National Income

Question 1

When was NIC established?

Answer 1

National Income Committee was established in 1949

Question 2

Define national income

Answer 2

National income is the flow of goods and services produced in an economy during a year.

Question 3

Define National Income by NIC

Answer 3

According to NIC, a national estimate measures the volume of commodities and services turned out during a given period counted without duplication.

Question 4

Members of NIC in 1949

Answer 4

The national income committee was appointed in august 1949 with Prof. P.C. Mahalanobis as Chairman, Prof. D.R.Gadgil and Dr. V.K.R.V Rao as members

Question 5

Who publishes data on national income?

Answer 5

The Central Statistical Organisation compiles and publishes data on national income and allied aggregates every year

Question 6

Features of National Income

Answer 6

1. Value of only final goods and services
2. Flow concept
3. Financial year
4. Money value
5. Macro economic concept
6. Net aggregate value
7. Net income from abroad

Question 7

Value of only final goods and services

Answer 7

In order to avoid double counting, the value of only final goods and services is considered in national income. the value of intermediate goods or raw material is not considered.
For eg: while estimating the production of shirts, there is no need to take the value of cotton, as it is already included in the price of the shirt

Question 8

Flow concept

Answer 8

National income is a flow concept as it shows the flow of goods and services produced in an economy during a year

Question 9

Financial year

Answer 9

National income is always expressed with reference to a time period.
In india, it is from 1st april to 31st march

Question 10

Money value

Answer 10

National income is always expressed in monetary terms. it represent only those goods and services which are exchanged for money.

Question 11

Macro economic concept

Answer 11

National income represents income of the economy as a whole rather than that of an individual.
Hence it is a macro economic concept

Question 12

Net aggregate value

Answer 12

Nationa income includes net values of goods and services produced and does not include depreciation cost

Question 13

Net incomes from abroad

Answer 13

National income includes net income from abroad i.e difference between export value and import value and net difference between receipts from abroad and payments made abroad

Question 14

Product flows

Answer 14

The factors of production flow from households to firms. The firms use these to produce goods and services required by the households. Thus goods flow from hoseholds to firms and from firms to households. This is called product flows

Question 15

Money flows

Answer 15

In the same way, money flows from firms to househholds in the form of rent, wages, interest and profits. The households use this income to ourchase goods and services. Hence money flows from firms to households and from households to firms. This icalled as money flows

Question 16

Why is the flow of income circular?

Answer 16

In the circular flow of income, production generates factor income which is converted into expenditure. This flow of income continues as production is a continuous activity due to never ending human wants. This makes the flow circular.

Question 17

Circular flow of income

Answer 17

1. Basic concept of macroeconomics
2. Refers to the process whereby an economy’s money receipts and payment flow in a circular manner continuously through time.

Question 18

Name the sectors

Answer 18

1. Two sector economy( households and firms)
   Y=C+I
2. Three sector economy( households, firms and government sector)
   Y=C+I+G
3. Four sector economy ( Households, firms, government sector and foreign sector)
   Y=C+I+G+(X-M)

Question 19

Output method

Answer 19

This method of measuring national income is also known as product method or inventory method.
This method approaches national income from the output side. According to this method, the economy is divided into different sectors, such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services. The output or product method is followed either by valuing all the final goods and services, produced during a year, at their market price or by adding up all the values at each higher stage of production, until these products are turned into final products.
While using this method utmost care must be taken to avoid multiple or double counting. To avoid double counting this method suggests two alternative approaches for the measurement of GNP.

Question 20

Final goods approach

Answer 20

Final goods are those goods which are ready for final consumption.
According to this approach, value of all final goods and services produced in primary, secondary and tertiary sector are included and the value of all intermediate transactions are ignored. Intermediate goods are involved in the process of producing final goods, that is, the final flow of output purchased by consumers. Hence, the value of final output includes the value of intermediate products.
For example, the price of bread includes, the cost of wheat, making of flour, etc., wheat and flour are both intermediate goods. Their values are paid up during the process of production. In the final product i.e. bread, the values of intermediate goods are already included.
Thus, a separate accounting of the values of intermediate goods, along with the accounting of the value of final product, would mean double counting. To avoid this, the value of only the final product or goods must be computed.

Question 21

Value added approach

Answer 21

In order to avoid double counting value added approach is used.
According to this approach, the value added at each stage of the production process is included. The difference between the value of final outputs and inputs, at each stage of production is called the value added. Thus, GNP is obtained as the sum total of the values added by all the different, stages of the production process, till the final output is reached in the hands of consumers, to meet the final demand

Question 22

Precaution in output method

Answer 22

1. The value of only goods should be considered
2. Depreciation of capital assets should be deducted
3. Indirect taxes should be deducted and subsidies given by gov should be added
4. Goods for self consumption should be estimated and added
5. Second hand goods sale should be ignored
6. Changes in price level should be considered
7. Value of imports should be deducted and value of exports should be added

Question 23

Income method

Answer 23

This method of measuring national income is also known as factor cost method. This method estimates national income from the distribution side. According to this method, the income payments received by all citizens of a country, in a particular year, are added up, that is, incomes that accrue to all factors of production by way of rents, wages, interest and profits are all added together, but income received in the form of transfer payments are ignored. The data pertaining to income are obtained from different sources, for instance, from income tax returns, reports, books of accounts, as well as estimates for small income.
GNP can be treated as the sum of factor incomes, earned as a result of undertaking economic activity, on the part of resource owners and reflected in the production of the total output of goods and services during any given time period.
Thus, GNP, according to income method, is calculated as follows:
NI = Rent + Wages + Interest + Profit + Mixed Income + Net income from abroad.
NI = R + W + I + P + MI + (X–M)

Question 24

Precautions for income method

Answer 24

Transfer incomes or transfer payments like scholarships, gifts, donations, charity, old age pensions, unemployment allowance etc., should be ignored.
2) All unpaid services like services of a housewife, teacher teaching her/his child, should be ignored.
3) Any income from sale of second hand goods like car, house etc., should be ignored.
4) Income from sale of shares and bonds should be ignored, as they do not add anything to the real national income.
5) Revenue received by the government through direct taxes, should be ignored, as it is only a transfer of income.
6) Undistributed profits of companies, income from government property and profits from public enterprise, such as water supply,
should be included.
7) Imputed value of production kept for selfconsumption and imputed rent of owner occupied houses should be included

Question 25

Expenditure method

Answer 25

This method of measuring national income is also known as Outlay Method.According to this method, the total expenditure incurred by the society, in a particular year, is added together. Income can be spent either on consumer goods or on capital goods. Thus, we can get national income by summing up all consumption expenditure and investment expenditure made by all individuals, firms as well as the government of a country during a year.
NI = C + I + G + (X–M) + (R–P)

Question 26

Private Final Consumption Expenditure

Answer 26

Private Final Consumption Expenditure (C) by households on non-durable goods, such as food, which are used immediately; expenditure on durable goods such as car, computer, television set, washing machine etc., which are generally used for a longer period of time; and expenditure on services like transport services, medical services, etc

Question 27

Gross domestic private investment expenditure

Answer 27

It refers to expenditure made by private businesses on replacement, renewals and new investment (I)

Question 28

Government final consumption and investment expenditure(G)

Answer 28

Government’s final consumption expenditure refers to the expenditure incurred by government on various administrative services like, law and order, defence, education, health etc.
Government’s investment expenditure refers to the expenditure incurred by government, on creating infrastructural facilities like
construction of roads, railways, bridges, dams, canals, which are used by the business sector for production of goods and services in any economy (G).

Question 29

Net exports(X-M)

Answer 29

It refers to the difference between exports and imports of a country during the period of one year

Question 30

Net receipts

Answer 30

It refers to the difference between expenditure incurred by foreigners on domestic goods and services(R) and expenditure incurred by residents abroad on foreign goods and services(P)

Question 31

Precautions in expenditure method

Answer 31

Expenditure on all intermediate goods and services should be ignored, in order to avoid double counting.
2) Expenditure on the repurchase of second hand goods, should be ignored, as it is not incurred on currently produced goods.
3) Expenditure on transfer payments like scholarships, old age pensions, unemployment allowance etc., should be ignored.
4) Expenditure on repurchase of financialassets such as shares, bonds, debentures etc., should not be included, as such transactions do not add to the flow of goods and services.
5) Indirect taxes should be deducted.
6) Expenditure on final goods and services should be included.
7) Subsidies should be included

Question 32

Valuation of inventories

Answer 32

Raw materials, intermediate goods, semi-finished and
finished products in the stock of the producers are known as inventories. Any mistake in measuring the value of inventory,
will distort the value of the final production of the producer. Therefore, valuation of inventories requires careful assessment

Question 33

Illiteracy and ignorance

Answer 33

Due to ignorance and illiteracy, small producers do not keep an account of their production. So they cannot give information about the quantity or value of their output.

Question 34

Problem of double counting

Answer 34

The greatest difficulty in calculating national income is of double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. For example, flour used by a bakery is an intermediate product and that by a household is final product

Question 35

Capital gains and losses

Answer 35

Capital gainsor capital losses, which accrue to the property owners by increase or decrease in the market value of their capital assets or changes in demand, are not included in the national income because these changes do not result from current economic activities.

Question 36

inadequate and unrealiable data

Answer 36

Adequate and correct data on production and cost data relating to crops, fisheries, animal husbandry, forestry, construction workers, small enterprises etc., are not available in a developing country. Besides this, data on unearned incomes, consumption and investment expenditure of rural and urban population are also not available. This does not reveal the actual size of national income

Question 37

Depreciation

Answer 37

Depreciation refers to wear and tear of capital assets, due to their use in the process of production. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. Thus, it is difficult to make correct deductions for depreciation

Question 38

Difficulties in the classification of working population

Answer 38

In India, working population is not clearly defined. For instance, farmers in India are not engaged in agriculture round the year. Obviously, in the off season, they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes from a particular occupation.

Question 39

Existence of non-monetized sector

Answer 39

In India, especially in rural areas, there exists the non-monetized sector. Agriculture, still being in the nature of subsistence farming, a major part of production is partly exchanged for other goods and services. It is excluded while counting national income.