Question 1).

What Are The Difficulties Involved In Estimating

National Income ?

Answer :-
There are many difficulties in measuring national income of a country. The difficulties
involved are both conceptual and statistical in nature. Some of the important difficulties are
explained below.

1. Treatment of non-monetary transactions :

In the national income goods and services transected in terms of money are
included. The problem arises with respect to treatment of goods and services not
transacted in terms of money.

2. Transfer income :
National income refers to the earned income of the people. These are in the form of
rent, wages, interest and profits. There are incomes which are received without any
corresponding contribution to the output of goods and services. Such income sre
called as transfer income.

3. Government income :
Government may receive income from its property or services rendered.
Government may earn profit by rendering services in the form of public utilities like
transport, electricity etc.

4. Income from illegal activities :

Income of smugglers, pick pocketers, illicit distiller etc., are not included in the
national income because such incomes are not earned legally.

5. Capital gains :
Capital gains or losses accrue to the owners of capital assets due to changes in their
market prices. They are excluded from the national income because they do not
represent any counterpart increase in the national product.

6. Imputed values :
There are a number of goods and services which do not enter the market to be
transacted such as goods produced and consumed by the farmers, services
rendered by commercial banks and other financial institution to their employees.

7. Inventories :
Changes in inventories are included in GNL. The firms record inventories at their
original costs rather than at replacement costs. Further, the business not maintain
the records of inventories on physical units but in terms of value.
8. Depreciation :
It is also difficult to estimate depreciation correctly. Usually the depreciation is
calculated on the original cost of the assets. Thus, the amount of depreciations may
fall short of the amount needed for the replacement of assets.

9. Problems of estimations in developing countries :

In addition to above problem the national income estimation in developing countries
like India face additional problems due to unorganized and non-monetised sector,
lack of accounting practices of producers.
Question 2). Distinguish between: GNP and GDP .

Answer :-
The distinction between GNP and GDP is gives below :

Sr.no GNP GDP

(1) It is the total money value of goods It is the total money value of goods
and services produced by the and services produced in the
nationals during a given year . domestic territory of a country during
a given year.

(2) The income earned by national It does not include the income eared
whether inside or outside the by the national outside the country.
country is include in GNP.

(3) The part of income produced in the All the income produced in country
country but earned by foreigners is by nationals or foreigners working in
excluded from GNP. the country are included in GDP.

(4) GNP will be larger than GDP if the GDP will be larger than GNP if much
people or firms of a country hold of the income from a country’s
large amounts of the stocks and production flows out of the country,
bonds of firms or governments of i.e., R<P
other countries and derives income
from them, i.e., R>P .

(5) GNP = C+I+G+(X-M)+(R-P) GDP= C+I+G+(X-M)

Question 3). Explain meaning of HDI. Explain the limitations.

Answer :-

Meaning of Human Development Index (HDI)

The HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of country not economic growth alone. The HDI can
also be used to question national policy choices asking how two countries with the same
level of GNI per capita can end up with different human development outcomes. These
contrasts can stimulate debate about government policy priorities.

The Human Development Index (HDI) is a summary measure of achievement in three key
dimensions of human development: A long and healthy life, access to knowledge and a
decent standard of living. The HDI is the geometric means of normalized indices for each of
the three dimensions.

The health dimension is assessed by life expectancy at birth, the education dimension is
measured by mean of years of schooling for adults aged 25 years expected years of
schooling for children of school entering age. The standard of living dimension is measured
by gross national income per capita. The HDI uses the logarithm of income, to reflect the
diminishing importance of income with increasing GNI. The scores for the three HDI
dimension indices are then aggregated into a composite index using geometric mean. Refer
to Technical notes for more details. The HDI simplifies and captures only part of what
human development entails. It does not reflect on inequalities, poverty, human security,
empowerment.

 Limitations of Human Development Index

According to critics the HDI has its limitations, hence it is not sufficiently good measure of
human development. Some these limitations are:

1. It comprises a mixture of stock and flow variables :

HDI value includes adult literacy index and life expectancy at birth index which are
stock variables whereas real per capita GDP and gross enrolment rates are flow
variables. Such combination do not give a correct measurement of progress .

2. Not a comprehensive measure :

The HDI is not in any sense a comprehensive measure of human development. It
does not include important indicators such as respect for human rights, democracy
and inequality. It provides a board view of human development.
3. Conceals wide disparities :
All three dimension measures of human development are averages. This conceals
wide disparities in the overall population. Different social groups have different life
expectancies. There are also wide differences in male and female literacy rates.
Further income is also distributed unevenly.

4. HDI captures only a few of people’s choices :

The HDI index captures a few of people’s choices and leaves out many that people
value highly such as economics, social and political freedom and protection against
violence, insecurity and discriminations.

5. Measures relative human development :

The HDI measures relative rather than absolute human development. Thus if all
countries improve their HDI value at the same rate, the ranking of the countries in
HDI will not change. Thus the low human development countries will not get
recognition for their development efforts.
Question 4). Explain the tradeoff between inflation and
unemployment ?

Answer :-
The Phillips curve is a curve that shows the short run tradeoff between inflation and
unemployment. A. W. Phillips, the British economist conducted a study of the data
pertaining to money wages, inflation and unemployment in the United kingdom for the
period 1861 to1957, his studies led to the conclusion that wages tend to rise when
unemployment low and vice versa from this Phillips analysed the short term relationship
between unemployment and inflation. Phillips showed a negative correlation between the
rate of unemployment and the rate of inflation. He showed that years with low
unemployment tend to have high inflation and years with high unemployment tend to have
low inflation. This correlation arose because low unemployment was associates with high
aggregate demand which in turn raised wages and prices in the economy.

The Phillips curve that explains that tradeoff between inflation and unemployment is shows
on following figure. It shows changes in the rate of inflation and unemployment.
Question5). What is national income . Explain the features of national
income ?

Answer :-

National Income :
National income is a yardstick through which progress of economy is measured. When we
say India is growing at 7 percent, it refers to the growth of national income over and above
the growth of national income over and above the previous year.

National income of a country can be defined as the total market value of all final goods and
services produced in the economy during a given year. Let us understand the concept of
national income with help of following definition by economists.

“ The labour and capital of a country acting on national resources produce annually a certain
net aggregate of commodities in materials including services of all kinds”- Alfred marshall
( British economist , 1842-1924) .

The features of national income :

1. Macro economic concept
The National income is a study of Macro economics concept. It is the aggregate income of
all goods and services produced in a country during a given year. It provides a clear picture
country’s economic performance during a particular year.

2. Flow concept
National income is a flow concept i.e. flow of goods and services produced in the economy
during a year. It varies according to variations in production within the country. National
income flows only if there is productivity activity in the economy.

3. All goods and services

It includes all goods and services produced in the economy they flow from primary ,
secondary and tertiary sectors. Every good and service produced are part of national
income.

4. Final goods and services

Production involves different stages where various types of inputs are used to produces a
final good or services. When you purchase text book for ₹ 100, it includes payment made to
authors, paper, printing, binding, and selling. We cannot take into account all these
payments plus the price of the book this will inflate the value of the book and give us an
inflated value of GDP. If we add value of inputs as well as final good, it Is called as double
counting.
5. Produced during the year

GDP account is related to a given period; that is the financial or calendar year. Products
produced during the earlier year cannot be included in the current year GDP.

6. Within the economy

GDP measures all those goods and services produced within the political boundary of a
country. Goods and services produced within country, either by citizens or foreigners are
included in the GDP of that particular country.

7. Market value

When you ask a farmer about his annual income, if he tells you that his income includes 10
quintals of rice, 2000 coconuts, 75 kgs of vegetables, 25kgs of chillies and 500 liters of milk;
you will be in state of total confusion. On the contrary if the farmer tells you that his annual
income is ₹ 1,25,000 you will have a clear idea about his income. Therefore GDP is not
expressed as an aggregate of all goods and services in physical terms, it is expressed in
terms of money values of all those good and services. India’s GDP in year 2017-2018 was ₹
1,64,38,895 crore.