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Chapter Analysis
Intermediate24 pages • EnglishQuick Summary
The chapter 'National Income Accounting' introduces the fundamental functioning of a simple economy and explores methods for calculating national income, including the product, expenditure, and income methods. It discusses various sub-categories of national income, key concepts such as GDP, GNP, NNP, and the problems with using GDP as a sole indicator of economic well-being. The chapter also explains the circular flow of income and touches on elements like depreciation and externalities impacting economic assessments.
Key Topics
- •Gross Domestic Product (GDP)
- •Net National Product (NNP)
- •Personal Income and Disposable Income
- •Methods of Calculating National Income
- •Depreciation and Investment
- •Price Indices: GDP Deflator, CPI, WPI
- •Externalities and Economic Welfare
- •Circular Flow of Income
Learning Objectives
- ✓Understand different methods of national income accounting.
- ✓Differentiate between GDP, GNP, NNP, and related concepts.
- ✓Analyze the impact of externalities and taxation on national income.
- ✓Calculate personal and disposable income using economic formulas.
- ✓Comprehend the application of real versus nominal GDP.
- ✓Recognize the limitations of GDP as an economic welfare indicator.
Questions in Chapter
What are the four factors of production and what are the remunerations to each of these called?
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Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
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Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.
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What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
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Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP.
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Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was ( – ) Rs 1,500 crores. What was the volume of trade deficit of that country?
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Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation.
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Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?
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From the following data, calculate Personal Income and Personal Disposable Income.
Answer: a) Net Domestic Product at factor cost 8,000, b) Net Factor Income from abroad 200, c) Undisbursed Profit 1,000, d) Corporate Tax 500, e) Interest Received by Households 1,500, f) Interest Paid by Households 1,200, g) Transfer Income 300, h) Personal Tax 500
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Additional Practice Questions
Explain how GDP is calculated using the income method.
mediumAnswer: GDP using the income method is calculated by summing all the incomes received by the factors of production, including wages, profits, rents, and interest.
How does the circular flow of income illustrate a simple economy?
mediumAnswer: The circular flow of income demonstrates the exchanges between households and firms where households provide factors of production and earn incomes which they spend on goods and services produced by the firms.
What role do indirect taxes and subsidies play in determining NNP?
hardAnswer: NNP at factor cost is derived by subtracting indirect taxes and adding subsidies to the NNP at market prices, accounting for government taxation and financial supports.
Discuss the significance of the GDP deflator.
mediumAnswer: The GDP deflator is a price index reflecting the average price level of all finished goods and services included in a country's GDP. It is used to differentiate the nominal GDP from the real GDP, allowing economists to measure inflation.
Describe the difference between real GDP and nominal GDP.
easyAnswer: Nominal GDP is measured at current market prices, while real GDP is adjusted for changes in the price level, providing a more accurate depiction of an economy's growth rate over time.