Q.
1) Suppose in a hypothetical economy there are only two Firms A and B, Firm A sold goods for ₹ 2,000 to Firm B and
purchased goods for ₹ 1,000. Firm B exported goods for ₹ 2,500 and had domestic sales of ₹ 1,500. Calculate Net
Domestic Product at market price, if consumption of fixed capital is ₹ 200.
Ans.
Value of Output (in ₹) Intermediate Consumption (in ₹) Value Addition (in ₹)
A 2,000 (to B) 1,000 (Purchases) 1,000
B 2,500 (exports) 1,500(domestic sales) 2,000 2,000
Total 6,000 3,000 3,000
Net Domestic Product at MP = Gross Domestic Product at Market price – Consumption of Fixed Capital = 3,000 – 200 = ₹
2,800
Q.2) a) Define Gross Domestic Product (GDP) deflator and discuss its importance.
b) State and discuss any two precautions to be considered while estimating national income by Expenditure Method.
Ans.
a) GDP Deflator is the ratio of Nominal to Real GDP. It is a tool which is used to eliminate the effect of price fluctuations in
the economy and to determine the real change in physical output of current year. GDP deflator helps in comparison of
growth rate of the economy.
b) i) Expenditure on second hand goods is not to be included in the final consumption expenditure as the production of
these goods might not be attributed to the current year.
ii) Expenditure on ‘intermediate goods’ are not to be taken into account, to avoid the problem of double counting of value
of goods and services.
Q.3) Distinguish between ‘Value Addition’ and ‘Final Value of Output’.
Ans. Value Addition refers to the excess of ‘Value of Output’ over the ‘Value of Intermediate Consumption’.
Value Addition = Value of Output – Value of Intermediate Consumption
Whereas; Final Value of output refers to the total money value of goods and services produced during a given period of
time.
Final Value of output = (Number of units produced) x (Price per unit)
Q.4) Find the Value Added by Firm A, from the following information:
S.No. Particulars Amount (in ₹ crore)
i Purchase of factor inputs by Firm A 5
ii Purchase of non-factor inputs by Firm A 2
iii Sales by Firm A to other firms in the domestic economy 10
iv Import of raw materials by firm A from rest of the world 50
v Excess of opening stock over closing stock 3
Ans. Value added = Value of output - Intermediate consumption
Value added by firm A = (iii)- (v) – (ii + iv) = 10 - 3 –(2+50)
Q.5) “National income is always greater than domestic income”. Do you agree with the given statement? Support your
answer with a valid reason.
Ans. No. Net factor income from abroad (NFIA) is the component which depicts the difference between National income
(NNPFC) and Domestic income (NDPFC).
National income can be less than the domestic income in case of negative NFIA i.e. when, Factor Income from abroad <
Factor Income to abroad.
Q.6) In the estimation of Gross Domestic Product (GDP) using expenditure method, focus lies only on expenditure by the
residents of the country.” Do you agree with the given statement? Give valid reasons for your answer.
Ans. No. This is because Gross Domestic Product (GDP) by expenditure method takes into account the aggregate spending
on all the final goods and services in the domestic territory, whether incurred by the residents or non-residents during a
given period of time.
Q.7) Suppose in an imaginary economy, Gross Domestic Product (GDP) at market price in 2019-20 was ₹ 5,000 crore,
National Income was ₹ 3,500 crore, Net Factor Income paid by the economy to rest of the world was ₹ 450 crore and the
Net Indirect Taxes was ₹ 400 crore. Estimate the value of consumption of fixed capital for the economy from the
information given above.
Ans. National Income (NNPfc) = GDPmp – Consumption of Fixed Capital - Net factor income paid by the economy to the
rest of the world – Net Indirect Taxes
3,500 = 5,000 - Consumption of Fixed Capital – 450 – 400
Consumption of Fixed Capital = ₹ 650 crore
Q.8) State any three precautions that are taken while estimating national income by production method.
Ans. Three precautions that are taken while estimating national income by production method:
• Value of intermediate goods should not be included in the estimation of National Income, to avoid the problem of
double counting (as their value has already been included in the value of final goods)
• Imputed value of goods for self-consumption should be taken into consideration while estimating National Income, as it
adds to the current flow of goods and services.
• Sale and purchase of financial assets should not be included in the estimation of National Income, as such transactions
are mere paper claims and do not lead to value addition.
Q.9) (i) State the meaning of domestic income.
Ans. Domestic Income is the sum total of income earned by the factors of production (wages, profits, rent, interest) within
the domestic territory of a country, during an accounting year.
(ii) Discuss briefly how distribution of income affects the welfare of an economy.
Ans. Distribution of income is one of the limitations of using GDP as an index of welfare. A rise in Gross Domestic Product
(GDP) may not benefit all sections of society in the same dimension. The benefit of increase in GDP may be concentrated
in the hands of a few individuals while the majority of people may remain deprived of such benefits. This may lead to
inequitable distribution of income. Hence, the welfare of the entire economy may not increase despite the increase in
GDP.
Q.10) From the following data show that, Net Value Added at factor cost (NVAFC) is equal to the sum of factor income:
Ans. Net Value Added at Factor Cost (NVAFC) = v + ix + iii – viii – i – iv
= 2160 + 240 + 240 – 840 – 90 – 60 = ₹ 1,650 crore
S.No. Particulars Amount (in ₹ crore)
Factor income = xi + x + xii + vi + vii i Consumption of Fixed Capital 90
= 720 + 90 + 540 + 180 + 120 ii Imports of raw material 120
iii Change in stock 240
= ₹ 1,650 crore
iv Goods and Services Tax 60
v Domestic sales 2,160
vi Distributed profits 180
vii Retained earnings 120
viii Purchase of raw material 840
ix Exports 240
x Rent and Royalty 90
xi Compensation of employees 720
xii Interest 540
Q.11) On the basis of the given data, estimate the value of Domestic Income:
S.No. Particulars Amount (in ₹ crore)
i Household Consumption Expenditure 600
ii Gross Fixed Capital Formation 200
iii Change in Stock 40
iv Government Final Consumption Expenditure 200
v Net Exports -40
vi Net Indirect Taxes 120
vii Net Factor Income from Abroad 20
viii Consumption of Fixed Capital 40
Ans. Domestic Income (NDP at FC) = (i) + (v) + (ii) + (iii) + (v) – (viii) – (vi)
= 600 + 200 + 200 + 40 + (-40) – 40 – 120
= ₹ 840 crore
Q.12) State the meanings of the following:
(i) Externalities (ii) Operating Surplus (iii) Consumption Goods
Ans. (i) Externalities – Externalities refer to benefits (positive externalities)/ harms (negative externalities) which are
caused by one entity to another without being paid/ penalised for it.
(ii) Operating Surplus – Operating Surplus is the sum total of rent, royalties, interest and profits. It is also known as non-
wage income.
(iii) Consumption goods – Goods which are consumed by the ultimate consumers or meet the immediate need of the
consumer are called consumption goods. It may include services as well.
Q.13) (a) Giving valid reasons, explain how the following would be treated while estimating domestic income?
(i) Payment made by American tourist for goods purchased in India.
(ii) Tomatoes grown by Ms. Puja in her kitchen garden.
(b) "Machine purchased by a firm is always a capital good." Do you agree with the given statement? Give valid reasons for
your answer.
Ans. (a)
(i) Yes, it will be included in domestic income as goods purchased by American tourist is the expenditure made by him in
India and will be included as exports.
(ii) No, it will not be included in domestic income because it is difficult to ascertain their market value. Moreover, such
transactions are not undertaken for any monetary consideration.
(b) No. Capital goods are those final goods which help in the production of other goods and services. A machine
purchased by a firm will be a capital good when it is used for the production of other goods and services. However, if it is
purchased by a firm for resale purposes in the same year, it will be considered as an intermediate good and not a capital
good.
Q.14) On the basis of the data given below for an imaginary economy, estimate the value of Net Domestic Product at
Factor Cost (NDPFC):
S.No. Particulars Amount (in ₹ crore)
i Gross Domestic Fixed Capital Formation 200
ii Exports 50
iii Government Final Consumption Expenditure 320
iv Consumption of Fixed Capital 35
v Household Final Consumption Expenditure 470
vi Inventory Investment (Net) (-) 40
vii Imports 60
viii Net Indirect Taxes 50
ix Net Factor Income from Abroad 20
Ans. Net Domestic Product at Factor Cost (NDPFC) = (v)+(iii)+(i)+(vi)+(ii-vii)-(iv)-(viii)
=470+320+200+(-40)+(50-60)-35-50
= ₹ 855 crore
Q.15) (a) Elaborate the concept of Externalities with the help of suitable example
(b) Define Operating Surplus.
Ans. (a) Externalities refer to benefits/harms which are caused by one entity to another without being paid/ penalised for it.
For example: Newly developed public park
(b) Factor income earned in the form of rent, royalties, interest and profits are together called ‘Operating Surplus’.
Q.16) (a) Discuss briefly the concept of circular flow of income in a two-sector model.
(b) “Real Gross Domestic Product (GDP) is a better indicator of economic growth of a nation as compared to the Nominal
Gross Domestic Product (GDP).” Do you agree with the given statement? Justify your answer with a valid hypothetical
numerical example.
Ans. (a) In a two-sector economy model, households are the owners of factors of production (Land, Labour, Capital,
Entrepreneur). Firms combine these factors of production to produce goods and services. They make factor payments
(Rent, wages, Interest, Profits) to households, which in turn, are spent by the households on the consumption of final
goods and services. Thus, the income earned by the factors of production flows back to the production units in the form
of aggregate consumption expenditure. Thereby, completing the circular flow of income.
(b) Yes. Real Gross Domestic Product (GDP) is the money value of all the final goods and services produced in the
domestic territory of an economy, measured at base year prices. Whereas, Nominal Gross Domestic Product (GDP) is
money value of all the final goods and services produced in the domestic territory of an economy, measured at current
year prices.
For example:
Year Price (in ₹) Output (in units) Real GDP (P0Q1) Nominal GDP (P1Q1)
2010 (Base Year) 10 100 1,000 1,000
2011 (Current Year) 15 100 1,000 1,500
Real GDP is a better indicator to make comparison in terms of physical output and it eliminates the effect of price change.
Q.17) On the basis of the given data, estimate the value of Net Value Added at Factor Cost (NVAFC):
S.No. Particulars Amount (in ₹ crore)
i Sales 1000
ii Change in stock 150
iii Purchase of raw material 300
iv Gross Investment 100
v Net Investment 80
vi Net Indirect Taxes 20
Ans. Net Value Added at Factor Cost (NVAFC) = (i) + (ii) – (iii) – [(iv) – (v)] – (vi)
= 1,000 + 150 – 300 – [100 – 80] – 20
= ₹ 810 crore
Q.18) (a) Differentiate between stock variables and flow variables with suitable example.
(b) “Externalities can be classified into negative or positive, however it is not necessary that they will be directly correlated
with the Gross Domestic Product.”
Do you agree with the given statement? Give valid reasons in support of your answer.
Ans. (a) Stock variables are the variables which are measured at a particular point of time. For example: National Wealth
Whereas;
Flow variables are the variables which are measured over a period of time. For instance: National Income
(b) Yes, externalities may not directly correlate with the Gross Domestic Product (GDP) as externalities do not have any
market in which they can be bought/sold. GDP does not take into account any such negative/positive impact on the third-
party as they are not penalised/paid for such harms/benefits. Consequently, it may lead to
overestimation/underestimation of the actual welfare of the economy.
Q.19) On the basis of the given data, estimate the value of Domestic Income (NDPFC):
S.No. Particulars Amount (in ₹ crore)
i Household Consumption Expenditure 800
ii Gross Business Fixed Capital Formation 150
iii Gross Residential Construction Investment 120
iv Government Final Consumption Expenditure 170
v Excess of Imports over Exports 20
vi Inventory Investment 140
vii Gross Public Investment 500
viii Net Indirect Taxes 70
ix Net Factor Income From Abroad (-) 50
x Consumption of Fixed Capital 40
Ans. Domestic Income (NDPFC) = i + iv + ii + iii + vii + vi – v – x – viii
= 800+170+150+120+500+140–20 – 40 – 70
= ₹ 1,750 crore
Q.20) State the steps pertaining to the estimation of National Income under the income method.
Ans. Steps pertaining to the estimation of National Income under the Income method:
1. Identify and classify production units into distinct heads namely primary, secondary, and tertiary sector.
2. Estimate and classify the factor payments in different categories as Compensation of Employees, Operating Surplus,
and Mixed Income. The sum of factor payments represents the contribution of the sectors to Domestic Income (NDPFC).
3. Finally, estimate and add the value of Net Factor Income from Abroad (NFIA) to arrive at National Income (NNPFC).
Q.21) (I) On the basis of the following hypothetical data: (all figures in ₹ crore)
Year Nominal GDP Nominal GDP adjusted to base year prices
2020 3,000 4,000
2023 4,000 4,500
Calculate the percentage change in Real Gross Domestic Product in the year 2023 using 2020 as the base year.
(II) “The public investment on the construction of a multi-lane flyover may reduce traffic congestion.”
On the basis of the above statement, discuss its likely impact on Gross Domestic Product (GDP) and welfare in an economy.
Ans. (I) Percentage change in Real GDP = Change in Real GDP X 100 /Real GDP
= (4,500 – 4,000) x 100 /4,000
= 12.5 %
(II) The public investment on the construction of a multi-lane flyover may impact the Gross Domestic Product (GDP)
positively as good quality infrastructure (like an effective transport system) generally attracts higher investments in an
economy and may lead to an increase in employment opportunities. It may also lead to a reduction in travel time and
lower average transportation costs. Consequently, it may increase the well-being of citizens.
Q.22) (I) “Basis of classification of final goods into consumption and capital goods depend on the economic nature of its
use.” Defend or refute the statement, with the help of a suitable example.
(II) ‘Natural calamities in the hill states of India have led to massive destruction of capital assets.’ Identify the type of loss
(depreciation or capital loss) indicated in the aforesaid statement. Give valid reasons in support of your answer.
Ans. (I) The given statement is defended. Consumption goods are those goods that directly satisfy the wants of the
consumer whereas, capital goods are those final goods that are used for further production. A good can be considered as
a consumption good or a capital good. It depends upon the economic nature of its use. For example, machinery
purchased by a household can be classified as a consumption good whereas, if it is purchased by a firm for further
production, then as a capital good.
(II) The massive destruction of capital assets caused by the recent natural calamities in the hill states of Himachal Pradesh
and Uttarakhand can be considered as capital loss. Capital loss refers to the loss in the value of fixed assets due to
unforeseen circumstances like natural disasters, theft, fires, etc.
LIKE | SHARE | COMMENT
DOWNLOAD SPCC APP CUET LIVE CUET 2025 PREMIUM COURSE
