ECONOMICS ASSIGNMENT

SUBMITTED BY: SUBMITTED TO:

Gagandeep Singh Mr. Vivek Chaturvedi
Roll No. B72
Reg. No. 11012935

Note: No assignment shall be catered after the date of submission.

S.no. Topic No.

1 Fill in the blanks.

(a) Personal Income = Private income-undistributed profits of corporations________-Corporate
savings.

(b)Net domestic product at market price ________= Gross Domestic Product at market prices -
Depreciation
(c) personal disposable income________= Personal income- Personal direct taxes- fines.
(d) NNP at factor cost =_NNP at market prices - Indirect taxes + Subsidies.

(e) Gross national product at market price __________= GDP at market price + Net factor
income from abroad.
(f) Net factor income from abroad = Factor income received from abroad – Factor income paid
to abroad.

2 Using the following data, calculate:

(a) GNP at Factor Cost
(b) NNP at Factor Cost
(c) NNP at Market Price
Components Rs. In crores
GNPMP 51,589
Indirect taxes less subsidies 8671
Depreciation 3589
Profits from government enterprises 896
National Debt Interest 629
Transfer payments 864
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 Current transfers from abroad 769
Ans:
(a) GNP at factor cost = GNPmp --- net indirect taxes(indirect tax less subsidies)
GNPfc= 51589-8671= 42898
(b) NNP at factor cost = NNP at market price- net indirect taxes
NNP at market price=GNP at market price – depreciation
NNP at factor cost = 51,589(GNPmp) – 3589(depreciation) – 8671( indirect taxes less subsidies)
= 39329
(c) NNP at market price = GNP at market price – depreciation
NNP at market price = 51,589 – 3589
NNP at market price = 48000

3 State whether true or false.

a) NNP= C+G+X+M. (false).
b) Disposable income includes personal taxes. (false).
c) Value added = Total sales + total expenditure on raw materials and intermediate products -
closing stock of finished and semi-finished gods.( false)
d) GDP= GNP+ Net factor income from abroad. (False).
e) NNPMP=NNPFC+ Indirect taxes - Subsidies.(true).
f) Under product approach, the factors of production used in the production of a product are added
up. (false)
g) The three approaches to national income will all lead to different results.(true)

4 Comment on the following statements in light of your study of income method and expenditure
method of national income measurement.
(a) Income from the sales proceeds of second-hand goods will be included in the national
income under the income method.
Ans: No, income from the sale of second hand goods will not be included in national income
under income method. And this will come under double counting method with no limit to
increase national income.

(b) Government final consumption expenditure under the expenditure method includes
compensation of employees, net purchases of goods and services in the domestic market and net
purchases of goods and services abroad.

Ans: Expenditure method includes only compensation of employees and net purchases of
goods and services from abroad but it does not include net purchases of goods and services
from domestic market. Thus government final consumption expenditure is estimated as the
total expenditure incurred by government for the provision of its various services for
collective consumption.

(c) Corporate tax is a separate entity included in the national income under the income method.

Ans: corporate tax is a separate entity but it is included in national income under the income
method. Because under national factor cost all taxes are included. So corporate tax will
include under it.

(d) Production for self-consumption should be included in the national income under the income
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 method.

Ans: YES, By definition goods produced for self consumption are not sold in the market. So
it is included in the estimation of national income under income method.

(e) Changes in inventories of manufacturing companies will not be included in the national
income under the expenditure method.
Ans: Change in inventory of manufacturing companies is a part change in stock with the
producers. It is a part of inventory investment, and therefore it is a part of national income.

(f)Net exports of goods and services will be included in the national income under the expenditure
method
Ans: YES, net export and services will be included in national income under the expenditure method.
Because under expenditure method export and import of goods plays an important role.
5 What is the impact (if any) on the national income of India in each of the following cases?
a)Shyam receives Rs 5000 as a gift from his father who is also a resident of
India.
Ans: The above situation will not affect the national income because transaction is done between
the father and son there will be no effect on national income. It will come under transfer payment.
b) Aggregate inventories in Indian companies go down by Rs 20,000.
Ans: This statement does not effect on national income because it is a inventory of Indian
company do not contribute anything to national income.
(b) A receives 100 dollars as dividend from a company based in the USA
Ans: It will effect national income because A receives 100 dollar as dividend from a company based
in USA .so it will definitely affect the national income of the country.
d) A sells shares and reaps capital gains worth Rs 1,000. Give reasons for your answer.
Ans: The above equation will not affect national income
f) A teacher teaches her own child
Ans: No the above equation will not affect national income because a teacher teaches her own child and
this will contribute nothing in national income. So it will not include.

7 Suppose capital stock of an economy is worth Rs 200 million and it depreciates at the rate of 10 per cent
per annum. Indirect taxes amount to Rs 30 million, subsidies amount to Rs 15 million. Its GNP at market
prices is Rs 1200 million. Calculate the national income. (NNP at factor cost is termed national income).

ANS: National income(NNPfc ) = NNPmp – net indirect tax (indirect tax – subsidies)
NNPmp = GNPmp – depreciation
NNPmp = 1200 – 20(200*10%)
NNPmp = 1180
NNPfc = 1180 – 15(30 -15)
NNPfc = 1165
8 Calculate national income from the following figures (in Rs crores):
Consumption 200
Depreciation 20
Retained earnings 12
Gross investment 30
Import 40
Provident Fund contributions 25
Exports 50
Indirect business taxes 15
Govt. purchases 60
Personal income Taxes 40
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 If all prices were to double overnight, what would happen to the value of real and nominal GDP per
capita?
ANS: National income(NNPfc) = Consumption + retained earnings +gross investment +provident fund
+exports +govt.purchases – depreciation –imports –indirect business taxes – personal income taxes =262
If all prices were to double overnight then there will no change in real GDP per capita income it will
remain constant but Nominal GDP per capita income will be double.
9 “Per capita income is just an average and is affected by the extreme values. Therefore it cannot be taken as an
indicator of standard of living of people of the country.” Discuss
Ans: Yes it is effected by the extreme value. It cannot be taken as indicator of standard of living
of people of the country because of unequal distribution of income in various sectors.
10 No method of national income accounting is perfect .Critically evaluating the different methods of national
income accounting in the context of this statement.

Ans: INCOME METHOD- An appraisal method, also called the Investment Method, which is
typically used for income producing properties. It converts the income stream produced by the
property into a market value for the property by using a Capitalization .

EXPENDITURE METHOD- The method of calculating domestic product using information on

expenditure by various sectors of the economy, including consumers, investors, and the
government.

PRODUCT METHOD- It is also known as value added method that is use to calculate
the value of output of intermediaries goods

11 Illustrate graphically the circular flow of income and expenditure in a four sector model. Also explain
the leakages and injections in the circular flow of income and expenditure.

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 LEAKAGES AND INJECTIONS.
The first is the Financial Sector that consists of banks and non-bank intermediaries who engage in the
borrowing (savings from households) and lending of money This is a leakage because the saved money
cannot be spent in the economy and thus is an idle asset that means not all output will be purchased.
The injection that the financial sector provides into the economy is investment (I) into the
business/firms sector.
Other is Government Sector that consists of the economic activities of local, state and federal
governments. The leakage that the Government sector provides is through the collection of revenue
through Taxes (T) that is provided by households and firms to the government.
The final sector in the circular flow of income model is the overseas sector which transforms the model
from a closed economy to an open economy. The main leakage from this sector are imports (M), which
represent spending by residents into the rest of the world. The main injection provided by this sector is
the exports of goods and services which generate income for the exporters from overseas residents

12 What is meant by the three identities of national income, national output and national expenditure?
Explain with the help of suitable diagram.
Ans:

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The circular flow of income refers to a simple economic model which shows the flow of income in
an economy. The circular flow of income also show the 3 different methods that National Income
is calculated.

1. National Output. Output is produce by firms.

2. National Income. Firms have to pay workers to produce the output. Therefore income flows
from firms to households.

3. National Expenditure. With wages from work, households can they buy goods produced by
firms. Therefore, the spending goes back to firms.

This represents a simple economic model; it is a closed economy without any government
intervention

National Income Accounting. There are 3 ways to calculate National Income (GDP)

1. National Output
2. National Income
3. National Expenditure

These 3 methods should give the same result (allowing for accounting discrepancies)

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 In the real world it is more complicated

4. The government tax firms and consumers and then spends money

5. Foreign sector. We sell exports abroad and buy imports. Therefore, there is a flow of money
between one country and the rest of the world.

13 Real measure of national Income is NNP, not GDP. Do you agree with this? Give arguments in support
of your point of view.
ANS: Yes real measure of national income is NNP not GDP because NNP comes after
deducting depreciation from GDP