Chapter 2 National Income and Related Aggregates Solutions
Question - 1 : - Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
Answer - 1 : - The sum of final expenditures in an economy must be equal to the income received by all the factors of production taken together (final spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interests earning and rents.
Question - 2 : - What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Answer - 2 : -
Planned Inventory. It refers to changes in the stock inventories that have occurred in a planned way. In a situation of planned inventory accumulation, firm will plan to raise its inventories. Unplanned Inventory. It refers to changes in the stock of inventories that have occurred in an unexpected way. In a situation of unplanned inventory accumulation, due to unexpected fall in sales, the firm will have unsold stock of goods.
Value added of a firm (GVA) = Gross value of output produced by the firm – Value of intermediate goods used by the firm.
OR
GVA = Value of sales by the firm + Value of change in inventories – Value of intermediate goods used by the firm
Question - 3 : - Write down the three identities of calculating the GDP of a country by the three methods. Also, briefly explain why each of these should give us the same value of GDP.
Answer - 3 : - National Income = National Product = National Expenditure. Each one will give the same result. The only difference is that with product methods, NI is calculated at production or creation level with income Method NI is measured at distribution level, and with expenditure method NI is measured at disposal level
Question - 4 : - Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (-) Rs 1,500 crores. What was the volume of trade deficit of that country?
Answer - 4 : -
Budget deficit. It measures the amount by which the government expenditure exceeds the tax revenue earned by it. Budget Deficit = G – T.
Trade deficit: It measures the amount of excess expenditure over the export revenue earned by the country.
Trade Deficit = M – X
Given G – T = (-) Rs 1500 crore
Investment – Saving = Rs 2000 crore Trade deficit = [I – S] + [G – T]
= [2000]+ [-1500] = Rs 500 crore.
Question - 5 : - Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores.
Answer - 5 : - The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.
Answer
National Income (or NNPFC) = GDPmp- Depreciation + Net factor income from abroad – [Indirect Taxes-Subsides] 850 = 1100 – Depreciation +100- 150
Depreciation = 1100+ 100- 150-850 Depreciation = Rs 200 Crore
Answer - 6 : - There are no interest payments made by the households to the firms / government, or by the firms / government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
Answer
Personal disposable income = Personal income – Personal tax – miscellaneous receipts of government 1200 = Personal Income – 600 – 0 Personal Income = 1800 Crore Private Income = Personal income + retained earnings + corporate tax = 1800 + 200 + 0 = 2000 Crore Private income = NNPFC (National income) – NDPFC of government sector + Value of transfer payment 2000 = 1900 – 0 + Value of transfer payment
Value of transfer payment =100 Crore
Answer - 7 : - 
Answer
Private Income = NDPFC – NDPFC of government sector + NFIA + Transfer Income + net interest receive from household (Interest Received by Households – Interest Paid by Households) = (i) – 0 + (ii) + (vii) + [(v) – (vi)]
= 8000 + 200 + 300 + (1500 – 1200)
= 8800 Crore
Personal Income = Private income – Undistributed profit – Corporation tax = 8800 – (iii) – (ii)
= 8800 – 1000 – 500 = 7300 Crore
Personal Disposable Income =
Personal income – Personal tax = 7300 – (viii)
= 7300 – 500 = 6800 Crore
Answer - 8 : -
Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income
Gross Domestic Product
NNP at market price
NNP at factor cost
Personal income
Personal disposable income.
Answer
- GDP contribution by Raju = Rs 500
- NNPMP (Raju’s contribution) = GDP – Depreciation = 500 – 50 = Rs 450.
- NNPrr (Raju’s contribution) = NNPMP -Indirect tax =450-30 = Rs 420
- Personal Income = NNPFC-Retained Earnings = 420 – 220 = Rs 200
- Personal Disposable Income = Personal Income – Income Tax = 200 – 20 = Rs 180 Crore
Answer - 9 : - The value of GNP of that countiy during the same year evaluated at the prices of the same base year was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Did the price level rise between the base year and the year under consideration?
Answer
GNP deflator = Nominal GNP/Real GNP x 100 = 83.3%
No, the price level did not rise between the base year and the year under consideration. In fact, it fell.
Answer - 10 : -
Per Capita Real GDP can be taken as indicator for economy. But by itself is not an adequate indicator. There are many reasons behind this. These are:
1. Many goods and services contributing economic welfare are not included in GDP Or Non-Monetary exchanges.
(a)There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
(b)These are left on account of non availability of data and problem in valuation.
(c)It is generally agreed that these items contribute to economic welfare.
(d)So, if we depend only on GDP, we would be underestimating economic welfare.
2. Though externalities are not taken into account in GDP, they affect welfare.
(a)When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
(b)Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
(c)GDP does not take into account these externalities.
(d)For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
(e)Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare In this case, welfare is much less than indicated by GDP.
3. Change in the distribution of income (GDP) may affect welfare.
(a)All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
(b)At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
(c)It means that the inequality in the distribution of income may increase or decrease.
(d)If it increase it implies that rich become more rich and the poor become more poor.
(e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
(f) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
4. All products may not contribute equally to economic welfare.
(a)GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc.
(b)Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products like police services, military services etc. may comparatively contribute less and may not directly affect the standard of living of the people.
(c)Therefore, how much is the economic welfare would depend more on. the types of goods and services produced, and not simply how much is produced.
(d) It means that if GDP rises, the increase in welfare may not be in the same proportion.
5. Contribution of some products may be negative
(a)GDP includes all final products whether it is milk or liquor.
(b)Milk may provide both immediate and ultimate satisfaction to consumers On the other hand, liquor may provide some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare.
(c)GDP include only the monetary values of the products and not their contribution to welfare.
(d)Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and services consumed.