NCERT Solutions For Class 12 Economics Chapter 4
National Income Accounting

The aggregate final expenditure (expenditure made on final goods, it does not include spending on intermediate goods) of an economy be equal to the aggregate factor payments because in an economy, producer employs four factors of production i.e land, capital, labour and entrepreneurs to produce goods and services and by selling these goods and services receives revenue and thereby pays remuneration to four factors of production in the form of rent, interest, wages and profits. The owners of four factors of production sell their factor services to producers and earn income and the same income then spend on goods and services produced by producers.

Nominal GNP = ₹ 2,500 crores

Real GNP = ₹ 3,000 crores

GNP Deflator = (Nominal GNP X 100) ÷ Real GNP

= (2,500 X 100) ÷ 3,000

= 83.33%

No, the price level has fallen between the base year and the year under consideration by 16.67 (100 -83.33)%.

Net National Product at Factor Cost, NNP at FC = ₹ 1,900 crores

Personal Disposable Income of the household = ₹ 1,200 crores

Personal income taxes = ₹ 600 crores

The value of retained earnings of the firms and government is valued = ₹ 200 crores

Personal Disposable Income of the household = NNP at FC - value of retained earnings of the firms and government is valued + Value of transfer payments - Personal income taxes

1,200 = 1,900 – 200 + Value of transfer payments – 600

Value of transfer payments = 1,900 - 1,200 + 200 + 600

Value of transfer payments = 100

The value of transfer payments made by the government and firms to the households is ₹ 100 crores.

Net National Product at Factor Cost, NNP at FC = ₹ 850 crores

GDP at MP = ₹ 1,100 crores

Net Factor Income from Abroad, NFIA = ₹ 100 crores

Value of Indirect taxes – Subsidies, NIT = ₹ 150 crores

NNP at FC = GDP at MP + NFIA – NIT - Depreciation

850 = 1,100 + 100 – 150 - Depreciation

Depreciation = 1,100 + 100 – 150 – 850

Depreciation = 200

The aggregate value of depreciation = ₹ 200 crores

The following are the four factors of production:

1. Land: It refers to natural resources like air, water, soil which are freely available. The payment or remuneration made by the firms to use these resources is called rent.
2. Labour: It refers to physical and mental efforts done by labourers to earn income. The remunerations made to labourers are termed as wage.
3. Capital: It refers to monetary investment and physical or tangible investment made in the production process. The payment or remunerations received by the owners of capital is termed as interest.
4. Entrepreneurs: It refers to an individual or organisations that bear the risk to organise and manage the production process. The remuneration paid to entrepreneurs is termed as profit.

The amount, by which the government expenditure exceeds the tax revenue earned by it, is termed by budget deficit.  Symbolically, it can be written as:

Budget deficit = G – T,

Where, G = government expenditure

T = tax revenue earned by government

Trade deficit measures the excess of import expenditure over the export revenue earned by the economy. Symbolically, it can be written as:

Trade deficit = M - X

M = import expenditure

X = export revenue

In the given situation:

The excess of private investment over saving of a country in a particular year was ₹ 2,000 crores, i.e. I – S = 2000 crores and Budget deficit = G – T = - 1,500 crores.

We know that,

M – X = (I – S) + (G – T)

= 2000 + (-1500)

= 500 crores

The volume of trade deficit of that country was ₹ 500 crores.

It is assumed that higher the GDP, higher the economic welfare but it has some limitations:

1. GDP does not consider the composition of output and to measure the actual welfare of the economy composition of GDP needs to be considered.

2. GDP ignores distribution of income. It does not tell us much about living standard of economy.

3. GDP only considered the values which are expressed in monetary terms and ignores the significance of leisure in economic welfare.

4. GDP ignores the cost of environmental pollution.

5. GDP does not take into account how the GDP is being produced and how the increase in it has been brought about i.e. the increase in value of GDP maybe because of inflation or less value of GDP may be because of black money or parallel economy which leads to over or  under reporting of actual GDP.

6. It ignores the national welfare which is measured in non-monetary terms.

7. It also ignores the value of household chores performed by women due to love and affection, which has direct relation to human welfare.

(a) Gross Domestic Product = ₹ 500 crores

(b) NNP at market price = Gross Domestic Product – Depreciation

NNP at market price = 500 – 50 = ₹ 450 crores

(c) NNP at factor cost = NNP at market price – indirect tax (sales tax)

NNP at factor cost = 450 – 30 = ₹ 420 crores

(d) Personal income = NNP at factor cost – Retained Earnings

Personal income = 420 – 220 = ₹ 200 crores

(e) Personal disposable income = Personal income – direct tax

Personal disposable income = 200 – 20 = ₹ 180 crores

Personal Income = Net Domestic Product at factor cost + Net Factor Income from abroad - Undisbursed Profit - Corporate Tax + Interest Received by Households - Interest Paid by Households + Personal Tax

Personal Income = 8000 + 200 - 1000 - 500 + 1500 – 1200 + 300

Personal Income = ₹ 7300 crores

Personal Disposal Income = Personal Income – Personal tax

Personal Disposal Income = 7300 – 500 = ₹ 6800 crores

The three identities of calculating the GDP of a country by the three methods are as follows:

1. Product method or Value added method: This method measures the national income by estimating the contribution of sector i.e. primary, secondary and tertiary sector of economy in an accounting year.

Symbolically, GDP at MP = Gross value added by primary sector + Gross value added by secondary sector + Gross value added by tertiary sector

2. Expenditure Method: This method measures the national income in terms of expenditure made on the purchase of all final goods and services (i.e. gross domestic product) at market price during an accounting year.

Symbolically, GDP at MP = Private final consumption expenditure (C) + final investment expenditure (I) + Government final consumption expenditure (G) + exports (X) – imports (M)

3. Income Method: This method measures the national income by aggregating the factor income accruing to the residents of a country in an economy.

Symbolically, GDP at MP = compensation of employees + operating surplus + mixed income of self-employed + net indirect taxes + depreciation

The value of GDP at MP is identical in all the three cases i.e.  income method, the value added method and the expenditure method.

National Income Ξ National Product Ξ National Expenditure

Where, Ξ sign indicates identity.

It is because what is produced in the economy is either consumed or invested. The product method presents the value added or total production, the income method depicts income earned by all the factors and the expenditure method presents the expenditure incurred on goods and services produced in the economy. In an economy, producer employs four factors of production to produce goods and services and by selling these goods and services receives revenue and thereby pays remuneration to four factors of production. The owners of four factors of production sell their factor services to producers and earn income and the same income then spend on goods and services produce by producers.

Hence, the three methods of calculating national income gives the same value of GDP. The only difference is that in production method national income is calculated at production level, in income method national income is calculated at distribution level and in expenditure method national income is calculated at disposal level.

Planned inventories accumulation: It refers to the inventory that is anticipated and planned by the firm. Suppose: a firm wants to raise inventories from 10 units (existing) to 20 units and expects to sell 100 units during a year. The firm is producing 110 units i.e. 100 units for sales and 10 units for inventory. If at the end of the year the actual sale is only 100 units and the firm ends up with 20 units of inventory which is planned inventories accumulation.

Unplanned inventories accumulation: Firms may experiences unsold stock of goods due to unexpected fall in the sales, this stock is referred as unplanned inventories accumulation. Suppose: a producer produces 110 units i.e. 100 units for sale and 10 units for inventory. At the end of the year, the firm experiences the actual sale of only 60 units and left out with 50 units. This unexpected rise in inventory of 50 units is termed as unplanned inventories accumulation.

The relation between change in inventories and value added of a firm can be understood by the following equation:

Gross value added by firm = Sales + change in inventory – Value of intermediate goods

This equation indicates any positive/negative change in inventories will bring positive/negative change in Gross value of added by the firm.

The differences between stock and capital are as follows:

Between net investment and capital, net investment is flow and capital is stock.

At any point of time, the amount of water available in water tank is an example of stock. It is because this water can be measured with reference to point of time. Similarly, capital can be compared with amount of water in a tank at a point of time because it is also measured at a point of time.

If the water is flowing out of tank through a tap, then the level of water changes over time. Here, the amount of water can be measured with reference to period of time. Thus, it is flow. We can compare net investment with flow of water into a tank because net investment is the change in investment over a period of time.