NCERT Questions for Class 12 Economics Chapter 2 – National Income Accounting

Important Questions with Solutions of Class 12 Economics Chapter 2 – National Income Accounting

1) Define national disposable income.

Ans – National disposable income refers to the amount of income available in an economy to be spent or saved after all the accounts of economic activities are done. It’s the amount of money spent by households & the government for consumption purposes or as an investment after deducting the taxes and adding transfers.

You calculate national disposable income using the following formula:

National Disposable Income (NDI) = NNPMP + Net Current Transfers from Abroad

This measure reflects the total financial resources available to the economy for all such uses as consumption and investment.

2) What is money flow?

Ans – Money flow refers to money transferred from one sector to another within an economy, like firms & households. The income and expenditure are circulated in an economy, whereby wages and salaries paid by firms to households flow on one side & households spend their income on goods & services from firms. This exchange helps sustain economic activities and contributes to its overall growth.

3) What must be included in domestic factor income to gain national income?

Ans – To obtain national income, you must add net factor income from abroad to domestic factor income. Net factor income from abroad is income that residents receive from investments abroad minus income non-residents receive from investments made here in the country. This adjustment allows for the computation of the total income earned by all country’s residents including abroad and at home.

4) What are non-market activities?

Ans – Non-market activities are not bought and sold in the open market & by definition, they have no market prices. Of course, most of these take place within households or informal settings. Consider growing vegetables in a home kitchen garden. Those would add to well-being, but their value would not be reflected in market transactions or prices.

5) How does personal income differ from private income?

Ans – Personal Income is the total of separate incomes received from every possible source. Personal income includes wages, salaries, and transfer payments in the form of government benefits. It is also derived with the following formula:

Personal Income = National Income – Undistributed Corporate Profits + Transfer Payments + Net Interest Payments.

Personal income includes all the sources of income received directly by individuals, domestic and international.

Private Income: Private income is the net income earned from private sources, eliminating certain corporate elements. It includes factor and transfer incomes from private sources but does not include undistributed corporate profits.

The formula for computing private income is as follows:

Private Income = Personal Income – Corporate Taxes – Corporate Savings = Personal Income – Corporate Savings (Undistributed Profits) Briefly, personal income includes the direct incomes from individuals whereas private income consists of only that income from private sources, eliminating items like undistributed corporate profits.

6) Explain double counting in economics & how to eliminate them.

Ans – Double counting is nothing but considering the good’s value more than once at every production by inflating the measure of economic output. This can distort the true value of national income or Gross Domestic Product.

To avoid this, double-counting fallacy, the below ways may be utilized:

a) Value-Added Method: Here, the value added at each production is calculated, not the total value of goods at each stage. In other words, it considers the incremental value added by each producer to avoid double counting.

b) Measure Only Final Goods and Services: The value of national income or GDP has to be worked out only based on the value of the final goods and services. It does not include the value of intermediate goods in any form. This will ensure that only the final product is accounted for and double counting values are avoided.

7) Outline the process of calculating national income by the product approach.

Ans – Check out the major stages in measuring national income via this product method:

1. Different industrial sectors such as primary, secondary, and tertiary sectors classify the economic sectors to be reviewed systematically about their contribution.
2. The net value added at the factor cost by each sector is calculated. This measure captures each sector’s contribution to the economy by deducting the value of intermediate goods from the total value of the output.
3. Checking the value of the output comes from adding up sales and changes in stock levels. This ensures that one has taken care of the total economic activity.
4. The value of the output eliminating intermediate consumption would give the added gross value at market prices.
5. Deduct depreciation and net indirect taxes from the added gross value to get the Net Domestic Product at Factor Cost (NDPFC).
6. Add Net Factor Income from Abroad: Add the net factor income from abroad to NDPFC and get the Net National Product at Factor Cost (NNPFC). This final figure represents the national income.

These steps give an inclusive method of measuring national income, whereby all economic activities are accounted for with several adjustments.

8) Is a machine always considered a final good? Explain why & why not.

Ans – A machine is considered a good product or not a good one depending on the user’s choice. The final good is when a household buys a machine for its use. Instead, when a business buys a machine for its operations it becomes a final good. On the contrary, if a company buys a machine to sell or uses it as an input good to be further produced into goods, it’s defined as an intermediate good.

9) What safety protocols should be taken while estimating national income using a product method like the value-added one?

Ans – While estimating national income via product method follow the below guidelines:

a) Don’t rely on a value-added approach for each production and refrain from double counting.

b) Add self-consumption for the desired output.

c) Exclude considering intermediate consumption.

d) Avoid sales & acquisition of used products.

e) While rendering services, sales must be considered a valuable commodity.

These precautions help to arrive at correct national income figures from the product method and avoid the underestimation of the true value of the economic activities.

10) How do you check national & gross national disposable income from the below insights?

S.No	Contents	Rs. (in crores)
1	Net indirect tax	5
2	Net domestic fixed capital formation	100
3	Net exports	-20
4	Government’s expenditure	200
5	Net current transfers from abroad	15
6	Private final consumption expenditure	600
7	Change in stock	10
8	Net factor income from abroad	5
9	Gross domestic fixed capital formation	125

Ans – To calculate the national income (NNPFC) and gross national disposable income (GNDI), follow these steps:

1. Check Net Domestic Product at Market Price (NDPmp):

NDPmp = Government’s final consumption expenditure + Private final consumption expenditure + Net domestic fixed capital formation + Change in stock + Net exports

NDPmp = 200+600+100+10+(−20) = 890 crores

2. Check Net National Product at Factor Cost (NNPfc):

NNPfc = NDPmp + Net factor income from abroad − Net indirect tax

NNPfc = 890+5-5 = 890 crores

3. Check Depreciation:

Depreciation = Gross domestic fixed capital formation − Net domestic fixed capital formation Depreciation = 125-100 = 25 crores

4. Check Gross National Disposable Income (GNDI):

GNDI = NNPFC + Net indirect tax + Net current transfers from abroad + Depreciation

GNDI = 890+5+15+25 = 935 crores Therefore, the national income (NNPFC) is 890 crores, and the gross national disposable income (GNDI) is 935 crores.

11) How do you check the market rate NNP using the production & income process?

S.No	Contents	Rs. (in crores)
1	Intermediate consumption
	Primary sector	500
	Secondary sector	400
	Tertiary sector	300
2	Value of output
	Primary sector	1000
	Secondary sector	900
	Tertiary sector	700
3	Rent	10
4	Emoluments of employers	400
5	Mixed-income	650
6	Operating surplus	300
7	Net factor income from abroad	-20
8	Interest	5
9	Consumption of fixed capital	40
10	Net indirect tax	10

Ans – 1. By Production Method:

Step 1: Check the Gross Domestic Product at Market Price (GDPMP):

Value added at MP = Value of output − Intermediate consumption

Value added at MP = (1000+900+700) − (500+400+300) = 2600−1200 = 1400 crores

Step 2: Calculate Net National Product at Market Price (NNPMP):

NNPmp = GDPMP − Consumption of fixed capital + Net factor income from abroad

NNPMP =1400−40+(−20) = 1400−40−20 =1340 crores

2. By Income Method:

Step 1: Check Net National Product at Market Price (NNPMP):

NNPMP= Emoluments of employees + Mixed income + Operating surplus + Net indirect tax + Net factor income from abroad

NNPMP = 400+650+300+10+(−20)

NNPMP = 1340 crores

Therefore, the net national product at market price (NNPMP) is 1340 crores, using both production and income methods.