National Income Accounting Overview
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Questions and Answers

What leads to double counting errors when computing total units produced?

  • Only considering new production
  • Including only the cost of final goods
  • Adding the value of intermediate goods (correct)
  • Excluding the value of final goods

Which of these items is not included in GDP calculations?

  • Production of legal goods
  • Sales of new cars
  • Sale of second-hand items (correct)
  • Construction of new houses

How is National Income defined in the context of the income method?

  • Total production across all sectors
  • Total income earned by citizens and businesses (correct)
  • Total final value of produced goods
  • Sum of transfer payments to households

Which of the following is NOT a factor of production?

<p>Economics (C)</p> Signup and view all the answers

What is included in the calculation of GDP according to the income method?

<p>Wages, interest, rent, and profits (D)</p> Signup and view all the answers

What adjustment is made to the GDP calculation regarding taxes?

<p>Add indirect taxes and subtract subsidies (D)</p> Signup and view all the answers

What distinguishes retained profits in GDP calculations?

<p>Profits not distributed to shareholders (D)</p> Signup and view all the answers

What does National Income Accounting primarily measure?

<p>The economic activity of a national economy (A)</p> Signup and view all the answers

Which of these is a non-economic good that is excluded from GDP?

<p>Air (D)</p> Signup and view all the answers

In the context of National Income Accounting, what does GDP stand for?

<p>Gross Domestic Product (D)</p> Signup and view all the answers

Which of the following best represents how GDP is calculated in National Income Accounting?

<p>Total amount spent by households on goods and services (D)</p> Signup and view all the answers

What components are included in the calculation of GDP according to National Income Accounting?

<p>Wages, rent, and profits paid by firms (B)</p> Signup and view all the answers

What is a primary function of National Income Accounting?

<p>To measure economic performance of a country (A)</p> Signup and view all the answers

Which of the following is NOT a component in the GDP accounting framework?

<p>Foreign aid received (A)</p> Signup and view all the answers

How do firms contribute to GDP according to National Income Accounting?

<p>By paying wages, rents, and profits (B)</p> Signup and view all the answers

In National Income Accounting, what relationship is depicted between households and firms?

<p>Households buy goods from firms (D)</p> Signup and view all the answers

How can a strong exchange rate negatively impact economic growth?

<p>It reduces demand for domestically produced goods. (B)</p> Signup and view all the answers

What is a suitable long-term indicator of economic performance regarding exchange rates?

<p>Stability of the currency. (B)</p> Signup and view all the answers

Which of the following factors does NOT directly reflect the economic performance concerning exchange rates?

<p>Exchange rate values alone. (A)</p> Signup and view all the answers

What primary element determines the confidence in an economy regarding currency exchange rates?

<p>The stability or volatility of the currency. (D)</p> Signup and view all the answers

How did India's trade deficit change from 2016-17 to 2017-18?

<p>It increased from US$ 112.4 billion to US$ 160 billion. (D)</p> Signup and view all the answers

What can be a misleading indicator of overall economic health in the short term?

<p>Speculation-driven exchange rates. (D)</p> Signup and view all the answers

Which country was mentioned as having a significant trade deficit despite showing macroeconomic improvements?

<p>India. (B)</p> Signup and view all the answers

What does not contribute to a strong exchange rate over a long period of time?

<p>Increased trade deficits. (C)</p> Signup and view all the answers

What is one major reason women lack economic independence?

<p>Dependence on male family members (A)</p> Signup and view all the answers

What has the government introduced to enhance women's political empowerment?

<p>Compulsory reservation in local bodies (B)</p> Signup and view all the answers

Which act has been made a powerful legislation to combat violence against women?

<p>Domestic Violence Act (B)</p> Signup and view all the answers

What aspect of women's issues has been highlighted through legislation aimed at gender-based development?

<p>Women-centric legislations and schemes (B)</p> Signup and view all the answers

How does the trade deficit in India relate to its macro-economic performance?

<p>It continues to widen despite improving fundamentals (C)</p> Signup and view all the answers

What factor is NOT associated with women having lower literacy rates?

<p>Strong national policies promoting education (C)</p> Signup and view all the answers

What opportunity is provided through the promotion of Self-Help Groups (SHGs) for women?

<p>Greater economic empowerment (C)</p> Signup and view all the answers

What should India focus on to boost its trade performance?

<p>Improving export strategies (B)</p> Signup and view all the answers

What constitutes national income?

<p>The money value of final flow of output of goods and services produced within an economy over a year (C)</p> Signup and view all the answers

Which method measures national income by calculating the aggregate value of final goods and services?

<p>Value Added Method (C)</p> Signup and view all the answers

What is a significant difficulty in estimating national income using the Product Method?

<p>The prevalence of self-consumption in agriculture (D)</p> Signup and view all the answers

What should be excluded from the calculation by the Income method?

<p>Income without flow of goods and services (B)</p> Signup and view all the answers

What is considered a challenge in applying the Factor Income Method?

<p>Lack of awareness among a large segment of the population regarding income tracking (C)</p> Signup and view all the answers

Which of the following represents the components of final expenditure in GDP calculation?

<p>Consumption, Investment Expenditure, Government Expenditure, Net Exports (C)</p> Signup and view all the answers

What type of valuation poses a problem when a new commodity is produced?

<p>Valuing it at constant prices (C)</p> Signup and view all the answers

Which expenditure category includes payments made directly by households to firms?

<p>Consumption (C)</p> Signup and view all the answers

Which of the following is NOT one of the factors of production considered in the Factor Income Method?

<p>Government intervention (D)</p> Signup and view all the answers

Which of the following is NOT included in Government Expenditure?

<p>Pension schemes for retired employees (C)</p> Signup and view all the answers

Which of the following statements about the difficulties in estimating national income is true?

<p>Bartering in agriculture makes valuation complex (A)</p> Signup and view all the answers

How is Net Exports calculated within the context of GDP?

<p>Exports minus Imports (B)</p> Signup and view all the answers

Which method does NOT involve measuring national income through final output?

<p>Accounts Method (C)</p> Signup and view all the answers

In an economy, which agencies primarily purchase goods and services?

<p>Households, Firms, Government (B)</p> Signup and view all the answers

What is the correct formula to calculate GDP using the expenditure method?

<p>GDP = C + I + G + X - IM (D)</p> Signup and view all the answers

What is a fundamental principle underlying national income accounting?

<p>All three approaches give identical measurements of current economic activity (B)</p> Signup and view all the answers

Flashcards

National Income Accounting

Methods used to measure the total economic activity within a country.

Gross Domestic Product (GDP)

The total value of all goods & services produced within a country's borders in a specific time period.

Circular Flow of Income

Money spent by households on goods & services equals money paid to firms for wages, rent, and profit.

Double Counting Error

The value of final goods and services should be considered in the national income calculation to avoid double counting. This means excluding the cost of intermediate goods, which are already included in the final price.

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Non-Productive Activities

Items that are not considered part of the GDP calculation because they do not involve the production of new goods or services. This includes second-hand items and transfer payments like scholarships and pensions.

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Income Method

Income Method is a way of calculating national income by focusing on the total income earned by households and businesses from factors of production.

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Factor Payments

Payments made to factors of production – land, labor, capital and organization – in the form of rent, wages, interest and profit.

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Income Exclusion in Income Method

Income without any corresponding flow of goods, services or value creation shouldn't be included in GDP calculation using the Income Method.

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What does the Expenditure Method measure?

The Expenditure Method calculates GDP by summing up all spending on final goods and services in an economy.

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Who spends on goods and services?

Households, firms, and the government are the main entities that spend money on goods and services in an economy.

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What is Consumption (C) in GDP?

Consumption spending refers to household spending on goods and services.

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What is Investment (I) in GDP?

Investment spending refers to additions to the capital stock of an economy, including both business and government investments.

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What is Government Spending (G) in GDP?

Government expenditure includes spending on goods and services by the government.

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What are Net Exports (X-IM) in GDP?

Net Exports represent the difference between a country's exports (goods sold to other countries) and imports (goods bought from other countries).

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What is the GDP formula in the Expenditure Method?

The formula for GDP using the Expenditure Method is: GDP = C + I + G + (X - IM)

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Exchange Rate

The relationship between the value of a country's currency and the currencies of other countries.

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Economic Growth Rate

The rate at which a country's economy grows, measured by the percentage increase in its GDP over a period of time.

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Trade Deficit

A situation where a country spends more on imports than it earns from exports.

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Trade Balance

The difference between a country's total earnings from exports and total spending on imports.

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Current Account Deficit

A measure of the difference between a country's total income and its total spending.

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Strong Exchange Rate

A situation where the value of a country's currency is rising relative to other currencies.

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Weak Exchange Rate

A situation where the value of a country's currency is falling relative to other currencies.

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Exchange Rate Volatility

Fluctuations in the value of a currency.

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Women's Economic Dependence

Women's economic dependence on men can limit their ability to make independent decisions, impacting both their personal lives and the effectiveness of women-centric development programs.

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Women's Literacy and Rights

A low literacy rate among women hinders their understanding of their rights and ability to advocate for themselves, perpetuating social inequalities.

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Government's Role in Gender Equality

The government recognizes the importance of gender equality in development and is taking steps to address social evils and practices that harm women.

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Self-Help Groups (SHGs)

Self-Help Groups (SHGs) provide women with economic empowerment by promoting financial independence and entrepreneurship.

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Women's Political Representation

Reservations in local bodies ensure greater political representation for women, enhancing their voices and participation in decision-making.

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Women-Centric Legislation

Legislation specifically aimed at women's issues, like the Domestic Violence Act or the Sexual Harassment at Workplace Act, provides legal protection and recourse.

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Currency Exchange Rate as a Measure of Economic Performance

The exchange rate doesn't always accurately reflect a country's economic performance, as other factors can influence its fluctuations.

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India's Trade Deficit

Despite improving macroeconomic conditions, India's trade deficit is widening, indicating a growing imbalance between imports and exports.

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National Income

The total value of all goods and services produced in an economy in a year, including net income earned from abroad.

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Product/Value Added Method

Measures national income by adding up the value added at each stage of production. Value added is the difference between the value of goods produced and the cost of intermediate inputs.

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Factor Income Method

Measures national income by adding up all income earned by factors of production: wages, rent, interest, and profits.

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Expenditure Method

Measures national income by adding up all spending on final goods and services. This includes consumption, investment, government spending, and net exports.

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Non-monetized Activities

The difficulty of accurately valuing non-monetized goods and services, such as bartering and self-consumption, in rural areas.

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Valuation of New Goods

The challenge of accurately valuing newly produced goods at constant prices, as it is difficult to determine their historical value.

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Ignorance in Income Recording

Lack of accurate accounting records and financial literacy among certain groups, making it difficult to accurately assess their income and expenditure.

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Improving National Income Accounting

Steps taken to improve the accuracy of national income accounting include: collecting more detailed data, improving record-keeping practices, and adjusting for non-monetized activities.

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Study Notes

National Income Accounting (NIA)

  • NIA measures a nation's overall economic activity.
  • It's analogous to calculating income for an individual or business.
  • Households buy goods/services from firms, which use revenue to pay workers, landowners, and business owners.
  • GDP equals total household spending on goods/services, and total payments to production factors (wages, rent, profit).
  • Double counting is avoided by only including the final value of goods/services and excluding intermediate goods.
  • Second-hand goods, illegal activities, non-economic resources (air, water), and transfer payments (scholarships, pensions) aren't included in GDP calculations.

Income Method

  • This approach calculates national income by aggregating factor payments (wages, interest, rent, profit) to households.
  • It essentially sums the income earned by a country's citizens and businesses.
  • Includes indirect taxes, subtracts subsidies and adds depreciation to obtain GDP.
  • Profit includes profit tax, dividends, and retained profit.
  • It measures the contribution of service sectors.
  • Income without a corresponding flow of goods/services isn't included.

Expenditure Method

  • This approach measures the final expenditure on GDP.
  • It focuses on all spending on recently produced final goods/services.
  • Expenditure comes from households, businesses, and government.
  • Government expenditure on transfers (pensions, scholarships) isn't included.
  • Net exports (exports minus imports) is also part of total expenditure.
  • GDP = Consumption + Investment + Government Spending + (Exports - Imports)

Equivalence of Methods

  • All three methods (income, expenditure, and value-added) provide identical GDP measurements.

Gender Development in India

  • Women often lack independence in financial and political decisions due to cultural dependencies on fathers/husbands/sons.
  • Lower literacy rates and awareness decrease women's access to resources/rights.
  • The government's focus on gender in development is increasing. This leads to policies and programs targeted at women.
  • There are initiatives for the economic and political empowerment of women, which include (but are not limited to) self-help groups (SHGs), reservations in local bodies, and programs like the National Literacy Mission.
  • Specific legislation to counter violence against women and sexual harassment has been enacted.

Currency Exchange Rate as a Measure of Economic Performance

  • Exchange rates are not a direct measure of economic growth, although they can influence each other.
  • Short-term exchange rate fluctuations might be due to speculation instead of long-term economic improvements.
  • Long-term stability often correlates with low inflation, high competitiveness, and greater global demand.
  • Volatility signifies instability and vulnerability to speculators.
  • India's macroeconomic indicators (e.g., GDP growth) show some improvement, but the trade deficit increased.

National Income Measurement Difficulties

  • Estimating national income is challenging due to insufficient, inaccurate, or incomplete data about production and income.
  • Difficulty in valuing non-monetary transactions (e.g., bartering) and self-consumed goods (e.g., home production).
  • Valuing new products in constant prices can be complex.
  • Illiteracy and lack of record-keeping make accurately measuring income challenging for many people.

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Description

This quiz covers the fundamentals of National Income Accounting (NIA) and the Income Method. It explores how a nation's overall economic activity is measured through various components like GDP, household spending, and income aggregation. Test your understanding of key concepts such as double counting and the factors included in GDP calculations.

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