Ncert Solutions for Class 12 Macro Economics Chapter 2 National Income Accounting

Economics Class 12 Chapter 2 questions and answers: National Income Accounting ncert solutions

Textbook	NCERT
Class	Class 12
Subject	Economics
Chapter	Chapter 2
Chapter Name	National Income Accounting class 12 ncert solutions
Category	Ncert Solutions
Medium	English

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Question 1: What are the four factors of production and what are the remunerations to each of these called?

Answer 1: The four factors of production are the fundamental resources used in the creation of goods and services. They are:

1. Land: This refers to natural resources such as land, minerals, water, and forests. Remuneration: Rent.

2. Labor: This represents the human effort (both physical and mental) used in the production process. Remuneration: Wages or Salaries.

3. Capital: This includes machinery, tools, buildings, and equipment that are used to produce goods and services. Remuneration: Interest.

4. Entrepreneurship: This refers to the ability and initiative to organize the other three factors of production and bear the risks involved in business. Remuneration: Profit.

Question 2: Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Answer 2: The aggregate final expenditure of an economy is the sum of all the spending in the economy. In economics, factor payment denotes the wage, interest, rent and other payments done as a remuneration for the factors or production. The income earned is either spent on goods on services or saved. But, all savings can be counted as investments for future expenditure. Therefore, the aggregate final expenditure of an economy should be equal to aggregate factor payments.

Question 3: Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.

Answer 3: Distinction Between Stock and Flow:

Stock: A stock is a quantity measured at a particular point in time. It represents a snapshot or the accumulation of resources at a specific moment. Examples of stock variables include wealth, capital, and population. Stocks do not have a time dimension.

Flow: A flow is a quantity measured over a period of time. It indicates a rate of change and represents an activity that takes place within a given time frame. Examples of flow variables include income, investment, and output. Flows are always associated with a time period (e.g., “per month” or “per year”).

Net Investment and Capital:

Net Investment: This refers to the addition to the stock of capital after accounting for depreciation. It is a flow because it represents how much new capital is added over a period of time.

Capital: This refers to the total accumulated stock of physical assets (such as machinery, buildings, and equipment) at a particular point in time. It is a stock because it is measured at a specific moment and does not require a time dimension.

Comparing Net Investment and Capital with the Flow of Water into a Tank:

Think of capital as the amount of water already present in a tank at a given point in time—it’s the total accumulated quantity (a stock). Net investment is like the flow of water into the tank over a certain period of time—the rate at which the water (or capital) increases (a flow). Just as water flowing into the tank increases the total volume of water, net investment increases the stock of capital over time.

Question 4: 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 4: Difference between Planned and Unplanned Inventory Accumulation:

Planned Inventory Accumulation: This occurs when a firm intentionally produces more goods than it sells, expecting to sell them in the future. It is part of the firm’s production strategy and is deliberately managed.

Unplanned Inventory Accumulation: This happens when a firm produces more goods than expected demand, resulting in unsold goods. It is unintentional and usually occurs when actual sales are lower than anticipated.

Relation between Change in Inventories and Value Added of a Firm:

The change in inventories is part of a firm’s value added. Value added is calculated as:

Value Added = Sales + Change in Inventories – Intermediate Goods Cost

The change in inventories (whether positive or negative) adjusts the value added by accounting for goods that are produced but not sold.

Question 5: 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 5: The Three Methods of Calculating GDP:

1. Production Method (or Value Added Method):

Formula:
GDP = \(\sum \) (Value of Output – Value of Intermediate Goods)

Explanation: In this method, GDP is calculated by summing the value added by each firm in the economy. Value added is the difference between the value of a firm’s output and the value of intermediate goods used in the production process. By aggregating the value added at each stage of production, we arrive at the total value of goods and services produced in the economy.

2. Income Method:

Formula:
GDP = Wages + Rent + Interest + Profit

Explanation: This method calculates GDP by summing all the incomes earned by factors of production in the economy, i.e., wages for labor, rent for land, interest for capital, and profits for entrepreneurship. Since these factor incomes are generated from the production of goods and services, summing them gives us the total value of output in the economy.

3. Expenditure Method:

Formula: GDP = C + I + G + (X – M)

Where:

• (C) = Consumption expenditure
• (I) = Investment expenditure
• (G) = Government expenditure
• (X) = Exports
• (M) = Imports

Explanation: This method calculates GDP by summing all the expenditures made on final goods and services in the economy. Consumption, investment, government spending, and net exports (exports minus imports) represent the total demand for the country’s output.

Why All Three Methods Give the Same GDP Value:

The reason all three methods yield the same value of GDP is that they are simply different perspectives of measuring the same economic activity:

• Production Method focuses on the value of goods and services produced (output).
• Income Method measures the total income generated from that production (factor payments).
• Expenditure Method tracks the total spending on the final goods and services produced.

Question 6: 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 6: Budget Deficit :- The excess of government expenditure over government income is termed as budget deficit.

Budget Deficit = G − T

Where,

G represents government expenditure

T represents government income

Trade Deficit :- Trade deficit measures the excess of import expenditure over the export revenue of a country.

Trade Deficit = M − X

Where,

M represents expenditure on imports

X represents revenue earned by exports

It is given that,

I − S = Rs.2000 crores.

G − T = (−) Rs.1500 crores.

Therefore,

Trade deficit = [I − S] + [G − T]

= 2000 + [−1500]

= Rs.500 crores.

Question 7: 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. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.

Answer 7:

National Income (NNP_FC) = Rs.850 crores

GDP_MP = Rs.1100 crores

Net factor income from abroad = Rs.100 crores

Net indirect taxes = Rs.150 crores

NNP_FC = GDP_MP + Net factor income from abroad − Depreciation − Net indirect taxes

Putting these values in the formula,

850 = 1100 + 100 − Depreciation − 150

⇒ 850 = 1100 − 50 − Depreciation

⇒ 850 = 1050 − Depreciation

⇒ Depreciation = 1050 − 850 = Rs.200 crores

The aggregate value of depreciation is Rs 200 crores.

Question 8: Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. 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 8: As per question,

NNP_FC = Rs.1900 crores

PDI = Rs.1200 crores

Personal income tax = Rs.600 crores

Value of retained earnings = Rs.200 crores

PDI = NNP_FC − Value of retained earnings of firms and government + value of transfer payments − personal tax

⇒ 1200 = 1900 − 200 + Value of transfer payments − 600

⇒ 1200 = 1100 + Value of transfer payments

⇒ Value of transfer payment = 1200 − 1100 = Rs 100 crores

Question 9: From the following data, calculate Personal Income and Personal Disposable Income.

	Rs. (crore)
(a) Net Domestic Product at factor cost	8,000
(b) Net Factor Income from abroad	200
(c) Undisbursed Profit	1,000
(d) Corporate Tax	500
(e) Interest Received by Households	1,500
(f) Interest Paid by Households	1,200
(g) Transfer Income	300
(h) Personal Tax	500

Answer 9: Personal Income = NDP_FC + Net factor income from abroad (NFIA) + Transfer Income − Undistributed profit − corporate tax − Net interest paid by households

NDP_FC = Rs.8000 crores

NFIA = Rs.200 crores

Transfer Income = Rs.300 crores

Undistributed profit = Rs.1,000 crores

Corporate tax = Rs.500 crores

Net interest paid by households = Interest paid − Interest received

= 1200 − 1500

= (−) Rs.300 crores

So, putting the values in the above formula

PI = 8000 + 200 + 300 − 1000 − 500 − (− 300)

= 8000 + 200 + 300 − 1000 − 500 + 300

⇒ PI = 7300

So, Personal Income = Rs.7300 crores

Personal Disposable income = Personal Income − Personal Payments

= 7300 − 500

= Rs.6800 crores

Question 10: . In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, 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 (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.

Answer 10: (i) Gross Domestic Product or GDP = Rs.500 (This is the earning by Raju in a day from haircuts)

(ii) NNP at market price or NNP_MP = GDP – Depreciation

Putting the values of GDP and depreciation, we get NNP_MP

= 500 − 50

= Rs.450

(iii) NNP at factor cost or NNP_FC = NNP_MP  − Sales tax

Here NNP_MP = 450

Sales Tax= 30

Therefore NNP_FC is

= 450 − 30

= Rs.420

(iv)Personal Income or PI = NNP_FC − Retained earnings

Here NNP_FC = 420

Retained earnings = 220

Therefore, Personal Income is

= 420 − 220

= Rs.200

(v) Personal Disposable Income or PDI = PI − Income tax

Putting values of PI and Income Tax we get PDI is

= 200 − 20

= Rs.180

Question 11: The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?

Answer 11: To calculate the GNP deflator, the formula is:

GNP Deflator = \(\left( \frac{\text{Nominal GNP}}{\text{Real GNP}} \right) \times 100\)

Given:

• Nominal GNP = Rs 2,500 crores
• Real GNP (at base year prices) = Rs 3,000 crores

Substitute the values into the formula:

GNP Deflator = \(\left( \frac{2,500}{3,000} \right) \times 100 = 83.33\%\)

Since the GNP deflator is less than 100%, this indicates that the price level has fallen between the base year and the year under consideration.

Question 12: Write down some of the limitations of using GDP as an index of welfare of a country.

Answer 12: Using GDP as an index of welfare has several limitations:

1. Non-Market Transactions: GDP does not account for non-market activities such as household labor, volunteer work, and informal economy contributions, which can significantly impact welfare.
2. Income Distribution: GDP measures total economic output but does not reflect how income is distributed among the population. High GDP may coexist with high inequality, meaning that welfare may not improve for everyone.
3. Quality of Life: GDP does not consider factors that contribute to quality of life, such as environmental sustainability, health, education, leisure time, and overall happiness.
4. Externalities: GDP can increase due to activities that may harm social welfare, such as pollution and crime, without reflecting the negative impacts of these activities on society.
5. Short-Term Focus: GDP measures economic activity over a specific period, which may encourage short-term growth at the expense of long-term sustainability and well-being.
6. Public Goods and Services: GDP may not adequately capture the value of public goods and services (like parks, infrastructure, and public education), which are essential for welfare but are not directly sold in the market.
7. Economic Structure: GDP does not account for the structural changes in the economy, such as shifts from manufacturing to services, which may have varying impacts on employment and welfare.
8. Adjustment for Cost of Living: GDP does not adjust for differences in cost of living across regions, leading to misleading comparisons of welfare between countries or regions.
9. Informal Economy: In many countries, a significant portion of economic activity occurs in the informal sector, which may not be captured in GDP statistics, underestimating actual welfare.