Students can read the important questions given below for National Income Accounting Class 12 Economics. All National Income Accounting Class 12 Notes and questions with solutions have been prepared based on the latest syllabus and examination guidelines issued by CBSE, NCERT and KVS. You should read all notes provided by us and Class 12 Economics Important Questions provided for all chapters to get better marks in examinations. Economics Question Bank Class 12 is available on our website for free download in PDF.
Important Questions of National Income Accounting Class 12
Question. What is meant by capital goods?
Ans. Capital goods are those goods which are used in the process of production for several years and which are of high value. These goods are fixed assets of the producers.
Question. What is fixed investment?
Ans. Fixed investment refers to increase in the stock of fixed assets or capital goods (like plant and machinery) of the producers during an accounting year.
Question. What do you mean by inventory investment?
Ans. Change in inventory stock during the year is called inventory investment of the producer.
Question. Define intermediate goods.
Ans : Intermediate goods are those goods which are within the boundary line of production and not ready for use by their final users. These goods are purchase for further sale or are to be use as raw material by the producers.
Question. What is meant by producer goods?
Ans. Producer goods are those goods which are used for further production. These may be used either as raw material(like wood used in making chair) or as fixed assets (like a tractor in farming).
Question. What is meant by consumption of fixed capital?
Ans. Consumption of fixed capital or depreciation refers to loss of value of fixed assets in use on account of: 1. Normal wear and tear; 2. Normal rate of accidental damage, and 3. Expected or foreseen obsolescence.
Question. Define money flow.
Ans. Money flow refers to the flow of money (in term of receipts and payment) across different sectors of the economy. It is called money flow because it involves the flow of money value from one sector to the other. Thus, producers make sector payment to the households and household make payment to the producers (for the purchase of goods and services) in term of money.
Question. Should purchase of wheat in the wholesale market be treated as the purchase of final goods?
Ans. Purchase of wheat in the wholesale market is often done by the trader. Wheat is a consumption goods and traders are not the final users of wheat. Therefore, purchase of wheat in the wholesale market is to be treated as the purchase of intermediate goods. However, sometimes the households buy wheat in bulk from wholesale market. In such situation, purchase of wheat should be treated as purchase of final good.
Question. What is national debt interest?
Ans. National debt interest refers to the interest payment accruing to residents of the country on account of borrowings by the govt. The government borrows money from the people (by issuing bond like National Saving Certificates in India).
Question. Define depreciation reserve fund?
Ans. Depreciation reserve fund is a provision of funds to cope with depreciation losses. These fund are used for the replacement of fixed assets when these are worm-out or when these become obsolete/outdated.
Question. Define real flow.
Ans. Real flow refers to the flow of factor services from the household sector to the producing and the corresponding flow of goods and services from the producing sector to the household sector.
Question. What is meant by transfer payment?
Ans. Transfer payment (or transfer expenditure) are all those unilateral payment corresponding to which there is no value addition in the economy.
Question. What is meant by nominal GDP?
Ans. Nominal GDP refers to market value of the final goods and services produced
Question. How will you treat the following in the calculation of gross domestic product of India? Give reasons for your answers.
(i) Profit earned by a branch of foreign Bank in India.
(ii) Salaries of Indian employees working in embassy of Japan in India
(iii) Salaries of residents of Japan working in Indian embassy of Japan
Ans. (i) Yes, it will be included in the gross domestic product of India as profits are earned within the domestic territory of India.
(ii) No, it will be not included in the gross domestic product of the India as the embassy of japan is not the part of domestic territory of India.
(iii) Yes, it will be included in the gross domestic product of India as the India embassy is the part of domestic territory of India.
Question. Define Production.
Ans: Production is the process of converting inputs into outputs or value added to the raw materials.
Question. Define consumption.
Ans: The process of using up utility of goods and services for direct satisfaction of individual or collective human wants is called Consumption.
Question. Define Capital Formation.
Ans: Excess of production over Consumption is called investment.
Question. Define Good.
Ans: In economics, a good is defined as any physical object, natural or manmade, or service rendered, that could command a price in the market.
Question. Define Consumption Goods.
Ans: Goods purchased or even produced, for satisfaction of wants is called consumption goods. Example: washing machines, TV etc.
Question. Define Capital Goods.
Ans: Goods capable of being used for producing other goods are called Capital goods. Eg. car machinery etc.
Question. Define final goods.
Ans: Goods and services purchased, or own produced, for the purpose of consumption and investment are final goods.
Question. Define Intermediate goods.
Ans: Intermediate goods refer to those goods and services which are purchased during the year by one production unit from other production unit and completely used up, or resold, during the same year.
Question. Define Stocks.
Ans: Variables whose magnitude is measured at a particular point of time are called stock variables.
Question. Define Flow.
Ans: Variables whose magnitude is measured over a period of time are called flow variables.
Question. Distinguish between leakages and Injections.
|1. These flow variables have a negative impact on the process of production.
|1. These cause positive impact on the process of production or income generation.
|2. impact on the process of production. These are withdrawals from circular flow of income.
|2. These are additions to the circular floe of income.
|3. Effect on economy: reduce demand of goods and services; reduce flow of income
|3. Effect on economy: Add to the production capacity of the economy; generate demand of goods and services
|4. Examples: saving taxation and imports.
|4. Examples: investment, exports, consumption expenditure
Question. What are the steps for estimating national income by value added method?
Ans: 1. Identification of producing units
(namely primary sector, secondary sector and tertiary sector)
2. Calculation of GDPmp or GVAmp:
• GVOmp=Sales + Change in Stocks+Goods produced for self-consumption
=(Domestic Sales+exports)+(Closing Stock-Opening Stock)
• GVA mp/GDPmp =GVOmp-intermediate Consumption
3. Calculation of Domestic Income(NDP fc): NDP fc=GDPmp-Depreciation-NIT
4.Calculation of National income (NNpfc): NNPfc=NDPfc+NFIA
Question. What is double counting? How can it be avoided?
Ans: Counting the value of commodities at every stage of production more than one time is called double counting. It can be avoided by
a) taking value added method in the calculation of the national income.
b) By taking the value of final commodity only while calculating N. I.
Question. Given the following data:
i) GDPFC = 25,215 Crores
ii) Net Indirect Taxes = 1575 Crores
iii) Depreciation = 1000 Crores
iv) NFIA = 40 Crores
i) GDPMP ii) GNPMP ii) NNPMP iv) NNPFC v) NDPMP vi) NDPFC
Ans. i) GDPMP = GDPFC + NIT
= 25215 + 1575
= Rs. 26,790 Crores
ii) GNPMP = GDPMP + NFIA
= 26790 + 40
= Rs. 26,830 Crores
iii) NNPMP = GDPMP – Depreciation – NFIA
= 26,790 – 1000 – 40
= Rs. 25,750 Crores
iv) NNPFC = NNPMP – NIT
= 25,750 – 1575
= Rs. 24,175 Crores
v) NDPMP = NNPFC – NFIA + NIT
= 24,175 – 40 + 1575
= Rs. 25,710 Crores
vi) NDPFC = NDPMP – NIT
= 25,710 – 1,575
= Rs. 24,135 Crores
Question. In the determination of social welfare what matter is the quantum of output rather than the composition of output? Defend or refute.
Ans. The above statement is incorrect. Social welfare depends both on the quantum of output as well as the composition of the output. If good are produce primarily for richer section of the society (ignoring the interest of poorer section of the society) social welfare is bound to remain low even when the quantum of output is rising.
Question. Is brokerage paid to real estate agents only on the sale and purchase of new houses include in the
Ans. No, brokerage paid to real estate agent only on the sale and purchase of new as well as second – hand house should be included in the estimation of national income.
Question. In the estimation of GDP (using expenditure method), we focus only on expenditure by the resident of a country. Is it true?
Ans. No, it is not true. In the estimation of GDP we include all expenditure on the domestically produce goods both by the resident as well nonresidents of a country.
Question. Why are exports included in the estimation of domestic income?
Ans. Export are included in the estimation of domestic income because exports are the parts of domestically produced goods & services, or because exports are part of a goods & services produced within the domestic territory of a country.
Question. Why are imports consider as a negative item in the estimation of domestics income?
Ans. Imports are consider as a negative item in the estimation of domestic income because imports are not an expenditure on the domestic produced goods and services in an accounting year. It is an expenditure on the goods produced aboard.
Question. Define the term Macro Economics.
Ans : It is that branch of economics which studies the aggregates of an economy or the larger units of an economy. The main objective of Macroeconomic study is ‘how the income & employment of an economy is determined?’ This branch of economics deals with the fuller utilization of resources.
Question. Define the term National Income.
Ans : It can be defined as the net value of all final goods & services produced by the normal residents in the domestic territory of a country in an accounting year (NVAFC), and adding net factor income from abroad (NFIA).NI= NVAFC + NFIA
Question. Who are Normal Residents?
Ans : This refers to those individuals & institutions who normally reside in a country for more than one year, and whose centre of economic interest lies in that country.
Question. Briefly explain the concept of Depreciation or Consumption of Fixed Capital (CFC).
Ans : It refers to the loss of value of fixed assets due to normal wear & tear.
Question. Briefly explain the concept of Net Indirect Tax.
Ans : It refers to the difference between Indirect Tax paid by the enterprises to the Govt. & the Subsidies paid by the Govt. to some of the enterprises. This concept is used to obtain the national income at factor cost or factor prices. The NIT is deducted from market price (MP) to get factor cost (FC).Indirect Tax is the amount of burden whose impact falls on one person or a group and the incidence falls on other person or group. Subsidies refer to the financial assistance or aid provided by the state to the weak & sick units.
Question. Define the term Net Factor Income from Abroad & explain its components.
Ans : It is defined as the difference between income earned by the resident households in abroad & the same earned by the foreign residents in a resident country in an accounting year. In other words, it is the income earned from work, property & entrepreneurship by the resident household of a particular country in the ROW ‘less’ the same earned by the residents of ROW in a resident country in an year.
Components of NFIA: It contains three elements viz:
i) Net Compensation of Employees: This refers to the income from work earned by the resident workers in the ROW ‘less’ the same earned by the resident workers of ROW in a resident country.
ii) Net Operating Surplus: This refers to the difference between the income from property & entrepreneurship earned by the residents in ROW & the same earned by the foreign residents in a resident country.
iii) Net Retained Earnings of Resident Companies in Abroad: It is the difference between the retained earnings of the resident companies abroad & the same of the foreign companies in a resident country.
Question. Define the following Concepts of Value of Output.
Ans : 1. Intermediate Cost / Consumption is defined as the expenditure incurred on raw materials, fuel, semi-finished goods & other inputs by the firms to produce final products. It is the sum of purchase of raw materials & fuel purchased in domestic market & abroad (Import of raw materials). This amount has to be deducted from GVO to obtain GDPMP, as the intermediate expenditure is not estimated in the estimation of NI to avoid the problem of double counting.
2. Final sales are the sum of domestic sales & sales made in abroad (Exports) & production for self-consumption.
3. Change in Stock is defined as the difference between Closing Stock & Opening Stock. Closing stock is the stock of raw materials, semi-finished goods, unsold finished goods been held by the enterprises; strategic materials &food grains held by the govt. agencies; & the livestock held by the animal husbandry, been estimated in the end of an accounting year i.e. 31st of March of a year.
Opening stock is the same estimated in the beginning on an accounting year i.e. 1st of April of a year.
Question. Explain the methods of measuring NI. Also state their precautions.
Ans : There are three methods to measure NI which is based on the principle of equality between income, expenditure & production. These methods are i) Value Added or Product or Output method; ii) Income method; iii) Expenditure or Commodity Flow method.
1. Value Added Method: By value added we mean the money value of final products produced by the normal residents in the domestic territory of a country. It is the difference between Value of Output & Intermediate Cost. Thus, VA = VO – IC This method is based on the production of the country in a year. The following steps can be enumerated to explain this method:
i) Firstly we identify the production units & classify them into three economic sectors viz. primary, secondary & tertiary sectors.
ii) Then we estimate the money value of total production in each & every units, we get GVO.
iii) Thirdly, we calculate the IC in every unit & deduct IC from VO to obtain VA, & after summing the VA of all the units, we get GVAMP / GDPMP.
iv) Next we deduct CFC & NIT from GVAMP, we get NVAFC.
v) Finally, we add NFIA to NVAFC to get NI/NNPFC.
Precautions: – The following precautions are required while using this method, viz.
i) The value of intermediate goods should not be included, rather the value of only the final products to be included. Otherwise, the problem of double counting may arise.
ii) The value of second hand goods is not to be included since the value of this goods have been already valuated in the NI of those years when these goods have been manufactured & sold.
iii) The value of illegal goods to be excluded because these goods have no legal sanction or authority to be produced or sold.
iv) The value of leisure items & non market goods not to be included because it is difficult to keep accountability of these goods, & moreover, these goods are
produced with not the motive of earning income.
v) The value of transfer payments are to be excluded because these transactions do not contribute in the flow of income & product, rather these are transfer of ownerships.
2. Income Method: According to this method, the factor incomes have to be estimated, & then, after adding the total factor incomes generated in the domestic territory, we get domestic income. The domestic income is then has to be added to NFIA, we obtain NI. The following steps can be followed to measure NI by this method:
i) Firstly, the factor incomes have to be identified & then classify them into CE, OS & MISE.
ii) Then we add the total factor incomes generated in the domestic territory i.e. CE + OS + MISE, we get domestic income (NVAFC).
iii) Finally we add the domestic income to the NFIA, we get NI. Precautions: The following precautions have to be considered while measuring NI by this method:
a) The transfer incomes are not to be included because these transactions do not contribute to the flow of national production. For e.g., tax, gifts, donations, scholarships etc.
b) The incomes derived from illegal sources are not to be included since the illegal activities are not backed by the legal sanction. For e.g., gambling, muggling, theft & loot etc.
c) The incomes received after selling second hand goods are not to be included but the commission earned by the broker is to be included because it is a factor income.
d) The income derived from leisure time activities is not to be included because it is difficult to determine the actual price of leisure time goods.
e) The income earned by selling shares is also not to be included since this is considered as the transfer income because these transactions are mere transfer of ownership of assets.
3. Expenditure Method: According to this method, NI is evaluated by estimating the final expenditure incurred by different economic units’ viz. household, govt. & the enterprises. The following steps are to be followed:
i) At first, the sources of final expenditure have to identified & classify them into Private Final Consumption Expenditure (PFCE), Govt. Final Consumption Expenditure (GFCE), Gross Domestic Capital Formation (GDCF),& Net Exports (XM).
ii) Then we estimate the above four components of final expenditure incurred in the domestic territory in an year & add all the four components, we get DPMP.
iii) Next, we deduct CFC & NIT from GDPMP, we get NDPFC.
iv) Finally, we add NFIA to NDPFC, we get NI.
Precautions: The following precautions are to be taken:
a). The expenditure on intermediate goods are not to be estimated, otherwise it may lead to problem of double counting. We must make sure that we are not including the intermediate expenditure.
Question. Differentiate between Real & Nominal GDP.
Ans : Nominal GDP is estimated at current price ie the market values of the prevailing year, while Real GDP is estimated at constant(base)price. Nominal GDP is helpful to measure the price fluctuations while Real GDP helps to measure & compare the economic growth & performance. The nominal GDP is so called because it reflects the growth of output in monetary terms as it includes price effect, whereas real GDP reflect the growth of output in real/physical terms & does not include the price effect.
Question. Which one is a better indicator of economic growth & why?
Ans : Real GDP as it does not include the price effect on the growth of output.
Question. What is meant by economic welfare? What is its indicator?
Ans : The term welfare means the sense of wellbeing. The economic welfare means the sense of wellbeing which are affected by the non-economic factors viz. NI, consumption expenditure etc. which can be expressed in monetary terms. Wellbeing of the people is also affected by various non-economic factors viz. pollution, liberty etc. The economic welfare is indicated by Per Capita Real GDP.
Question. How Real GDP is derived?
Ans : Real GDP = Nominal GDP/Price Index X 100
Question. Explain the circular flow of Income & Product (two sector model).
Ans : Circular flow refers to the cyclical transactions of income & expenditure (money flow) & goods & services (real flow) among the economic sectors viz. household, enterprises, Govt. & foreign sector.
Question. How are the following treated while estimating private final consumption xpenditure Give reasons for your answer.
Ans : 1. Exports; 2. Direct purchases made abroad by resident household; 3. Final consumption expenditure of non-profit institutions serving households; 4. Change in stocks.
Question. Differentiate between stock & flow.
Ans : Stock refers to those variables which are measurable at a given point of time while flow refers to those variables which are measurable during a given a period of time. In this way, stock is static while flow is dynamic. Stock has no time dimension while flow has. For eg. Wealth is stock while income is flow, capital is stock while capital formation is flow.