods to avoid double counting
2. Exclude transfer payments (pensions, scholarships)
3. Exclude second-hand sales (only new production)
4. Exclude financial transactions (shares, bonds)

Distinguish between Final goods and Intermediate goods:

Final goods: Goods that are used for final consumption or investment. They are not resold or used as inputs in further production. Example: A car purchased by a consumer.

Intermediate goods: Goods that are used as inputs in the production of other goods. They are resold or processed further. Example: Flour used by a baker to make bread.

Question 2

Estimate the missing values (?), if the value of Gross Domestic Product at factor cost (GDP_FC) by Expenditure Method and Income Method is Rs. 920 crore :

Accepted Answer

Given: GDP_FC by Expenditure Method = GDP_FC by Income Method = Rs. 920 crore

Using Expenditure Method:
GDP_FC = C + G + I + (X-M) - NIT
Where C = Private Final Consumption Expenditure
G = Government Final Consumption Expenditure
I = Gross Domestic Capital Formation
(X-M) = Net Exports
NIT = Net Indirect Taxes

Using Income Method:
GDP_FC = Compensation of Employees + Operating Surplus + Mixed Income

The missing values can be calculated by equating both methods and solving for the unknown variables. The key is that both methods should yield the same GDP_FC value of Rs. 920 crore.

Question 3

State any two precautions to be adopted while estimating National Income by Value Added Method. State any two precautions to be adopted while estimating National Income by Income Method.

Accepted Answer

Precautions for Value Added Method:
1. Exclude intermediate goods to avoid double counting
2. Include only value added at each stage of production
3. Use market prices for output and factor cost for inputs
4. Exclude non-production transactions

Precautions for Income Method:
1. Exclude transfer payments (gifts, donations)
2. Exclude windfall gains (lottery, prizes)
3. Include only factor incomes (wages, rent, interest, profit)
4. Exclude income from second-hand sales
5. Include imputed values for owner-occupied houses

Question 4

When does Net Factor Income from Abroad (NFIA) shows Negative Value ? State the meaning of retained earning.

Accepted Answer

NFIA shows negative value when:
1. Factor income earned by foreigners in India exceeds factor income earned by Indians abroad
2. More payments are made to foreign factors of production than received from abroad
3. Net outflow of factor incomes occurs

Retained earnings:
Retained earnings refer to the portion of corporate profits that are not distributed as dividends but are retained by the company for reinvestment. They are also called undistributed profits or reserves. Retained earnings are part of the company's savings and are used for future expansion, debt repayment, or other business purposes.

Question 5

Distinguish between Consumption goods and Capital goods. Giving valid reasons, classify the following into stock and flow variables : (i) Population of India as on 31st March, 2021 (ii) Domestic Income of Indian Economy during the fiscal year 2020 – 21

Accepted Answer

Distinguish between Consumption goods and Capital goods:

Consumption goods: Goods used for final consumption by households. They satisfy direct wants. Example: Food, clothing, electronics.

Capital goods: Goods used for further production. They help in producing other goods. Example: Machinery, equipment, factories.

Stock vs Flow variables:

(i) Population of India as on 31st March, 2021: Stock variable
- Measured at a particular point in time
- It is a snapshot of population on a specific date

(ii) Domestic Income: Flow variable
- Measured over a period of time
- It represents income generated during a year

National Income and Related Aggregates

Study Simplify Special