Question 1

Using a suitable example, distinguish between positive externalities and negative externalities. Using a suitable example, distinguish between stock variables and flow variables.

Accepted Answer

Positive externalities are benefits caused by an activity for which no payment is received. For example, construction of a public park increases welfare of people who use it for free. Negative externalities are harms caused by an activity for which no penalty is imposed. For example, industrial pollution reduces welfare of nearby residents.

Stock variables are measured at a point in time and have no time dimension (e.g., wealth, capital). Flow variables are measured over a period of time and have a time dimension (e.g., income, investment). For example, savings is a flow concept (per month/year) while wealth is a stock concept (at a given date).

Question 2

Estimate the value of Nominal Gross Domestic Product (GDP) for a hypothetical economy. The values of Real Gross Domestic Product (GDP) and Price Index are given as Rs. 500 crores and 125 respectively. Giving valid reasons explain, which of the following will not be included in the estimation of National Income of India ? (i) Purchase of shares of Sethi Ltd. by an investor in the Bombay Stock Exchange. (ii) Salaries paid by Indian Embassy situated at Japan, to the local workers. (iii) Depreciation on capital assets charged by firms.

Accepted Answer

Given: Real GDP = Rs. 500 crores, Price Index = 125

Nominal GDP = (Real GDP x Price Index) / 100
= (500 x 125) / 100
= Rs. 625 crores

Question 3

(i) From the following data, calculate the value of Gross National Product at Factor Cost (GNP_FC) : (ii) Distinguish between Rent and Royalty. (i) Calculate the value of 'Net Value Added at Factor Cost' (NVA_FC) using the given data : (ii) Distinguish between 'value of output' and 'value addition'.

Accepted Answer

(i) Using Income Method:
GNP_FC = NDP_FC + NFIA = (COE + Operating Surplus + Mixed Income) + NFIA

From the table:
COE = 12,000
Operating Surplus = Rent & Interest + Profits = 1,800 + 1,500 = 3,300
(Note: Rent and Interest are combined as 1,800)
NDP_FC = 12,000 + 3,300 = 15,300
GNP_FC = 15,300 + NFIA (NFIA value needed from full table)

From the given data, using the relationship:
GNP_FC = NDP_FC + NFIA
Without the complete NFIA value, we use: GNP_FC = GDP_FC + NFIA

(ii) Rent is income from physical property (land, buildings). Royalty is income from intellectual property or subsoil assets (mineral deposits, patents). Rent relates to physical assets; royalty relates to intangible rights.

(iii) NVA_FC = Value of Output - Intermediate Consumption - Depreciation
From the data: NVA_FC can be calculated using the given values.

(iv) Value of Output = Sales + Change in Stock (total market value of goods produced)
Value Addition = Value of Output - Intermediate Consumption (net contribution of enterprise)

Question 4

Calculate the value of Nominal Gross Domestic Product (GDP) for a hypothetical economy. The values of Real Gross Domestic Product (GDP) and Price Index are given as Rs. 1,000 crores and 250 respectively. Giving valid reasons explain, which of the following will not be included in the estimation of National Income in India ? (i) Purchase of shares by an investor in the Bombay Stock Exchange. (ii) Salaries paid to Russians working in Indian Embassy in Russia. (iii) Imputed rent of self occupied houses.

Accepted Answer

Given: Real GDP = Rs. 1,000 crores, Price Index = 250

Nominal GDP = (Real GDP x Price Index) / 100
= (1,000 x 250) / 100
= Rs. 2,500 crores

Question 5

State any two precautions to be adopted while estimating National Income by Income Method. Distinguish between 'Value of Output' and 'Value Addition'.

Accepted Answer

Precautions for Income Method:
1. Transfer incomes (scholarships, pensions, gifts) should not be included as they are not connected with productive activity.
2. Income from sale of second-hand goods should not be included as they were counted in the year of original production.

Difference between Value of Output and Value Addition:
Value of Output = Sales + Change in Stock (market value of all goods produced)
Value Addition = Value of Output - Intermediate Consumption
Value of Output includes intermediate goods consumed in production, while Value Addition shows only the net contribution of the enterprise.

Measurement of National Income

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