# NCERT Solutions for Class 12 Economics Chapter 2 National Income Accounting

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 2 National Income Accounting Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

## National Income Accounting NCERT Solutions for Class 12 Economics Chapter 2

### National Income Accounting Questions and Answers Class 12 Economics Chapter 2

Question 1.
What are the four factors of production and what are the remunerations to each of these called?
The four factors of production and their respective remunerations: Land – Rent; Labour – Wage; Capital – Interest; and Entrepreneur – Profit.

Question 2.
Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
The aggregate final expenditure of an economy should always be equal to the aggregate factor payments (or incomes) because of the circular flow of income. The final expenditure and aggregate factor payments are two sides of the same coin. The firms hire or purchase factor services from households and use them to produce goods and services.

Factor payments made by the firms become factor incomes in the hands of households. Households spend their income on purchase of goods and services, which are produced by firms. Expenditure by household implies income to the firms. Thus, the income of economy goes througn the two sectors, firms and households, in a circular way. This is represented in the following figure:

In the figure, the uppermost arrow moving from the households to the firms represents the spending of households on goods and services produced by the firms. The second arrow moving from the firms to the households is the counterpart of the arrow above. It stands for the goods and services, which are flowing from the firms to the households.

Similarly, the two arrows at the bottom of the diagram represent the factor of the production market The lowermost arrow moving from the households to the firms symbolises the services that the households are rendering to the firms. Using these services, the firms are manufacturing the output. The arrow above’-this, moving from the firms to the households,

represents the payments made by the firms xo the households for the services provided by the latter. Thus, there is no leakage from this circular flow of income between households and firms. That is, the money spent by the firms on factor services is exactly equal to the money they receive for the goods and services sold to the households.

Question 3.
Distinguish between stock and flow. (C.B.S.E. Outside Delhi 2013,2017).
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.
Following are the points of difference between stock and flow:

 S.No. Stock Flow 1. Stock is an economic variable that is measured at a specific point of time. Flow is an economic variable that is measured over a specific period of time. 2. Stock is a static concept. Flow is a dynamic concept. 3. Stock does not have a time dimension. Flow has time dimension in terms of per hour, per month, per year, etc. 4. Example: Wealth Example: Income

Net investment is a flow while capital is a stock. Net investment is a flow variable because its magnitude is measured over a period of time, say, one year. Capital is a stock because its magnitude is measured at a point of time, say, on 31 st March, 2017. Net investment and capital can be compared with flow of water into a tank.

Capital is like water in tank while net investment is the water flowing in to and out of the tank. Flow of water into tank is measured over a period of time while water in the tank is measured at a particular point of 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.
The change in inventories may be planned or unplanned. Following points explain the difference between the two:

 S.No. Planned Inventory Unplanned Inventory 1. Planned inventories refer to the changes in the stock of inventories, which take place in an anticipated way. Unplanned inventories refer to the changes in the stock of inventories, wriiph’takerplace’ in an unanticipated manner, 2. In a situation of planned inventory accumulation, firm plans to raise its inventories. In case of an unexpected fall in sales, the firm will have unsold stock of goods, which ft had not anticipated. Hence, there will be jyhpianned: accumulation of inventories ;; 3. In a situation of planned inventory dispersal, firm plans to reduce its inventories. Iri cise::Of ah unexpected rise in sales, the firm: will fall short of stock of goods. Hence, there will be unplanned dispersal of inventories

Value added is the difference between the value of the total output and the value of intermediary goods used by each production unit in an economy. It includes the change in firm’s stock of inventories. Thus, Gross Value Added of firm = Value of sales by the firm + Value of change in inventories : – Value of intermediate goods used by the firm
GVA = V + A – Z
The change in inventories means difference between opening inventories and closing inventories. The change in inventories affects the Gross Value Added. It is derived from the production and sales of the firm.

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.
Following are the three methods and their respective identities for calculating GDP:
GDPMp = GVA1 + GVA2 +………….+GVAN
$$G D P_{M P}=\sum_{j=1}^{N} G V A$$

(ii) Income Method:
GDPMp = Rent + Wage + Interest + Profit + Depreciation + Met Indirect Taxes
GDPMp= R + W+ ln + P + Depreciation + NIT

(iii) Expenditure Method:
GDPW = Private Consumption + Investment + Government Consumption + (Exports-lmports)
GDPmp = C + I + G + (X-M)

All the three methods of measuring National: Income give the same value of GDP. Each method reflects three different phases of the same circular flow of income.

• Production phase gives the GDP using output or value added method.
• Distribution phase give the GDP using income method.
• Disposition phase gives the GDP using expenditure method.

Question 6.
Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was ₹ 2,000 crores. The amount of budget deficit was (-) ₹ 1,500 crores. What was the volume of trade deficit of that country?
Budget deficit means the excess of the government expenditure (G) over tax revenue (T).
Budget Deficit = G – T
Trade deficit means the excess of import (M) expenditure over the export revenue (X) earned by the economy.
Trade Deficit = M – X
Given:   I – S = ₹ 2,000 crores
G – T = ₹ 1,500 crores
Trade Deficit = (I – S) + (G – T)
= 2,000 + 1,500 = 3,500
Thus, the volume of trade deficit of the country is ₹ 3,500 crores.

Question 7.
Suppose the GDP at market price of a country in a particular year was ₹ 1, 100 crores. Net Factor Income from Abroad was f 100 crores. The value of indirect taxes – subsidies was ₹ 150 crores and National Income was ^ 850 crores. Calculate the aggregate value of depreciation.
The following information is given:

 Particulars (₹ crores) GDP at market price 1,100 Net Factor Income from Abroad 100 Net Indirect Taxes 150 National Income 850

National Income (NNPFC) = GDPMp + Net Factor Income from Abroad – Net Indirect Taxes – Depreciation
Substituting appropriate values from the table, we get:
850 = 1, 100 + 100 – 150 – Depreciation Depreciation = 1, 100 + 100 – 150 – 850 = 1,200- 1000 = 200
Thus, the aggregate value of depreciation is ? 200 crores.

Question 8.
Net National Product at Factor Cost of a particular country in a year is ₹ 1,900 crores. There are no interest payments made by the households to the firms/ government, or by the firms/ governments to the households. The Personal Disposable Income of the households is ₹ 1,200 crores. The personal income taxes paid by them ₹ 600 crores and the value of retained earnings of the firms and government is valued at? 200 crores. What is the value of transfer payments made by the government and firms to the households?
The following information is given:

 Particulars (₹ crores) Net National Product at Factor Cost (NNPfc) 1,900 Personal Disposable Income 1,200 Personal Income Taxes 600 Retained Earnings 200

Personal Disposable Income
= NNPfC– Retained Earnings – Personal Taxes + Transfer Payments from the Government and the Firms Substituting appropriate values from the table, we get:
1,200 = 1,900 – 200 – 600 + Transfer Payments from the Government and the Firms
Transfer payments from the Government and the firms
= 1,200 + 600 + 200- 1,900 = 2,000 – 1,900 = 100
Thus, the value of transfer payments made by the government and firms to the households is ₹ 100 crores.

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

 Particulars (T crores) Net Domestic Product at Factor Cost 8,000 Net Factor Income from abroad 200 Undistributed Profit 1,000 Corporate Tax 500 Interest Received by Households 1,500 Interest Paid by Households 1,200 Transfer Income 300 Personal Tax 500

Personal Income
= Net Domestic Product at Factor Cost + Net Factor Income from Abroad – Undistributed Profit – Corporate Tax + Interest Received by Households + Transfer Income – Interest paid by Households
= 8,000 + 200-1,000 -500+1,500 + 300-1,200
= 10,000-2,700
= 7,300
Personal Disposable Income
= Personal Income – Personal Tax = 7,300 – 500 = 6,800
Thus, the Persona! Income is ₹ 7,300 crores and Personal Disposable Income is ₹ 6,800 crores.

Question 10.
In a single day, Raju, the barber, collects 500 from haircuts; over this day, his equipment depreciates in value by ₹ 50. Of the remaining ₹ 450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹ 220 for improvement and buying of new equipments. He further pays ₹ 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

The following information is given:

 Particulars (₹) Total Collection 500 Depreciation 50 Indirect Tax (Sales Tax) 30 Dividend 200 Retained Earning 220 Personal Tax 20

(i) Gross Domestic Product at Market Price (GDPmp) = ₹ 500
Gross Domestic Product at Factor Cost (GDPFC) = GDPmp – GDPmp
= ₹ 500 – ₹ 30
= ₹ 470

(ii) NNP at Market Price = GDPmp – Depreciation
= ₹ 500 – ₹ 50
= ₹ 450

(iii) NNP at Factor Cost = NNPmp – Indirect Taxes
= ₹ 450 – ₹ 30
= ₹ 420

(iv) Personal Income = NNPFC – Retained Earning
= ₹ 420 – ₹ 220
=₹ 200

(v) Personal Disposable Income = Personal Income – Personal Taxes
= ₹ 200 – ₹ 20
= ₹ 180

Question 11.
The value of the nominal GNP of an economy was ₹ 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 ₹ 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?
Nominal GNP = 2,500 crores
Real GNP = 3,000 crores

Since the GNP deflator is less than 100 percent, price level has not risen. In fact, price level declined 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.