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National Income Accounting

National income is a measure of the total value of all goods and services produced by a
country's economy within a specific time frame, typically a year.
National income accounting refers to the systematic measurement and recording of the
economic activity within a country's borders over a specific period. It provides a framework
for analyzing and understanding the overall economic performance of a nation.

The purpose of national income accounting is to quantify the total value of goods and services
produced within an economy, as well as the income generated from these economic activities.

Factors of Production
 Factors of production is an economic term that describes the inputs used in the
production of goods or services to make an economic profit.
 These include any resource needed for the creation of a good or service.
 The factors of production are land, labor, capital, and entrepreneurship.

Land As a Factor

Land has a broad definition as a factor of production and can take on various forms, from
agricultural land to commercial real estate to the resources available from a particular piece
of land. Natural resources, such as oil and gold, can be extracted and refined for human
consumption from the land.

Labor As a Factor

Labor refers to the effort expended by an individual to bring a product or service to the
market. Again, it can take on various forms. For example, the construction worker at a hotel
site is part of the labor, as is the waiter who serves guests or the receptionist who enrolls
them into the hotel.

Capital As a Factor

In economics, capital typically refers to money. However, money is not considered part of
the capital factor of production because it is not directly involved in producing a good or
service. Instead, it facilitates the acquisition of things that are considered capital such as
capital goods. As a factor of production, capital refers to the purchase of goods made with
money in production. For example, a tractor purchased for farming is capital. Along the
same lines, desks and chairs used in an office are also capital.

Entrepreneurship: Entrepreneurship involves the organization and coordination of the

other factors of production. Entrepreneurs take risks by investing capital to produce goods
or services with the aim of making a profit. They innovate, make strategic decisions, and
bear the uncertainties associated with business ventures.

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Factor payments refer to the incomes earned by the factors of production for their
contribution to the production process. There are four primary factor payments
corresponding to the four factors of production:

 Rent: This is the income earned by owners of land or other natural resources for the
use of their property in the production process. For example, landowners receive
rent payments from tenants who use the land for farming, commercial activities, or
residential purposes.
 Wages: Wages are payments made to labor for their contribution to production.
Workers receive wages in exchange for their physical or mental efforts in producing
goods or providing services. Wages can vary based on factors such as skill level,
experience, and demand for labor.
 Interest: Interest is the income earned by owners of capital for lending their money
or assets to others. It is the compensation for the use of financial capital in the
production process. For instance, individuals or institutions receive interest
payments on loans, bonds, or savings accounts.
 Profit: Profit is the residual income earned by entrepreneurs or business owners
after deducting all expenses (including rent, wages, and interest) from total revenue.
It represents the return to entrepreneurship and risk-taking in organizing the factors
of production to produce goods or services. Profit serves as a reward for successful
business operations and innovation.

Transfer Payments:

 Transfer payments are payments made by a government to individuals, households,

or other entities without receiving any goods or services in return.
 These payments are typically made to redistribute income or to provide assistance to
individuals or groups in need.
 Transfer payments do not involve a direct exchange of productive inputs or goods
and services.
 Examples of transfer payments include social welfare programs (such as
unemployment benefits, social security payments, and food stamps), subsidies,
grants, and pensions.

The circular flow of income is a fundamental economic concept that illustrates how
money flows through an economy between households and firms (businesses) in a
continuous loop. It shows the interdependence of various economic agents and sectors. The
circular flow model typically involves two main sectors: the household sector and the
business sector.

Here's how the circular flow of income works:

1. Household Sector:

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Households are the primary consumers of goods and services in the economy.
They supply factors of production (land, labor, capital, entrepreneurship) to
businesses in return for factor payments (wages, rent, interest, profit).
 Households spend their income on goods and services produced by
businesses.
2. Business Sector:
 Businesses produce goods and services using the factors of production
supplied by households. They pay factor payments to households in return for
these inputs.
 Businesses sell goods and services to households, generating revenue.

The circular flow model demonstrates two main types of flows:

 Real Flow: This refers to the flow of goods and services between businesses and
households. Businesses supply goods and services to households, while households
provide factors of production to businesses.
 Monetary Flow: This represents the flow of money between households and
businesses. Households receive income from businesses in the form of wages, rent,
interest, and profit. They, in turn, spend this income on goods and services produced
by businesses.

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In the circular flow model, money flows continuously between households and businesses,
creating a cycle of production, income generation, and consumption. This cycle forms the
basis of economic activity in a market economy.

Extensions of the circular flow model can include the government sector, the financial
sector, as well as the external sector. These extensions add complexity to the model but
still revolve around the core concept of income and expenditure flows within the economy.

In a five-sector economy, the circular flow of income model expands upon the basic model by
including additional sectors beyond households and businesses. The additional sectors
typically include the government sector, financial sector, and external sector (foreign trade).
Here's how the circular flow of income works in a five-sector economy:
1. Household Sector:
 Households are the primary consumers of goods and services. They supply
factors of production (land, labor, capital, entrepreneurship) to businesses in
return for factor payments (wages, rent, interest, profit).
 Households also consume goods and services produced by businesses and may
save some of their income.
2. Business Sector:
 Businesses produce goods and services using the factors of production supplied
by households. They pay factor payments to households in return for these
inputs.
 Businesses sell goods and services to households and other sectors, generating
revenue.
3. Government Sector:
 The government collects taxes from households and businesses and provides
goods and services (such as public infrastructure, education, healthcare) in
return.
 The government may also redistribute income through transfer payments (e.g.,
social welfare programs, subsidies) to households and businesses.
4. Financial Sector:
 The financial sector includes banks, financial institutions, and capital markets.
 Households and businesses save money and deposit it in banks, which then lend
it to other households and businesses for investment purposes.
 Financial institutions also facilitate transactions, provide loans, and invest in
various financial assets.
5. External Sector (Foreign Trade):

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 The external sector involves trade with other countries.

 Businesses export goods and services to foreign countries, earning revenue
from exports.
 Businesses and households import goods and services from foreign countries,
paying for imports.
 The balance of trade (exports minus imports) affects the overall flow of income
in the economy.

Leakages and Injections

The concepts of leakages and injections are essential components of the circular flow of
income model, particularly in the context of macroeconomics. They refer to flows of income
into and out of the circular flow, affecting the equilibrium level of economic activity.
1. Leakages:
 Leakages represent any outflows of income from the circular flow. They occur
when individuals, businesses, or the government save rather than spend their
income, or when funds flow out of the domestic economy.
 The three primary forms of leakages are saving, taxes, and imports.
 Saving: When households or businesses save a portion of their income
instead of spending it on consumption or investment, it constitutes a
leakage from the circular flow.

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 Taxes: When the government collects taxes from households and

businesses, it reduces the disposable income available for consumption
or investment, thus acting as a leakage.
 Imports: When domestic consumers and businesses purchase goods and
services from foreign countries, funds flow out of the domestic economy,
constituting a leakage.
 Leakages reduce the total amount of spending in the economy and can lead to a
decrease in the equilibrium level of economic activity.
2. Injections:
 Injections represent any inflows of income into the circular flow. They occur
when funds are added to the circular flow from external sources, such as
investment, government spending, or exports.
 The three primary forms of injections are investment, government spending,
and exports.
 Investment: When businesses invest in capital goods, such as machinery,
equipment, or infrastructure, it adds funds to the circular flow,
stimulating economic activity.
 Government Spending: When the government spends money on goods,
services, or transfer payments, it injects funds into the circular flow,
supporting aggregate demand and economic growth.
 Exports: When domestic producers sell goods and services to foreign
countries, funds flow into the domestic economy from external sources,
constituting an injection.
 Injections increase the total amount of spending in the economy and can lead to
an increase in the equilibrium level of economic activity.

Stock Variable:
 A stock variable represents a quantity measured at a specific point in time.
 It is like a snapshot or a photograph capturing the state of a system at a
particular moment.
 Examples of stock variables include the amount of money in a bank account, the
total population of a country, the quantity of machinery in a factory, or the
inventory level of a product.
Flow Variable:
 A flow variable represents a quantity measured over a period of time.

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 It captures the rate at which something occurs or accumulates over time.

Examples of flow variables include income, expenditure, production,

consumption, investment, or the number of births and deaths per year.
Measurement of National Income

National income, which measures the total value of goods and services produced within a
country's borders over a specific time period, can be measured using various methods. Here
are some of the common methods:
1. Income Approach:
 This method calculates national income by summing up all the incomes earned
by individuals and businesses within the country during a given time period.
 It includes wages and salaries, rents, profits, interest, and other forms of income.
 The income approach is particularly useful for countries with well-established
financial systems and reliable data on incomes.
2. Production or Output Approach:
 This method calculates national income by summing up the total value of goods
and services produced within the country during a given time period.
 It measures the contribution of each sector of the economy (such as agriculture,
manufacturing, and services) to the overall output.
 The production approach is often used in conjunction with the value-added
method, where the value added at each stage of production is summed up to
avoid double counting.
3. Expenditure Approach:
 This method calculates national income by summing up all expenditures on final
goods and services produced within the country during a given time period.
 It includes consumption expenditure, investment expenditure, government
expenditure on goods and services, and net exports (exports minus imports).
 The expenditure approach is based on the principle that total expenditure in the
economy must equal total income.

GDP,GNP,NDP,NNP

Gross Domestic Product (GDP), Net Domestic Product (NDP), Gross National Product (GNP),
and Net National Product (NNP) are all key measures used in economics to gauge the

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economic performance of a country. They differ in their scope and the adjustments made to
account for various factors. Here's what each term means:
1. Gross Domestic Product (GDP):
 GDP measures the total value of all goods and services produced within the
borders of a country during a specific period, typically a year or a quarter.
 It includes all final goods and services produced for consumption, investment,
government spending, and net exports (exports minus imports).
 GDP provides an indication of the size and health of a country's economy.
2. Net Domestic Product (NDP):
 NDP is similar to GDP but adjusts for depreciation (or the wear and tear on
capital goods) over the accounting period.
 It is calculated by subtracting depreciation from GDP.
 NDP gives a more accurate picture of the net output or income generated within
the country after accounting for the replacement of depreciated capital.
3. Gross National Product (GNP):
 GNP measures the total value of all goods and services produced by the
residents (citizens and businesses) of a country, regardless of where they are
located.
 It includes GDP plus net income from abroad (such as wages, profits, and
interest) earned by domestic residents minus net income earned by foreign
residents within the country.
 GNP reflects the overall economic output generated by the citizens and
businesses of a country, whether domestically or abroad.
4. Net National Product (NNP):
 NNP is similar to NDP but takes into account the net income earned from
abroad.
 It is calculated by subtracting depreciation from GNP.
 NNP provides a measure of the net output or income generated by the citizens
and businesses of a country after accounting for both depreciation and net
income earned from abroad.
Consumer Goods, Intermediate goods and Capital Goods
Consumer goods, intermediate goods, and capital goods are categories used to classify
different types of goods produced and used within an economy. Each category serves a
distinct purpose and plays a specific role in the production and consumption process:

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1. Consumer Goods:
 Consumer goods are products that are purchased by individuals or households
for direct consumption or personal use to satisfy their wants and needs.
 These goods are the final output of the production process and are intended for
immediate use or consumption.
 Examples of consumer goods include food, clothing, electronics, automobiles,
household appliances, and personal care products.
2. Intermediate Goods:
 Intermediate goods are products used as inputs in the production of other goods
and services rather than being sold directly to consumers.
 These goods are used up or transformed during the production process and do
not retain their identity in the final product.
 Intermediate goods are typically purchased by businesses for use in further
production or by wholesalers for resale.
 Examples of intermediate goods include raw materials, components, parts, and
semi-finished products used in manufacturing processes.
3. Capital Goods:
 Capital goods are durable goods that are used by businesses to produce other
goods and services rather than being consumed directly by individuals.
 These goods are used to create wealth and increase productivity by facilitating
the production of consumer goods and services.
 Capital goods include machinery, equipment, tools, buildings, infrastructure,
and other long-lasting assets used in production processes.
 Unlike consumer goods, capital goods are not consumed in the short term but
contribute to future production and economic growth through their productive
capacity.

Tax Vs Subsidy
Tax: A tax is a mandatory financial charge or levy imposed by a government on individuals
or entities to fund public expenditures and government operations. Taxes are typically
enforced by law and collected by government agencies. They serve various purposes,
including revenue generation, income redistribution, and influencing economic behavior.
Subsidy: A subsidy is a financial assistance or support provided by a government to specific
industries, activities, or groups to promote certain behaviors, correct market failures, or
achieve policy objectives. Subsidies can take the form of direct payments, tax breaks, or other
incentives designed to encourage the production, consumption, or investment in particular
goods or services.

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Factor Cost, Basic Price and Market Price

Factor cost, basic price, and market price are terms used in national income
accounting to represent different stages of pricing and income generation within an
economy. Here's what each term means:
1. Factor Cost:
 Factor cost refers to the total amount of income earned by factors of production
(land, labor, capital, entrepreneurship) for their contribution to the production
process.
 It includes payments made to factors of production in the form of wages, rent,
interest, and profit.
 Factor cost represents the cost incurred by producers to employ factors of
production and does not include indirect taxes or subsidies.
2. Basic Price:
 Basic price = Factor Cost + Production Taxes paid by producers – Production
Subsidies received by them
 For example if a company XYZ pays 1 lakh excise duty (production tax) and
receives 50000 subsidy from the government for producing electric vehicles, its
Basic Price = Factor Cost + 100000 - 50000
3. Market Price:
 Market price refers to the price at which goods and services are bought and sold
in the marketplace.
 It represents the actual price paid by consumers for goods and services,
including all taxes and subsidies.
 Market Price = Basic Price + Product Taxes – Product Subsidies
 Market Price = Factor Cost + Production Taxes + Product Taxes – Production
Subsidies – Product Subsidy = Factor Cost + Net Indirect Taxes

In India, the term "National Income" typically refers to Net National Income at Factor
Cost (NNI FC).
Real GDP and Nominal GDP

Real GDP and Nominal GDP are both measures of a country's economic output, but they differ
in how they account for changes in prices over time. Here's a breakdown of each:
1. Nominal GDP:
 Nominal GDP measures the total value of all final goods and services produced
within a country's borders during a specific period, typically a year or a quarter.

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 It is calculated using current market prices without adjusting for inflation or

changes in price levels.
2. Real GDP:
 Real GDP also measures the total value of all final goods and services produced
within a country's borders during a specific period, but it adjusts for changes in
price levels over time.
 Real GDP is calculated by using constant prices from a base year, which
eliminates the effects of inflation or deflation.
 By removing the influence of price changes, real GDP provides a more accurate
measure of the volume or quantity of goods and services produced in an
economy.
 Real GDP is often used to compare economic performance over time because it
reflects changes in output that are not merely due to changes in prices.

GDP Deflator
The GDP deflator is a measure of the price level of all goods and services included in gross
domestic product (GDP). It's essentially a ratio of nominal GDP to real GDP multiplied by 100.
The GDP deflator is calculated using the formula:
GDP Deflator=Nominal GDPReal GDP×100GDP Deflator=Real GDPNominal GDP×100
The GDP deflator reflects changes in the overall level of prices within an economy over time.
If the GDP deflator increases, it indicates that, on average, the prices of goods and services
have increased from the base year to the current year, which implies inflation. Conversely, if
the GDP deflator decreases, it suggests that, on average, prices have decreased, indicating
deflation.
The GDP deflator is a broader measure of inflation compared to consumer price index (CPI)
or wholesale price index (WPI) because it reflects changes in prices across all sectors of the
economy, not just specific baskets of goods and services consumed by households or
producers. As a result, it provides a comprehensive view of overall price movements within
an economy and is often used to compare inflation rates over time.

GDP Vs GVA
GDP (Gross Domestic Product) and GVA (Gross Value Added) are two key metrics used to
measure the economic performance of a country, but they focus on slightly different aspects.
1. GDP (Gross Domestic Product):
 GDP measures the total monetary value of all goods and services produced
within a country's borders within a specific time period, typically annually or
quarterly.

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2. GVA (Gross Value Added):

 GVA measures the contribution to the economy of each individual producer,
industry, or sector.
 It represents the value created by a company, industry, or sector in the
production process, excluding any costs associated with inputs (like raw
materials and services) that have been used up in the production process.
 GVA provides a more detailed picture of the economy than GDP because it
allows policymakers and analysts to see which sectors are driving economic
growth and where value is being added.

GDP measurement in India

In India, National Statistical Office under Ministry of Statistics and Program Implementation,
does the estimation of GDP.

It releases estimates quarterly, half yearly, 9 monthly and yearly.

Some sample Official Estimates are listed below:

Govt publishes 2 data sets :

1. GVA @ Basic prices reflecting data from production /supply side

2. GDP @ Market prices reflecting data from consumption/demand side

GDP = GVA + Product Taxes – Product Subsidies

The data are also published @ constant prices reflecting Real GVA/GDP and @ current prices
reflecting Nominal GVA/GDP

In GDP Estimates we can find the following :

PFCE – Private Final Consumption Expenditure – measures final consumption expenditure

by all households. This is the major component.
GFCE – Government Final Consumption Expenditure – measures total consumption
expenditure by the Government
GFCF – Gross Fixed Capital Formation – measures investment expenditure by both private
and government sectors.
Changes in Stocks (CIS) – measures addition in inventory levels in the said period
Imports – total expenditure towards imported goods (by households, private and
government sectors)
Exports – total expenditure by foreigner country’s towards goods produced in India
Discrepancies – errors in measurement

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Economic Growth Vs Economic Development

Economic growth and economic development are related but distinct concepts in economics.
Economic Growth refers to the increase in a country's production of goods and services over
time. It is often measured by the growth rate of a country's Gross Domestic Product (GDP) –
the total value of all goods and services produced within a country's borders. Economic
growth is typically quantified by changes in GDP over specific periods, such as quarterly or
annually. It indicates the expansion of the economy's capacity to produce goods and services.
Economic Development, on the other hand, encompasses a broader set of criteria beyond
just the increase in GDP. It refers to improvements in the standard of living, well-being, and
quality of life for the population of a country. Economic development considers various
aspects such as education, healthcare, infrastructure, income distribution, social welfare,
environmental sustainability, and political stability.
While economic growth is a necessary condition for economic development, it is not a
sufficient condition. A country can experience economic growth without significant
improvements in the well-being of its citizens. For example, if economic growth is not
inclusive and benefits only a small segment of the population, or if it causes environmental
degradation or social unrest, it may not contribute to overall economic development.

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Indicators of Economic Development

Indices released by UNDP
HDI, IHDI, PHDI, GII, GDI, GSNI, MPI

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 a country, not economic growth alone.
The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development: a long and healthy life, being knowledgeable and having
a decent standard of living.
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 and more and 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 can 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 HDI simplifies and captures only part of what human development entails. It does not
reflect on inequalities, poverty, human security, empowerment, etc.

HDI Dimensions and Indicators

INEQUALITY-ADJUSTED HUMAN DEVELOPMENT INDEX (IHDI)

IHDI adjusts the Human Development Index (HDI) for inequality in the distribution of each
dimension across the population.

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The IHDI accounts for inequalities in HDI dimensions by “discounting” each dimension’s
average value according to its level of inequality. The IHDI value equals the HDI value when
there is no inequality across people but falls below the HDI value as inequality rises. In this
sense, the IHDI measures the level of human development when inequality is accounted for.
PLANETARY PRESSURES–ADJUSTED HUMAN DEVELOPMENT INDEX (PHDI)
PHDI discounts the HDI for pressures on the planet to reflect a concern for intergenerational
inequality, similar to the Inequality-adjusted HDI adjustment which is motivated by a
concern for intragenerational inequality. It is computed as the product of the HDI and (1 –
index of planetary pressures) where (1 – index of planetary pressures) can be seen as an
adjustment factor.
PHDI is the level of human development adjusted by carbon dioxide emissions per person
(production-based) and material footprint per capita to account for the excessive human
pressure on the planet. It should be seen as an incentive for transformation. In an ideal
scenario where there are no pressures on the planet, the PHDI equals the HDI. However, as
pressures increase, the PHDI falls below the HDI. In this sense, the PHDI measures the level
of human development when planetary pressures are considered.
GENDER DEVELOPMENT INDEX (GDI)
GDI measures gender inequalities in achievement in three basic dimensions of human
development: health, measured by female and male life expectancy at birth; education,
measured by female and male expected years of schooling for children and female and male
mean years of schooling for adults ages 25 years and older; and command over economic
resources, measured by female and male estimated earned income.
GENDER INEQUALITY INDEX (GII)
GII reflects gender-based disadvantage in three dimensions— reproductive health,
empowerment and the labour market—for as many countries as data of reasonable quality
allow. It shows the loss in potential human development due to inequality between female
and male achievements in these dimensions. It ranges from 0, where women and men fare
equally, to 1, where one gender fares as poorly as possible in all measured dimensions.

Dimensions and Indicators

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Gender Social Norms Index (GSNI)

Gender bias is a pervasive problem worldwide. The Gender Social Norms Index
(GSNI) quantifies biases against women, capturing people’s attitudes on
women’s roles along four key dimensions: political, educational, economic and
physical integrity.

Multidimensional Poverty Index (MPI)

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MPI Dimensions and Indicators

Annex: The dimensions, indicators, deprivation cutoffs, and

weights of the global Multidimensional Poverty Index

Dimensions of Indicator Deprived if living in the household where… Weight

Poverty
Health Nutrition Any adult under 70 years of age or any child for whom there is 1/6
nutritional information is undernourished. 1
Child Any child under the age of 18 years has died in the family in 1/6
mortality the five-year period preceding the survey.2,3
Education Years of No household member aged ‘school entrance age + six4 years 1/6
schooling or older has completed at least six years of schooling.
School Any school-aged child is not attending school up to the age at 1/6
attendance which he/she would complete class eight. 5
Standard of Cooking The household cooks with dung, wood, charcoal or coal. 1/18
living Fuel
Sanitation The household’s sanitation facility is not improved (according 1/18
to SDG guidelines) or it is improved but shared with other
households.6
Drinking The household does not have access to improved drinking 1/18
Water water (according to SDG guidelines) or improved drinking
water is at least a 30-minute walk from home, round trip. 7
Electricity The household has no electricity.8 1/18
Housing At least one of the three housing materials for roof, walls and 1/18
floor are inadequate: the floor is of natural materials and/or
the roof and/or walls are of natural or rudimentary materials. 9

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Assets The household does not own more than one of these assets: 1/18
radio, television, telephone, computer, animal cart, bicycle,
motorbike or refrigerator, and does not own a car or truck. 10

Green GDP
Green Gross Domestic Product (GDP) is a concept that adjusts traditional GDP calculations to
account for environmental sustainability and natural resource depletion. While GDP
measures the total market value of goods and services produced within a country's borders,
Green GDP seeks to incorporate the environmental costs associated with economic activities
into the calculation.

Genuine Progress Indicator (GPI)

Genuine Progress Indicator (GPI) measures the economy holistically by considering

economic indicators that the GDP doesn't. For example, it accounts for negative externalities,
such as pollution and crime, and other social breakdowns that compromise the economy and
the welfare of the people it serves.

Gross National Happiness Index (GNHI)

The Gross National Happiness (GNH) Index is a holistic measure of well-being and progress
that was developed in Bhutan. Unlike traditional economic indicators like Gross Domestic
Product (GDP), which focus solely on economic output, the GNH Index considers various
dimensions of well-being, including psychological well-being, health, education, time use,
cultural diversity, good governance, community vitality, ecological diversity, and living
standards.

The GNH Index is based on the four pillars of GNH:

1. Sustainable and equitable socio-economic development: This pillar emphasizes the
importance of economic development that is sustainable and inclusive, addressing
poverty and inequality while ensuring environmental sustainability.
2. Conservation of the environment: GNH recognizes the intrinsic value of nature and
promotes conservation efforts to protect the environment and natural resources for
current and future generations.
3. Preservation and promotion of culture: Cultural heritage and traditions are integral to
Bhutanese society, and the GNH Index considers efforts to preserve and promote
cultural identity as essential for well-being.
4. Good governance: Effective governance, transparency, and accountability are crucial
for ensuring the well-being of citizens and fostering trust in institutions.

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PYQs
1. Economic growth in country X will necessarily have to occur it (2013)
(a) there is technical progress in the world economy
(b) there is population growth in X
(c) there is capital formation in X
(d) the volume of trade grows in the world economy
Answer- c
a and d statement does not say anything about the country X, only the general world
economy. In b, if there is population growth without any avenues for the economy to absorb
them, it will have a deteoriarating effect. c is the most appropriate option, as whenever there
is capital formation in country it will lead to growth.

2. The national income of a country for a given period is equal to the (2013)
(a) total value of goods and services produced by the nationals
(b) sum of total consumption and investment expenditure
(c) sum of personal income of all individuals
(d) money value of final goods and service produced
Answer- a
NNP at factor cost ≡ National Income (NI) so A is the best option. No other option mentions
Nationals.

3. In the 'Index of Eight Core Industries', which one of the following is given the highest
weight? (2015)
(a) Coal production
(b) Electricity generation
(c) Fertilizer production
(d) Steel production
Answer- b
Core industries account for 38 % in IIP. Electricity with 10.3% has the highest weight among
core industries viz. coal, fertilizer, electricity, crude oil, natural gas, refinery product, steel,
and cement.

4. With reference to Indian economy, consider the following statements:

1. The rate of growth of Real Gross Domestic Product has steadily increased in the last decade.

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2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last
decade.
Which of the statements given above is/are correct? (2015)
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer- b
Rate of growth of Real Gross Domestic Product has fluctuated a lot during the last decade and
decreased significantly in 2008-09 due to global financial crisis. Gross Domestic Product at
market prices (in rupees) has increased and did not show a declining treand even once during
the last decade as clearly seen from the planning commission data

5. Increase is absolute and per capital real GNP do not connote a higher level of economic
development, if (2018)
(a) industrial output fails to keep pace with agricultural output.
(b) agricultural output fails to keep pace with industrial output.
(c) poverty and unemployment increase.
(d) imports grow faster than exports.
Answer- c
An essential aspect of development is to enable the maximum number to experience the fruits
of development. Concepts of per capita income (per capita GDP or per capita NSDP) are not
able to capture this aspect of development.
There may be a case wherein increase in absolute and per capita GNP is reflective of growth
in income of a small section of society and that majority of the population is poverty stricken
and unemployed. Multi -dimensional non -monetary social indicators are better reflectors of
overall economic development in the society.

6. Consider the following statements: Human capital formation as a concept is better

explained in terms of a process which enables
1. individuals of a country to accumulate more capital.
2. increasing the knowledge, skill levels and capacities of the people of the country.
3. accumulation of tangible wealth.
4. accumulation of intangible wealth.
Which of the statements given above is/are correct? (2018)
(a) 1 and 2
(b) 2 only
(c) 2 and 4
(d) 1, 3 and 4
Answer- c
Human capital formation indicates, “the process of acquiring and increasing the number of
persons who have the skills, education and experience which are critical for the economic
and the political development of the country.
Human capital formation is thus associated with investment in man and his development as
a creative and productive resource.” Hence, statement 1 is correct.

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Intangible wealth consists of factors such as the trust among people in a society, an efficient
judicial system, clear property rights, effective government, and good education system etc.
Human capital formation enables accumulation of intangible wealth. Hence, statement 4 is
correct.

7. Despite being a high saving economy, capital formation may not result in significant
increase in output due to (2018)
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio
Answer- d
Capital formation means increasing the stock of real capital in a country. In other words,
capital formation involves making of more capital goods such as machines, tools, factories,
transport equipment, materials, electricity, etc., which are all used for future production of
goods. For making additions to the stock of Capital, saving and investment are essential.
Capital output ratio is the amount of capital needed to produce one unit of output. For
example, suppose that investment in an economy, investment is 32% (of GDP), and the
economic growth corresponding to this level of investment is 8%. Here, a Rs 32 investment
produces an output of Rs 8. Capital output ratio is 32/8 or 4. In other words, to produce one
unit of output, 4 unit of capital is needed.
Hence, if the capital-output ratio is high, there will not be significant increase in output
despite high savings and investment.

8. Which of the following activities constitute real sector in the economy?

1. Farmers harvesting their crops
2. Textile mills converting raw cotton into fabrics
3. A commercial bank lending money to a trading company
4. A corporate body issuing Rupee Denominated Bonds overseas
Select the correct answer using the code given below: (2022)
(a) 1 and 2 only
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2, 3 and 4
Answer – a
The real sector of an economy is the key section as activities of this sector persuade economic
output and is represented by those economic segments that are essential for the progress of
GDP of the economy. For instance, farmers harvesting their crops or textile mills converting
raw cotton into fabrics ensure increase of economic output and in turn progress of GDP. The
sector is crucial for the sustainability of the economy because of its productive capability to
meet nations’ aggregate demand. Hence statements 1 and 2 are correct.
On other hand, the financial sector is a section of the economy made up of firms and
institutions that provide financial services to commercial and retail customers. The financial
sector generates a good portion of its revenue from loans and mortgages. This sector
comprises a broad range of industries including banks, investment companies, insurance
companies, and real estate firms. Thus, a commercial bank lending money to a trading

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company or a corporate body issuing rupee denominated bonds overseas constitute financial
sector activities and not real sector activities. Hence statements 3 and 4 are not correct.

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