myCBSEguide

Class 12 - Economics
Methods of Calculating National Income Test - 03

1. Which of the following will you include while estimating national income by expenditure method?
a) Purchase of new car by a household
b) Consumption of fixed capital
c) Net indirect taxes
d) Purchase of raw materials by a producer
2. What will be included in national income by income method?
a) Illegal incomes
b) Imputed rent of owner occupied house
c) Transfer payment
d) Capital gains
3. Which of the following is not included in compensation of employees?
a) Employers' contribution to social security schemes
b) Wages and salaries in kind
c) Employees' contribution to social security schemes
d) Wages and salaries in cash
4. Which of the following is added to national income while calculating personal income?
a) Corporate taxes
b) Transfer payments to individuals
c) Undistributed profits
d) Social security contributions
5. Match the following-:
(a) Transfer Income (i) Gambling
(b) illegal activities (ii) Dividend
(c) Profit (iii) Pension on retirement
(d) Compensation of employees (iv) Old age pensions
To practice more questions & prepare well for exams, download myCBSEguide App. It provides complete study
material for CBSE, NCERT, JEE (main), NEET-UG and NDA exams. Teachers can use Examin8 App to create similar
papers with their own name and logo.
6. In which type of economy, domestic income will be equal to national income?
7. Giving reason state how the given is treated in the estimation of national income: Contribution to provident fund or
insurance premium paid by employees.
8. Is brokerage paid to Real Estate Agents on the sale and purchase of only new (and not the old) houses included in the
estimation of national income?
9. From the following data about firm X, calculate its Gross Value Added at Factor Cost:
Items (Rs. in thousands)
(i) Opening stock 50

(ii) Closing stock 40

(iii) Subsidy 60
(iv) Purchase of intermediate products 450

((v) Sales 750

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

1/6
myCBSEguide

(vi) Purchase of machinery 200

10. Why are net exports included in national income? Explain.
11. Giving reason, explain whether the following are included in domestic product of India.
i. Profits earned by a branch of foreign bank in India.
ii. Payment of salaries to its staff by an embassy located in New Delhi.
iii. Interest received by an Indian resident from its abroad firms.
12. Calculate Net National Product at Market Price.
S.no. Contents (Rs. in arab)

(i) Consumption of Fixed Capital 40

(ii) Change in Stocks (-) 10

(iii) Net Imports 20

(iv) Gross Domestic Fixed Capital Formation 100

(v) Private Final Consumption Expenditure 800

(vi) Net Current Transfer to Rest of the World 5

(vii) Government Final Consumption Expenditure 250

(viii) Net Factor Income to Abroad 40

(ix) Net Indirect Tax 130

13. Calculate GVA at factor cost of a firm:
Items (₹)
(i) Net production taxes 600

(ii) Product taxes 400

(iii) Price per unit of output 10
(iv) Net change in stocks (-) 50

(v) Purchases of raw materials 10000

(vi) Import of raw materials 3000
(vii) Import of machines 20000

(viii) Product subsidies 100

Additional information: Output sold is 2000 units.

14. Calculate Gross Fixed Capital Formation from the following data:
Items (₹ in crore)
(i) Private final consumption expenditure 1,000

(ii) Government final consumption expenditure 500

(iii) Net exports (-) 50
(iv) Net factor income from abroad 20

(v) Gross domestic product at market price 2,500

(vi) Opening stock 300

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

2/6
myCBSEguide
(vii) Closing stock 200
15. Calculate GDPMP and national income:

Particulars (₹) In Crore

(i) Government final consumption expenditure 100

(ii) Opening stock 50
(iii) Gross fixed capital formation 120

(iv) Net factor income from abroad (-) 10

(v) Indirect taxes 60
(vi) Closing stock 80

(vii) Subsidies 10
(viii) Rent, interest and profit 350
(ix) Consumption of fixed capital 20

(x) Private final consumption expenditure 400

(xi) Exports 50
(xii) Imports 40

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

3/6
myCBSEguide

Class 12 - Economics
Methods of Calculating National Income Test - 03

Solution

1. (a) Purchase of new car by a household

Explanation: Purchase of new car by household is final consumption expenditure. Hence, it is to be included while
calculating national income by expenditure method.
2. (b) Imputed rent of owner occupied house
Explanation: Imputed rent of the owner-occupied house is to be treated along with rent as a component of factor
incomes.
3. (c) Employees' contribution to social security schemes
Explanation: Employees' contribution to social security schemes is not included in compensation of employees because
it is paid out of their income.
4. (b) Transfer payments to individuals
Explanation: Transfer payments to individuals
5. (a)-(iv) , (b)-(i) , (c)-(ii) ,(d)-(iii)
6. Closed Economy, as there will be no Net factor income from abroad.
7. No, it is not included in national income because it is paid out of compensation of employees, which is already included.
8. No. Brokerage paid to Real Estate Agents on the sale and purchase of new as well as old houses is included in the
estimation of national income.
Reason: Brokerage relates to payment for services, no matter on new or old houses.
9. Gross Value Added at Factor Cost by firm X
= Sales + Change in stock (Closing stock - Opening stock) - Purchase of intermediate products + Subsidy
= 750 thousand + (40 thousand - 50 thousand) - 450 thousand + 60 thousand
= Rs. 350 thousand.
Therefore GVAfc is equal to Rs. 350 thousand.
10. Net exports represent the excess of exports over imports. The goods exported are a part of domestic product while
imports are not produced within the domestic territory. National income is the sum total of all goods and services i.e. the
domestic product, produced by the residents and net exports shows net domestic product exported which is a part of
domestic product. Therefore, net exports are included in national income.
11. i. As the profits are earned in the domestic territory of India, the profits earned by a branch of the foreign bank in India
will be 'included' in domestic income of India.
ii. Payment of salaries to its staff by an embassy located in New Delhi will 'not be included' in the domestic income of
India, as it is not a part of the domestic territory of India.
iii. As interest received by an Indian resident from its abroad firms is factor income from abroad, it will 'not be included'
in domestic income of India.
12. Calculation of Net National Product at Market Price:
(NNPmp)= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic
Fixed Capital Formation + Change in Stock - Consumption of Fixed Capital + Net Factor Income to Abroad - Net
Imports
NNPmp = 800 + 250 + 100 + (-10) + 40 - 40 - 20
= 1,190 - 70
= Rs. 1120, arab
Using the expenditure method Net National Product at market price comes out to be Rs.1120 arab.

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

4/6
myCBSEguide
13. As per the value-added method,
GVA= value of output - intermediate consumption
Items (₹)

Sales (note 1) 20000

plus: Net change in stocks (-) 50

Value of output 19950

minus: Intermediate consumption (note 2) (-) 10000

(Purchases of raw materials)
GVA at market prices 9950

minus: Net product taxes (note 3) (-) 300

GVA at basic prices 9650

minus: Net production taxes (-) 600

GVA at factor cost 9050

Note:
i. Sales = Output sold × Price per unit = 2000 units × ₹ 10 = ₹ 20000
ii. Import of raw materials is already included in Purchase of raw materials. Import of machines is not included in
intermediate consumption.
iii. Net product taxes = Product taxes - Product subsidies = 400 - 100 = ₹ 300
To practice more questions & prepare well for exams, download myCBSEguide App. It provides complete study
material for CBSE, NCERT, JEE (main), NEET-UG and NDA exams. Teachers can use Examin8 App to create similar
papers with their own name and logo.
14. By expenditure method,
GDP at MP= Consumption expenditure+ investment expenditure+ government expenditure+ net Exports
Gross Fixed Capital Formation
= Gross domestic product at market price - Private final consumption expenditure
- Government final consumption expenditure - Net exports - Change in stock (Closing stock
- Opening stock)
= ₹2,500 crore - ₹1,000 crore - ₹500 crore - (-) ₹50 crore - (₹200 crore - ₹300 crore)
= ₹2,500 crore - ₹1,000 crore - ₹500 crore + ₹50 crore + ₹100 crore
= ₹1,150 crore
Gross fixed capital formation = ₹1,150 crore
15. Calculation of national income by expenditure method:
GDPMP = Government final consumption expenditure + Private final consumption expenditure + Gross domestic capital
formation [Gross fixed capital formation + (Closing stock - Opening stock)] + [Exports – Imports]
= (i) + (x) + (iii) + [(vi) – (ii)] + [(xi – (xii)]
= 100 + 400 + 120 + (80 – 50) + (50 – 40) = 100 + 400 + 120 + 30 + 10
= 660crore
NNPFC = GDPMP – Consumption of fixed capital + Net factor income from abroad – Net Indirect Tax [Indirect taxes –
Subsidies]
= GDPMP – (ix) + (iv) – [(v) – (vii)]
= 660 – 20 + (-10) – (60 – 10) = 660 – 20 – 10 – 50 = 580 crore
Step for calculating national income by expenditure method:

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

5/6
myCBSEguide
Step 1: Identification of economic units incurring final expenditure like household. Consuming sector, firms or
producing sector and government sector.
Step 2: Classification of final expenditure into following category:
a. Government final consumption expenditure (GFCE): The expenditure made by general government on current
expenditure on goods and service like public health, defence, law and order, education, etc.
b. Private final consumption expenditures (PFCE): Private final consumption expenditure is defined as consumption
expenditure by consumer households (Household final consumption expenditure) and private NPISH (Non-profit
Institution serving households) on all types of consumer goods.
c. Gross domestic capital formation: It refers to additions to the physical stock of capital during a period of time. It
includes building ,machinery, Housing construction, construction of factories, etc.
d. Net export (NX): It shows the difference between Domestic spending on foreign goods (i.e., imports) and foreign
spending on domestic goods (i.e., exports). Thus, the difference between exports and imports of a country is called
Net Exports.
Step 3: Measurement of final expenditure on components of GDP. Their sum total gives us value of GDPMP.
GDPMP = 2.1 + 2.2 + 2.3 + 2.4
Step 4: Deduction of depreciation and NIT and addition of NFIA in GDP to get NY, i.e., NNPFC.
NNPFC = GDPMP – Depreciation + NFIA – NIT
Precautions of expenditure method:
a. Avoid intermediate Expenditure: By definition the method includes only final expenditures, i.e. expenditure on
consumption and investment. Like in the value added method, inclusion of intermediate expenditure like that on raw
material, etc. will mean double counting.
b. Do Not Include Expenditure On second Hand Goods And Financial Assets: Buying second hand goods is not a fresh
production activity. Buying financial assets is not a production activity because financial assets are neither goods nor
service services. Therefore, they should not be included in estimation of national income.
c. Include The Self Use Of Own Produced Final Products: For example, a house owner using the house. Although
explicitly he does not incur any expenditure, implicitly he is making payment of rent to himself. Since the house is
producing a service, the imputed value of this service must be included in national income.
d. Avoid Transfer Expenditures: A transfer payment is a payment against which no service are rendered. Therefore no
production takes place. Since no production takes place, that is why it should not be included in national income.
Charities, donations, gifts, scholarships, etc. are some of its examples.

Copyright © myCBSEguide.com. Mass distribution in any mode is strictly prohibited.

6/6