Namma Kalvi

Loyola www.nammakalvi.in EC 12th Economics

Unit Introduction to Macro

1 Economics
Part - I - Book Back Questions
PART - A

Multiple Choice questions

1. The branches of the subject Economics is
a) Wealth and welfare b) Production and consumption
c) Demand and supply d) Micro and macro
2. Who coined the word 'macro'?
a) Adam Smith b) J M Keynes
c) Ragnar Frisch d) Karl Marx
3. Who is regarded as Father of Modern Macro Economics?
a) Adam smith b) J M Keynes c) Ragnar Frisch d) Karl Marx
4. Identify the other name for macro Economics.
a) Price Theory b) Income Theory c) Market Theory d) Micro Theory
5. Macro economics is a study of __________.
a) individuals b) firms c) a nation d) aggregates
6. Indicate the contribution of J M Keynes to economics
a) Wealth of nations b) General Theory
c) Capital d) Public Finance
7. A steady increase in general price level is termed as__________.
a) Wholesale price index b) Business Cycle
c) Inflation d) National Income

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8. Identify the necessity of Economic policies.

a) to solve the basic problem b) to overcome the obstacles
c) to achieve growth d) all the above
9. Indicate the fundamental economic activities of an economy.
a) Production and Distribution b) Production and Exchange
c) Production and Consumption d) Production and Marketing
10. An economy consists of
a) Consumption sector b) Production sector
c) Government sector d) All the above
11. Identify the economic system where only private ownership of production
exists.
a) Capitalistic Economy b) Socialistic Economy
c) Globalistic Economy d) Mixed Economy
12. Economic system representing equality in distribution is
a) Capitalism b) Globalism c) Mixedism d) Socialism
13. Who is referred as `Father of capitalism`?
a) Adam smith b) Karl Marx c) Thackeray d) J M keynes
14. The country following Capitalism is __________.
a) Russia b) America c) India d) China
15. Identity The Father of socialism
a) J M Keynes b) Karl Marx c) Adam smith d) Samuelson
16. An economic system where the economic activities of a nation are done both by
the private and public together is termed as__________.
a) Capitalistic Economy b) Socialistic Economy
c) Globalistic Economy d) Mixed Economy
17. Quantity of a commodity accumulated at a point of time is termed as __________.
a) production b) stock c) variable d) flow
18. Identity the flow variable
a) money supply b) assets
c) income d) foreign exchange reserves

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19. Identity the sectors of a Two sector Model.

a) Households and Firms b) Private and Public
c) Internal and External d) Firms and Government
20. The Circular Flow Model that represents an open Economy.
a) Two sector Model b) Three sector Model
c) Four sector Model d) All the above
Answer

1 2 3 4 5 6 7 8 9 10
d c b b d b c d c d
11 12 13 14 15 16 17 18 19 20
a d a b b d b c a c
PART - B

Two Mark Questions

21. Define Macro Economics

1) Macros in Greek means `large`. Macro Economics is a study of the economy as
a whole
2) It deals with aggregates such as national income, employment and output.
22. Define the term 'Inflation'.
Inflation refers to steady increase in general price level
23. What is meant by an `Economy`?
An Economy is referred to any system or area where economic activities are
carried out.
(Or)
"An Economy is a cooperation of producers and workers to make goods and
services that satisfy the wants of the consumers" - J.R.Hicks
24. Classify the economies based on status of development.
Developed, underdeveloped, undeveloped and developing economies.
25. What do you mean by Capitalism?
Capitalism is an economic system where the role of the government is minimum
and market determines the economic activities.

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26. Define 'Economic Model'.

A Model is a simplified representation of real situation. An Economic model is an
explanation of how the economy or part of the economy, works.
27. 'Circular Flow Income' - Define .
The circular flow of income is a model of an economy showing connections
between different sectors of an economy.
PART - C

Answers the following questions in about a paragraph.

28. State the importance of Macro Economics.

i) To solve the basic problems prevailing in an economy by understanding the
economy as a whole.
ii) To evolve precautionary measures to avoid economic crises.
iii) It provides opportunities to use scientific investigation to understand the
reality
iv) To compare and analyse the economic indicators.
29. Describe the different types of economic systems.
1. Capitalism :
It is an economic system where the role of the government is minimum and
market determines the economic activities.
2. Socialism :
It is a system in which major industries are owned and controlled by the
government.
3. Mixedism :
In a mixed economy both private and public sectors co - exist.
30. Outline the major merits of Capitalism.
1) Automatic working
2) Efficient use of Resources
3) Incentives for Hard work
4) Economic progress
5) Consumers Sovereignity
6) Higher rates of capital formation
7) Development of New Technology.
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31. Indicate the demerits of socialism.

1) Red Tapism and Bureaucracy
2) Absence of Incentive
3) Limited Freedom of choice
4) Concentration of power.
32. Enumerate the features of mixed economy.
1) Ownership of property and means of production
2) Coexistence of public and private sectors.
3) Solution to Economic problems.
4) Freedom and control.
33. Distinguish between Capitalism and Globalism.
Capitalism Globalism
1. It is a free market economy where the It is a ideology of globalisation that
role of the government is minimum. connects nations together through
international trade.
2. The system is for national development It aims at global development.
3. It is also called as command economy. It is also termed as `Extended
capitalism`.
34. Briefly explain the two sector circular flow model.
Ø There are only two sector namely households and firms. Here,Production and
sales are equal and there will be a circular flow of income and goods.
Ø Real flow indicates the factor services flow from household sector to the business
sector.
Ø Monetary flow indicates the good and services flow from business sector to the
household.
The basic identity are Y=C+I
PART - D

Answer the following questions in one page.

35. Discuss the scope of Macro Economics.
The study of macro economics has wide scope and it covers the following, major
areas.

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(i) National Income : Measurement of national income and its composition by

sectors are the basic aspects of macro economic analysis. It provide a long
term understanding of the growth process of an economy.
(ii) Inflation : It refers to steady increase in general price level. To estimate the
general price level various price index numbers like wholesale price Index,
consumer price Index etc are needed.
(iii) Business cycle : All economies face the problem of business fluctuations
and business cycle. It can be carefully studied based on aggregate economic
variables.
iv) Poverty and unemployment : The economic paradox of poverty and
unemployment in resource - rich nations can be corrected by initiating macro
economic measures.
v) Economic growth : The factors determining growth and development of an
economy can be understood only through macro analysis.
vi) Economic policies : Macro Economics is significant for evolving suitable
economic policies.
36. Illustrate the functioning of an economy based on its activities.
An economy is referred to any system or area where economic activities are
carried out.
Functioning of an Economy Based on Activities

i) In an economy, the fundamental economic activities are production and

consumption .

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ii) The 'exchange activity' supports the production and consumption activities.
These activities are influenced by several economic and non-economic
activities.
iii) The major economic activities include transportation, banking, advertising,
planning, government policy and others.
iii) The major economic activities are environment, health, education,
entertainment, governance, regulations etc.,
v) The external activities from other economies such as import, international
relations, emigration,immigration, foreign investment, foreign exchange
earnings etc ., also influence the entire functioning of the economy.
37. Compare the features of capitalism and socialism.

S.No Features Capitalism Socialism

1. Ownership of means Private ownership Public ownership
of production
2. Economic motive Profit Social welfare

3. Solution of central Free market system Central planning system

problems
4. Government Role Internal regulation Complete involvement
only
5. Income Distribution unequal Equal

6. Nature of Enterprise Private Enterprise Government Enterprise

7. Economic Freedom Complete Freedom Lack of Freedom

8. Major problem Inequality Inefficiency

38. Compare the feature among capitalism, socialism and Mixedism
S.No Features Capitalism Socialism Mixedism
1. Ownership Private Public ownership Private
of means of ownership and public
production ownership

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2. Economic Profit Social welfare Social welfare

motive and profit motive
3. Solution Free market Central Planning Central planning
of central system system `and Free market
problems system
4. Government Internal Complete Limited Role
Role regulation only involvement
5. Income unequal Equal Less unequal
Distribution
6. Nature of Private Government Both private and
Enterprise Enterprise Enterprise state Enterprise
7. Economic Complete Lack of freedom Limited freedom
freedom freedom
8. Major Inequality Inefficiency Inequality and
Problem Inefficiency.

Part - II - Additional Questions

I. Choose the best Answer.

1. Inflation refers to
a) Decrease in price level and increase in money value.
b) Increase in price level and decrease in money value.
c) Increase in price level and increase in money value.
d) None of the above.
Ans : b) Increase in price level and decrease in money value.
2. The term 'Globalism' was coined by ____________ .
a) A.J. Brown b) Manfred D Steger
c) J. R. Hicks d) J.M. Keynes
Ans : b) Manfred D Steger
3. ____________ is the driving force behind capitalism.
a) Social welfare b) Equality c) Profit motive d)Private ownership
Ans : c) Profit motive

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4. _____________ countries are the examples of Mixedism.

a) India, Russia, England, France
b) England, China, Russia, Brazil
c) India, China, England, France
d) India, England, France, Brazil Ans : d) India, England, France, Brazil
5. Poverty and unemployment can be minimized by
a) Proper allocation of resource and initiating corrective measures.
b) Increasing the Role of Government.
c) Increasing production and Investment.
d) All the above.
Ans : a) Proper allocation of resource and initiating corrective measures.
6. ____________ helps to make meaningful comparison and analysis of economic
indicators.
a) Micro Economics b) Command Economy
c) Fiscal Economics d) Macro Economics
Ans : d) Macro Economics
7. There are ___________ major types of economic systems.
a) 4 b) 5 c) 3 d) 2 Ans : c) 3
8. Circular flow of income representing the major economic systems are of
____________ types.
a) 4 b) 3 c) 5 d) 2 Ans : b) 3
9. The commonly used economic models are ___________
a) The supply - demand models. b) Circular flow models
c) Smith models d) All the above
Ans : d) All the above
10. In a four - sector economy
a) Y = C + I + G + ( X /M) b) Y = C + I + G +( X - M)
c) Y = C + I + G + ( X + M) d) Y = C + I + G + ( X x M) Ans : b
II. Match the following :

1. A) Micro – 1) J.M.Keynes
B) Macro – 2) Micro Economics

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C) National Income – 3) Ragnar Frish

D) Individual Income – 4) Macro Economics
Ans : A B C D
a) 1 2 3 4
b) 3 1 4 2
c) 4 3 2 1
d) 1 4 3 2 Ans : b) 3 1 4 2
2. A) Macro Economics - 1) National Accounts
B) Micro Economics - 2) Depression
C)Business cycle - 3) Income theory
D) Circular flow of Income - 4) Price theory
Ans : A B C D
a) 2 1 3 4
b) 1 2 4 3
c) 3 2 4 1
d) 3 4 2 1 Ans : d) 3 4 2 1
3. A) Capitalism - 1.North Korea
B) Socialism - 2. United States
C) Communism - 3. India
D) Mixedism - 4.China
Ans : A B C D
a) 2 4 1 3
b) 1 2 3 4
c) 3 4 2 1
d) 2 3 4 1 Ans : a) 2 4 1 3
III. Choose the correct pair :

1. a) Father of Macro Economics - Adam Smith

b) Father of Socialism - J.M. Keynes
c) Extended capitalism - Manfred D. Steger
d) Father of capitalism - Karl Marx
Ans : c) Extended capitalism - Manfred D. Steger

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2) a) Capitalist Economy - Foreign Exchange

b) Socialist Economy - Market Economy
c) Stock variable - Command Economy
d) Flow variable - Consumption
Ans : d) Flow variable - Consumption
3) a) Y - Government
b) C - Consumption
c) I - Income
d) G - Investment
Ans : b) C - Consumption
IV. Choose the Incorrect pair :

4) a) Two sector Economy - Y=C+G

b) Three sector Economy - Y=C+ I+G
c) Four sector Economy - Y = C + I + G +(X-M)
d) Socialist Economy - Planned Economy
Ans : a) Two sector Economy - Y = C + G
5) a) Capitalist Economy - USA, West Germany
b) Socialist Economy - Australia, Japan
c) Mixed Economy - France, Brazil
d) Globalism - International trade
Ans : b) Socialist Economy - Australia, Japan
6) a) Red tapism and corruption - Lassiez faire Economy
b) Bureaucratic Expansion - Socialism
c) Profit motive - Capitalism
d) Customs and tradition - Traditional Economy
Ans : a) Red tapism and corruption - Lassiez faire Economy
V. Choose the correct statement

1.) a) J.M.Keynes was awarded first Nobel prize in Economics.

b) Ragnar Frisch wrote the General Theory of Employment, Interest and Money
c) Micro Economics studies the economy as a whole.
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d) Macro Economics covers National income, inflation, business cycles, poverty

and Inequality.
Ans : d) Macro Economics covers National income, inflation, business
cycles, poverty and Inequality.
2) a) ''An Economy is a cooperation of producers and workers to make goods and
services that satisfy the wants of the consumers'' - A.J. Brown.
b) ''A system by which people earn their living'' - J.R. Hicks
c) Inflation refers to steady increase in general price level.
d) The means of production in a capitalistic economy are owned by Government.
Ans : c) Inflation refers to steady increase in general price level.
VI. Choose the incorrect statement

1) a) Socialism aims at equality on the distribution of income and wealth for all.
b) In a capitalist economy resources are owned by individuals and the
government.
c) Stock refers to a quantity of a commodity measured at a point of time.
d) Flow variables are measured over a period of time.
Ans : b) In a capitalist economy resources are owned by individuals
and the government.
2) a) The circular flow of income is a model of a economy showing connections
between different economies of the world.
b) Two sector model is for a simple economy with households and firms.
c) Three sector model is for a mixed and closed economy.
d) Four sector model is for an open economy.
Ans : a) The circular flow of income is a model of a economy showing
connections between different economies of the world.
VII. Choose the Odd Man Out

1) Four - Sector Economy comprises of

a) Households b) Firms c) Government d. Internal sector
Ans : d) Internal sector
2) a) Traditional Economy b) Socialism
c) Globalism d) capitalism Ans : c) Globalism

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3) a) Boom b) Extension
c) Recession d) Depression Ans : b) Extension
VIII. Analyse the Reason

1) Assertion (A) : Profit is the driving force behind all economic activities in
capitalism.
Reason (R) : The golden rule for a producer under capitalism is to maximise
profit.
a) Both (A) and (R) are true and R is the correct explanation of (A).
b) Both (A) and (R) are true but R is not the correct explanation of (A).
c) A is true but R is false
d) A is false but R is true.
Ans : a) Both (A) and (R) are true and R is the correct explanation of (A).
2) Assertion(A) : In a socialistic economy all the resources are owned and
operated by the Government.
Reason (R) : Public welfare is the main motive behind all economic
activities.
a) Both A and R are true but R is not the correct explanation of A.
b) Both A and R are true, R is the correct explanation of A.
c) (A) is true (R) is false.
d) (A) is false (R) is true.
Ans : b) Both A and R are true, R is the correct explanation of A.
3) Assertion (A) : A model is a simplified representation of real situation.
Reason (R) : Economists use models to describe economic activities, their
relationships and their behaviour.
a) Both A and R are true R is the correct explanation of (A)
b) Both A and R are true R is not the correct explanation of (A)
c) (A)is true (R) is false
d) (A) is false (R) is true.
Ans : b) Both A and R are true R is not the correct explanation of (A)
IX. Answer the following questions is one or two sentence :
1. Name the divisions of Economics.
1. Micro Economics
2. Macro Economics

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2. Define National Income

National Income is the total money value of all final goods and services produced
in a country during a particular period of time.
3. What is Unemployment?
Unemployment is a situation when there are people, who are willing to work and
able to work but cannot find suitable jobs.
4. What is Globalism?
Globalism is the new market ideology of globalisation that connects nations
together through international trade and aiming at global development.
5. What is Mixedism?
Mixedism is an ideology that mixes or combines the principles of Capitalism and
socialism.
6. What is an Economy?
An Economy is “ A system by which people earn their living” - A.J.Brown.
7. Name the fundamental economic activities.
1. Production 2. Consumption
8. What is an Economic System?
Economic system refers to the manner in which individual and institutions are
connected together to carry out economic activities in a particular area.
9. What is Red Tapism?
In socialism, decision are taken by government agencies, approval of many
officials and movement of files from one table to other takes time and leads to
Red Tapism.
10. What is meant by circular flow of Income?
The circular flow of income is a model of an economy showing connections
between different sectors of an economy.
X. 3 Mark Questions

1. Mention the limitations of Macro Economics.

1) There is a danger of excessive generalization of the economy as a whole.
2) It assumes homogeneity among the individual units.
3) There is a fallacy of composition.

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4) Many non-economic factors determine economic activities but are not

considered in Macro Economics.
2) What are the demerits of Capitalism?
1) Capitalism increases inequalities of income.
2) Large amount of resources are wasted on competitive advertising and
duplication of products.
3) Capitalism leads to class struggle as it divides the society into capitalists
and workers.
4) Free market system leads to frequent violent economic fluctuations and
crises.
5) Even the harmful goods are produced if there is possibility to make profit.
3) State the merits of Socialism?
1) There is a reduction in Inequalities and exploitation.
2) The central planning authority allocates the resources in a planned manner.
So wastages are minimized.
3) As inequalities are minimum there is no conflict between rich and poor
class.
4) Planning authority takes control over production and distribution. Therefore
economic fluctuations can be avoided.
5) It promotes social welfare. There is absence of exploitation, reduction in
economic inequalities.
4) Explain the features of mixed Economy.
1) The means of production and properties are owned by both private and
public.
2) In mixed economies, both private and public sectors coexist. Private
industries work for profit whereas public sector had a view to maximize
social welfare.
3) The central planning authority prepares the economic plans. National plans
are drawn up by the Government and both public and private abide.
4) The basic problems of the economy are solved through the price mechanism
as well as state intervention.
5) The overall control on the economic activities rests with the government.

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5. What is circular flow of income?

1) The circular flow of income is a model of an economy showing connections
between different sectors of an economy.
2) It shows flows of income, goods and services and factors of production
between economic agents such as firms, households, government and
nations.
3) The circular flow analysis is the basis of national accounts and
macroeconomics.
XI. 5 Mark Questions :

1) Explain the merits and demerits of capitalism.

Merits of capitalism :
1) Automatic working :
Without any government intervention, the economy works automatically.
2) Efficient use of Resources :
All resources are put into optimum use.
3) Incentives for Hard work :
Hard work is encouraged and entrepreneurs get more profit for more
efficiency.
4) Consumer Sovereignity :
All production activities are aimed at satisfying the consumers.
5) Development of New Technology :
As profit is aimed at, producers invest on New technology and produce
quality goods.
6) Economic progress :
Production and productivity levels are very high in capitalistic economies.
7) Higher rates of capital Formation :
Increase in saving and Investment leads to higher rates of capital formation.
Demerits of capitalism :
1) Concentration of wealth and Income :
Capitalism causes concentration of wealth and income in a few hands
and thereby increases inequalities of income.

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2) Wastages of Resources :
Large amount of resources are wasted on competitive advertising and
duplication of products.
3) class struggle :
Capitalism leads to class struggle as it divides the society into capitalists
and workers.
4) Business cycle :
Free market system leads to frequent violent economic fluctuations and
crises.
5) Production of non essential goods :
Even the harmful goods are produced if there is possibility to make profit.
2) Explain the merits and demerits of Mixed economy.
Merits of Mixed Economy:
1) Rapid Economic Growth:
It promotes rapid economic growth. Thus, both public requirements and
private needs are taken care of.
2) Balanced Economic Growth:
It promotes balanced growth between agriculture and industry, consumer
goods and capital goods, rural and urban etc.
3) Proper utilization of Resources:
The government can ensure proper utilization of resources. The
government controls most of the important activities directly and the
private sector indirectly.
4) Economic Equality:
The government uses progressive rates of taxation for levying income tax to
bring about economic equality.
5) Special Advantages to the society:
The government safeguards the interest of the weaker sections by legislating
on minimum wages and rationing, establishing fair price shops and
formulating social welfare measures.
Demerits of Mixed Economy:
1) Lack of coordination:
As private and public sector work with divergent motives, it creates many
coordination related problem.

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2) Competitive Attitude:
It is expected that both government and private should work with a
complementary spirit towards the welfare of the society, but is reality they
are competitive in their activities.
3) Inefficiency:
Most of the public sector enterprises remain inefficient due to lethargic
bureaucracy red tapism and lack of motivation.
4) Fear of Nationalization:
In a mixed economy, the fear of nationalization discourages the private
entrepreneurs in their business operations and innovative initiatives.
5) Widening Inequality:
Ownership of resources, laws of inheritance and profit motive of people
widens the gap between rich and poor.
3. Explain the circular flow of income.
The circular flow of income is a model of an economy showing connections
between different sectors of an economy. It shows flows of income, goods and
services and factors of production between economic agents such as firms,
household, government and nations. The circular flow analysis is the basis of
national accounts and macroeconomics.
Circular flow of Income in a two-sector Economy :
There are only two sectors namely, household sector and firm sector.
1) Household sector :
The household sector is the sole buyer of goods and services, and the sole
supplier of factors of production.
2) Firms :
The firm sector hires the factors of production owned by the household
sector. It sells the entire output to households.
In a two-sector economy, production and sales are equal and there will be a
circular flow of income and goods.
Therefore, here
Y= C + I
Where Y – Income C – Consumption I – Investment

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Circular flow of Income in a Three sector Economy :

In addition to household and firms, inclusion of the government sector makes
this model a three-sector model.
Under three sector model, national income (Y) is obtained by adding consumption
expenditure (C), Investment expenditure (I) and Government expenditure (G).
Therefore,
Y=C+I+G
Circular flow of Income in a Four – sector Economy :
In a Four-sector economy, in addition to household, firms and government, a
fourth sector namely, external sector is included.
The external sector comprises of exports and imports.
Y = C + I +G + (X-M)

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Unit
National Income
2
Part - I - Book Back Questions
PART - A

Multiple Choice questions

1. Net National product at factor cost is also known as

a) National Income b) Domestic Income
c) Per capita Income d) Salary
2. Primary sector is
a) Industry b) Trade c) Agriculture d) Construction
3. National income is measured by using __________ methods.
a) Two b) Three c) Five d) Four
4. Income method is measured by summing up of all forms of
a) Revenue b) Taxes c) expenditure d) Income
5. Which is the largest figure?
a) Disposable income b) Personal Income
c) NNP d) GNP
6. Expenditure method is used to estimate national income in
a) Construction sector b) Agriculture sector
c) Service sector d) Banking sector
7. Tertiary sector is also called as ________ sector
a) Service b) Income c) Industrial d) Production
8. National income is a measure of the __________ performance of an economy.
a) Industrial b) Agricultural c) Economic d) Consumption

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9. Percapita income is obtained by dividing the National income by__________.

a) Production b) Population of a country
c) Expenditure d) GNP
10. GNP = ____________ + Net factor income from abroad.
a) NNP b) NDP c) GDP d) Personal income
11. NNP stands for __________.
a) Net National Product b) National Net Product
c) National Net Provident d) Net National Provident
12. __________ is deducted from gross value to get the net value.
a) Income b) Depreciation
c) Expenditure d) Value of final goods.
13. The financial year in India is __________.
a) April 1 to March 31 b) March 1 to April 30
c) March 1 to March 16 d) January 1 to December 31
14. When net factor income from abroad is deducted from NNP, the net value is
__________
a) Gross National Product b) Disposable Income
c) Net Domestic Product d) Personal Income
15. The value of NNP at production point is called __________.
a) NNP at factor cost b) NNP at market cost
c) GNP at factor cost d) Per capita income
16. The average income of the country is __________.
a) Personal Income b) Per capita Income
c) Inflation Rate d) Disposal Income
17. The value of national income adjusted for inflation is called __________.
a) Inflation Rate b) Disposal income
c) GNP d) Real national income
18. Which is a flow concept?
a) Number of shirts b) Total wealth
c) Monthly income d) Money supply

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19. PQLI is the indicator of

a) Economic growth b) Economic welfare
c) Economic progress d) Economic development
20. The largest proportion of national income comes from __________.
a) Private sector b) Local sector
c) Public sector d) None of the above
Answers

1 2 3 4 5 6 7 8 9 10
a c b d d a a c b c
11 12 13 14 15 16 17 18 19 20
a b a c a b d c b a
PART - B

Answer the following questions in one or two sentences.

21. Define National Income.

"The labour and capital of a country acting on its natural resources produces an-
nually a certain net aggregate of commodities, material and immaterial including
services of all kinds. This is the true net annual income or revenue of the country
or national dividend" - Alfred Marshall.
22. Write the formula for calculating GNP.
GNP at market prices = C + I + G + (X - M) + (R-P)
C – consumption
I – Investment
G - Government
X – M - Net export
R – P - net factor income from abroad.
23. What is the difference between NNP and NDP?
NNP is Net National product it is obtained from GNP as
NNP = GNP - depreciation
NDP is Net Domestic product which is obtained from GDP as
NDP = GDP - Depreciation.

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24. Trace the relationship between GNP and NNP

GNP is the total measure of the flow of final goods and services at market value
during a year.
NNP is the value of the net output of the economy during the year.
NNP = GNP - depreciation
25. What do you mean by the term Personal Income?
Personal income is the total income received by the individuals of a country from
all sources before payment of direct taxes in a year.
26. Define GDP deflator.
GDP deflator is an index of price changes of goods and services included in GDP.
27. Why is self consumption difficult in measuring national income?
The problem of self consumption is whether that part of the produce which is
retained for self consumption can be included in national income or not.
PART - C

Answer the following questions in one paragraph.

28. Write a short note on per capita income

The average income of a person of a country in a particular year is called per
capita income. per capita income is obtained by dividing national income by pop-
ulation.
National Income
Per capita Income =
Population
29. Differentiate between personal and disposable income.
Ø Personal income is the total income received by the individuals of a country from
all sources before payment of direct taxes in a year.
Ø Disposable income is the individuals income after the payment of income tax.
This is the amount available for households for consumption.
Disposable income = Personal income - Direct Tax.
30. Explain briefly NNP at factor cost.
NNP refers to the market value of output. whereas NNP at factor cost is the total
of income payment made to factor of production.
NNP at factor cost = NNP at market prices - Indirect taxes + subsidies

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31. Give short note on Expenditure method.

In Expenditure method, the total expenditure incurred by the society in a
particular year is added together.
GNP = C+I+G+(X_M) .
C - Private consumption
I - Private Investment Expenditure.
G- Government expenditure.
X-M- Net export.
32. What is the solution to the problem of double counting in the estimation of
national income?
Ø Double counting is to be avoided under value added method. Any commodity
which is either raw material or intermediate good for the final production should
not be included.
Ø For example, value of cotton enters value of yarn as cost, and value of yarn in
cloth and that of cloth in garments. At every stage value added only should be
calculated.
33. Write briefly about national income and welfare.
Ø National income is considered as as indicator of the economic wellbeing of a
country. The economic progress of countries is measured in terms of their GDP
percapita and their annual growth rate.
Ø A country with a higher per capita income is supposed to enjoy greater economic
welfare with a higher standard of living.
Ø But the rise in GDP need not always promote economic welfare.
34. List out the uses of national income.
1) To know the sectoral contribution.
2) To formulate the national policies.
3) To formulate planning and evaluate plan progress.
4) To build economic - models.
5) To make international comparison.
6) To know a country`s per capita income for various factors of production.
7) To know the distribution of income for various factors of production.
8) To arrive at many macro economic variables.

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PART - D

Answer the following questions in about a page

35. Explain the importance of national income.

National income is regarded as accounts of the economy, which are known as
social accounts. It enables us.
1) To know the relative importance of the various sectors of the economy and
their contribution towards national income.
2) To formulate the national policies such as monetary policy, fiscal policy and
other policy.
3) To formulate planning and evaluate plan progress.
4) To build economic models both in short run and long run.
5) To make international comparison, inter- regional comparison and inter - tem-
poral - comparison of growth of the economy during different periods.
6) To know a country`s per capita income which reflects the economic welfare of
the country.
7) To know the distribution of income for various factors of production in the
country.
8) To arrive at many macro economic variables namely, Tax - GDP ratio, current
Account Deficit -GDP ratio, Fiscal Deficit - GDP ratio, Debt - GDP ratio etc.,.
36. Discuss the various methods of estimating the national income of a country.
There are three methods that are used to measure national income.
Product Method :
Ø Product method measures the output of the country. It is also called inventory
method. Under this method, the gross value of output from different sectors are
obtained for the entire economy during a year. The value obtained is actually the
GNP at market prices.
Ø In this method Double counting should be carefully avoided.
Income Method :
Ø This method approaches national income from the distribution side. Under this
method, national income is calculated by adding up all the incomes generated in
the course of producing national product.
Y = W + r + i + p + ( R-P )

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W - wages r - rent
i - interest p - profit
R- P - net factor income from abroad.
The Expenditure Method :
In this method, the total expenditure incurred by the society in a particular
year is added together. To calculate the expenditure of a society, it includes
personal consumption expenditure (c) net domestic investment (I), govern-
ment expenditure on consumption (G) as well as capital goods and net exports
(X-M )
GNP = C+I+G+(X-M)
If the above methods are done correctly, the following equation must hold
Output = Income = Expenditure
37. What are the difficulties involved in the measurement of national income?.
In India because of various problems posed, a valuation of output is very difficult.
Transfer payments :
The government expenditure like pensions, unemployment allowance, subsidies
etc are not included in the national income, Because they are paid without adding
anything to the production process. Interest on national debt is also considered
as transfer payment..
Difficulties in assessing depreciation allowance :
It requires high degree of judgment to assess the depreciation allowance and
other charges. Deduction of these from national income is not an easy task.
Unpaid services :
The service of housewife are not included in National income whereas the similar
service performed by paid servants are included. Similarly there are number of
goods and services which are difficult to be assessed in money terms are not in-
cluded.
Income from illegal activities :
Income earned through illegal activities are not included in national income.
Production for self consumption and changing price :
Farmers keep a large portion of their produce for self consumption. The problem
is whether they can be included in national income or not.

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National income by product method is measured by the value of final goods and
services at current market prices. But prices do not remain stable. To solve this
constant price level is considered .
Capital Gains :
Capital gains arise when a capital asset is sold at higher price than was paid for it
at the time of purchase. capital gains are excluded from national income.
Statistical problems :
Statistical data may not be perfectly reliable, when they are compiled from nu-
merous sources. skill and efficiency of the statistical staff and cooperation of peo-
ple at large are also equally important in estimating national income.
38. Discuss the important of social accounting in economic analysis :
Ø National income is also being measured by the social accounting method. Under
this method, the transactions among various sectors such as firms, households,
government etc., are recorded and their interrelationships traced.
Ø The social accounting framework is useful for economists as well as policy makers,
Because it represents the major economic flows and statistical relationships
among various sectors of the economic system. It become possible to forecast the
trends of economy more accurately.
Ø Under this method, the economy is divided into several sectors like 1) firms 2)
Households 3) Government 4) Rest of the world and 5) Capital sector..
1) Firms undertake productive activities.
2) Households are consuming entities and represent the factors of production.
3) The Government sector refers to the economic transactions of public bodies at
all levels.
4) Rest of the world relates to international economic transactions of the country.
5) Capital sector refers to saving and investment activities.
Part - II - Additional Questions

I. Match the following

1. A) Noble laureate - 1. Banking

B) Primary sector - 2. Simon kuznet
C) Secondary sector - 3. Agriculture
D) Tertiary sector - 4. Industry
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A B C D
a. 1 2 3 4
b. 4 3 2 1
c. 3 2 4 1
d. 2 3 4 1 Ans : d) 2 3 4 1
2. A) PQLI - 1. C + I + G + (X-M)
B) GNPMP - 2. GNP - depreciation allowance
C) NNP - 3. Economic welfare
D) GNP - 4. C + I + G + (X - M) + (R - P)
A B C D
a. 4 3 2 1
b. 3 4 2 1
c. 1 2 3 4
d. 4 2 1 3 Ans : b) 3 4 2 1
Nominal GDP
3. A) Disposable Income - 1. ×100
Real GDP
B) Per capita Income - 2. GDP - Depreciation
C) GDP deflator - 3. Personal income - Direct Tax
National Income
D) NDP - 4.
Population
A B C D
a. 3 4 1 2
b. 1 2 3 4
c. 4 2 3 1
d. 1 4 3 2 Ans : a) 3 4 1 2
II. Choose the correct pair

1. a. Disposable income - Consumption + saving

National Income
b. Per capita income -
Disposable Income
c. Capital gains - Included in National Income
d. National income - Four methods
Ans: a) Disposable income - Consumption + saving
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2. a. Expenditure method - Value method

b. Income method - Output method
c. Product method - Factor Earning Method
d. Inputs - Factors of production
Ans : d) Inputs - Factors of production
3. a. Transfer payment - Purchase of shares
b. Double counting - Value added method
c. National income - Y = w+r+i+(R-P)
d. Value of output - Cost x Quantity sold
Ans : b) Double counting - Value added method
III. Choose the incorrect pair

1. a) Labour income - wages and salaries

b) Capital income - profit, dividend
c) National income - domestic factor income + gross factor income
d) Mixed income - farming, sole proprietorship
Ans : c) National income - domestic factor income + gross factor income
2. a) w - wages
b) p - loss
c) r - rent
d) i - interest Ans : b) p - loss
3. a) C - Private consumption expenditure
b) I - Private Investment Expenditure
c) G - Government expenditure
d) X-M - Net import Ans : d) X-M - Net import
Choose the best answer
1. Personal Income is
a) National Income - Direct taxes
b) National Income - Indirect taxes
c) National Income - (Social security contribution and undistributed
corporate profits) +Transfer payments
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d) National Income - Net Income from abroad

Ans : c) National Income - (Social security contribution and undistrib-
uted corporate profits) +Transfer payments
2. Real income is ___________
a) National Income at current price + P1 /P0
b) National Income at current price – P1/P0
c) National Income at current price x P1 /P0
d) National Income at current price ÷ P1/P0
Ans : d) National Income at current price ÷ P1/P0
3. National income by income method is
a) Y = w + r + i + p + (R – P)
b) Y = w + r + i + p – (R – P)
c) Y = w + r + i + p + (R + P )
d) Y =w + r + p – i – (R – P) Ans : a) Y = w + r + i + p + (R – P)
4. Capital sector refers to
a) Savings and income activities
b) Savings and investment activities
c) Investment and production activities
d) All the above. Ans : b) Savings and investment activities
5. Transfer payment are
a) Pensions, unemployment allowance and subsidies given by Government.
b) Pension, unemployment allowance and subsidies given by private.
c) Pension, unemployment allowance and subsidies given by N. G. O. S.
d) None of the above.
Ans : a) Pensions, unemployment allowance and subsidies given by
Government.
6. Percapita income is
a) National income - Population
b) National income - Real income
c) National income - ÷ Population
d) National income - Disposable income
Ans : c) National income - ÷ Population
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7. Production method is also called as

a) Factor earning method b) Inventory method
c) Expenditure method d) Outlay method
Ans : b) Inventory method
8. Which method of calculating National income is called as Factor Earning
Method?
a) Product method b) Expenditure method
c) Income method d) Inventory method
Ans : c) Income method
9. NDP is
a) GNP – Depreciation b) GNP – Taxes
c) GDP – Depreciation d) GDP – NNP
Ans : c) GDP – Depreciation
10. Disposable Income is
a) Personal income + Direct taxes
b) Personal income – Indirect taxes
c) Personal income + Transfer payments
d) Personal income – Direct taxes
Ans : d) Personal income – Direct taxes
V. Choose the correct statement

1. a. J.M.Keynes introduced the concept of national income.

b. GDP is the total market value of final goods and services produced within
the country during a year.
c. NDP is the value of net exports of the economy during the year.
d. Net National product refers to the value of the net imports of the economy
during the year.
Ans : b) GDP is the total market value of final goods and services produced within
the country during a year.
2. a. Disposable Income is the amount available for households for investment.
b. The average income of a person of a country in a particular year is called
National Income
c. Real income is the buying power of nominal income.

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d. Entire disposable income is spent on consumption.

Ans : c) Real income is the buying power of nominal income.
3. a. There are three methods that are used to measure National Income.
b. Factor incomes are grouped as labour income, capital income and national
income.
c. Double counting is avoided under Income method.
d. Capital sector relates to international economic transactions of the country.
Ans : a) There are three methods that are used to measure National Income.
IV. Choose the incorrect statement

1. a. National income denotes the country’s purchasing power.

b. Product method measures the output of the country.
c. Double counting is avoided under value added method.
d. Income method is also called as inventory method.
Ans : d) Income method is also called as inventory method.
2. a. Transfer payments are to be included in estimation of national income.
b. Expenditure on intermediate goods are to be excluded from national income.
c. Interest on national debt is considered as transfer payments.
d. PQLI includes standard of living, life expectancy at birth and literacy.
Ans : a) Transfer payments are to be included in estimation of national
income.
3. a. The Government sector refers to the economic transactions of public bodies
at all levels.
b. Households under take productive activities.
c. Rest of the world sector relates to international economic transaction of the
country.
d. Capital sector refers to saving and investment activities.
Ans : b) Households under take productive activities.
VII. Pick the odd one out :

1. a. Product method b. Income method

c. Investment method d. Expenditure method
Ans : c) Investment method
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2. a. Transfer payments b. Social Accounting

c. Unpaid services d. Capital gains
Ans : a) Transfer payments
3.. a. Factor income b. Labour income
c. Capital income d. Mixed income
Ans : a) Factor income
VIII. Analyse the reason :
1. Assertion (A) : National income estimates are not very accurate in our
country.
Reason (R) : Proper valuation of output is very difficult because of the
existence of large unorganised and non-monetised subsis-
tence sector.
a. Both A and R are true and R is the correct explanation of A.
b. Both A and R are true but R is not the correct explanation of A.
c. Both A and R are false.
d. A is true but R is false
Ans : a) Both A and R are true and R is the correct explanation of A.
2. Assertion (A) : Income method approaches national income from the
distribution side.
Reason(R) : In this method, national income is calculated by adding up
all the incomes generated in the course of producing nation-
al product.
a. Both A and R are true and R is the correct explanation of A
b. Both A and R are true but R is not the correct explanation of A
c. A is true but R is false
d. A is false but R is true
Ans : b) Both A and R are true but R is not the correct explanation of A
IX. Answer the following questions (2 Marks)
1. Name the methods of measuring National Income.
1. Product method
2. Income method
3. Expenditure method

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2. Name some of the concepts used in measuring national income.

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP)
4. Personal Income
5. Per Capita Income
3. What is Net National Product?
NNP refers to the value of the net output of the economy during the year.
NNP = GNP – Depreciation Allowance
4. What is per capita Income?
The average income of a person of a country is a particular year is called per capita
Income.
National Income
Per capita Income =
Population
5. What is Real Income ?
Real income is the buying power of nominal income.
Nominal Income at Current price
National Income at constant price = P1 |Po

6. What are transfer payments?

Transfer payments are payments of the Government that are paid without adding
anything to the production processes.
Eg : Unemployment allowances, subsidies
7. What is Market Price ?
The Market Price is the price that consumers will pay for the product when they
purchase it from the sellers.
Market Price = Factor Cost - Subsidies
8. What is meant by income from illegal activities?
Illegal activities like gambling, smuggling etc have value and satisfy the wants of
the people but they are not considered as productive.
Income from these illegal activities are not included in National income.

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9. What are capital gains?

Capital gains arise when a capital asset such as a house, other property, stocks or
shares, etc. is sold at higher price than was paid for it at the time of purchase.
10. What is meant by PQLI?
The physical Quality of Life Index (PQLI) is considered a better indicator of eco-
nomic welfare. It includes standard of living, life expectancy at birth and literacy.
Answer the following questions (3 Marks)
1. How is Gross National Product measured?
GNP is the total measure of the flow of final goods and services at market value
resulting from current production in a country during a year, including net income
from abroad.
GNP = C + I +G + (X-M) + (R-P)
C – Consumption
I – Gross Investment
G – Government expenditure
X-M – Net export
R – P – Net factor income from abroad
2. Write a note on statistical problems that affect national income estimate in our
country?
1. Accurate and reliable data are not adequate, as farm output in the subsistence
sector is not completely informed. In animal husbandry there are no authentic
production data available.
2. Different languages, customs etc., also create problems in computing estimates.
3. People in India are indifferent to the official inquiries. They are most cases non
– co operative also.
4. Most of the statistical staff are untrained and inefficient.
Therefore, national income estimates in our country are not very accurate or
adequate.
3. Write a note National Income in terms of US $?
1. The national income of a country in money terms describes the economic per-
formance of a country.
2. When Indian national Income is expressed in terms of US $, the former looks
very low.
3. If purchasing power parity (PPP) method is adopted India looks better.

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4. What is a sector? Name its divisions.

A sector is a group of individuals or institutions having common interrelated
economic transactions. The economy is divided into the following sectors:
1. Firms: The organizations which employ the factors of production to produce
goods and services.
2. Households: They are consuming entities and represent the factors of production.
3. The government sector: It refers to the economic transactions of public bodies at
all levels, centre, state and local.
4. Rest of the world sector: It relates to international economic transactions of the
country.
5. Capital sector: It refers to saving and investment activities.
5. Explain the precautionary measures taken while calculating National income in
expenditure method.
1. Second hand goods:
The expenditure made on second hand goods should not be included.
2. Purchase of shares and bonds:
Expenditures on purchase of old shares and bonds in the secondary market
should not be included.
3. Transfer payments:
Expenditures towards payment incurred by the government like old age pen-
sion should not be included.
4. Expenditure on intermediate goods:
Expenditure on seeds and fertilizers by farmers, cotton and yarn by textile
industries are not to be included to avoid double counting only expenditure on
final products are to be included.
6. Explain the steps involved in Income method.
1. The enterprises are classified into various industrial groups.
2. Factor incomes are grouped under labour income, capital income and mixed
income.
i) Labour Income - Wages and salaries, fringe benefits, employer’s con-
tribution to social security.
ii) Capital Income - Profit, internet, dividend and royalty
iii) Mixed Income - Farming, sole proprietorship and other professions.

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3. National income is calculated as domestic factor income plus net factor income
from abroad.
In short
Y = w + r + i + Π + (R-P)
W = Wages, r – rent , i = interest, Π – Profits , R = Export , P=Import
XII. Answer the following questions (5 Marks)
1. How is National income calculated under product method?
Product method measures the output of the country. It is also called inventory
method. Under this method, the gross value of output from different sectors like
agriculture, industry, trade and commerce etc., is obtained for the entire economy
during a year.
To avoid double counting, either the value of the final output should be taken
into the estimate of GNP or the sum of values added should be taken.
In India, the gross value of the farm output is obtained as follows.
1. Total production of 64 agriculture commodities is estimated. The output of
each crop is measured by multiplying the area shown by the average yield per
hectare.
2. The total output of each commodity is valued at market prices.
3. The aggregate value of total output of these 64 commodities is taken to measure
the gross value of agricultural output.
4. The net value of the agricultural output is measured by making deductions for
the cost of seed, manures and fertilizers, market charge, repairs and depreciation
from the gross value.
5. Similarly, the gross values of the output of animal husbandry, forestry, fishery,
mining and factory establishments are obtained by multiplying their estimates
of total production with market prices.
Net value of the output in these sectors is derived by making deductions for cost
of materials used in the process of production and depreciation allowances, etc.,
from gross value of output.
2. Explain the basic concepts of measuring National income.
The following are some of the concepts used in measuring national income.
1. Gross Domestic Product (GDP)
GDP is the total market value of final goods and services produced within the
country during a year.

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GDP = C + I + G + (X-M)
2. Net Domestic Product (NDP)
NDP is the value of net output of the economy during the year.
NDP = GDP – Depreciation
3. Gross National Product (GNP)
GNP is the total measure of the flow of final goods and services at market value
resulting from current production in a country during a year, including net
income from abroad.
GNP = C+I+G+(X-M)+(R-P)
4. Net National Product (NNP)
NNP refers to the value of the net output of the economy during the year.
NNP = GNP – depreciation allowance
5. Personal Income :
Personal income is the total income received by the individuals of a country
from all sources before payment of direct taxes in a year.

Personal Income = National Income – (Social security

contribution and undistributed
corporate profits) + Transfer Payments

6. Per Capita Income :

The average income of a person of a country in a particular year is called per
capita Income.
National Income
Per Capita income =
Population

3. Explain Gross Domestic Product by sum of Expenditure, Factor Incomes or Out-

put.
GDP GDP GDP
(Expenditure) (Factor Incomes) (Value of Output)
1. Consumption Income from people 1. Value added from
in jobs and in self each of the main
employment. (eg. economic sectors
Wages and salaries)

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2. Government Profits of private sector 2. These sectors are

Spending business Ø Primary
Ø Secondary
Ø Manufacturing
Ø Quaternary
3. Investment Spending 3. Rent income from the
ownership of land.
4. Change in value of
stocks
5. Exports
6. Imports
7. = GDP (Known as
aggregate demand)
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