Economics Chapter 6: National Income

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Questions and Answers

What does the Basic Price of a product exclude?

Production costs

Wholesale markup

Production subsidies

Taxes on products (correct)

What is the formula for calculating Net Domestic Product at Factor Cost (NDP FC)?

NDP FC = Total Income - Deductions

NDP FC = NDP MP + Net Indirect Taxes

NDP FC = Compensation of employees + Operating Surplus + Mixed Income (correct)

NDP FC = GDP at Factor Cost - Depreciation

What does Market Price include that Basic Price does not?

Operating surplus

Employee compensation

Production subsidies

Product tax (correct)

Which of the following is included in the calculation of Net Domestic Product at Market Price?

Indirect taxes Signup and view all the answers

How is National Income defined?

Factor income of normal residents of the country during a year Signup and view all the answers

What constitutes the factor cost in GDP measurements?

Operating surplus and employee compensation Signup and view all the answers

What adjustment must be made to get from Net Domestic Product at Market Price to Net Domestic Product at Factor Cost?

Subtract net indirect taxes Signup and view all the answers

Which statement accurately reflects the relationship between Basic Price and Factor Cost?

Factor Cost equals Basic Price minus subsidies Signup and view all the answers

What is the main difference between national income and personal income?

Personal income includes transfer payments which are excluded from national income. Signup and view all the answers

How is Disposable Personal Income (DI) calculated?

DI = Personal Income - Personal Income Taxes - Non tax payments Signup and view all the answers

What does Net National Disposable Income (NNDI) consist of?

Net National Income plus other net current transfers from abroad. Signup and view all the answers

Which of the following formulas correctly represents Gross National Disposable Income (GNDI)?

GNDI = NNDI + CFC Signup and view all the answers

What does Private Income measure?

Income from all sources, both domestic and international, to the private sector. Signup and view all the answers

Which is included in Disposable Personal Income (DI)?

Personal Income after all taxes and transfers are deducted. Signup and view all the answers

What is implied by the term 'income from domestic product accruing to the public sector'?

Income from government departments and state-owned enterprises. Signup and view all the answers

What constitutes the 'Domestic Income' from the private sector?

National Disposable Income minus income from government administrative departments. Signup and view all the answers

Which of the following is an example of economic 'bads' that make us worse off?

Traffic congestion Signup and view all the answers

What is a key characteristic of volunteer work in relation to economic welfare?

It is rendered without remuneration. Signup and view all the answers

How do increased expenditures on police protection relate to national income?

They only prevent a decline in welfare without improving it. Signup and view all the answers

Which of the following is a limitation faced in the computation of national income?

Measurement is more complex in underdeveloped and developing countries. Signup and view all the answers

Which term best describes external effects that do not form part of market transactions?

Both positive and negative externalities Signup and view all the answers

What does the Value Added Method primarily measure?

Net values added by all producing enterprises in the economy Signup and view all the answers

Which of the following is NOT a phase of measuring national income?

Capital formation phase Signup and view all the answers

In the context of the Value Added Method, which sector does NOT represent the primary classification of enterprises?

Quaternary sector Signup and view all the answers

What kind of expenditures does the Expenditure Method track?

Sum of expenditures from government, households, and enterprises Signup and view all the answers

Which step is included in the Value Added Method for measurement?

Identifying and classifying producing enterprises Signup and view all the answers

What does the Income Method of national income calculation emphasize?

Total factor incomes from production of goods and services Signup and view all the answers

Which commodity group does NOT fall under the producing enterprises classification?

Salaried employment Signup and view all the answers

Which method reveals the relative contribution of factor owners?

Income Method Signup and view all the answers

What is the formula for calculating Gross Value Added (GVA MP)?

Value of output - Intermediate consumption Signup and view all the answers

What must be subtracted from GVA MP to find Net Value Added (NVA MP)?

Depreciation Signup and view all the answers

How is National Income calculated from Net Domestic Product (NVA FC)?

NVA FC - Net indirect taxes + NFIA Signup and view all the answers

Which of the following is NOT included in the calculation of Net Domestic Product (NVA FC)?

Net factor income from abroad Signup and view all the answers

Which items contribute to the calculation of value-added in the economy?

Own account production and imputed rent Signup and view all the answers

Under the Income Method, which factor incomes are included in the calculation of national income?

Payments to both residents and non-residents Signup and view all the answers

What happens to imports when calculating the value of intermediate consumption?

They are added to total purchases. Signup and view all the answers

Which of the following correctly defines Net Value Added (NVA MP)?

Gross Value Added minus depreciation Signup and view all the answers

Which of the following formulas correctly defines the relationship between GNP and GDP?

GNP MP = GDP MP + Net Factor Income from Abroad Signup and view all the answers

What is the relationship between NDP at market price and depreciation?

NDP MP = GDP MP - Depreciation Signup and view all the answers

What does the circular flow of income depict?

The interactions between different sectors in an economy Signup and view all the answers

Which of the following is true about Net National Product at Factor Cost (NNP FC)?

NNP FC = Gross National Product - Depreciation Signup and view all the answers

How is net domestic product at factor cost (NDP FC) described?

Total income earned by domestic production factors Signup and view all the answers

Which of the following statements about the expenditure approach is correct?

It aggregates final expenditures in an accounting period Signup and view all the answers

Which equation correctly represents the relationship for Gross Domestic Product at Factor Cost (GDP FC)?

GDP FC = GDP MP - Indirect Taxes + Subsidies Signup and view all the answers

What type of income does Disposable Personal Income (DI) account for?

Total income received minus personal income taxes Signup and view all the answers

Study Notes

Chapter 6: Determination of National Income

Learning Outcomes: Students will understand national income definitions, significance, various concepts, calculation methods, the Indian system of regional accounts and challenges in national income computation.

Unit 1: National Income Accounting

National Income Accounting: A macro-economic system, starting from product/service production to final disposal.
Usefulness and Significance of National Income Estimates: Crucial for macroeconomic analysis, especially in emerging/transition economies; assisting businesses in forecasting demand.
Concepts of National Income: Includes nominal GDP (GDPMP - value of all final goods/services produced within a country), and real GDP which adjusts for price changes.
Measurement of National Income in India: The Central Statistical Organization (CSO) compiles the statistics. At the state level, State Directorates of Economics and Statistics (DESs) compile their State Domestic Product and other aggregates.
Challenges in National Income Computation: Various obstacles include data inadequacy, non-monetized sectors, difficulties in self-employment measurement and consumption estimation.

Different Concepts of National Income

Gross Domestic Product (GDP): The basic measure of output, valued at market prices.
Nominal GDP/GDPMP: Value of all final goods/services produced in a country in a given period.
Real GDP: GDP adjusted for price changes over time (using a base year), crucial for comparing production over time.

Real GDP Growth Rate and Inflation Rate

The graph displays the fluctuations in real GDP growth rate and inflation rate over time.
Real GDP growth rate is important to measure the economic health of a country.
Inflation rate can be a significant macroeconomic variable.

GDP Deflator

A price index used to convert nominal GDP to real GDP.
It measures the current price level relative to the base year's prices.
The deflator of the base year is always 100.

Net Domestic Product (NDP)

NDP is equivalent to GDP minus depreciation (the wearing out/obsolescence of capital goods).
It measures the net amount of goods produced in a given period, considering the consumption of fixed capital.

Gross National Product (GNP)

GNP is the market value of all final goods/services produced by a nation's residents, including those produced abroad.
GNP MP = GDP MP + Net Factor Income from Abroad (NFIA).
NFIA = net compensation of employees + net income from property and entrepreneurship + net retained earnings.

Net National Product (NNP)

NNP MP represents the market value of final goods and services produced by a country's residents, adjusting for depreciation.
NNP MP = NDP MP + NFIA
NNP FC = NNP MP - Net Indirect Taxes

GDP at Factor Cost (GDPFC)

GDPFC is equivalent to GDP at market prices (GDPMP) minus net indirect taxes. Measurement of output created within a domestic territory.

National Income (NI)

This is the sum of factor incomes from within a country, plus net factor income from abroad.
Factor incomes are compensation to employed individuals + income from entrepreneurial activities + investment income.

Per Capita Income

GDP per capita is total GDP divided by population, an indicator of a country's standard of living and, therefore, its welfare.

Personal Income (PI)

PI is the total amount of income received by individuals for consumption and savings. This value differs slightly from national income.
PI = NI + Non-factor income received - Non-factor income paid

Disposable Personal Income (DPI)

Disposable income is personal income less mandatory payments (taxes, etc.). This is the amount that individuals have available for consumption or saving decisions.
DI= Personal Income- Personal Income Taxes-Non-tax Payments

Measurement of National Income in India

The Indian system uses a three-phased strategy, including (1) Value added, (2) Income and (3) Expenditure techniques.
Data collection and consistency are difficult due to various reasons in the Indian system.

Limitations and Challenges of National Income Computation

Difficulties arise from determining a precise definition of national income, accurate distinction between final goods and services, and dealing with transfer payments.
Ensuring reliability and accuracy in data collection and measurement is a significant task in various economic contexts, particularly in developing economies.

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Description

This quiz covers Chapter 6 focusing on the determination of national income. Students will explore various definitions, significance, and calculation methods of national income, with a detailed look at the Indian system of regional accounts. The insights provided will enhance understanding of macroeconomic analysis, especially in the context of emerging economies.