Part – A Multiple choice questions
1. The branches of the subject Economics is | |
a) Wealth and welfare | |
b) production and consumption | |
c) Demand and supply | |
d) micro and macro | |
2. Who coined the word ‘Macro’? | |
a) Adam Smith | |
b) J M Keynes | |
c) Ragnar Frisch | |
d) Karl Marx | |
3. Who is regarded as Father of Modern Macro Economics? | |
a) Adam Smith | |
b) J M Keynes | |
c) Ragnar Frisch | |
d) Karl Marx | |
4. Identify the other name for Macro Economics. | |
a) Price Theory | |
b) Income Theory | |
c) Market Theory | |
d) Micro Theory | |
5. Macro economics is a study of ___________________. | |
a) individuals | |
b) firms | |
c) a nation | |
d) aggregates | |
6. Indicate the contribution of J M Keynes to economics. | |
a) Wealth of Nations | |
b) General Theory | |
c) Capital | |
d) Public Finance | |
7. A steady increase in general price level is termed as_____________. | |
a) wholesale price index | |
b) Business Cycle | |
c) Inflation | |
d) National Income | |
8. Identify the necessity of Economic policies. | |
a) to solve the basic problems | |
b) to overcome the obstacles | |
c) to achieve growth | |
d) all the above | |
9. Indicate the fundamental economic activities of an economy. | |
a) Production and Distribution | |
b) Production and Exchange | |
c) Production and Consumption | |
d) Production and Marketing | |
10. An economy consists of | |
a) consumption sector | |
b) Production sector | |
c) Government sector | |
d) All the above | |
11. Identify the economic system where only private ownership of production exists. | |
a) Capitalistic Economy | |
b) Socialistic Economy | |
c) Globalisic Economy | |
d) Mixed Economy | |
12. Economic system representing equality in distribution is _________. | |
a) Capitalism | |
b) Globalism | |
c) Mixedism | |
d) Socialism | |
13. Who is referred as ‘Father of Capitalism’? | |
a) Adam Smith | |
b) Karl Marx | |
c) Thackeray | |
d) J M Keynes | |
14. The country following Capitalism is ________________ . | |
a) Russia | |
b) America | |
c) India | |
d) China | |
15. Identify The Father of Socialism. | |
a) J M Keynes | |
b) Karl Marx | |
c) Adam Smith | |
d) Samuelson | |
16. An economic system where the economic activities of a nation are done both by the private and public together is termed as_____________. | |
a) Capitalistic Economy | |
b) Socialistic Economy | |
c) Globalisic Economy | |
d) Mixed Economy | |
17. Quantity of a commodity accumulated at a point of time is termed as ____________.. | |
a)production | |
b) stock | |
c) variable | |
d) flow | |
18. Identify the flow variable. | |
a) money supply | |
b) assests | |
c) income | |
d) foreign exchange reserves | |
19. Identify the sectors of a Two Sector Model. | |
a) Households and Firms | |
b) Private and Public | |
c) Internal and External | |
d) Firms and Government | |
20. The Circular Flow Model that represents an open Economy. | |
a) Two Sector Model | |
b) Three Sector Model | |
c) Four Sector Model | |
d) All the above |
Part – B Answer the following questions in one or two sentences
21. Define National Income.
Answer: According to Alfred Marshall, National Income is defined as “The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend”.
22. Write the formula for calculating GNP.
Answer: GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad.
23. What is the difference between NNP and NDP?
Answer:
Feature | NNP | NDP |
Definition | Net National Product refers to the value of the net output of the economy during the year. NNP is obtained by deducting the value of depreciation, or replacement allowance of the capital assets from the GNP. | NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes outdated each year during the production process. |
Formula | NNP is expressed as NNP = GNP – depreciation allowance. | Net Domestic Product = GDP – Depreciation. |
24. Trace the relationship between GNP and NNP.
Answer: GNP is the total measure of the flow of final goods and services at market value resulting from current production in a country during a year, including netincome from abroad. GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad. Net National Product refers to the value of the net output of the economy during the year. NNP is obtained by deducting the value of depreciation, or replacement allowance of the capital assets from the GNP.NNP = GNP – depreciation allowance.
25. What do you mean by the term ‘Personal Income’?
Answer: Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in a year. Personal income is derived from national income by deducting undistributed corporate profit, and employees’ contributions to social security schemes and adding transfer payment. Personal Income = National Income – (Social Security Contribution and undistributed corporate profits) + Transfer payments.
26. Define GDP deflator.
Answer: GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100.
GDP deflator =
27. Why is self consumption difficult in measuring national income?
Answer: Farmers keep a large portion of food and other goods produced on the farm for self consumption. The problem is whether that part of the produce which is not sold in the market can be included in national income or not.
Part – C Answer the following questions in one Paragraph
28. Write a short note on per capita income.
Answer: Per Capita Income is the annual average income of a person. A country with a higher per capita income is supposed to enjoy greater economic welfare with a higher standard
of living. But, an increase in per capita income due to employment of women and children or forcing workers to work for long hours will not promote economic welfare. Per capita income is obtained by dividing national income by population.
Per Capita Income =
29. Differentiate between personal and disposable income.
Answer:
Feature | Personal income | Disposable income |
Definition | Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in a year. | Disposable Income is the individuals income after the payment of income tax. |
Implication | Personal income is never equal to the national income, because it includes transfer payments whereas they are not included in national income. | This is the amount available for households for consumption. |
Formula | Personal Income = National Income – (Social Security Contribution and undistributed corporate profits) + Transfer payments | Disposal income = consumption + saving |
30. Explain briefly NNP at factor cost.
Answer: NNP refers to the market value of output. Whereas NNP at factor cost is the total of income payment made to factors of production. Thus from the money value of NNP at market price, we deduct the amount of indirect taxes and add subsidies to arrive at the net national income at factor cost.
NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.
31. Give short note on Expenditure method.
Answer: Under the Expenditure method, the total expenditure incurred by the society in a particular year is added together. The expenditure of a society includes personal consumption expenditure, net domestic investment, government expenditure on consumption as well as capital goods and net exports.
GNP = C + I + G + (X-M) where:
C – Private consumption expenditure
I – Private Investment Expenditure
G – Government expenditure
X-M = Net exports
32. What is the solution to the problem of double counting in the estimation of national income?
Answer: The problem of double counting in the estimation of national income can be avoided as follows:
- Double counting is to be avoided under value added method. Any commodity which is either raw material or intermediate good for the final production should not be included. For example, value of cotton enters value of yarn as cost, and value of yarn in cloth and that of cloth in garments. At every stage value added only should be calculated.
- To avoid double counting, either the value of the final output should be taken into the estimate of GNP or the sum of values added should be taken.
33. Write briefly about national income and welfare.
Answer: National Income is considered as an indicator of the economic wellbeing of a country. The economic progress of countries is measured in terms of their GDP per capita and their annual growth rate. A country with a higher per capita income is supposed to enjoy greater economic welfare with a higher standard of living. But the rise in GDP or per capita income need not always promote economic welfare.
34. List out the uses of national income.
Answer:
- To know the relative importance of the various sectors of the economy and their contribution towards national income.
- To formulate the national policies such as monetary policy and fiscal policy and other policies.
- To formulate planning and evaluate plan progress.
- To build economic models both in the short – run and long – run.
- To make international comparison, inter – regional comparison and inter – temporal comparison of growth of the economy during different periods.
- To know a country’s per capita income which reflects the economic welfare of the country.
- To know the distribution of income for various factors of production in the country.
- To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account Deficit – GDP ratio, Fiscal Deficit – GDP ratio, Debt – GDP ratio etc.
Part – D Answer the following questions in about a page
35. Explain the importance of national income.
Answer:
- To know the relative importance of the various sectors of the economy and their contribution towards national income; from the calculation of national
income, we could find how income is produced, how it is distributed, how much is spent, saved or taxed. - To formulate the national policies such as monetary policy and fiscal policy, proper measures can be adopted to bring the economy to the right path with the help of collecting national income data.
- To formulate planning and evaluate plan progress; it is essential that the data pertaining to a country’s gross income, output, saving and consumption from different sources should be available for economic planning.
- To build economic models both in the short – run and long – run.
- To make international comparison, inter – regional comparison and inter – temporal comparison of growth of the economy during different periods.
- To know a country’s per capita income which reflects the economic welfare of the country.
- To know the distribution of income for various factors of production in the country.
- To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account Deficit – GDP ratio, Fiscal Deficit – GDP ratio, Debt – GDP ratio etc.
36. Discuss the various methods of estimating the national income of a country.
Answer: There are three methods that are used to measure national income.
- Production or value added method
- Income method or factor earning method
- Expenditure method
Product Method
Product method measures the output of the country. It is also called inventory method. Under this method, the gross value of output from different sectors like agriculture, industry, trade and commerce, etc., is obtained for the entire economy during a year. The value of the final product is derived by the summation of all the values added in the productive process.
In India, the gross value of the farm output is obtained as follows :
(i) Total production of 64 agriculture commodities is estimated. The output of each crop is measured by multiplying the area sown by the average yield per hectare.
(ii) The total output of each commodity is valued at market prices.
(iii) The aggregate value of total output of these 64 commodities is taken to measure the gross value of agricultural output.
(iv) The net value of the agricultural output is measured by making deductions for the cost of seed, manures and fertilisers, market charges, repairs and depreciation from the gross value.
Similarly, the gross values of the output of animal husbandry, forestry, fishery, mining and factory establishments are obtained. Net value of the output in these sectors is derived by making deductions for cost of materials used in the process of production and depreciation allowances, etc. from gross value of output.
Precautions
- Double counting is to be avoided under value added method.
- The value of output used for self consumption should be counted.
- Sale and purchase of second hand goods should not be included.
Income Method
This method approaches national income from the distribution side. Under this method, national income is calculated by adding up all the incomes generated in the course of producing national product.
Steps involved
- The enterprises are classified into various industrial groups.
- Factor incomes are grouped under labour income, capital income and mixed income.
- i) Labour income – Wages and salaries, fringe benefits, employer’s contribution to social security.
- ii) Capital income – Profit, interest, dividend and royalty
- iii) Mixed income – Farming, sole proprietorship and other professions.
- National income is calculated as domestic factor income plus net factor incomes from abroad. Y = w + r + i + π + (R-P) where w = wages, r = rent, i = interest, π = profits, R = Exports and P = Imports.
This method is adopted for estimating the contributions of small enterprises, banking and insurance, commerce and transport, professions, liberal arts and domestic service, public authorities, house property and foreign sector transaction. Data on income from abroad is obtained from the account of the balance of payments of the country.
Precautions
- Transfer payments such as pension and social insurance are not to be included in estimating national income.
- The receipts from the sale of second hand goods should not be treated as part of national income.
- Windfall gains such as lotteries are also not to be included.
- Corporate profit tax should not be separately included.
Items to be included
- Imputed value of rent for self occupied houses or offices is to be included.
- Imputed value of services provided by owners of production units is to be included.
The Expenditure Method
Under this method, the total expenditure incurred by the society in a particular year is added together. Expenditure of a society includes personal consumption expenditure, net domestic investment, government expenditure on consumption as well as capital goods and net exports.
GNP = C + I + G + (X-M) where C – Private consumption expenditure I – Private Investment Expenditure G – Government expenditure X-M = Net exports
Precautions
- The expenditure made on second hand goods should not be included.
- Expenditure on purchase of old shares and bonds in the secondary market should not be included.
- Expenditure towards payment incurred by the government like old age pension should not be included.
- Expenditure on seeds and fertilizers by farmers, cotton and yarn by textile industries are not to be included to avoid double counting.
37. What are the difficulties involved in the measurement of national income?
Answer: The difficulties involved in the measurement of national income are as follows:
1. Transfer payments
Government makes payments in the form of pensions, unemployment allowance, subsidies, etc. These are government expenditure. But they are not included in the national income. Because they are paid without adding anything to the production processes. During a year, Interest on national debt is also considered transfer payments because it is paid by the government to individuals and firms on their past savings without any productive work.
2. Difficulties in assessing depreciation allowance
The deduction of depreciation allowances, accidental damages, repair and replacement charges from the national income is not an easy task. It requires high degree of judgment to assess the depreciation allowance and other charges.
3. Unpaid services
A housewife renders a number of useful services like preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up children, etc. She is not paid for them and her services are not directly included in national income. The reason for the exclusion of her services from national income is that the love and affection of a housewife in performing
her domestic work cannot be measured in monetary terms. Similarly, there are a number of goods and services which are difficult to be assessed in money terms, such as rendering
services to friends, painting, singing, dancing, etc.
4. Income from illegal activities
Income earned through illegal activities like gambling, smuggling, illicit extraction of liquor, etc., is not included in national income. Such activities have value and satisfy the wants of the people but they are not considered as productive from the point of view of society.
5. Production for self-consumption and changing price
Farmers keep a large portion of food and other goods produced on the farm for self consumption. The problem is whether that part of the produce which is not sold in the market can be included in national income or not. National income by product method is measured by the value of final goods and services at current market prices. But prices do not remain stable. They rise or fall. To solve this problem, economists calculate the real national income at a constant price level by the consumer price index.
6. Capital Gains
Capital gains arise when a capital asset such as a house, other property, stocks or shares, etc. is sold at higher price than was paid for it at the time of purchase. Capital gains are excluded from national income.
7. Statistical problems
The following are the some of the statistical problems:
- Accurate and reliable data are not adequate, as farm output in the subsistence sector is not completely informed. In animal husbandry, there are no authentic production data
available. - Different languages, customs, etc., also create problems in computing estimates.
- People in India are indifferent to the official inquiries. They are in most cases non-cooperative also.
- Most of the statistical staff are untrained and inefficient.
Therefore, national income estimates in our country are not very accurate or adequate. There is at least 10 per cent margin of error. That is why the GDP estimates for India varies from 2 trillion US dollar to 5 trillion US dollars.
38. Discuss the importance of social accounting in economic analysis.
Answer: National income is also being measured by the social accounting method.
Under this method, the transactions among various sectors such as firms, households, government, etc., are recorded and their interrelationships traced. The social accounting framework is useful for economists as well as policy makers, because it represents the major economic flows and statistical relationships among various sectors of the economic system. It
becomes possible to forecast the trends of economy more accurately.
A sector is a group of individuals or institutions having common interrelated economic transactions. The economy is divided into the following sectors:
(i) Firms,
(ii) Households,
(iii) Government,
(iv) Rest of the world and
(v) Capital sector.
Firms undertake productive activities. Thus, they are all organizations which employ the factors of production to produce goods and services.
Households are consuming entities and represent the factors of production, who receive payment for services rendered by them to firms. Households consume the goods and services that are produced by the firms. Thus, firms make payment to households for their services. Households spend money incomes they received on the goods and services produced by the firms. This is a circular flow of money between these two groups.
The Government sector refers to the economic transactions of public bodies at all levels, centre, state and local. Edey and Peacock have defined government as a collective ‘person’ that purchases goods and services from firms. These purchases may be financed through taxation, public borrowings, or any other fiscal means. The main function of the government is to provide social goods like defence, public health, education, etc. This means satisfying the collective wants of society. However, public enterprises like Post Offices and railways are separated from the Government sector and included as “Firms”.
Rest of the world sector relates to international economic transactions of the country. It contains income, export and import transactions, external loan transaction, and allied overseas investment income and payments.
Capital sector refers to saving and investment activities. It includes the transactions of banks, insurance corporations, financial houses, and other agencies of the money market. These are not included under “Firms”. These agencies merely provide financial assistance to the firms’ activities.
Leave a Reply