2nd PUC Economics Question Bank Chapter 8 National Income Accounting

Students can Download Economics Chapter 8 National Income Accounting Questions and Answers, Notes Pdf, 2nd PUC Economics Question Bank with Answers helps you to revise the complete Karnataka State Board Syllabus and to clear all their doubts, score well in final exams.

Karnataka 2nd PUC Economics Question Bank Chapter 8 National Income Accounting

2nd PUC Economics National Income Accounting One Mark Questions and Answers

I. Choose The Correct Answer.

Question 1.
The Study of National Income is related to ……………………
(a) Micro economics
(b) Macro economics
(c) Both Micro & Macro
(d) None of the above
Answer:
(b) Macro economics

Question 2.
NNP = GNP -……………………
(a) Deduction
(b) Depreciation
(c) Investment
(d) None of the above
Answer:
(b) Depreciation

Question 3.
The value of GDP at the current prevailing prices is……………………
(a) Real GDP
(b) GDP at Factor cost
(c) Nominal GDP
(d) NDP
Answer:
(c) Nominal GDP

Question 4.
By deducting undistributed profit from national income, we get……………………
(a) Personal Disposable Income
(b) Personal Income
(c) Private income
(d) Subsidies
Answer:
(b) Personal Income

Question 5.
Measuring the sum total of all factor payments will be called……………………
(a) Product method
(b) expenditure method
(c) Income method
(d) None of the above
Answer:
(c) Income method

Question 6.
Which of the following option is an economic activity?
(a) Listening to music on the radio
(b) Teaching one’s own son at home
(c) Medical facilities rendered by a charitable dispensary.
(d) A house wife doing household duties.
Answer:
(c) Medical facilities rendered by a charitable dispensary.

Question 7.
Per capita income means:……………………
(a) Population / NNP
(b) Total capital population
(c) NNP/Population
(d) None of the above
Answer:
(c) NNP/Population

Question 8.
Goods purchased for the following purpose are final goods
(a) For satisfaction of want
(b) For investment in firm
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)

Question 9.
Domestic income is lower than national income
(a) Due to positive NFIA
(b) Due to negative net indirect taxes
(c) Due to negative NFIA
(d) Due to positive net indirect taxes
Answer:
(a) Due to positive NFIA

Question 10.
Domestic income is higher than national income
(a) Due to positive NFIA
(b) Due to negative net indirect taxes
(c) Due to negative NFIA
(d) Due to positive net indirect taxes.
Answer:
(c) Due to negative NFIA

Question 11.
Which of the following is an example of final good?
(a) Unemployment compensation
(b) A Music system puchased as a gift
(c) Steel used in production of appliances
(d) Milk purchased by hotel.
Answer:
(b) A Music system purchased as a gift

Question 12.
Value added is
(a) Value of output
(b) Value of final output
(c) Sales + change in stock
(d) Value of intermediate consumption
Answer:
(b) Value of final output

Question 13.
Which one of the following good come under consumption goods?
(a) Durable goods
(b) Semi-durable goods
(c) Non-durable goods
(d) All of the above
Answer:
(d) All of the above

Question 14.
Goods produced for the satisfaction of wants are called……………………
(a) Capital goods
(b) Intermediate goods
(c) Consumption goods
(d) Produces goods
Answer:
(c) Consumption goods

Question 15.
Which of the following is the money value of total output produced in an economy?
(a) Private income
(b) National income
(c) Personal disposable income
(d) None of the above
Answer:
(b) National income

Question 16.
The book “An Enquiry into the Nature and Cause of The Wealth of Nations” was written by……………………
(a) Alfred Marshall
(b) J M Keynes
(c) Adam Smith
(d) Amartya Sen
Answer:
(c) Adam Smith

Question 17.
Transfer payments refer to payments which are made.
(a) without any exchange of goods and services
(b) to workers on transfer from one job to another
(c) as compensation to employees
(d) none of the above
Answer:
(a) without any exchange of goods and services

Question 18.
Net value added is equal to……………………
(a) payments accruing to factors of production.
(b) compensation to employees
(c) wages plus rent
(d) value of output minus depreciation
Answer:
(a) payments accruing to factors of production.

Question 19.
Per capita national income means……………………
(a) NNP ÷ population
(b) Total capital ÷ population
(c) Population ÷ NNP
(d) None of these
Answer:
(a) NNP ÷population

Question 20.
Which variables are defined as any quantity measured at a particular point of time?
(a) Stock
(b) flow
(c) Investment
(d) Inventory
Answer:
(a) Stock

Question 21.
refers to the flow of money across different sectors of the economy
(a) Real flow
(b) Circular flow
(c) Money flow
(d) Both (a) and (c)
Answer:
(c) Money flow

Question 22.
In GNP Calculation, which of the following should be excluded?
(a) Rental incomes
(b) Interest payments
(c) Dividends
(d) Government transfer payment
Answer:
(d) Government transfer payment

Question 23.
Which of the following represents National Income?
(a) GNP_FC
(b) NDP_FC
(c) NNP_MP
(d) NNP_FC
(d) NNP_FC

Question 24.
The most common problem in estimating GNP is……………………
(a) double counting
(b) smuggling
(c) black marketing
(d) unorganised market
Answer:
(a) double counting

II. Fill in the Blanks

1.  ……………………….. are defined at a particular point of time.
Answer:
Stocks

2. ……………………….. goods will not pass through any more stages of production.
Answer:
Final

3. ………………………..  is an annual allowance for wear and tear of a capital good.
Answer:
Depreciation

4. ……………………….. is a stock variable.
Answer:
Inventory

5. Pollution is an example for ………………………..  externalities.
Answer:
Negative

6. The net contribution made by a firm is called its………………………..
Answer:
Value added

7. Real national income means the national income is measured in terms of ………………………..
Answer:
Constant prices

8. The deletion which is made from the value of gross investment in order to accommodate regular wear and tear of capital is ………………………..
Answer:
Depreciation

9. The story which describes the functioning of an imaginary economy is………………………..
Answer:
Macroeconomic Model.

10. ……………………….. is deducted from GNP to arrive at NNP.
Answer:
Depreciation

11. Nominal national income means the national income is measured in terms of ………………………..
Answer:
Current Prevailing Prices

12. Wholesale price is also called as ………………………..  in country like USA
Answer:
Producer Price Index

13. ……………………….. are defined as a period of time.
Answer:
Flows

14. ……………………….. are defined as a particular point of time.
Answer:
Stocks

15. ……………………….. is the money value of all final goods and services produced in a country during a particular period.
Answer:
National Income

16. Goods which are purchased for final use are ………………………..
Answer:
Final goods

17. Goods which are used in the production of some other goods are …………………………
Answer:
Capital goods.

18. In Economics, the stock of unsold finished goods, or semi-finished goods, or raw materials which a firm carries from one year to the next is called …………………………
Answer:
Inventory.

19. Addition to the stock of capital of a firm is known as …………………………
Answer:
Investment.

20. ………………………..  measures the aggregate production of final goods and services taking place within the domestic economy during a year.
Answer:
Gross Domestic Product

21. GNP stands for ………………………..
Answer:
Gross National Product.

22. The ratio of nominal to real GDP is a well known index of prices, This is called ………………………..
Answer:
GDP Deflator.

23. ……………………….. is the index of prices of a given basket of commodities which are bought by the
representative consumer.
Answer:
Consumer Price Index

24. ……………………….. is the satisfaction or utility derived by an individual from the use of economic goods and services.
Answer:
Economic Welfare

25. ………………………..  refer to the benefits or harm a firm or an individual causes to another for which they are not paid or penalized.
Answer:
Externalities

26. The four factors of production are ……………………….., ……………………….. and ………………………… .
Answer:
Land, Labour, Capital and Organization.

27. ……………………….. is the flow of goods and services in circular flow of income.
Answer:
Real flow

28. Out of national income, which is earned by the firms and government enterprises, a part of profit in not distributed among the factors of production. This is called as ………………………..
Answer:
Undistributed Profits

III. Match the following:

Question 1.

A	B
1. Labour	a. Non – Monetany exchange
2. GDP	b. Personal Disposable Income
3. Inventory	c. Gross Domestic Product
4. PDI	d. Stock variable
5. Domestic service	e. Wages

Answers:
1. (e) Wages
2. (c) Gross Domestic Product
3. (d) Stock variable
4. (b) Personal Disposable Income
5. (a) Non – Monetany exchange

Question 2.

A	B
1. CPI	(a) Current prevailing prices
2. WPI	(b) Wealth of Nations
3. Nominal GDP	(c) Producer Price Index
4. GDP	(d) Constant Prices
5. Real GDP	(e) Whole Sale Price Index
6. PPI	(f) GDP/gdp
7. GDP Deflator	(g) Consumer Price Index
8. Adam Smith	(h) Gross Domestic Product

Answers:
(g) Consumer Price Index
(e) Whole Sale Price Index
(a) Current prevailing prices
(h) Gross Domestic Product
(d) Constant Prices
(c) Producer Price Index
(f) GDP/gdp
(b) Wealth of Nations

IV. Answer the following questions in a sentence/word.

Question 1.
What do you mean by final goods?
Answer:
The good that will not pass through any more stages of production or transformations is called a final good.

Question 2.
Expand CPI.
Answer:
Consumer Price Index

Question 3.
Expand GNPmp”
Answer:
Gross National Product at market price.

Question 4.
How do you get net value added?
Answer:
If we deduct the value of depreciation from gross value added we obtain Net Value Added.

Question 5.
Give the meaning of GDP.
Answer:
Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year.

Question 6.
Give the meaning oflntermediate goods.
Answer:
Intermediate goods are those goods used as raw materials or inputs for production of other commodities.

Question 7.
What is Depreciation?
Answer:
The deletion which is made from the value of gross investment in order to accommodate regular wear and tear of capital is called depreciation.

Question 8.
How do we get personal Disposable income?
Answer:
If we deduct the Personal Tax Payments and Non-Tax Payments from Personal income, we obtain Personal Disposable Income.

Question 9.
Write the equation of GVA at market prices.
Answer:
GVA at basic prices + Net product taxes = GVA at Market prices.

Question 10.
What is GDP deflator?
Answer:
The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator.

2nd PUC Economics National Income Accounting Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
What are the four factors of production? mention their rewards.
Answer:
The four factors of production are Land, Labour, Capital and Organisation. The rewards of factors of production are Rent, Wages, Interest and Profit.

Question 2.
Distinguish between stock and flow. Give example.
Answer:
Stock is defined at a particular point of time. Flows are defined over a period of time. For example, suppose a tank is being filled with water coming from a tap. The amount of water is flowing into the tank per minute is a flow. But how much water there is in the tank at a particular point of time is a stock concept.

Question 3.
What is the difference between consumer goods and capital goods?
Answer:
Goods like food and clothing, services like recreation that are consumed when purchased by their ultimate consumers are called consumer goods.
Goods which are used in the production of some other goods are capital goods. For example, machinery, tools, equipments etc.

Question 4.
Mention 3 Methods of measuring GDP (National Income).
Answer:
The three methods of measuring national income are

(a) Product Method
(b) Income Method
(c) Expenditure Method

Question 5.
What do you mean by externalities? Mention its two types.
Answer:
Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). There are two types of externalities,

(a) Positive Externalities
(b) Negative Externalities

Question 6.
Write the equation of GDP_Mp and GDP_FC
Answer:
The equation of GDP_Mp is
GDP_Mp = C + I + G + X-M
The equation of GDP_FC is
GDP_FC = GDP_Mp – Net Product Taxes (NIT)

Question 7.
Write the difference between nominal and real GDP.
Answer:
Real GDP is calculated in a way such that goods and services are evaluated at some constant prices.
Where as, Nominal GDP is simply the value of GDP at the current prevailing prices.

2nd PUC Economics National Income Accounting Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Write a short note on the concept of final good.
Answer:
Final good are those goods which are ready to use. The goods are called as final good because,

• Once the final good is sold, it passes out of the active economic flow.
• It will not undergo any further transformation at the hands of any producer.
• It, may, however, undergo transformation by the action of the producer.

Thus the tea leaves purchased by the consumer are not consumed in that form – they are used to make drinkable tea, which is consumed. Similarly most of the items that enter out kitchen are transformed through the process of cooking. But cooking at home is not an economic activity, because it is not offered for sale. But the same is cooked is restaurant it is economic activity because it is offered for sale and it is considered as final good.
Thus it is not the nature of the good but in the economic nature of its use that a good becomes a final good.

Question 2.
Explain the circular flow of income of an economy.
Answer:
Meaning: The circular flow of income and expenditure illustrates the process whereby, the 1 national income and expenditure of an economy flows in a circular manner continuously between different sectors.
Circular flow of income in a simple economy

A simple economy is a closed economy in which there is no government, or external trade or ‘ savings.
The following are the assumptions of two sector model economy.

• There are only two sectors in the economy. They are household and firms or producers.
• Households are the owners of factors of production. And firms buy these factors form household.
• Households receive income from the firms by selling the factor services and spend their entire income on consumption. There are no savings.
• Firms sell their entire produce to the households. There are no inventories.
• The economy is a closed economy, without government or external trade.

With the help of above assumptions we can explain the circular flow of income with the help of a chart.

In the above chart we can see that the household sector supplies factors such as land, labour, capital and organization to firms and the firms produce and supply goods to households. This supply of goods and services from one sector to another is called as real flow.
Firms make factor payments such as rent, wages, interest and profit to households as reward for factor services.

Households spend this income on buying goods and services produced by firms. This is money flow.
In the above chart we can calculate national income at three points namely A, B and C. If we add all the factor payments at point C, it is called as income method. If we add the aggregate spending on goods at point A it is called as expenditure method. If we add the final good at point B, it is product method.

Conclusion: In this way, production generates factor income, which is converted into expenditure. Thus, production is a continuous activity because human wants are unlimited. This makes the flow of income circular.

Question 3.
Write a note on externalities.
Answer:
Externalities refer to the benefits (or harms] a firm or an individual causes to another for which they are not paid (or penalized]. There are two types of externalities,

1. Positive Externalities
2. Negative Externalities

For example, let us suppose there is an oil refinery which refines crude petroleum and sells it in the market. The value added of the refinery will be counted as part of the GDP of the economy which is called as positive externality. But in carrying out the production the refinery may also be polluting the nearby river which harm creates harm to the people who use the water of the river and hence it is called as negative externality.
Thus externalities are a limitation for treating GDP as an index of welfare.

Question 4.
Illustrate unplanned accumulation and decumulation of inventories with an example.
Answer:
In case of an unexpected fall in sales, the firm will have unsold stock of goods which is not anticipated. Hence there will be unplanned accumulation of inventories.

For example, suppose a firm starts the year with an inventory of 100 shirts and it expects to sell 1000 shirts for the coming year and it produces 1000 shirts and expecting to keep 100 as inventories.
However, during the year, the sales of shirt turned out to be unexpectedly low where the firm is able to sell only 600 shirts. This means that the firm is left with 400 unsold shirts. The firm ends the year with 400+100=500 shirts. The unexpected rise of inventories by 400 will be an example of unplanned accumulation of inventories.

In case of an unexpected rise in the sales there will be unplanned decumulation of inventories.
For example, if the sales are more than 1000 shirts during the year we would have unplanned decumulation of inventories. Suppose the sales are 1050, then the firm will have to sell 50 extra shirts out of the 100 shirts of inventories along with the 1000 shits. This 50 unexpected reduction in inventories is an example of unexpected decumulation of inventories.

Question 5.
Explain the examples of planned accumulation and decumulation of inventories.
Answer:
In case, if the firm wants to increase the inventories purposefully then it is called as planned accumulation of inventories.
For example, suppose the firm wants to raise the inventories from 100 shirts to 200 shirts during the year. Expecting the sales of 1000 shirts during the year, the firm produces 1000 +100 = 1100 shirts. If the sales are actually 100 shirts, then the firm indeed ends up with a rise of inventories. The new stock of inventories is 200 shirts, which was planned by the firm. This rise is an example of planned accumulation of inventories.

In case, if the firm wants to decrease the inventories purposefully then it is called as planned decumulation of inventories.
For example, If the firm wanted to reduce the inventories from 100 to 25 shirts, then it would produce 1000-72 = 925 shirts. This is because it plans to sell 75 shirts out of 100 shirts it started as inventories. If the sales indeed turn out to be 100 as expected by the firm, then the firm will be left with planned decumulation of inventories that is 25 shirts.

2nd PUC Economics National Income Accounting Six Marks Questions and Answers

VII. Answer the following Questions in 20 Sentences.

Question 1.
Explain the macro economic identities.
Answer:
The following are some of the macroeconomic identities:
(a) Gross Domestic Product (GDP): It measures the aggregate production of final goods and services taking place within the domestic economy during a year. GDP ignores the value of goods and services produced by Non-Resident Indians working in foreign countries, but consider the same when it is produced by foreigners working in India.

(b) Gross National Product (GNP): GNP measures the total money value of all final goods and services produced in a nation in particular year, plus net income from abroad.
GNP = GDP + Factor income earned by the domestic factors of production employed in the rest of the world – factor income earned by the factors of production of rest of the world employed in the domestic country.
Hence, GNP = GDP + Net factor income from abroad.

(c) Net National Product (NNP): It has been noted that a part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. Naturally, depreciation does not become part of anybody’s income. If we deduct depreciation from GNP we obtain Net National Product.
Thus NNP = GNP – Depreciation
While calculating NNP at market prices, we have to deduct Indirect taxes from NNP and add subsides to the NNP.

By doing so, we obtain NNP at factor cost or National Income.
Thus, NNP at factor cost = National Income = NNP at market prices – (indirect taxes – subsidies) = NNP at market prices – Net indirect taxes (Net indirect taxes = indirect taxes -Subsidies).

(d) Personal Income (PI): Out of national income, which is earned by the firms and government enterprises, a part of profit in not distributed among the factors of production. This is called as Undistributed Profits. We have to deduct Undistributed Profits from National Income to arrive at Personal Income.
Thus, Personal Income (PI) = NI – Undistributed Profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

(e) Personal Disposal Income (PDI): The whole of the Personal Income cannot be spent on consumption because taxes have to be paid on the income.
PDI = PI – Personal tax payments (example income tax) – Non-tax payments.(example fines). PDI is the part of the aggregate income which belongs to the households. They may decide to consume a part of it, and save the rest.

Question 2.
Briefly explain the expenditure method of measuring GDP.
Answer:
In this method we add the final expenditures that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

Firm i can make the final expenditure on the following accounts

(a) The final consumption expenditure on the goods and services produced by the firm. We shall denote this by Ci. We may not that mostly it is the households which undertake consumption expenditure.

(b) The final investment expenditure, Ii, incurred by other firms on the capital goods produced by firm i.
Observe that unlike the expenditure on intermediate goods which is not included in the calculation of GDP, expenditure on investments is included. The reason is investment goods remain with the firm, whereas intermediate goods are consumed in the process of production.

(c) The expenditure that the government makes on the final goods and services produced by firm i. We shall denote those by Gi. (Both consumption and investment expenditure of government is included).

(d) The export revenues that firm 1 earns by selling its goods and services abroad. This will be denoted by Xi.

Thus the sum total of the revenues that the firm i earns is given by RV. = Sum total of final consumption, investment, government and exports expenditures received by the firm i
= C_i + I_i + G + X

If there are N firms then summing over N firms we get
\(\sum_{i=1}^{N} R V_{i} \equiv\) sum total of final consumption, investment, government and exports expenditures received by all the firms in the economy
\(\equiv \sum_{i=1}^{N} C_{i}+\sum_{i=1}^{N} I_{i}+\sum_{i=1}^{N} G_{i}+\sum_{i=1}^{N} X_{i}\)

Let C be the aggregate final consumption expenditure of the entire economy. Cm denotes expenditure on the imports of consumption goods. Therefore C – Cm denotes that part of aggregate final consumption expenditure that is spent on the domestic firms.

Similarly, let I -I_m stand for that part of aggregate final investment expenditure that is spent on domestic firms, where I is the value of aggregate final investment expenditure of the economy and out of this I_m is spent on foreign investment goods.
Similarly, G – G_m stands for that part of aggregate final government expenditure that is spent on the domestic firms, where G is the aggregate expenditure of the government of the economy and G_m is the part of G which is spent on imports.

Here X (equation to be given) denotes aggregate expenditure by the foreigners on the exports of the economy. M = C_m + I_m + G_m is the aggregate imports expenditure incurred by the economy. Therefore, \(\mathrm{GDP} \equiv \sum_{i=1}^{N} \mathrm{RV}_{i} \equiv \mathrm{C}+\mathrm{I}+\mathrm{G}+\mathrm{X}-\mathrm{M}\)

Question 3.
Explain a numerical example to show that all the three methods of estimating GDP gives us the same answer.
Answer:
Let us look at a numerical example to see how all three methods of estimating GDP gives us the same answer.
There are two firms, A and B. Suppose firm A uses no raw material and produces cotton worth ₹50. Firm A sells its cotton to firm B, who uses it to produce cloth. Firm B sells the cloth produced to consumer for ₹200.

1. GDP in the phase of production or the value added method: Value added (VJ = sales – intermediate goods.
Thus V_A of firm A = 50 – 0 = 50 and V_A of firm B = 200 – 50 = 150 Thus, GDP = V. of firm A + V_A of firm B = 200
Distribution of GDPs for firm A and B

	Firm A	Firm B
Sales	50	200
Intermediate Consumption	0	50
Value Added	50	150

2. GDP in the phase of expenditure method: GDP = sum of final expenditure or expenditure on goods and services for end use.
In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200

3. GDP in the phase of income method.
Now, of this 50 received by firm A, the firm gives ₹20 to the workers as wages and keeps the remaining 30 as its profits. Similarly, firm B gives 60 as wages and keeps 90 as profits.

Distribution of factor incomes of firms A and B

	Firm A	Firm B
Wages	20	60
Profits	30	90

GDP by income method = sum total of factor incomes, which is equal to total wages received by both the firms and total profits earned by both the firms, which is equal to 80 + 120 = 200
Hence, estimation of GDP gives us same answer in all three methods of calculating GDP.

Question 4.
Write down some of the limitations of using GDP as an index of welfare of a country.
Answer:
Following are limitations of using GDP as an index of welfare of a country,
(a) Distribution of GDP: It is to be seen as to how the increase in national income is distributed. If national income rises, it is not necessary that income of each individual rises in the same proportion. Individual incomes may rise in different proportions. In some cases, it may fall. In other words, inequalities may rise. Rise in inequalities in income may adversely affect the economic welfare of the society. Therefore, for ascertaining the effect on increase in national income, it has to be seen whether it increases income inequalities or reduces income inequalities.

(b) Non- Monetary exchanges: Many activities in an economy are not evaluated in monetary terms. GDP is underestimated by the way of not calculating of Non- monetary exchanges. In India, non-monetary transactions are quite evident in rural areas. So, GDP is not a good indicator of economic welfare.

(c) Externalities: Externalities refer to the benefits or harm a firm or an individual causes to another for which they are not paid or penalized. For example, chemical factory increases output of chemicals and, hence increases GDP but, at the same time, it has negative effect because it pollutes nearby atmosphere. As a result of which people living nearby are adversely affected. Thus externalities are a limitation for treating GDP as an index of welfare.