Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 2. National Income Accounting

Subject: Social Science - Class 12th

Q. No. 5 of Exercises

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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.

The three identities of calculating the GDP of a country are being discussed below –

v Value Added Method –


Ø It is also called product method. Under this method national income is measured in terms of value addition by each producing enterprise.


Ø GDP at market price = GVA in primary sector at market price + GVA in secondary market at market price + GVA in territory sector at market price


Ø NDP at market price = GDP at market price - depreciation


Ø NDP at factor cost = NDP at market price - net indirect tax


Ø National income = NDP at market price + NFIA


v Income method


Ø Under this method national income is measured in terms of factor payments to the owners of factors of production.


Ø Net domestic income = compensation of employees + operating surplus + mixed income of self employed


Ø National income = Net domestic income + NFIA


v Expenditure method


Ø Under this method national income is measured in terms of expenditure on purchase of final goods and services produced in the economy.


Ø GDP at market price = Private final consumption expenditure + Government final consumption expenditure + Gross domestic fixed capital formation + Change in stock + Net Exports


Ø NDP at market price = GDP at market price - depreciation


Ø NDP at factor cost = NDP at market price - net indirect tax


Ø National income = NDP at factor cost + NFIA


5

More Exercise Questions

1

What are the four factors of production and what are the remunerations to each of these called?
2

Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
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.
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.
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.
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?
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.
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?
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
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.
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?
12

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