National Income and Related Aggregates: NBSE Class 12 notes

Introduction

National income is a crucial economic concept that represents the total value of all goods and services produced over a specific period within a country. It is a measure of a nation’s economic activity, and it is generated through the production process. The four primary inputs or factors of production—land, labour, capital, and entrepreneurship—contribute to this process.

Land refers to all natural resources, such as soil, rivers, forests, and minerals. Labor involves human efforts, both mental and physical, aimed at earning income. Capital includes all man-made goods used for further production of wealth, such as machinery, buildings, and raw materials. The entrepreneur organizes these factors, taking on the risks and uncertainties involved in production.

National income can be measured at current prices, also known as nominal national income, which is the money value of all final goods and services produced in a year at the prices prevailing in that year. Alternatively, it can be measured at constant prices, or real national income, which is the money value of all final goods and services produced in a year at fixed prices, typically those of a base year.

The concept of economic territory is also significant in understanding national income. Economic territory refers to the geographical area administered by a government within which persons, goods, and capital circulate freely. A resident, in this context, is a person or institution that ordinarily resides in a country and whose center of economic interest lies in that country.

Production can be for self-consumption, where the producers consume the entire output they produce, or for exchange, where goods and services are produced for sale in the market to earn a profit.

Understanding these concepts is crucial for policymakers and economists as they provide insights into the economic health of a country, guiding decisions on fiscal and monetary policies.

Textual questions and answers

A. Very short-answer questions

1. What is GDP at market price?

Answer: GDP at market price refers to the market value of all the final goods and services produced within the domestic territory of a country during a year.

2. What are the factors of production?

Answer: The factors of production are:

Land – includes all natural resources like soil, forests, rivers, etc.
Labour – refers to human physical and mental efforts aimed at earning income.
Capital – includes all man-made production inputs like machinery, tools, buildings, etc.
Entrepreneur – refers to the person who organizes and manages the other factors of production and bears risks.

3. “Indian ships are moving between the UK and Pakistan”. Does this come under the domestic territory of India?

Answer: Yes, Indian ships moving between the UK and Pakistan regularly are considered part of the domestic territory of India.

4. National Income is often estimated as ____________

Answer: The sum of money value of net flow of all the final goods and services produced by normal residents within and outside the country during a period of account.

5. Under which category will ‘the financial help to victim’ come?

Answer: Financial help to victim will come under the category of transfer payments.

6. How is GNP at market price estimated?

Answer: GNP at market price is estimated as: GNP at market price = GDP at market price + Net factor income from abroad.

7. “National income is equal to GNPfc + Depreciation”. Is this true?

Answer: No, this statement is false.

8. What is the difference between transfer income and factor income?

Answer: The difference between transfer income and factor income are:

Factor income is earned by providing productive service, while transfer income is received without providing any good or service in return.
Factor income is earned, while transfer income is received.
Wages, rent, interest and profit are examples of factor incomes. Gifts, donations, subsidies are examples of transfer incomes.
Factor income is included in national income, while transfer income is excluded.

9. What is the impact of externality-positive or negative?

Answer: Externalities can have both positive and negative impacts.

Negative externalities like pollution, cause harm to others which reduces welfare.
Positive externalities like public parks, provide benefits to others which increase welfare.

10. “Domestic product refers to value addition only by the resident producers”. True or false.

Answer: True.

11. “National income is always greater than the domestic income”. True or false.

Answer: False.

12. Is it possible for NIT to be zero?

Answer: Yes, it is possible for Net Indirect Taxes (NIT) to be zero.

13. Define externalities.

Answer: Externalities refer to benefits or harm which a firm or an individual causes to others but for which they are not paid or penalised.

B. Short-answer questions-I

1. What is depreciation (or consumption of fixed capital)?

Answer: Depreciation refers to the fall in value of fixed assets due to normal wear and tear, and expected obsolescence.

2. What are factor incomes?

Answer: Factor incomes are payments made to factors of production (land, labor, capital, enterprise) for their contribution in the production process, like rent, wages, interest and profit.

3. What are transfer payments?

Answer: Transfer payments refer to unilateral payments received without making any contribution to production, like scholarships, pensions, donations, etc.

4. What are non-market activities?

Answer: Non-market activities refer to production of goods and services which are not exchanged through money, like household services, hobbies, barter exchanges, etc.

5. Define capital loss.

Answer: Capital loss refers to the fall in value of fixed capital due to natural calamities, wars, thefts etc. It is not considered as depreciation.

6. Define GNP and MP.

Answer: GNP stands for Gross National Product which measures the total value of final goods and services produced by normal residents of a country.

MP stands for Market Price which is the price at which a commodity is sold in the market.

7. What is meant by Nominal GDP?

Answer: Nominal GDP is the value of goods and services produced in a year calculated at current market prices prevailing that year.

8. What is meant by Real GDP?

Answer: Real GDP is the value of goods and services produced in a year calculated at constant prices of the base year.

9. What is meant by Inventory?

Answer: Inventory refers to the stock of unsold goods which a producer has at the end of an accounting period. Change in inventory is included in national income.

10. Define National Income. From the following, select the ones which are included in national income.

Answer: National income is the sum of factor incomes like rent, wages, interest and profit earned by normal residents of a country.

(i) old age pension

Answer: ot included, it is a transfer payment

(ii) money sent by an NRI to his family in India

Answer: Included, it is a factor income

(iii) transfer payments from rest of the world

Answer: Not included, it is a transfer payment

(iv) gifts received

Answer: Not included, it is a transfer payment

11. Which among the following makes GDP an inappropriate index of welfare?

(i) Non-monetary transactions

Answer: Yes, it is not included in GDP.

(ii) Externalities

Answer: Yes, positive and negative externalities are not accounted in GDP.

(iii) Composition and distribution of GDP

Answer: Yes, mere rise in GDP does not mean rise in welfare if income is unequally distributed.

12. What is barter system?

Answer: Barter system refers to the exchange of one commodity for another without the use of money. It is a feature of subsistence economies.

C. Short-answer questions-II

1. How is national income at current price different from national income at constant price?

Answer: National income at current prices (or nominal national income) refers to “the money value of all the final goods and services produced in a year measured at current prices, i.e., prices prevailing in that particular year.” In contrast, national income at constant prices (Real National Income) refers to “the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year.”

2. What is the significance of difference between current price and constant price?

Answer: The difference between current and constant prices is significant in economic analysis. Current prices reflect the value of goods and services at the prices prevailing in the year they’re produced, influenced by inflation or deflation. Constant prices, however, measure the value of goods and services using a fixed price level from a base year, eliminating the effect of price changes. This allows for a more accurate comparison of economic output over time, as it reflects changes in physical output, not price levels. Thus, it’s a better indicator of real economic growth.

3. Define real national income. Give advantages of calculating real national income.

Answer: Real national income refers to “the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year.” The key advantages are: (i) “Real GDP (i.e., at constant prices) truly reflects performance and level of economic growth in an economy whereas Nominal GDP (i.e., at current prices) does not.” (ii) “Real national income enables us to make year-to-year comparison of changes in the volume of output of goods and services.” (iii) “Real national income is also helpful in making international comparisons of economic performance of different countries.”

4. What do you mean by self-consumption? Give suitable examples.

Answer: Self-consumption means producers consume their own output. Examples are – farmer consuming own produce, teacher teaching his son, nurse bringing up her own child.

5. Briefly discuss the factors of production.

Answer: Factors of production are inputs needed for production. They are:

Land: It refers to all natural resources which are gifts of Nature.
Labour: Human efforts done mentally or physically with the aim of earning income are known as labour!
Capital: All man-made goods which are used for the further production of wealth are included in capital.
Entrepreneur: An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved in production.

6. If Real GDP is Rs 200 and price index (with base=100) is 110, calculate Nominal GDP.

Answer: Nominal GDP is calculated as:

Nominal GDP = Real GDP x Price Index/100

Here, Real GDP is given as Rs 200

The price index (with base year 100) is given as 110

Substituting the values:

Nominal GDP = Real GDP x Price Index/100
= 200 x 110/100
= 200 x 1.1
= Rs 220

Therefore, the Nominal GDP is Rs 220

7. If Real GDP is Rs 400 and Nominal GDP is 450, calculate the price index (base = 100).

Answer: The price index is calculated using the formula:

Price Index = (Nominal GDP/Real GDP) x 100

Here,
Real GDP is given as Rs 400
Nominal GDP is given as Rs 450

Substituting the values:

Price Index = (Nominal GDP/Real GDP) x 100
= (450/400) x 100
= 112.5

Therefore, the price index with base year 100 is 112.5

8. Case of Demonetisation will lead to GDP growth. Discuss.

Answer: Demonetisation refers to the decision by the government to ban high value currency notes and replace them with new notes. In November 2016, the Indian government decided to demonetise Rs 500 and Rs 1000 notes.

It helped to curb black money and expand formal economy – This can lead to higher tax revenue and productive usage of funds, boosting GDP growth.
It promoted digital payments and less cash economy – This improves transparency and formalization of informal sectors, aiding GDP growth.
It reduced real estate prices temporarily – Lower prices revived investment and construction activities, augmenting GDP growth.
It boosted bank deposits and lending capacity – More funds with banks for advancing loans spurred production and GDP growth.

9. “Sale of petrol and diesel cars is rising, particularly in big cities”. Analyse its impact on GDP and welfare.

Answer: The rising sale of petrol and diesel cars, especially in urban areas, has a dual impact on the economy:

Impact on GDP:

Increased car sales add to domestic production and growth in automotive sector, thereby raising GDP.
It creates positive production externality – ancillary industries like oil refineries, rubber, steel, etc also benefit.
Additional revenue for government through taxes on car sales.

Impact on welfare:

Negative consumption externality – air and noise pollution, traffic jams reduce quality of life.
More spending on fuel imports – negative impact on BoP and exchange rate.
Excludes poor who can’t afford – worsens equity.

10. Given nominal income to be 375 and price index (with base = 100) 125, calculate real income.

Answer: Real income is calculated using the formula:

Real income = Nominal income/Price index x 100

Here,
Nominal income is given as 375
Price index (with base 100) is given as 125

Substituting the values:

Real income = Nominal income/Price index x 100
= 375/125 x 100
= 300

Therefore, the real income is Rs 300.

11. Differentiate between transfer payments and factor payments.

Answer: Transfer payments and factor payments differ in the following ways:

Factor Payment/Income	Transfer Payment/Income
It is received in return for rendering productive service	It is received without providing any good or service in return.
It is an earned income (earning concept).	It is an unearned income (receipt concept).
It comprises rent, wages, interest and profit.	It comprises gifts, subsidies, donations old-age person, scholarships, old-age pension, etc.
It is bilateral payment.	It is unilateral payment.
It is included in national income.	It is not included in national income.

D. Long-answer questions-I

1. How will you treat school fees paid by students in estimating national income?

Answer: School fees paid by students will be treated as consumption expenditure and included in estimating national income. This is because school fees represent the payment made by households (students) to acquire education services. Education services are final goods produced by educational institutions. So the school fees paid represent final expenditure incurred on consumption of education services. This final consumption expenditure by households is a component of national income as per the expenditure method.

2. How are the following treated in estimating National Income (NI)? Give reasons.

(i) Services of owner occupied houses

Answer: Services of owner occupied houses will not be included in estimating national income as they represent non-monetary, imputed services for which no payments are made. There is no market transaction involved.

(ii) Sale of shares

Answer: Sale of existing shares on the stock exchange will not be included in national income. This is because sale of existing shares represents transfer of asset ownership. It does not add to current flow of goods and services.

(iii) Production for self-consumption

Answer: Production for self-consumption will be included in national income by imputing its market value. Though no monetary transaction is involved, it adds to production of goods.

(iv) Old-age pension

Answer: Old-age pension will not be included in national income as it is a transfer payment made without any current productive activity. It is an unearned income for the recipient.

(v) Wealth tax (or gift tax)

Answer: Wealth tax or gift tax will not be included in national income. These are capital transfers that do not affect current production. They only represent transfer of existing asset ownership.

3. Are the following a part of a country’s NDP at MP? Give reasons.

(i) Indirect taxes

Answer: Indirect taxes will be included in NDP at market price as they form a part of the price paid by buyers for goods/services.

(ii) Net exports

Answer: Net exports (X-M) will be included in NDP as they represent sale of domestically produced goods/services to foreign buyers.

(iii) Net factor income from abroad

Answer: Net factor income from abroad will not be included in NDP as it represents factor earnings of residents from rest of the world. NDP is a domestic product concept.

(iv) Consumption of fixed capital (depreciation)

Answer: Consumption of fixed capital (depreciation) will be included in NDP at market price as it covers the gross product/income flow. Depreciation is deducted from NDP at MP to arrive at NDP at factor cost.

4. What do you mean by domestic territory of a country? Discuss the cases which fall this category.

Answer: The domestic territory of a country, in national income accounting, is used in a wider sense than just the political frontiers of a country. According to the United Nations, “Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.” This includes:

Territory lying within the political frontiers of a country, including territorial waters and airspace.
Ships and aircraft owned and operated by the residents between two or more countries. For instance, Indian ships moving between the UK and Pakistan regularly or passenger planes operated by Air India between Russia and Japan are parts of domestic territory of India.
Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation.
Embassies, consulates and military establishments of the country located abroad. For example, Indian embassies in Russia, America and other countries will form parts of domestic territory of India because Indian laws are applicable in Indian embassies.

5. Distinguish between domestic product and national product.

Answer: Domestic product refers to the income generated within the economic (domestic) territory during a year. On the other hand, national income is obtained by adding Net Factor Income from Abroad (NFIA) to the domestic income. In other words, National income = Domestic income + NFIA. The implication of this concept is that income generated within economic (domestic) territory during a year is called domestic income. Distinction can be made between GDP and GNP. Simply put, GNP is GDP plus net factor income from abroad. Put in symbols: GNP = GDP + Net factor income from abroad.

6. Explain the concept of Green GNP.

Answer: Green GNP is defined as “GNP which is an indicator of a sustainable use of natural environment and equitable distribution of benefits of development.” This concept denotes the following characteristics:

Sustainable economic development, i.e., development which should not cause environmental degradation (pollution) and depletion of resources.
Equitable distribution of benefits of development.
Promote economic welfare for a long period of time.

Green GNP is calculated as GNP minus the net fall in stock of national capital. The concept of Green GNP has been introduced with economic welfare because GNP (or GDP) does not take into consideration the cost in terms of environmental pollution and depletion of natural resources caused by production of output. Mere increase in GNP will not reflect improvement in quality of life if it increases environmental pollution or reduces available resources for future generations.

7. What causes increase in inventory stock?

Answer: The value of output can be expressed as the sum of sales and change in stock because output is either sold or accumulated as unsold stock. This suggests that an increase in inventory stock could be due to the production of goods and services that have not yet been sold. In other words, when the production of goods and services exceeds the sales, the surplus is accumulated as unsold stock, leading to an increase in inventory stock

8. State the meaning of NFIA. What are the sources of NFIA?

Answer: Net Factor Income from Abroad (NFIA) is the difference between factor income received from the rest of the world and factor income paid to the rest of the world. Net factor income from abroad is the difference between the factor income earned from abroad by normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e., India).

Income from outside can be earned mainly in three ways, namely:

Income from work: It is the income earned by the residents of a country from abroad for the services they render to rest of the world. It includes wages, salaries, employers’ contribution to social security schemes, etc.
Income from property and entrepreneurship: It is the income earned by the residents of a country from abroad for the use of their property and entrepreneurship. It includes rent, interest, profit, dividends, royalties, etc.
Retained earnings of resident companies abroad: It is the part of profits of resident companies abroad which is not distributed among shareholders but retained for reinvestment.

9. Distinguish between the value of output and the value added with an example.

Answer: Value of output refers to the market value of all the goods and services produced by an enterprise during an accounting year. For example, if a shoe making enterprise produces 1,000 pairs of shoes annually and sells them at Rs 175 per pair, the value of its output will be Rs 1,75,000 (= 1,000 × 175).

On the other hand, value added refers to the addition made in the value of intermediate inputs by a firm by virtue of its productive activities. It is the difference between value of output and value of intermediate inputs. For instance, let us presume that a bakery buys intermediate inputs (milk, flour, sugar, etc.) worth Rs 2,000 and sells its output for Rs 2,500. In this case, value added by the bakery in production of biscuits is Rs 500 (= 2,500 – 2,000). This is the contribution of the bakery in the production of biscuits.

The difference between value of output and value added is intermediate consumption which is included in value of output but excluded from value added. Intermediate consumption means expenditure incurred on secondary inputs like raw material, power, etc., by a producing unit.

10. What is the relationship between Nominal GDP and Real GDP?

Answer: The relationship between Nominal GDP and Real GDP is significant in understanding the economic growth of a country. Real GDP, measured at constant prices, truly reflects the performance and level of economic growth in an economy, whereas Nominal GDP, measured at current prices, does not. This is because Nominal GDP is affected by changes in both physical output and prices, and can increase without an increase in physical output, causing only a money illusion without causing an increase in the flow of goods and services. On the contrary, Real GDP is affected by only one factor, namely change in physical output, because prices are fixed or constant. Thus, Real GDP can increase only when there is an increase in physical output during a year. An increase in Real GDP leads to a rise in the standard of living of the people as a greater quantity of goods and services is available.

11. Explain the meaning and types of transfer payments.

Answer: Transfer payments are payments received without providing any good or service in return. They are considered unearned income. Examples of transfer payments include old-age pensions, scholarships to students, unemployment allowances to unemployed people, flood relief, pocket money, etc. These payments are received without making a contribution to production.

Transfer payments can be further classified into two types: current transfers and capital transfers.

Capital Transfers: These are transfer payments that affect the asset base of both the paying party and the receiving party. They lead to a reduction in assets or wealth or capital of the payer and an addition in the assets or wealth or capital of the receiver.

Current Transfers: These are transfer payments that do not affect the asset base or wealth of the paying and receiving parties, but rather have an impact on the current income of the parties. They lead to a reduction in the current income of the paying party and an addition to the current income of the receiving party.

E. Long-answer questions-II

1. Differentiate between national income at current price and national income at constant price. What are the advantages of real national income?

Answer: National income at current prices, also known as nominal national income, is the money value of all the final goods and services produced in a year measured at current prices, i.e., prices prevailing in that particular year. In determining national income at current prices, not only physical output produced during the year is important, but also the prices prevailing in that year are equally important.

On the other hand, national income at constant prices, also known as Real National Income, is the money value of all the final goods and services produced in a year measured at fixed prices, i.e. prices of the base year. It is change in volume of physical output produced during the year which affects national income at constant prices because prices remain fixed (constant).

The advantages of Real National Income/GNP are:

National income measured at constant prices truly reflects the real change in physical output of a country whereas national income at current prices does not. It is useful in finding out the real development capacity of the economy.
Real national income (or for that matter GNP) enables us to make year-to-year comparison of changes in the volume of output of goods and services.
Real national income is also helpful in making international comparisons of economic performance of different countries.

2. How do GDP and welfare go together?

Answer: Gross Domestic Product (GDP), particularly real GDP, is often considered as an index of welfare of the people. Welfare refers to the sense of material well-being among the people. This well-being depends on the greater availability of goods and services per person for consumption. Higher per capita availability of goods and services means a higher level of standard of living and a rise in economic welfare.

However, this generalization may not always be correct due to several reasons:

Distribution of GDP: A mere rise in GDP may not lead to a rise in economic welfare if its distribution results in the concentration of income in the hands of very few individuals or firms.

Non-monetary exchanges or transactions: Many non-monetary activities in the economy done out of love and affection are not evaluated in monetary terms due to lack of authentic data.

Externalities: These refer to benefits or harm which a firm or an individual causes to others but for which they are not paid or penalized.

Composition of GDP: If the increase in GDP is due to more production of war materials like tanks, weapons, etc., it will not increase economic welfare.

Rate of population growth: If the rate of population growth is higher than the rate of growth of real GDP, this will lead to a fall in per capita availability of goods and services.

3. Briefly discuss the various aggregates of national income and their inter-relationships.

Answer: National income and related aggregates are basically measures of the value of production activity of a country. There are four variants of national income – two of domestic and two of national, but each can be expressed at Market Price (MP) as well as at Factor Cost (FC). The result is eight aggregates:

Gross Domestic Product (GDP) at Market Price (MP)
Net Domestic Product (NDP) at Market Price (MP)
Gross National Product (GNP) at Market Price (MP)
Net National Product (NNP) at Market Price (MP)
Gross Domestic Product (GDP) at Factor Cost (FC)
Net Domestic Product (NDP) at Factor Cost (FC)
Gross National Product (GNP) at Factor Cost (FC)
Net National Product (NNP) at Factor Cost (FC)

Out of the above-mentioned eight aggregates, it is only Net National Product at Factor Cost (NNPFC) which is called National Income. Similarly, NDP at FC is called Domestic Income. National income at the level of production is called national product and at the level of distribution of income is called national income. Thus, product aggregates and income aggregates are used interchangeably because they are values of the same physical products.

These different aggregates are inter-related and can be moved from one to another using certain formulas. For instance, GDP can be calculated from GNP by subtracting Net factor income from abroad (NFIA): GDP = GNP – NFIA. Similarly, GDP at MP can be calculated from NNP at FC by adding Depreciation and Net indirect taxes and subtracting NFIA: GDP at MP = NNP at FC + Dep. – NFIA + Net indirect taxes.

Additional/extra questions and answers

1. Explain how income is first generated in the production process and then distributed among factor owners?

Answer: Production is the result of the combined efforts of four primary inputs, also called factors of production: land, labour, capital, and enterprise. Whatever is produced jointly by these factors of production, which is the net value added at factor cost, gets distributed among them as factor income in the form of rent, wages, interest, and profit. The factors of production are paid their remuneration out of what they have produced. This is how income is first generated in the production process and then distributed among factor owners for rendering productive services.

2. What are the four factors of production? Describe the role and remuneration of each in the production process.

Answer: The primary inputs which are needed to produce goods and services are conventionally called factors of production. They are broadly divided into four categories: land, labour, capital, and entrepreneur. Whatever is produced jointly by factors of production gets distributed among them as factor income in the form of rent, wages, interest, and profit.

(i) Land: It refers to all natural resources which are gifts of Nature. Land, therefore, includes all gifts of Nature available to mankind both on the surface and under the surface, for example, soil, rivers, waters, forests, mountains, mines, deserts, seas, climate, rains, air, sun, etc. The remuneration for land is rent.
(ii) Labour: Human efforts done mentally or physically with the aim of earning income is known as labour. It is a physical or mental effort of a human being in the process of production. Land is a passive factor whereas labour is an active factor of production. The compensation given to labourers in return for their productive work is called wages.
(iii) Capital: All man-made goods which are used for further production of wealth are included in capital. Thus, it is a man-made material source of production. Examples are machines, tools, buildings, roads, bridges, raw material, trucks, and factories. The remuneration for capital is interest.
(iv) Entrepreneur: An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved in the production. He hires the other three factors, brings them together, organises and coordinates them so as to earn maximum profit. The remuneration for an entrepreneur is profit.

3. Explain the three phases in the circular flow of national income and how they lead to three different definitions of national income.

Answer: There are three phases in the circular flow of national income: production phase, income phase, and expenditure phase.

In the production process of goods and services, income is generated. This is how income is first generated in the production process and then distributed among factor owners for rendering productive services. Income gives rise to expenditure for the purchase of goods and services to satisfy wants. Expenditure, in turn, leads to further production.

Accordingly, national income can be defined in three different ways: as a flow of goods and services produced, as a flow of income (distributed), and as a flow of expenditure.

(i) From the production point of view, “National income is the sum of money value of net flow of all the final goods and services produced by normal residents within and outside the country during a period of account.”
(ii) From the income point of view, Central Statistical Organisation (CSO) has defined, “National income is the sum of factor incomes earned by normal residents within and outside the country in the form of rent, wages, interest and profit in an accounting year.”
(iii) From the expenditure point of view, Simon Kuznets defines thus, “National product is the net output of commodities and services flowing during the year from the country’s productive system into the hands of ultimate consumers or into the net addition to the country’s capital goods.”

4. Explain the concept of National Income at Current Prices and at Constant Prices. Why is the latter preferred for making comparisons over time?

Answer: National income can be measured in terms of money in two ways—at current prices and at constant prices.

National income at current prices (or nominal national income) is the money value of all the final goods and services produced in a year measured at current prices, i.e., prices prevailing in that particular year. For example, when goods and services produced during the year 2016-17 are valued at prices of the same year, i.e., 2016-17, it will be called national income at current prices for the year 2016-17.

National income at constant prices (Real National Income) is the money value of all the final goods and services produced in a year measured at fixed prices, i.e., prices of the base year. A base year is a carefully chosen year which is a normal year free from price fluctuations. For instance, if goods and services produced during the year 2016-17 are valued at the prices of the base year (i.e., 2011-12), it will be called national income at constant prices for the year 2016-17.

National income at constant prices is preferred for making comparisons over time. National income at current prices is affected by two factors, namely change in prices and change in physical output. If the current prices rise rapidly, national income at current prices will also inflate even if there is no increase in the level of physical output. Consequently, national income at current prices becomes deceptive and fails to reflect the growth in real national output.

National income at constant prices is affected by only one factor, namely change in physical output. It can rise only when there is an increase in the level of physical output because here prices are kept constant or fixed. Since a country is interested in its physical output, it is considered proper and desirable to estimate national income at constant prices because it reflects truly the real change in physical output of a country. When there is a continuous rise in national income at constant prices for a number of years, it means there is economic growth.

5. What is a base year? What is the current base year in India?

Answer: A base year is a carefully chosen year which is a normal year free from price fluctuations. In India, at present, 2011-12 is treated as the base year.

6. Explain the concept of domestic territory by giving examples of what is not included in it.

Answer: According to the United Nations, “Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.”

Domestic territory does not include:

(i) Territorial enclaves, like embassies, used or administered by foreign governments. For example, embassies of other countries located in India are not included in the domestic territory of India as they are not administered by the Indian government. They are treated as part of the economic territories of their respective countries.
(ii) International organisations which are physically located within the geographical boundaries of a country. Their offices form part of international territory.

7. Who are considered normal residents and who are not? Explain with examples of each.

Answer: A resident is a person or institution who ordinarily resides in a country and whose centre of economic interest lies in that country. The two normal conditions for becoming a normal resident are staying in the economic territory for more than a year and having an economic interest, such as earning, spending, and accumulation, in that country.

Examples of those considered normal residents are:

Both citizens and non-citizens (foreigners) who reside in a country for more than a year and have an economic interest in that country.
Local employees working in foreign embassies located in their country. For example, Indians working in the US embassy located in India are residents of India.
The staff of international bodies are treated as normal residents of the country in which the international body operates. For example, Americans working in the World Health Organisation office in India for more than a year will be treated as normal residents of India.

Examples of those who are not considered normal residents are:

International bodies like the World Bank, World Health Organisation, or International Monetary Fund are not considered residents of the country in which these organisations operate but are treated as residents of international territory.
Workers from across the border who cross the border in the morning to work in another country and return in the evening are not residents of the country where they work. For example, Indians who work in Nepal and return in the evening are not residents of Nepal.

8. Should the value of production for self-consumption be included in national income? Explain why.

Answer: Yes, the value of production for self-consumption should be included in national income. Its imputed value should be included because it is presumed that the producer, instead of selling in the market, has sold his product to himself.

9. What is a subsistence production unit?

Answer: A subsistence production unit is one which is able to produce that much which is just sufficient to meet its family needs. It is called so because its production is just sufficient for subsistence or just adequate to meet the consumption needs of the producer.

10. What is production for exchange?

Answer: This refers to the production of goods and services which is done for sale in the market to earn profit.

11. What is another name for consumption of fixed capital?

Answer: Another name for consumption of fixed capital is depreciation. It is sometimes also called the current replacement cost of fixed assets.

12. What is depreciation? Explain how it is different from a capital loss.

Answer: Depreciation means the loss of value of fixed capital assets during production. In other words, Depreciation is the value of existing fixed assets that has been consumed (used up) in the process of producing output. The fall in the value of fixed assets due to normal wear and tear, and expected obsolescence is called consumption of fixed capital. The loss of value in capital goods is mainly due to two reasons: normal wear and tear and expected obsolescence.

A capital loss is different from depreciation. A fall in the value of fixed capital due to natural calamities (like earthquakes, floods, fires) and unforeseen factors like war, thefts, etc. is called capital loss, and not depreciation.

13. Explain the two main reasons for the depreciation of fixed capital goods.

Answer: The loss of value in capital goods is mainly due to two reasons: normal wear and tear, and expected obsolescence.

(i) Normal wear and tear: During the production process, capital goods like machines, tools, buildings, and trucks wear out. The production of goods and services involves the wear and tear of fixed capital. A machine’s productive capacity declines with normal use in production, leading to a fall in its value. This fall in value due to normal wear and tear is called consumption of fixed capital.

(ii) Expected obsolescence: Obsolescence refers to the loss of value of a fixed asset due to a change in technology or a change in demand for goods and services. Capital goods like machines can become obsolete or disused due to a change in the technique of production or a change in fashion that results in a fall in demand for the goods and services the machine produces. For example, the steam engine of railways became obsolete due to the introduction of the diesel engine.

14. What is a Depreciation Reserve Fund?

Answer: The provision of funds made by an enterprise for the replacement of worn-out fixed capital over its expected life is called the Depreciation Reserve Fund.

15. Elaborate on the key distinctions used in national income accounting: Gross vs. Net, Domestic vs. National, and Market Price vs. Factor Cost.

Answer: The key distinctions used in national income accounting are as follows:

Gross vs. Net: The concept of depreciation, also called consumption of fixed capital, is used for differentiating between gross and net. The difference between gross and net is the value of depreciation. The term ‘gross’ means that the value of produce includes depreciation whereas ‘net’ excludes depreciation. Net is obtained after deducting depreciation from gross. In national accounting, gross variables like gross income or gross investment are inclusive of depreciation. When we deduct depreciation from the gross value of output, we get the net value of output.

Net Product = Gross Product – Depreciation
Net value added = Gross value added – Depreciation
Net domestic capital formation = Gross domestic capital formation – Depreciation

Domestic vs. National: Net Factor Income from Abroad (NFIA) is used for differentiating between national income and domestic income. Domestic income refers to income originating in production units located within the domestic territory of a country during a year. It is a territorial concept. National income is the sum-total of factor incomes earned by normal residents of a country within and outside the country during a year. It is an economic concept. By adding net factor income from abroad to domestic income, we get national income. NFIA is the difference between the factor income earned from abroad by normal residents of a country and the factor income earned by non-residents in the domestic territory of that country.

National Income = Domestic Income + NFIA
Domestic Income = National Income – NFIA

Market Price vs. Factor Cost: Net Indirect Taxes (NIT) is used for finding out the difference between market price and factor cost. The difference between Factor Cost (FC) and Market Price (MP) is ‘Net Indirect Tax’ (NIT), which is the difference between indirect tax and subsidy.

Factor cost refers to all factor payments made by the producing unit (firm) to the factors of production for their contribution in the production of goods and services.
Market price is the price at which a commodity is sold and purchased in the market. It is the price that the buyers actually pay.
When a product goes to the market for sale, the government levies indirect taxes which are added to the factor cost, making the market price higher. Sometimes, the government gives a subsidy on the sale of certain goods to lower the price, which is subtracted from the factor cost.

Market Price = Factor cost + Indirect taxes – Subsidies = Factor cost + Net indirect taxes
Factor Cost = Market price – Net indirect taxes

16. Explain the concept of Net Factor Income from Abroad (NFIA). Discuss its various components with suitable examples.

Answer: Net factor income from abroad (NFIA) is the difference between the factor income received from the rest of the world and the factor income paid to the rest of the world. It is the difference between the factor income earned from abroad by normal residents of a country and the factor income earned by non-residents (foreigners) in the domestic territory of that country.

Symbolically:
NFIA = Factor income earned from abroad by residents – Factor income of non-residents in domestic territory.

The normal residents of a country earn factor income not only within the domestic territory of a country but also outside it. Income from outside can be earned mainly in three ways, which are the components of NFIA:

(i) Income from work (Compensation of employees): Income from work can be earned by working in the domestic territories of other countries, earning thereby wages and salaries. For instance, suppose in 2016-17, Indian resident scientists and engineers employed abroad earned a factor income of ₹10,000 crore, whereas similar payments made to non-resident workers employed in the domestic territory of India was to the tune of ₹8,000 crore. Net compensation of employees from abroad to India would be ₹2,000 (10,000 – 8,000) crore.

(ii) Income from property and entrepreneurship (Rent, interest, profit): Factor income from abroad is also earned by owning property (like buildings, shops, factories, financial assets like bonds and shares in foreign countries) earning thereby rent and interest. Also, profit is earned for undertaking entrepreneurial activities. For instance, suppose in 2016-17, normal residents of India living temporarily abroad earned ₹25,000 crore by way of rent, interest, and profit, and similar payments made to the rest of the world were ₹20,000 crore. Net income from property and entrepreneurship from abroad would be ₹5,000 (25,000 – 20,000) crore.

(iii) Net retained earning of resident companies abroad: This is the third element of net factor income from abroad. Retained earning of a company is its undistributed profit. For instance, suppose in 2016-17 Indian companies working abroad retained a balance profit of ₹50,000 crore and foreign companies in India retained a similar profit of ₹65,000 crore. Net retained earning of resident companies abroad would be -₹15,000 (50,000 – 65,000) crore.

17. Explain the concept of ‘value added’. How does this concept help in solving the problem of double counting in national income estimation?

Answer: Value added refers to the addition made in the value of intermediate inputs by a firm by virtue of its productive activities. Alternatively, value added is defined as the contribution of an enterprise to the current flow of goods and services. It is the difference between the value of output and the value of intermediate inputs. The contribution of a firm to national income is the value added by it and not its value of output because the value of output includes the value of intermediate inputs purchased from other firms.

Symbolically:
Value added = Value of output – Intermediate consumption

The concept of value added helps in solving the problem of double counting. There is always a possibility of double counting if the value of intermediate consumption is not excluded from the value of output. For example, in a hypothetical economy with a farmer, a miller, and a baker, the total value of output might be ₹1,900, but this includes the value of wheat thrice and the value of flour twice. The actual income generated, or value added, is only ₹800. Thus, the amount of ₹800 and not ₹1,900 will be considered as national income. The value added approach eliminates double counting. It is the net value added at FC by the various producing units which is taken into account while calculating national income.

18. Explain how nominal GDP can be converted into real GDP using a price index.

Answer: To eliminate the effect of a price increase and to know the real change in physical output, Nominal GDP is converted into Real GDP with the help of a Price Index. A price index is an index number that shows the change in the price level between two different years, the current year and the base year. The price index of the base year is always assumed to be 100.

The formula used for conversion is:
Real GDP = (Nominal GDP / Price Index) × 100

19. What is the formula to calculate Net Domestic Capital Formation?

Answer: The formula is:
Net domestic capital formation = Gross domestic capital formation – Depreciation

20. How is Net Value Added at Factor Cost derived from Gross Value Added at Market Price?

Answer: To derive Net Value Added at Factor Cost (NVA at FC) from Gross Value Added at Market Price (GVA at MP), two steps are taken. First, depreciation is subtracted from GVA at MP to get Net Value Added at Market Price (NVA at MP). Second, net indirect taxes are subtracted from NVA at MP to arrive at NVA at FC.

21. What does the GDP deflator measure?

Answer: The GDP deflator measures the average level of prices of all the goods and services that make up GDP.

22. Critically examine the use of Gross Domestic Product (GDP) as a measure of economic welfare, detailing its limitations and discussing the concept of Green GNP as an alternative.

Answer: Often GDP (real GDP) is considered as an index of welfare of the people. Welfare means a sense of material well-being among the people. This well-being depends on greater availability of goods and services per person for consumption. Per head availability of goods and services means a higher level of standard of living and a rise in economic welfare. So, one may conclude that a higher level of GDP is an index of greater well-being of the people. But this generalisation may not be correct due to the following limitations or reasons:

(i) Distribution of GDP—A mere rise in GDP may not lead to a rise in economic welfare if its distribution results in the concentration of income in the hands of very few individuals or firms. A mere increase in GDP does not mean that every individual automatically gets this much of an increase. The distribution of GDP might have resulted in making the rich richer and the poor poorer.

(ii) Non-monetary exchanges or transactions—Many non-monetary activities in the economy done out of love and affection are not evaluated in monetary terms due to a lack of authentic data. Thus, non-market transactions like the services of a housewife, exchanges through barter, or enjoyment from hobbies like painting, which increase economic welfare, are not included in the measurement of GDP. Thus, GDP under-estimates welfare and may not reflect the well-being of the country.

(iii) Externalities—These refer to benefits or harm which a firm or an individual causes to others but for which they are not paid or penalised. For example, negative externalities occur such as the smoke of a factory that pollutes the air, resulting in a loss of social welfare, but nobody is penalised for it. Similarly, there are positive externalities like public parks and gardens whose positive impact on public health remains outside the realm of GDP. To that extent, GDP is under-estimated or over-estimated, making GDP an unreliable index of welfare.

(iv) Composition of GDP—In case an increase in GDP is due to more production of war materials like tanks, weapons, etc., it will not increase economic welfare.

(v) Rate of population growth—If the rate of population growth is higher than the rate of of real GDP, this will lead to a fall in per capita availability of goods and services. As a result, the overall welfare of the society tends to fall.

Although GDP may not be a sufficient index of welfare due to the above-mentioned limitations, it does reflect some index of economic welfare. The reason is that mere enhancement of GDP at any cost may create economic problems like poverty and pollution. That is why some economists have suggested an alternative measure, called Green GNP.

Green GNP is an alternative concept introduced with economic welfare. GNP does not take into consideration the cost in terms of environmental pollution and depletion of natural resources caused by the production of output. Green GNP is defined as “GNP which is an indicator of a sustainable use of natural environment and equitable distribution of benefits of development.” This concept denotes the following characteristics:

(i) Sustainable economic development, i.e., development which should not cause environmental degradation (pollution) and depletion of resources.
(ii) Equitable distribution of benefits of development.
(iii) Promote economic welfare for a long period of time.

The formula for Green GNP is:
Green GNP = GNP – Net fall in stock of national capital

23. What is Domestic Income?

Answer: NDP at FC (Net Domestic Product at Factor Cost) is called Domestic Income.

24. What is National Income (NNP at FC)?

Answer: Out of the eight aggregates, it is only Net National Product at Factor Cost (NNPFC) which is called National Income.

25. Discuss the concepts of factor income and transfer income. Explain why one is included in national income while the other is not, and further classify the types of transfer payments.

Answer: In national income accounting, incomes are broadly kept in two categories: factor income and transfer income.

Factor Income (or Factor Payment): A payment made to a factor of production in return for rendering a productive (or factor) service is called a factor payment (or factor income). For producing goods and services, producers hire or purchase factor services (services of land, labour, capital, etc.) from households and in return make payments to them in the form of rent, wages, and interest. For households, these payments are factor incomes, but for producers, these are factor costs. Examples of factor income are rent, wages, interest, and profit. This means that in order to earn income, one has to contribute to the production process. All factor payments (or factor incomes) are included in the national income.

Transfer Income (or Transfer Payment): A payment received without any good or service provided in return is called a transfer payment (or transfer income). Transfer income is a receipt concept as compared to factor income, which is an earning concept. There are certain types of payments which are received without making any corresponding contribution to the flow of goods and services; they are not earned but received only. Such payments for which no productive services are rendered are known as transfer payments. For the recipient, a transfer payment is an unearned income. Examples of transfer payments are old-age pensions, scholarships to students, and unemployment allowances.

Inclusion in National Income: Factor income is included in the estimation of national income, but transfer income is not. The difference between the two is whether or not the income received is for rendering a productive service. Payment received in exchange for rendering a productive service is factor income and is included because it represents a contribution to the current flow of goods and services. A payment received without providing any service or good in return is a transfer income and is not included in national income because it does not correspond to any production activity.

The comparison is as follows:

Factor Payment/Income

Transfer Payment/Income

It is received in return for rendering productive service.

It is received without providing any good or service in return.

It is an earned income (earning concept).

It is an unearned income (receipt concept).

It comprises rent, wages, interest and profit.

It comprises gifts, subsidies, donations, old-age pension, scholarships, etc.

It is bilateral payment.

It is unilateral payment.

It is included in national income.

It is not included in national income.

Types of Transfer Payments
Transfer payments may further be classified as current transfers or capital transfers.

(a) Capital Transfers – Transfer payments that affect the assets base of both the paying party as well as the receiving party are called capital transfers. In other words, the transfers that lead to a reduction in assets or wealth or capital of the payer and an addition in the assets or wealth or capital of the receiver are called capital transfers. Examples of capital transfers within the same country are capital taxes paid to the government and investment grants given by the government to businesses.
(b) Current Transfers – Transfer payments that do not affect the assets base or wealth of the paying and the receiving parties, but rather have an impact on the current income of the parties are referred to as current transfers. Such transfers lead to a reduction in the current income of the paying party and an addition of the current income of the receiving party. Examples of current transfers within the same country may be old age pension, scholarship to students, unemployment allowance to unemployed people, and flood relief.

26. Explain the concepts of National Disposable Income, Gross National Disposable Income, and Net National Disposable Income.

Answer: National disposable income is the income which is at the disposal of the nation as a whole for spending or saving. In other words, it refers to that amount of income which the nation can use for its consumption expenditure and saving purposes. The basic distinction between national income and national disposable income is that national income only refers to the earned income while disposable income also takes into consideration the transfer incomes.

Symbolically:
NDI = National income + Net indirect taxes + Net current transfers from rest of the world.

National disposable income may further be classified into gross national disposable income and net national disposable income.

Gross National Disposable Income: Gross NDI is defined as the sum of Gross National Product at market price (GNP at MP) and net current transfers from the rest of the world. In simple words, it may be understood as that NDI which is inclusive of the amount of depreciation.
Symbolically:
Gross NDI = GNP at MP + Net current transfers from rest of the world

Net National Disposable Income: Net NDI is defined as the sum of Net National Product at Market Price (NNP at MP) and net current transfers from the rest of the world. In simple words, it may be understood as that NDI which is exclusive of the amount of depreciation.
Symbolically:
Net NDI = NNP at MP + Net current transfers from rest of the world
= Gross NDI – Depreciation

27. Explain the inter-relationship among the eight aggregates of national income. Illustrate how one can move from one aggregate to another using the concepts of depreciation, NFIA, and NIT.

Answer: There are eight aggregates of national income. Four are of domestic product and four are of national product, and each can be expressed at Market Price (MP) as well as at Factor Cost (FC). The eight aggregates are:

Gross Domestic Product (GDP) at Market Price (MP)
Net Domestic Product (NDP) at Market Price (MP)
Gross National Product (GNP) at Market Price (MP)
Net National Product (NNP) at Market Price (MP)
Gross Domestic Product (GDP) at Factor Cost (FC)
Net Domestic Product (NDP) at Factor Cost (FC)
Gross National Product (GNP) at Factor Cost (FC)
Net National Product (NNP) at Factor Cost (FC)

The inter-relationship among these aggregates is based on three concepts which are used to move from one aggregate to another: Depreciation, Net Factor Income from Abroad (NFIA), and Net Indirect Taxes (NIT).

Depreciation (Consumption of Fixed Capital): This concept is used to differentiate between ‘Gross’ and ‘Net’ aggregates. The value of depreciation is the difference between gross and net. To move from a Gross aggregate to a Net aggregate, we subtract depreciation.

Net = Gross – Depreciation

Net Factor Income from Abroad (NFIA): This concept is used to differentiate between ‘Domestic’ and ‘National’ aggregates. To move from a Domestic aggregate to a National aggregate, we add NFIA.

National = Domestic + NFIA

Net Indirect Taxes (NIT): This concept is used to differentiate between ‘Market Price’ and ‘Factor Cost’ aggregates. NIT is the difference between indirect taxes and subsidies. To move from a Factor Cost aggregate to a Market Price aggregate, we add NIT. To move from Market Price to Factor Cost, we subtract NIT.

Market Price = Factor Cost + NIT

Using these three concepts, we can easily move from one aggregate to any other. For example, to move from GNP at MP to NDP at FC:
First, convert Gross to Net by subtracting Depreciation: NNP at MP = GNP at MP – Depreciation.
Second, convert National to Domestic by subtracting NFIA: NDP at MP = NNP at MP – NFIA.
Third, convert Market Price to Factor Cost by subtracting NIT: NDP at FC = NDP at MP – NIT.

The formulas showing these relationships are:

GDP = GNP – Net factor income from abroad
GDP at MP = NNP at FC + Dep. – NFIA + Net indirect taxes
GDP at FC = NNP at MP + Depreciation – NFIA – Net indirect taxes
GNP at FC = NNP at FC + Depreciation
GNP at FC = GNP at MP – Net indirect taxes
GDP = NNP – NFIA + Depreciation
GNP at MP = NDP at FC + Depreciation + NFIA + Net indirect taxes

Additional/extra MCQs

1: The sum of factor incomes earned by normal residents of a country is known as:

A. Domestic Income
B. National Income
C. Gross Domestic Product
D. Private Income

Answer: B. National Income

2: The difference between Gross Value Added and Net Value Added is:

A. Net Indirect Taxes
B. Net Factor Income from Abroad
C. Depreciation
D. Intermediate Consumption

Answer: C. Depreciation

3: National Income measured at the prices of a specific base year is referred to as:

A. Nominal National Income
B. National Income at Market Price
C. Real National Income
D. Gross National Product

Answer: C. Real National Income

4: Which of the following is added to Domestic Income to obtain National Income?

A. Net Indirect Taxes
B. Net Factor Income from Abroad
C. Consumption of Fixed Capital
D. Subsidies

Answer: B. Net Factor Income from Abroad

5: The loss of value of a fixed asset due to a change in technology or a change in demand is termed:

A. Normal wear and tear
B. Capital loss
C. Expected obsolescence
D. Unforeseen obsolescence

Answer: C. Expected obsolescence

6: The price at which a commodity is actually sold and purchased in the market is called:

A. Factor Cost
B. Market Price
C. Base Price
D. Production Cost

Answer: B. Market Price

7: Value of output is calculated as:

A. Sales – Change in stock
B. Sales + Intermediate consumption
C. Sales + Change in stock
D. Sales – Depreciation

Answer: C. Sales + Change in stock

8: A person or institution who ordinarily resides in a country and whose center of economic interest lies in that country is called a:

A. Citizen
B. Foreigner
C. Non-resident
D. Normal Resident

Answer: D. Normal Resident

9: The formula to calculate the GDP deflator is:

A. (Real GDP / Nominal GDP) × 100
B. (Nominal GDP / Real GDP) × 100
C. (Nominal GDP – Real GDP) × 100
D. (Real GDP – Nominal GDP) × 100

Answer: B. (Nominal GDP / Real GDP) × 100

10: Payments received without providing any good or service in return are known as:

A. Factor payments
B. Bilateral payments
C. Transfer payments
D. Capital payments

Answer: C. Transfer payments

11: The difference between indirect taxes and subsidies is known as:

A. Net Factor Income
B. Net Indirect Taxes
C. Net Domestic Product
D. Net Exports

Answer: B. Net Indirect Taxes

12: The geographical territory administered by a government within which persons, goods, and capital circulate freely is defined as:

A. Political Territory
B. Domestic Territory
C. National Territory
D. Economic Territory

Answer: D. Economic Territory

13: The measure that accounts for the depletion of natural resources and environmental degradation is called:

A. Real GNP
B. Nominal GNP
C. Green GNP
D. Gross National Disposable Income

Answer: C. Green GNP

14: If Factor Cost is greater than Market Price, it implies that:

A. Indirect taxes are greater than subsidies
B. Subsidies are greater than indirect taxes
C. Indirect taxes are equal to subsidies
D. There are no indirect taxes

Answer: B. Subsidies are greater than indirect taxes

15: National Disposable Income is calculated as National Income plus:

A. Net Factor Income from Abroad + Depreciation
B. Net Indirect Taxes + Net Current Transfers from the rest of the world
C. Depreciation + Net Indirect Taxes
D. Net Current Transfers from the rest of the world only

Answer: B. Net Indirect Taxes + Net Current Transfers from the rest of the world

16: Which of the following is NOT a primary factor of production?

A. Land
B. Labour
C. Raw Materials
D. Enterprise

Answer: C. Raw Materials

17: Which of the following is NOT included in the economic territory of a country?

A. Ships owned and operated by residents between two countries
B. Embassies of the country located abroad
C. Fishing vessels operated by residents in international waters
D. Embassies of foreign countries located within the country

Answer: D. Embassies of foreign countries located within the country

18: Which of the following is NOT a component of Net Factor Income from Abroad (NFIA)?

A. Net compensation of employees
B. Net income from property and entrepreneurship
C. Net retained earnings of resident companies abroad
D. Net current transfers

Answer: D. Net current transfers

19: All of the following are considered factor incomes EXCEPT:

A. Rent
B. Wages
C. Scholarships
D. Profit

Answer: C. Scholarships

20: Which of the following is NOT a reason for GDP being an unreliable index of welfare?

A. Distribution of GDP
B. Non-monetary exchanges
C. Externalities
D. Calculation at constant prices

Answer: D. Calculation at constant prices

21: Which of the following is NOT considered a normal resident of India?

A. An Indian working in the US embassy located in India
B. An American working in the WHO office in India for more than a year
C. An Indian official working in the Indian Embassy in Japan
D. A Japanese tourist staying in India for two months

Answer: D. A Japanese tourist staying in India for two months

22: Which of the following is NOT a cause of depreciation?

A. Normal wear and tear
B. Expected obsolescence due to technological change
C. Fall in value due to natural calamities like floods
D. Expected obsolescence due to change in fashion

Answer: C. Fall in value due to natural calamities like floods

23: National Income accounting considers all of the following phases in the circular flow of income EXCEPT:

A. Production phase
B. Income phase
C. Savings phase
D. Expenditure phase

Answer: C. Savings phase

24: To calculate Net National Product (NNP) at Market Price from Gross National Product (GNP) at Market Price, which of the following is NOT required?

A. Gross National Product at Market Price
B. Depreciation
C. Net Indirect Taxes
D. Consumption of Fixed Capital

Answer: C. Net Indirect Taxes

25: The term ‘capital’ as a factor of production does NOT include:

A. Machinery
B. Buildings
C. Money
D. Tools

Answer: C. Money

26: Assertion (A): Real GDP is considered a better indicator of economic growth than Nominal GDP.
Reason (R): Real GDP is affected only by the change in physical output, as prices are held constant.