NCERT Solutions for Class 12 Macro Economics Chapter 2 – National Income Accounting

NCERT Solutions for Class 12 Macro Economics Chapter 2 – National Income Accounting

NCERT Solutions are invaluable resources for students preparing for the CBSE Class 12 Economics Board examinations. These solutions are meticulously compiled by subject matter experts with extensive experience in the field. This chapter serves as a brief of National Income Accounting

Access NCERT Solutions for Class 12 Economics Chapter 2 – National Income Accounting

NCERT Macroeconomics Solutions Class 12 Chapter 2 – National Income Accounting

Textual Questions and Answers.

Q. 1. What are the four factors of production and what are the remunerations to each of these called?

Ans.

Great question! The four factors of production are the resources needed to create goods and services. They are:

1. Land: This includes all natural resources used in production, such as minerals, forests, water, and land itself. The remuneration for land is called rent.
2. Labor: This is the human effort, both physical and mental, used in the production process. The remuneration for labor is called wages.
3. Capital: These are man-made resources used in production, such as machinery, tools, buildings, and technology. The remuneration for capital is called interest.
4. Entrepreneurship: This involves the skills and risk-taking ability of individuals who bring the other three factors together to produce goods and services. The remuneration for entrepreneurship is called profit.

These factors and their remunerations are fundamental concepts in economics. If you have more questions or need further details, feel free to ask!

Q. 2. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Ans.

In economics, it is essential that the aggregate final expenditure of an economy matches the aggregate factor payments. Here’s why:

1. Aggregate Final Expenditure: This is the total spending on all final goods and services in an economy. It includes:

• Consumption (what households spend on goods and services)
• Investment (what businesses spend on capital like machinery)
• Government spending
• Net exports (exports minus imports)

1. Aggregate Factor Payments: This is the total payment made to the factors of production (land, labor, capital, and entrepreneurship). It includes:

• Rent (payment for the use of land)
• Wages (payment for labor)
• Interest (payment for capital)
• Profit (payment to entrepreneurs)

1. Income-Expenditure Identity: In a closed economy (with no international trade), the income generated from producing goods and services must equal the expenditure on those goods and services. Here’s how:

• When you buy something, the money you spend becomes income for the seller.
• The seller then uses this money to pay wages, rent, interest, and profit.
• The recipients of these payments then spend their income on goods and services, continuing the cycle.

1. Equilibrium Condition: For an economy to be stable, the total spending (aggregate expenditure) should equal the total income (aggregate factor payments). If spending is more than income, it can cause inflation. If income is more than spending, it can lead to unemployment.

In summary, aggregate final expenditure and aggregate factor payments must be equal to ensure that the economy functions smoothly and remains in balance.

Q. 3. Distinguish between stock and flow. 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.

Ans.

Certainly! Let’s break it down:

Stock vs. Flow

Stock:

• Represents a quantity measured at a specific point in time.
• It is like taking a snapshot of a particular amount.
• Example: The amount of water in a tank at a specific moment.

Flow:

• Represents a quantity measured over a period of time.
• It is like recording the ongoing activity.
• Example: The rate at which water flows into or out of the tank over a certain period.

Net Investment and Capital

Net Investment:

• Net investment is a flow.
• It measures the addition to the stock of capital over a period of time.
• It represents how much new capital is being created after accounting for depreciation.
• Example: If a company buys new machinery worth ₹1 million but old machinery worth ₹0.2 million depreciates, the net investment is ₹0.8 million for that year.

Capital:

• Capital is a stock.
• It represents the total value of assets at a specific point in time.
• It includes machinery, buildings, equipment, etc., that are used in production.
• Example: The total value of all machinery, buildings, and equipment owned by a company at the end of the year.

Comparison with Flow of Water into a Tank

Imagine a tank:

• The water in the tank at any given time represents the capital (a stock). It shows the total amount of water (capital) available at that moment.
• The flow of water into the tank represents the net investment (a flow). It shows how much water (capital) is being added to the tank over a period of time.

In other words:

• Capital (stock) is like the current level of water in the tank.
• Net investment (flow) is like the rate at which water is being added to the tank.

Q. 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.

Ans.

Planned vs. Unplanned Inventory Accumulation

1. Planned Inventory Accumulation:

• This happens when a firm deliberately decides to keep some goods unsold for future use.
• It is based on the firm’s expectation of future demand or production requirements.
• Example: A car manufacturer produces 100 cars but plans to sell only 90 this month, keeping 10 cars in inventory for next month.

1. Unplanned Inventory Accumulation:

• This happens when the actual sales differ from what the firm expected.
• It can be either positive or negative:
  • Positive Unplanned Inventory Accumulation: When actual sales are less than expected, resulting in more unsold goods.
  • Negative Unplanned Inventory Accumulation: When actual sales are more than expected, resulting in fewer goods in inventory.
• Example: If the car manufacturer planned to sell 90 cars but sold only 80, the remaining 10 cars are unplanned inventory.

Relation between Change in Inventories and Value Added of a Firm

Value Added: This is the increase in value that a firm adds to its raw materials and intermediate goods through its production process. It is calculated as:

Value Added = Sales Value – Cost of Raw Materials and Intermediate Goods

Change in Inventories: This includes both planned and unplanned inventory changes. It reflects how much inventory has increased or decreased during a period.

The relation can be expressed as:

Value Added = Sales + Change in Inventories – Cost of Raw Materials and Intermediate Goods

This means that the value added by the firm includes not just the sales of produced goods but also any changes in the inventory levels.

Q. 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.

Ans.

Three Methods of Calculating GDP

1. Production Method (Output Method):

• This method calculates GDP by adding up the value of all final goods and services produced in an economy during a specific period.
• Identity: GDP = ∑ (Value of Final Goods and Services)

1. Income Method:

• This method calculates GDP by adding up all the incomes earned by factors of production (land, labor, capital, and entrepreneurship) in an economy during a specific period.
• Identity: GDP = Rent + Wages + Interest + Profit

1. Expenditure Method:

• This method calculates GDP by adding up all expenditures made on final goods and services in an economy during a specific period.
• Identity: GDP = Consumption + Investment + Government Spending + (Exports – Imports)

Why These Methods Give the Same Value of GDP

1. Production Method:

This method focuses on the total value of goods and services produced, ensuring that we account for everything produced in the economy.

2. Income Method:

This method focuses on the total income earned from producing those goods and services. Since the value of goods and services produced becomes income for those who contributed to the production, the total income should match the value of production.

3. Expenditure Method:

This method focuses on the total spending on goods and services. When people spend money on goods and services, it is the same money that flows to producers as income.

In essence:

• The Production Method measures the value of output.
• The Income Method measures the income generated from that output.
• The Expenditure Method measures the spending on that output.

All three methods should give the same GDP value because the value of goods and services produced (Production Method) equals the income generated from producing them (Income Method), and this income is spent on buying these goods and services (Expenditure Method).

Q. 6. Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was ( – ) Rs 1,500 crores. What was the volume of trade deficit of that country?

Ans.

Sure! Let’s start with the definitions:

1. Budget Deficit:

• A budget deficit occurs when a government’s expenditures exceed its revenues during a specific period, typically a fiscal year.
• In simpler terms, it means the government is spending more money than it is earning from taxes and other sources.

1. Trade Deficit:

• A trade deficit occurs when a country’s imports of goods and services exceed its exports during a specific period.
• In simpler terms, it means the country is buying more from other countries than it is selling to them.

Now, let’s calculate the trade deficit given the information:

1. Excess of Private Investment over Saving: Rs 2,000 crores
2. Budget Deficit: (–) Rs 1,500 crores

Using the basic macroeconomic identity:

(S – I) + (T – G) = (X – M)

Where:

• S = Saving
• I = Investment
• T = Taxes
• G = Government spending
• X = Exports
• M = Imports

Given:

• I – S = 2,000 crores (Excess of Private Investment over Saving)

• G – T = 1,500 crores (Budget Deficit, given as a negative value since T – G = –1,500 crores)

The relation becomes:

2,000 – 1,500 = X – M

X – M = 500 crores

So, the volume of the trade deficit is Rs 500 crores.

Q. 7. Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.

Ans.

It is mentioned that,

National Income (NNP_FC) = ₹ ₹ 850 Crores

(GDP_MP) = ₹ 11,00 Crores

Net Factor Income from abroad = ₹ 100 crores

Net Indirect Taxes = ₹ 150 Crores

NNP_FC = GDP_FC + Net Factor Income from abroad – Depreciation – Net Indirect Taxes

Putting these values in the formula,

850 = 1100 + 100 – Depreciation – 150

850 = 1100 – 50 – Depreciation

850 = 1050 – Depreciation

Depreciation = 1050 – 850 = ₹ 200 crores

So, depreciation is ₹ 200 Crores

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

Ans.

NNP_FC = ₹ 1900 Crores

Personal Disposable Income (PDI) = ₹ 1,200 Crores

Personal Income Tax = ₹ 600 Crores

Value of retained earnings = ₹ 200 Crores

PDI = NNP_FC – Value of retained earnings of firms and government + Value of transfer payments – Personal Tax

1200 = 1900 – 200 + Value of Transfer Payments – 600

1200 = 1100 + Value of Transfer Payments

Value of transfer Payment = ₹ 1200 – ₹ 1100 = ₹ 100 Crores

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

	Rs. (Crore)
(a) Net Domestic Product at factor cost	8,000
(b) Net Factor Income from abroad	200
(c) Undistributed Profit	1,000
(d) Corporate Tax	500
(e) Interest Received by Households	1,500
(f) Interest Paid by Households	1,200
(g)Transfer Income	300
(h) Personal Tax	500

Ans.

Personal Income = NDP_FC + Net Factor income from abroad (NFIA) + Transfer Income – Undistributed Profit – Corporate Tax – Net Interest Paid by Househoolds

NDP_FC = ₹ 8,000 Crores

NFIA = ₹ 200 Crores

Transfer Income = ₹ 300 Crores

Undistributed Profit = ₹ 1,000 Crores

Corporate Tax = ₹ 500 Crores

Net interest paid by households = Interest paid – Interest received

= ₹ 1,200 – ₹ 1,500

= (-) ₹ 300 Crores

So, putting the values in the above formula

PI = ₹ 8,000 + ₹ 200 + ₹ 300 – ₹ 1000 – ₹ 5000 – (- ₹ 300)

= ₹ 8,000 + ₹ 200 + ₹ 300 – ₹ 1,000 – ₹ 500 + ₹ 300

PI = ₹ 7300

So, Personal Income = ₹ 7,300 Crores

Personal Disposable Income = Personal Income – Personal Payments

= ₹ 7,300 – ₹ 500

= ₹ 6,800 Crores.

Q. 10. In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.

Ans.

Its given

Indirect tax = ₹ 30

Personal Tax = ₹ 20

Depreciation = ₹ 50

Retained Earnings = ₹ 220

(i) GDP_MP = ₹ 500 (total collection of the barber)

(ii) NNP_MP = GDP – Depreciation

= 500 – 50 = ₹ 450

(iii) NNP_FC = NNP_MP – Sales Tax

= 450 – 30

= ₹ 420

(iv) Personal Income (PI) = NNP_FC – Retained Earnings

= 420 – 220

= ₹ 220

(v) Personal Disposable Income (PDI) = Personal Income (PI) – Income Tax

= ₹ 200 – ₹ 20

= ₹ 180

Q. 11. The value of the nominal GNP of an economy was Rs 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 Rs 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?

Ans.

It is given that,

Nominal GNP = ₹ 2,500

Real GNP = ₹ 3,000

GNP deflator

$\frac{Nominal GNP }{Real GNP} \times 100$

= 83.33%

So, (100 – 83.33)% = 16.67%

No, the price level has fallen down by 16.67%

Q. 12. Write down some of the limitations of using GDP as an index of welfare of a country.

Ans.

Limitations of Using GDP as an Index of Welfare

While GDP (Gross Domestic Product) is a widely used measure of a country’s economic performance, it has several limitations when it comes to measuring the welfare or well-being of its citizens. Here are some key limitations:

1. Non-Market Activities:

• GDP does not account for non-market activities, such as household work and volunteer services, which contribute to welfare.
• Example: Cooking meals at home or caring for family members are valuable activities but are not included in GDP.

1. Income Distribution:

• GDP measures the total output of an economy but does not show how income is distributed among the population.
• A country with high GDP might still have significant income inequality, where a large portion of the population lives in poverty.

1. Quality of Life:

• GDP does not consider factors that affect the quality of life, such as health, education, and environmental quality.
• Example: A country with high pollution levels may have a high GDP but poor quality of life for its residents.

1. Non-Economic Factors:

• GDP does not account for non-economic factors that contribute to well-being, such as happiness, freedom, and social relationships.
• Example: Higher GDP does not necessarily mean that people are happier or have better social connections.

1. Sustainability:

• GDP measures current economic activity but does not consider whether the growth is sustainable in the long term.
• Example: Overexploitation of natural resources may boost GDP temporarily but harm future generations.

1. Underground Economy:

• GDP does not include the underground economy, which consists of illegal activities and unreported income.
• Example: Transactions in the black market or informal sector are not captured in GDP statistics.

In summary, while GDP is a useful indicator of economic performance, it has limitations in capturing the overall welfare of a country’s citizens. To get a complete picture of welfare, it is important to consider other indicators alongside GDP.