“Measurement of National Income” is a Significant Part of the Economics Syllabus for Board Exams.
FAQs on Measurement of National Income: Chapter 4 Solutions
1. How do you calculate National Income using the Income Method as per the NCERT solutions for Class 12?
To calculate National Income (NNP at FC) using the Income Method, you must sum up all factor incomes generated within the domestic territory of a country. The step-wise process is as follows:
Step 1: Identify and sum up the three main components of factor income: Compensation of Employees (wages, salaries, employer's social security contribution), Operating Surplus (rent, interest, profit), and Mixed-Income of the self-employed.
Step 2: The sum from Step 1 gives you the Net Domestic Product at Factor Cost (NDPfc).
Step 3: To arrive at National Income, add the Net Factor Income from Abroad (NFIA) to the NDPfc. The formula is: National Income (NNPfc) = NDPfc + NFIA.
2. What is the step-by-step process for calculating National Income using the Expenditure Method in NCERT problems?
The Expenditure Method measures National Income by summing up all final expenditures in an economy. The correct steps are:
Step 1: Sum up all final expenditures: Private Final Consumption Expenditure (C), Government Final Consumption Expenditure (G), Gross Domestic Capital Formation (I), and Net Exports (X-M).
Step 2: This sum gives you the Gross Domestic Product at Market Price (GDP at MP). Formula: GDP at MP = C + I + G + (X-M).
Step 3: To reach National Income (NNP at FC), make the following adjustments: Subtract Depreciation (Consumption of Fixed Capital) from GDP at MP to get NDP at MP. Then, subtract Net Indirect Taxes (NIT) to get NDP at FC. Finally, add Net Factor Income from Abroad (NFIA). The full conversion is: NNP at FC = GDP at MP - Depreciation - NIT + NFIA.
3. What are the key steps to correctly apply the Value Added Method (or Product Method) for solving Chapter 4 problems?
The Value Added Method calculates the contribution of each producing unit in the economy. The correct procedure is:
Step 1: Classify all production units into Primary, Secondary, and Tertiary sectors.
Step 2: Calculate the Gross Value Added at Market Price (GVA at MP) for each sector. The formula is: GVA at MP = Value of Output - Intermediate Consumption.
Step 3: Sum the GVA at MP of all three sectors to get Gross Domestic Product at Market Price (GDP at MP).
Step 4: Adjust the GDP at MP to arrive at National Income (NNP at FC) by subtracting Depreciation, subtracting Net Indirect Taxes, and adding Net Factor Income from Abroad.
4. When solving NCERT problems, what are the most common items that students incorrectly include or exclude when using the Income Method?
When applying the Income Method, students often make errors by incorrectly treating certain items. Key points to remember for accurate solutions are:
Exclude Transfer Payments: Items like scholarships, old-age pensions, and unemployment allowances must be excluded as they are not earned in return for any productive service.
Exclude Windfall Gains: Income from lotteries or capital gains from the sale of shares are not included because they do not represent earnings from the current production of goods and services.
Exclude Sale of Second-Hand Goods: The income from selling used goods should be excluded as their value was already counted in the year of original production. However, any commission or brokerage earned on the sale is a factor income and must be included.
Include Imputed Rent: The imputed rent of owner-occupied houses is a service and must be included in the Operating Surplus.
5. Why is the value of intermediate goods excluded when calculating National Income? What is the correct way to identify them in a problem?
The value of intermediate goods is excluded to avoid the problem of double counting. If we were to include the value of both the final product (e.g., a car) and the intermediate goods used to make it (e.g., steel, tires), the value of the intermediate goods would be counted multiple times, leading to an overestimation of the national income.
To correctly identify an intermediate good in an NCERT problem, you should check its end use. A good is considered an intermediate good if it is:
Used up entirely in the production process within the same year.
Purchased by one firm from another for resale or for further production.
6. How are transfer payments, like pensions and scholarships, treated when calculating National Income, and why?
Transfer payments are not included in the calculation of National Income. This is because they are unilateral payments for which no productive service is rendered in the current accounting year. National Income only measures the income generated from the production of goods and services. Since transfer payments do not contribute to the current flow of economic output, they are excluded from all methods of calculation (Income, Expenditure, and Value Added).
7. How do you convert National Income at Market Price to National Income at Factor Cost in a typical NCERT solution? Why is this adjustment necessary?
To convert National Income from Market Price (MP) to Factor Cost (FC), you must subtract Net Indirect Taxes (NIT). The formula is:
National Income at FC = National Income at MP - Net Indirect Taxes.
Where, Net Indirect Taxes (NIT) = Indirect Taxes - Subsidies.
This adjustment is necessary because Market Price includes the effect of government-imposed taxes and subsidies, which distort the true income earned by the factors of production. Factor Cost reflects the actual cost of production, representing the income (wages, rent, interest, profit) paid to the factors. Removing NIT provides the actual factor earnings.
8. What precautions must be taken to avoid the problem of double counting while measuring national income using the expenditure method?
The primary precaution to avoid double counting in the Expenditure Method is to include only the expenditure on final goods and services. Expenditure on all intermediate goods and services must be strictly excluded. For example, if a bakery buys flour to make bread, only the final expenditure by a consumer on the bread is included. The bakery's expenditure on flour is an intermediate cost and is excluded to prevent its value from being counted twice (once as flour and again as part of the bread's price).
9. In the context of NCERT solutions, how does the treatment of 'Net Factor Income from Abroad' (NFIA) differ when calculating GDP versus GNP?
The treatment of NFIA is the key difference between Gross Domestic Product (GDP) and Gross National Product (GNP).
GDP (Domestic Concept): It measures the total value of goods and services produced within the domestic territory of a country, regardless of who produces it. Therefore, GDP does not include NFIA.
GNP (National Concept): It measures the total value of goods and services produced by the normal residents of a country, regardless of where they produce it. Therefore, GNP includes NFIA.
The correct conversion formula is: GNP = GDP + NFIA.
10. How do you solve for Gross Domestic Capital Formation (GDCF) if its components are given in an NCERT problem?
Gross Domestic Capital Formation (GDCF) represents the net addition to the capital stock of the economy. If its components are provided, you can solve for it using the following formula:
GDCF = Gross Fixed Capital Formation + Change in Stocks
Where:
Gross Fixed Capital Formation includes investment in fixed assets like machinery, buildings, and equipment. It is often broken down into Business Fixed Investment, Government Fixed Investment, and Household Investment (in construction).
Change in Stocks (or Inventory Investment) is calculated as the difference between closing stock and opening stock for the year (Closing Stock - Opening Stock).
