National Income Concept

Questions and Answers

What is included in consumption expenditure?

Net exports of goods

Expenditure on durable goods and services (correct)

Government salaries

Income from investments

Which type of investment is not typically classified under investment expenditure by business firms?

Business fixed investment

Inventory investment

Residential investment

Personal savings (correct)

Government expenditure does NOT include which of the following?

Social security benefits

Salaries to government employees

Public infrastructure projects

Investment in private firms (correct)

What defines net exports?

Exports minus imports Signup and view all the answers

What does national income represent in the context of a country?

Sum of incomes earned by residents from factor services. Signup and view all the answers

Which of the following factors is NOT compensated through the income method?

Government spending Signup and view all the answers

Compensation of Employees includes which aspect of employee remuneration?

Total wages and benefits Signup and view all the answers

Which of the following is NOT included in the calculation of national income?

Income earned by foreign residents in the country. Signup and view all the answers

What method measures national income based on spending on final goods and services?

Expenditure Method. Signup and view all the answers

The formula for national income includes which components?

C + G + I + T Signup and view all the answers

Which of the following components does NOT contribute to GDP according to the Expenditure Method?

Spending on intermediate goods. Signup and view all the answers

What does investment expenditure typically encompass?

Residential and inventory investments Signup and view all the answers

Which equation correctly represents the Income-Expenditure Identity for national income?

Y = C + I + G + NX. Signup and view all the answers

Which of the following is considered a factor of production in measuring national income?

Entrepreneurship. Signup and view all the answers

Which type of expenditures are summed to calculate the GDP at market prices?

Final expenditures from all sectors. Signup and view all the answers

What does the term 'residents' refer to in the definition of national income?

Individuals and institutions with economic interests in the country. Signup and view all the answers

What does Gross Operating Surplus include?

Rent, interest, royalty, and profit Signup and view all the answers

What is meant by 'mixed income' in the context of self-employed individuals?

Income that is not clearly defined as either wage or profit Signup and view all the answers

What type of payments do taxes on production and imports represent?

Compulsory, non-refundable payments Signup and view all the answers

Which method measures economic activity by adding the market values of goods and services produced?

Output Method Signup and view all the answers

In the Value Added Method, how is a firm's value added calculated?

Value of its output minus intermediate goods purchased Signup and view all the answers

Which forms of income are included in the Gross Operating Surplus calculation?

Rent, interest, royalties, and profits Signup and view all the answers

Which statement accurately describes employer contributions?

They include wages in kind and cash. Signup and view all the answers

What is the significance of excluding intermediate goods in the Value Added Method?

To avoid double counting in GDP calculations Signup and view all the answers

What does Gross Value Added represent in the Value Added Method?

Gross Output minus Intermediate Consumption Signup and view all the answers

Which of the following is NOT included in the calculation of Net Value Added?

Consumption Expenditure Signup and view all the answers

How is Net National Product calculated from National Income?

By adding net factor income from abroad to domestic income Signup and view all the answers

What is included in the calculation of Gross National Product?

Consumption, Investment, Government expenditure, and Net exports Signup and view all the answers

Which statement accurately describes how GNP is different from GDP?

GNP measures the income of all residents regardless of location. Signup and view all the answers

What is a key component excluded from GNP calculation?

Intermediate goods Signup and view all the answers

Which formula represents the calculation of GNP?

Y = C + I + G + X + Z Signup and view all the answers

What does Net National Product reflect?

Market value of finished goods produced by citizens domestically and abroad Signup and view all the answers

What does net national product (NNP) primarily measure?

The actual growth of a nation by subtracting depreciation from GNP. Signup and view all the answers

Which formula correctly represents net national income (NNI)?

NNI = GNP + Net Factor Income from Abroad - Indirect Taxes - Depreciation Signup and view all the answers

When net national product (NNP) declines, what action do businesses typically consider?

Shifting focus to recession-proof industries. Signup and view all the answers

How is net national product (NNP) affected by depreciation?

Depreciation is subtracted from GNP to determine NNP. Signup and view all the answers

What typically happens to business focus during a rise in net national product (NNP)?

Focus transitions to consumer-led industries. Signup and view all the answers

Which components are subtracted to calculate net national income (NNI)?

Indirect taxes and depreciation. Signup and view all the answers

Which of the following statements about net national product (NNP) is incorrect?

NNP is equal to gross national product (GNP). Signup and view all the answers

Net national income (NNI) includes which of the following components?

Income from households, businesses, and government minus indirect taxes and depreciation. Signup and view all the answers

Study Notes

Concept of National Income

National income is the aggregate of incomes earned by residents from factor services both domestically and internationally.
Residents’ economic interests are centered on production, consumption, and investment within their country.
Four factors of production (land, labor, capital, entrepreneurship) generate factor incomes.

Methods of Measuring National Income

Expenditure Method

Measures economic activity through spending on final goods and services, excluding intermediate goods.
Components of GDP:
- Private consumption expenditure (C)
- Private investment expenditure (I)
- Government expenditure (G)
- Net exports (NX)
Income-Expenditure Identity: Y = C + I + G + NX

Components of Expenditure

Consumption: Expenditure on goods/services sold to final users including durable goods, non-durable goods, and services.
Investment: Expenditure by businesses on production inputs, including fixed, residential, and inventory investments.
Government Expenditure: Spending by government entities on salaries, social security benefits, etc.
Net Exports: Calculated as exports minus imports; positive when exports exceed imports.

Income Method

Measures national income based on payments to factors of production.
National Income Formula: National Income = C + G + I + T
Compensation of Employees (C): Wages and benefits paid to employees by employers.
Gross Operating Surplus (G): Net business income, including rent, interest, royalty, and profit.
Income of Self Employed (I): Mixed income earned by proprietors, incorporating labor, capital, and profits.
Taxes (T): Compulsory payments related to production and imports, minus subsidies.

Value Added Method

Also known as the Output or Product Method; measures contributions of producing enterprises.
Gross Value Added = Gross Output - Intermediate Consumption
Net Value Added = Gross Output - Intermediate Consumption - Depreciation
National Income Calculation: NNPFc = Gross Output - Intermediate Consumption - Depreciation - Net Indirect Taxes + Net Factor Income from Abroad

Gross National Product (GNP)

Total value of goods and services produced by residents and businesses, regardless of production location.
Includes investments made by citizens abroad but excludes foreign earned income.
GNP Calculation: Y = C + I + G + X + Z

Net National Product (NNP)

Represents market value of goods/services produced by citizens, calculated as GNP minus depreciation.
Measures a nation’s actual consumption capability over a given time frame.

Net National Income (NNI)

Defined as net national product minus indirect taxes; captures income across households, businesses, and government.
NNI Calculation: NNI = C + I + G + NX + Net Factor Income from Abroad - Indirect Taxes - Depreciation

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Description

This quiz explores the concept of national income and its measurement. It covers the definition, components, and significance of national income in understanding an economy. Test your knowledge on how income is generated by residents and its implications for national wealth.