CHAPTER 4 - - - MEASURMENT OF NATIONAL INCOME

VALUE ADDED METHOD / product method / output

method

FORMULA –
Value of output - intermediate consumption = GDPmp / GVAmp

OR

Sales + self consumption + change in stock – intermediate consumption =

GDPmp / GVAmp

OR

Domestic sales +self consumption + exports – domestic purchases – imports

+ change in stock = GDPmp / GVAmp

NOTE;

Change in stock = closing stock – opening stock

Addition to stock means change in stock will be added

Fall in stock means change in stock will be deducted

Another names of intermediate consumption are;

Purchases

Purchase of raw material

Purchase of fuel , power and labour

But , purchase of assets and machinery will not be considered as intermediate
consumption.

THEORY OF VALUE ADDED METHOD –

RAW-MATERIAL VALUE ADDITION FINAL GOODS

200 Rs. intermediate 600 Rs.

400 Rs.
conumption
Value of output

VALUE ADDED refers to addition of value to the raw material by a firm during
the production process.

Value added = value of output – intermediate consumption

Suppose a bakery needs flour to produce bread. He purchases flour as input

worth Rs. 200 and converts the flour into bread and sell the bread for Rs.600.

So flour is considered as input means intermediate consumption and bread is

considered as final goods means value of output. So value addition will be
400Rs.

INTERMEDIATE CONSUMPTION refers to use of intermediate goods in the

production process . in the above example flour is the intermediate consumption.

VALUE OF OUTPUT
Value of output refers to market value of all goods and services produced during
a period of one year.

Value of output = sales + change in stock + self consumption

STEPS OF VALUE ADDED METHOD;

STEP 1 – IDENTIFY AND CLASSIFY THE PRODUCTION UNITS

The first step is to identify and classify all the producing units into primary ,
secondary and tertiary sectors.

STEP 2 – ESTIMATE GDPmp

In the second step gross value added at market price means GVAmp of each
sector will be calculated and sum total of GVAmp of all sectors give GDPmp of
economy.

STEP 3 – CALCULATE DOMESTIC INCOME (NDP fc)

By subtracting the amount of depreciation and net indirect taxes from GDPmp
we will get domestic income i.e NDPfc

STEP 4 – ESTIMATE NFIA TO ARRIVE AT NATIONAL INCOME (NNPfc)

In the final step NFIA will be added in domestic income to arrive at national
income (NNPfc)

GVAmp of primary sector

+ GVAmp of secondary sector

+ GVAmp of tertiary sector

GDPmp

- DEPRECIATION
- NET INDIRECT TAXES

NDPfc ( domestic income)

+ NFIA

NNPfc ( national income)

PRECAUTIONS OF VALUE ADDED METHOD –

1.) INTERMEDIATE GOODS are not to be included in national income because
its value is already included in the value of final goods and if they will be
included again then It will lead to double counting.

2.) sale and purchase of second hand goods in not to be included in

national income as there value has already been included during their original
purchase

However , brokerage and commission paid on such transactions will be included

in national income as it is related to productive service of current year.

3.) services for self consumption means domestic services will not be included in
national income as it is difficult to calculate its market value. For example
services of housewife and mother, kitchen gardening etc.

HOWEVER, paid services of maids, drivers, etc will be included as they are
charging something for their services.

4.) production of goods for self consumption will be included in national

income as they contribute to current output and its market value can be easily
measured.

5.) change in stock of goods(inventory) will be included in national income as

it is a part of capital formation i.e investment

6.) imputed rent of owner occupied house , imputed interest on own capital will
be included in national income as it is related to productive activities.

CONCEPT OF DOUBLE COUNTING

While calculating the national income , only the value of final goods and
services is to be included because the value of intermediate goods is already
included in the value of final goods.

The problem of double counting arises when value of intermediate goods is

again included in the national income.
Double counting refers to counting of an output more than once during the
production process.

COTTON THREADS SHIRTS consumers

Rs. 1000 Rs. 5000 Rs. 12000

IN the above flow chart , a person produces cotton worth Rs. 1000 and sell them
to a company for making threads worth Rs. 5000.

( here cotton is an intermediate for making threads)

Now, threads are further sold to a firm for making shirts worth Rs. 12000 and
shirts are consumed by final users i.e consumers. ( here thread is an
intermediate good for making shirts)

While calculating the national income , only the value of shirts is to be

included as value of cotton and threads is already included in the value of
shirt.

HOW TO AVOID DOUBLE COUNTING;

1.) FINAL OUTPUT METHOD –

According to this method , value of only final goods is to be included to

determine the national income. In the above case value of shirts i.e 12000 will be
included in national income.

2.) VALUE ADDED METHOD –

According to this method , value addition by each producing unit should be

taken taken to determine the national income. In the above case, value of input
is 1000 , first value addition is of 4000 Rs from cotton to threads and next
value addition is 7000 Rs. from threads to shirts.

Sum total of all these will be included in national income i.e 12000 Rs.

INCOME – METHOD/ distributive share method/

factor payment method
FORMULA –
COMPENSATION + OPERATING SURPLUS +MIXED INCOME = NDPfc
OF EMPLOYEES OF SELF EMPLOYED

CPMPENSATION OF EMPLOYEES WILL BE CALCULATED AS;

Wages and salaries in cash + wages and salaries in kind( vouchers, coupons ,
rent free house etc) + employer’s contribution in social security schemes +
retirement pension

OPERATING SURPLUS WILL BE CALCULATED AS;

Rent + royalty + interest + profits

In which profits = corporate savings + corporate dividend + corporate taxes.

Another name of corporate savings;

Undistributed profits or retained earnings.

THEORY OF INCOME METHOD;

1.) compensation of employees –

It refers to amount paid to employees by employer for rendering services. In
includes the following;

a.) wages and salaries in cash which includes all monetary benefits like wages
salaries bonus , commission, etc

b.) wages and salaries in kind which includes all non monetary benefits like
rent free house , free medical facilities etc.

c.) employers contribution to social security schemes like LIC , retirement

pension , provident funds , etc

2.) operating surplus

A) RENT and ROYALTY –

Rent is that part of national income which arises from ownership of land and
building where as , royalty refers to income received for granting patent rights .

B) INTEREST –

Interest refers to amount received for lending funds to a production unit.

It must be noted that;

a.) interest paid by one firm to another firm will not be included in national
income as it is the intermediate payment.

b.) if loan is taken for production purpose then its interest will be included in
national income as it related to productive activities.

c.) if loan is taken for consumption purpose then its interest will not be
included in national income as it is not related to any productive activities.

d) payment made by a firm to a CA or LAWYER will not be included in

national income as it is the intermediate payment.
e) interest received on deposits made by individuals or firms into banks will be
included in national income as such deposits are used for productive uses.

C) PROFITS –

Profit is a reward for the entrepreneur for his contribution in the production
process. It includes the following;

a.) corporate taxes b.) corporate dividend c.) corporate savings( undistributed
profits/ retained earnings)

3.) mixed income of self employed –

It is the income generated by own account workers. For example ; income of a

doctor running his clinic at his residence.

STEPS OF INCOME METHOD

Step 1 identify and classify the production units

All the producing units are identified and classified into primary , secondary
and tertiary sectors.

Step 2 estimate the factor income paid by each sector

The factor income paid by each sector are classified under

a.) compensation of employees b.) rent and royalty c.) interest d.) profits e.)
mixed income of self employed.

Step 3 calculate domestic income NDPfc

When factor income of all the sectors are summed up we get , domestic income
i.e NDPfc

Step 4 estimate NFIA for national income i.e NNPfc

in the final step , NFIA will be added in domestic income to calculate the
national income.

Compensation to employees

+ rent and royalty

+ interest

+ profits

+ mixed income of self employed

NDPfc

+NFIA

NNPfc

PRECAUTIONS OF INCOME METHOD

1.) transfer incomes like gifts , donations , charity , scholarships , old age
pension , remittances from abroad , unemployment allowances , expenditure on
birthday and marriages , pocket money , financial help to victims , meal to
beggars , compensation to accident victims , insurance claim, etc. will not be
included in national income as it is not connected with any productive
activity.
2.) income from sale of second hand goods will not be included in national
income as the original sale has already been counted. However , commission
and brokerage received on such transactions will be included in national
income as it is related to current flow of goods and services.

3.) income from sale of shares , debentures and bonds(financial assets) will not
be included in national income as such transactions do not contribute to
current flow of goods and services.

However , dividend and interest received on such assets and commission and
brokerage received on such transactions will be included in national income as
it is related to current productive services.

Capital gain means profit from increase in value of shares will not be included
in national income as it not related to any productive activities.

4.) windfall gains means income from lottery , casino, KBC , horse race will not
be included in national income as there is no productive activity connected with
them.

5.) imputed rent on owner occupied house , imputed interest on self supplied
capital will be included in national income as it is related to current productive
services.

6.) taxes and duties will not be included in national income as these are
compulsory transfer payments and govt. do not make any promises to provide
benefit in return.

7.) payment out of past savings will not be included in national income as it is
not related to current flow of goods and services.

EXPENDITURE METHOD / Income disposal Method

FORMULA –
Private final consumption expenditure + government final consumption
expenditure + private non profit institution’s expenditures + gross domestic
capital formation + net exports = GDPmp

Note ;

1.) Private final consumption expenditure is also known as personal final

consumption expenditure or household final consumption expenditure.

2.) Government final consumption expenditure is also known as government

purchase of goods and services.

3.)Net exports will be calculated as EXPORTS - IMPORTS

If net imports are given then it will be deducted.

4.) GROSS DOMESTIC CAPITAL FORMATION WILL BE CALCULATED

AS;

NET DOMESTIC FIXED GROSS PUBLIC INVESTMENT

CAPITAL FORMATION + GROSS RESIDENTIAL CONSTRUCTION
+ DEPRECIATION ( OR) INVESTMENT
+ CHANGE IN STOCK + GROSS BUSINESS FIXED
INVESTMENT
+ CHANGE IN STOCK

THEORY OF EXPENDITURE METHOD ;

1.) PRIVATE FINAL CONSUMPTION EXPENDITURE –

It refers to the expenditure incurred by households and private non profit
institutions on all consumer goods.

2.) GOVERNMENT FINAL CONSUMPTION EXPENDITURE –

It refers to the expenditure incurred by general government on various
administrative services like defence , law and order , education , etc.
3.) GROSS DOMESTIC CAPITAL FORMATION –

It refers to the addition to the capital stock of economy. It includes the following
;a.) gross business fixed investment b.) gross residential construction
investment c.) gross public investment d.) inventory investment

4.) NET EXPORTS –

it refers to the difference between exports and imports of a country.

STEPS OF EXPENDITURE METHOD –

STEP 1 IDENTIFY THE ECONOMIC UNITS

All the economic units are identified and classified into 4 groups (i) household
sector (ii) firm sector (iii) government sector (iv) abroad

STEP 2 CLASSIFICATION OF FINAL EXPENDITURES

Final expenditures by above mentioned economic units are identified and

classified into following heads;

a) private final consumption expenditure b) government final consumption

expenditure c) gross domestic capital formation d) net exports

sum total of all these will be equal to GDPmp

STEP 3 CALCULATE DOMESTIC INCOME (NDPfc) –

By subtracting the amount of depreciation and net indirect taxes from GDPmp
, we will get domestic income NDPfc

STEP 4 ESTIMATE NFIA TO ARRIVE AT NATIONAL INCOME (NNPfc) –

With the addition of NFIA under the domestic income , we will arrive at
national income (NNPfc)
 Private final consumption expenditure
+ government final consumption expenditure
+ gross domestic capital formation
+ net exports

GDPmp
- depreciation
- net indirect taxes

NDPfc

+ NFIA

NNPfc

PRECAUTIONS OF EXPENDITURE METHOD –

1.) expenditure on intermediate goods will not be included in national

income
As its value has already been included in value of final expenditures.

2.) transfer payments are not to be included in national income as it is not

connected with any productive activity.

3.) purchase of second hand goods are not to be included in national

income as it has already been included when they were originally purchased.
However, brokerage and commission paid on such transactions will be
included in national income as it is related with current productive services.

4.) purchase of financial assets like shares , debentures and bonds will
not be included in national income as these transactions do not contribute to
current flow of goods and services. However, dividend and interest paid on
such assets and commission and brokerage paid on such transactions will be
included in national income as it is related with current productive services.

5.) production of goods for self consumption and imputed rent of self
occupied house will be included in national income as it is connected with
current flow of goods and services.

ITEMS NOT TO BE INCLUDED IN NATIONAL INCOME

1.) transfer incomes and transfer payments like gifts , donations, charity ,
pocket money , scholarships , unemployment allowances , old age pension,
expenditure on birthday and marriages , remittances from abroad , financial
help to victims , meal to beggars , will not be included in national income
REASON – these incomes and payments are not connected with any productive
activity.

2.) compulsory transfer payments like taxes , duties etc will not be included in
national income.
REASON – it is compulsory transfer payment made to the government and
govt. do not make any promise to provide benefit in return.

3.) sale and purchase of financial assets like shares , debentures and bonds will
not be included in national income.
REASON – such transactions are not connected with current flow of goods and
services , they are just paper claims and involves change of title only.

4.) windfall gains like income from lottery , casino, KBC , horse race will not
be included in national income.
REASON – it is not connected with any productive activity.
5.) Non market transactions like kitchen gardening , services of housewife , a
parent teaching his own child will not be included in national income .
REASON – it is difficult to calculate its monetary value.

6.) intermediate consumption like purchase of raw-material by a firm ,

vegetables purchased by a restaurant , milk purchased by a diary shop ,
electricity charges paid for further services , advertisement expenses paid by a
firm , expenses on scientific research , purchase of cold drink by a school
canteen , expenditure on repair and maintenance will not be included in
national income.

REASON – they are intermediate expenditure and its value has already been
included in final expenditures.

7.) sale and purchase of second hand goods will not be included in national
income

Reason – its value has already been included when they were originally
purchased.

8.) capital loss like destruction of building in an earthquake will not be

included in national income.

REASON – they do not affect the national product.

9.) capital gain like profits due to increase in the value of shares and building
will not be included in national income

Reason – it is not connected with any productive activity.

10.) if loan is taken for consumption purpose, then its interest will not be
included in national income.

REASON – it is not connected with any productive activity.

11.) payment of interest by one firm to another firm will not be included in
national income.

Reason – it is an intermediate payment.

12.) payment of fees by a firm to a CA or lawyer will not be included in

national income .

REASON – it is an intermediate payment.

13.) petrol used in police vehicles , ambulance , taxi will not be included in
national income.

REASON – it is an intermediate expenditure because here fuel(petrol) is used

for further services.

14.) a person working in abroad and sending money to his family in INDIA
will not be included in national income.

REASON – it is the transfer income for the receiver.

15.) Insurance claim received from an insurance company will not be included
in national income.

REASON – it is the transfer income for the receiver.

16.) expenditure on repairmen and maintenance of assets will not be included

in national income.

REASON – it is the intermediate expenditure.

17.) factor income paid to abroad will not be included in national income.

REASON – it is the payment made to abroad and will be deducted while

calculating the national income.

18.) payment of interest by an individual to bank will not be included in

national income
REASON – loan is for consumption purpose and no productive activity
connected with them.

19.) interest on national debt and interest on loan taken by general

government will not be included in national income.

REASON – loan is for consumption purpose and no productive activity

connected with them.

ITEMS INCLUDED IN NATIONAL INCOME

1.) the brokerage and commission on sale and purchase of second hand goods
and on shares will be included in national income
REASON – it is connected with current productive services.

2.) imputed rent of self occupied house , imputed interest on self supplied capital
will be included in national income.

REASON – they are connected with current flow of goods and services.

3.) any type of investment like purchase of machinery , purchase of new house ,
construction of bridge, highway , addition to stock will be included in national
income

REASON – it is a part of gross domestic capital formation.

4.) Any payment or benefit given by employer to employee except transfer

income will be included in national income. for example payment of bonus ,
contribution to provident fund by employer , lunch to workers , medical
facilities and rent free house to workers.

REASON – it is a part of compensation to employees for productive services.

5.) Any expenditure made by households and consumers like payment of bus
fare , examination fees , insurance premium , purchase of durable goods ,
payment of telephone bill , electricity bill will be included in national income.
REASON – they are part of private final consumption expenditure.

6.) factor income received from abroad will be included in national income

REASON – it will be added in domestic income to arrive at national income.

7.) any expenditure made by government except transfer income will be

included in national income.

REASON – they are part of government final consumption expenditure.

8.) if loan is taken for production purpose then its interest will be included in
national income like loan taken by firm for productive services then its interest
will be a part of national income.

REASON – it is connected with productive activities.

9.) purchase of new house , adding a new floor(improvement of house) will be

included in national income.

REASON – it is an investment means capital formation.

10.) payment of interest by bank to households or to firms both will be included

in national income.

REASON – interest is connected with deposits made by households or firms

used for productive services.

RULES OF DOEMSTIC INCOME –

RULE 1ST
All the 29 points discussed above of inclusion and non- inclusion will be
applicable here also in the same manner. But,

RULE 2ND
While calculating the domestic income , factor income received from abroad and
factor income paid to abroad both will not be included in domestic income.

We should not consider the factor income received from or paid to abroad while
calculating the domestic income.

RULE 3RD
Anything which is a part of domestic territory, its income will be included in
domestic income. Anything which is not a part of domestic territory, then its
income will not be included in domestic income.

Example – profits earned by foreign banks in india.. its income will be

included in domestic income as that bank is a part of domestic territory.

Salary paid to a resident working in Russian embassy in INDIA, its income

will not be included in domestic income as that embassy is not a part of
domestic territory.

(FOR DOMESTIC TERRITORY REFER CHAPTER 2)

ASSIGNMENT OF INCLUSION AND NON INCLUSION;

(VERY IMPORTANT ASSIGNMENT)
( 6 MARKS MANDATORY QUESTION IN CBSE)
ASSIGNMENT OF NATIONAL INCOME (81 QUES.)
1.) construction of new house. 2.) winning of lottery prize 3.) increase in the price of
stocks lying with in the trader 4.) national debt interest 5.) rent free house given to
employer by an employee 6.) profits earned by branches of foreign banks in INDIA. 7.)
purchases by foreign tourists 8.) rent received by Indian resident from the buildings
rented to foreigners in INDIA . 9.) payment of fees to a lawyer 10.) free medical facilities
by the employer. 11.) gifts received from abroad or from employer 12.) profits of reliance
companies from its setup in Australia 13.) salary received by Indian resident working in
Russian embassy in INDIA 14.) subsidized lunch given to workers 15.) old age pension
16.) durable goods or car purchased by households 17.) profit earned by Indian bank from
its branches abroad 18.) earning of shareholders from the sale of shares 19.) expenditure
on advertisement or scientific research by a firm 20.) receipts from sale of land 21.)
financial help received by flood victims 22.) purchase of machine by a factory or purchase
of car by a taxi driver 23.) royalty 24.) commission or brokerage on sale of second hand
goods or on sale of shares 25.) dividend received by an Indian from his investment in
shares of foreign company 26.) purchase of raw material by a production unit 27.)
earning of a self employed doctor having his clinic at his residence 28.) money received
from sale of second hand goods 29.) imputed rent of self occupied house 30.) contribution
to provident fund by an employer OR foregone of interest by the employer on loan given
to employee 31.) wheat grown by farmer and self consumed by his family 32.)
expenditure on the construction of flyover by the government. 33.) commission received
by a dealer 34.) growing vegetables in kitchen garden 35.) services rendered by family
members to each other 36.) expenditure by govt. in providing free education/free
services/street lightning 37.) insurance premium paid by an household /fees received
from student 38.)mineral / national wealth of nation 39.) value of wood purchased for
manufacturing of a table/transport expenses by a firm 40.) purchase of equipments for
installation in a factory. 41.) payment of interest tax or death duty 42.) GST received by
government 43.) salary paid to Russians working in Indian embassy in Russia. 44.) capital
gain from sale of shares. 45.) harish works in USA and send money to his family in INDIA
46.) destruction of building in an earthquake 47.) HP uses its own new laptop in its office
for self consumption 48.) purchase of truck to carry goods by a production unit 49.) direct
purchases made by govt. from abroad 50.) earning from a part time job in mcDonalds 51.)
receipts from sale of property inherited from relative 52.) entertainment allowance given
by an employer to employee for entertaining business guests 53.) expenditure on purchase
of shares debentures and bonds 54.) goods lying with in the production boundary 55.)
money received by a family from relatives working abroad 56.) dividend received by
foreigner from his investment in Indian companies 57.) sale of an old house 58.) purchase
of house by a tenant 59.) insurance money received from insurance company against fire
in factory 60.) payment of interest by bank to depositors/payment of interest by a firm to
bank 61.) interest received on loan for purchase of personal car/payment of interest by an
individual 62.) interest received on loan given to a foreign company 63.) interest received
on debentures 64.) expenditure on improvement of assets/addition of new floor 65.)
scholarships given to student to study abroad 66.) value of bonus shares received bya
shareholders 67.) purchase of uniforms for nurses by a hospital 68.) expenditure on
repairmen and maintenance of building or assets 69.) payment of interest on borrowings
by a general government 70.) family members working free on farm 71.) payment of
bonus to employees 72.) purchase of tractor by a farmer 73.) expenditure on fertilizers by
a farmer 74.) purchase of furniture by a firm 75.) expenditure on education of a children
by a family . 76.) payment of electricity bill by a school or firm 77.) dividend received by
shareholders 78.) festival gifts from an employer 79.) contribution to provident fund by an
employee 80.) addition to stocks during an year 81.) payment of corporate tax by a firm

ASSIGNMENT OF DOMESTIC INCOME (27 QUES.)

1.) profit earned by branches of foreign banks in india 2.) profit earned by resident of india
from his company in Singapore 3.) profit earned by company in india which is owned by
non resident 4.) profits earned by branch of SBI(state bank of india) in japan 5.) rent
received by an Indian from his building in London 6.) compensation of employees to the
resident of japan working in Indian embassy in japan 7.) rent paid by embassy of japan in
india to a resident Indian 8.) salaries to Indian resident working in Russian embassy in
india 9.) profits earned by Indian employees working in Pakistan embassy in india 10.)
factor income from abroad 11.) scholarships given by govt. of india 12.) expenditure by
govt on providing old age pensions 13.) payment of bonus by a firm 14.) consultancy fees
paid to foreign expert. 15.) sale and purchase of shares , debentures and bonds 16.)
compensation of employees paid by a foreign company located in INDIA 17.) compensation
of employees paid by a foreign company located in India. 18.) earning of American express
bank branch located in Chennai . 19.) broker’s commission on sale of an old car 20.) profit
earned by a company located in INDIA partly owned by USA 21.) services rendered by
housewives 22.) capital gains 23.) windfall gains 24.) remittances from non residents to
their families in INDIA . 25.) and Indian owned airplane operating between singapor and
dubai 26.) gifts given by an employer to employees on independence day 27.) purchase of
goods by a foreign tourists

THE ASSIGNMENT MENTIONED ABOVE IS VERY IMPORTANT AS PER THE WEIGHTAGE OF

6 MARKS IN CBSE BOARD EXAMS. IT MUST BE NOTED THAT NO MARKS WILL BE GIVEN
IF REASON IS NOT MENTIONED

(for answers refer sandeep garg macro book)

NOMINAL AND REAL NATIONAL INCOME

NOMINAL NATIONAL INCOME (NNPfc at current prices)
It refers to the money value of final goods and services produced by normal
residents of a country during an accounting year , measured at current year
prices. Suppose current year is 2018 -19. It does not show the true picture of
economic growth of a country because any increase in nominal national
income is due to change in prices.

REAL NATIONAL INCOME (NNPfc at constant prices)

it is the money value of final goods and services produced by normal residents
of a country in a year measured at base year prices. Base year is a normal year
which is free from price fluctuations. Presently 2011-12 is taken as base year
in india. It shows the true picture of economic growth as increase in real
national income is only due to rise in output not due to rise in prices.

BASIS NOMINAL NNPfc REAL NNPfc

Meaning it refers to money value of it refers to money value of
Final goods and services final goods and services
Produced by normal produced by normal
Residents of a country residents of a country
During an accounting year, during an accounting
Measured at current prices year, measured at base
Year prices.
INDEX OF it is not a good tool it is a good tool for
GROWTH for measurement of measurement of
Economic growth economic growth

Calculation P1 X Q1 P0 X Q1

Another name it is also known as it is also known as

National income national income at
At current prices constant prices.
REAL NATIONAL INCOME = NOMINAL NATIONAL INCOME X 100

CURRENT PRICE INDEX

NOMINAL GDP AND REAL GDP

NOMINAL GDP OR GDP at current prices
when GDP of a given year is estimated on the basis of the price of same year, it
is called nominal GDP.

REAL GDP OR GDP at constant prices

when GDP of a given year is estimated on the basis of price of base year , it is
called real GDP.

 Price of base year is equal to price of current year, then , real GDP is equal
to nominal GDP.
 Price of base year is less than price of current year , real GDP is less than
nominal GDP.
 Price of base year is more than price of current year , real GDP is more
than nominal GDP.

REAL GDP IS BETTER THAN NOMINAL GDP

Real GDP is better than nominal GDP because of following reasons;

1.) real GDP helps in determining the effect of increased production of goods
and services as it is affected by change in output only.

2.) real GDP is a better tool to make periodic comparisons.

3.) real GDP is a better tool to facilitate international comparison of economic

performance.
REAL GDP = NOMINAL GDP X100

CURRENT PRICE INDEX

GDP DEFLATOR
GDP deflator measures the average level of prices of all goods and services that
make up GDP.

GDP deflator or PRICE INDEX = nominal GDP x 100

Real GDP

QUES.1) If real GDP is 12000 and nominal GDP is 15000 , then calculate GDP
deflator and what does this indicate?

GDP deflator is 15000 x 100 = 125.

12000

Base is 100 and GDP deflator is 125 , so price rises by 25%.

QUES 2.) if real GDP is 3000 and nominal GDP is 2500 . calculate GDP
deflator and what does this indicate?

GDP deflator is 2500 x 100 = 83.3

3000

Base is 100 and GDP deflator is 83.3. so prices fall by 16.67%

GDP AND WELFARE VERY IMPORTANT

GDP is often considered as an index of welfare. Welfare means sense of material
well- being among the people. However, there are some limitations of the above
mentioned line.
1.) DISTRIBUTION OF GDP
It is possible that with rise in GDP, inequalities also rises means the gap between
rich and poor increases. GDP does not take into account changes in inequalities
in the distribution of income. It means welfare may not arise with rise in GDP
if there is increase in inequalities along with it.

2.) CHANGE IN PRICES

If increase in GDP is due to rise in prices and not due to rise in physical output
then it will not be a reliable index of welfare.

3.) NON MONETARY TRANSACTIONS

Many activities in an economy are not calculated in monetary terms like
services of mother , a parent teaching his own child , etc . these transactions are
not included in GDP however it affect the economic welfare.

4.) RATE OF POPULATION GROWTH

GDP does not consider the changes in population growth of a country. If rate of
population growth is higher than the rate of growth of GDP , then it will reduce
the per capita availability of goods and services which will adversely affect the
economic welfare.

5.) EXTERNALITIES
Externalities refer to benefits or harms of an activity caused by a firm or an
individual for which he is not paid. Activities which results in benefit to others
are called positive externalities and activities which result in harm to others are
called negative externalities.

Environment pollution caused by industries are considered as negative

externalities which reduces the economic welfare but GDP does not take into
account all these externalities
Use of public parks by the people will improve their health is the positive
externalities and it will increase the economic welfare but GDP does not take
into account all these externalities.

6.) COMPOSITION OF GDP – Composition of GDP always affect the welfare of

country. If GDP of our country is increasing due to goods like wheat, Rice, etc
then along with GDP welfare will also increase. However, if GDP of our country
is increasing due to goods like liquor, cigarette, tobacco, war goods, etc then
GDP will increase but welfare will not increase.

WHAT IS GREEN GNP/GDP?

ANS. It measures GDP and national income of our country adjusted for the
depletion of natural resources and degradation of the environment. It will help
to attain a sustainable use of natural environment. Higher the Green GNP
signifies higher sustainable development.

NUMERICAL and theory QUESTIONS FOR

PRACTICE
Q.1) SALES 20,000 , purchase of machinery 5000 , purchase of raw-material 3000 , closing stock 500
, national debt interest on loan taken by general govt. 1300, private final consumption exp.2000 ,
opening stock 200 , consumption of fixed capital 100 , custom duty 200 , assistance 300 , factor
income received from abroad 1000 , capital transfers paid to abroad 700 , factor income paid to
abroad 800 , wages and salaries in cash 50 , retirement pension 90 , employers contribution to social
security schemes 60 , employee contribution in social security 300 , mixed income of self employed
5100 , interest 1000 , gross business fixed investment 3000 , corporate savings 500 , corporate taxes
800 , dividend 700, royalty 2500 , direct taxes paid by households 200. Calculate RENT. Ans. 6500

Q.2) A FARMER sold wheat to households 3000 , to government 1500 , to whole sellers 4500. Wheat
left unsold worth Rs.6000 and wheat of Rs. 2000 is used for self consumption. Farmer purchased a
tractor of Rs 50,000 and seeds for Rs. 3500. Current replacement cost 500 , factor income Paid to
abroad 4000 , factor income received from abroad 6500 , excise duty 2500 , subsidies 2000 , mixed
income of self employed 1000 , rent 200 , royalty 300 , corporate savings and taxes 400 , dividend 300
, interest 300 . calculate the value of compensation paid to employees and national income. Ans.
10000 , 15000
Q.3) ) salaries and wages in cash Rs. 1997 , transfer payments by government Rs. 25 , rent
Rs. 132 , indirect taxes Rs. 200, subsidies Rs.89, compensation of workers in kind Rs. 95,
depreciation Rs. 81, NFIA Rs.52 , interest Rs.92, govt. expenditure on goods and services
Rs.574, personal consumption expenditure on goods and services Rs.1805 , corporate tax Rs.
10 , mixed income of self employed Rs. 264, undistributed profits Rs. 26, corporate dividends
Rs. 201, exports Rs. 900, addition to stock Rs. 7 , social security contribution by employer Rs.
54 , social security contribution by employees Rs. 64 , imports Rs. 323 , gross domestic fixed
capital investment Rs. Rs.100. Calculate NATIONAL INCOME by INCOME method and
EXPENDITURE method ANS. 2923

Q.4) Calculate ' Net domestic product at factor cost' by the expenditure method and Product
method: -
ITEMS (Rs. in Crores)
i. Value of output in the economic territory 4100
ii. Net export. -50
iii. Intermediate purchase by the primary 600
sector.
iv. Private final consumption expenditure 1450
v. Intermediate purchase by the secondary 700
sector
Vi. Government final consumption 400
expenditure
vii. Net domestic fixed capital formation 200
viii. Intermediate purchase by the territory 700
sector.
ix. Net change in stock 50
X. Indirect taxes 100
xi. Consumption of fixed capital. 50
ANS. 1950
Q.5) calculate the value of CORPORATE SAVINGS; ANS. 17250

Sales 48000 , closing stock 300 , wages and salaries in cash 2500, opening stock 400 , purchase of raw material 6000,
purchase of machinery 5000, depreciation 800 , indirect taxes 650 , factor income paid to abroad 1100 , subsidies 350 , factor
income received from abroad 300 , retirement pension 800 , employers contribution in provident fund schemes 1250 , rent
and royalty 2000 , interest 1000 , mixed income of self employed 500 , corporate taxes 12500 , corporate dividend 3000 ,
gross domestic fixed capital formation 13450 , exports 450 , national debt interest 300 , private income 25800 .

Q.6) Calculate (a) Net domestic product at factor cost ANS. 1600

ITEMS (Rs. in Crores)

i. Domestic product accruing to govt. sector 300
ii. Wages and Salaries 1000
Iii Net current transfer to abroad. - 20
 iv. Rent 100
v. Interest paid by the production unit 130
Vi. National debt interest 30
vii. Corporation tax 50
viii. Current transfer by government. 40
ix. Contribution to social security scheme by 200
employers
x. Dividends 100
xi. Undistributed profit 20
xii. Net factor income to abroad. 0

Q.7) out of total production, ram sold 70% to normal public and rest 20% saved for his
family. 5% taxes are now levied on total production and electricity charges of Rs. 500 are now
subsidized. Closing stock at year end was 10,000 Rs. Ram decided to import some fabric from
ITALY for 17,000Rs.. Show the income of country if 18% of value of machinery is transferred
to provisions of depreciation. Value of machinery was Rs. 1,00,000. Total output produced is
of Rs. 2,00,000 inclusive of stock. Calculate domestic income. ANS. 155500

Q.8) answer the following questions…..WITH REASONS

(a) car purchased by taxi driver will be final good or intermediate?

(b) salary received by rakesh from airtel company from a branch setup in Chennai will be
included in national income or not?

(c) IN ________________ goods , value is to be added.

(d) NNPmp will always be greater than national income?

(e) wealth is a stock or flow?

(f) all assets are capital goods?

(g) interest on loan for textile industry will be included in national income or not?

Q.9) with a numerical example , show how domestic income and national income can be
equal as well as unequal. With such numerical example also show when can NDPmp and
domestic income be equal or unequal. State when can net indirect taxes be zero.
Q.10) calculate the value of hidden depreciation and national income from following data
Private final consumption expenditure Rs.2250, government final consumption expenditureRs. 1250, imports Rs.250,
factor income paid to abroad Rs.200, transfer income received from abroad Rs.875, indirect taxes Rs.1050,
subsidies Rs.2000, gross domestic capital formation Rs.5000, net domestic fixed capital formation Rs.3400,
closing stock Rs.800, opening stock Rs.200, exports Rs.300
Ans 1000 8300

Q.11) calculate the value of national income from following data:

Domestic sales 20,000 , purchase of tractor 65000 , closing stock 2500 , purchases 12000 ,
sales to abroad 13500 , rent and royalty 14500 , income of self employed 21500 , factor
income received from abroad 5000 , current replacement cost 550 , custom duty 1200 ,
subsidies 3500.

ANS. 30750

Q.12) wages and salaries in cash 2500, rent 1300, corporate taxes 300, retained earnings 600
, employer’s contribution in provident funds 5000, vouchers 1000 , royalty 3000 , retirement
pension 2500, corporate dividends 1400 , closing stock 700 , opening stock 500 , purchase of
fuel 1400 , consumption of fixed capital 100 , NFIA 1500 , subsidies 1100

Calculate SALES
Q.13) purchase of goods and services by households 13000 , transfers paid to abroad 13000 , government
purchase of goods and services 12000 , net imports 1000 , gross business fixed investment 2500 , closing
stock 1000 , gross residential construction investment 2000 , opening stock 500 , gross public investment 3000 ,
norrmal wear and tear 2000 , factor income paid to abroad 1500 , assistance 1800 , sales tax 3000 , purchase of
fuel 2000 , current transfers from abroad 3500 , capital transfers to abroad 2000. Calculate sales.

Q.14)

ITEMS (Rs. in Crores)

i. Value of output in the economic territory 4100

ii. Net export. -50

 iii. Intermediate purchase by the primary sector. 600

iv. Private final consumption expenditure 1450

v. Intermediate purchase by the secondary sector 700

Vi. Government final consumption expenditure 400

vii. Net domestic fixed capital formation 200

viii. Intermediate purchase by the territory sector. 700

ix. Net change in stock 50

X. Indirect taxes 100

xi. Consumption of fixed capital. 50

Q.15) sales 5500 , compensation of employees 1500 , change in stock 200 , rent and royalty
1000 , interest 450 ,national debt interest 380 , purchase of raw material 400 , direct taxes
450 , income of self employed 600 , corporate taxes 300 , corporate savings 250 , profit 550 ,
net exports (-150) , personal final consumption expenditure 3500 , government final
consumption expenditure 650 , net domestic fixed capital formation 600 , net indirect taxes
700 , depreciation 500 , NFIA 100 , wages and salaries in cash 800 , retirement pension 200 ,
savings of NPO 320 , provident funds 800 , miscellaneous receipts of govt. 200.

Calculate NATIONAL INCOME (NNPfc) by all three methods

16.) Calculate ' net value added at factor cost' from the following data: -
ITEMS (Rs. IN LAKHS)
i. Sale 800
ii. import of material. 50
iii. Subsidies 50
iv. Change in stock. 40
v. Purchase of raw material from domestic market. 450
vi. Wages and salaries 200
vii. Consumption of fixed capital 60

17.) Calculate NATIONAL income by income method:

Sales 1000 , closing stock 250 , rent and royalty 3000 , corporate taxes 240 , retained earnings 360 ,
wages and salaries in cash 3500 , intermediate consumption 4500 , retirement pension 6700 , mixed
income of self employed 4750 , opening stock 80 , interest 690 , corporate dividends 300 , employer’s
contribution in provident funds 2000 , indirect taxes 150 , current replacement cost 400 , subsidies 450
, factor income paid to abroad 350.
Q.18) value of output by primary sector 1000 , value of output by secondary sector 800 , value of
output by tertiary sector 600 , intermediate consumption of primary 400 ,of secondary 300 and of
tertiary sector 100 , compensation of employees 500 , rent 40 , consumption of fixed capital 80 ,
indirect taxes 30 , NFIA 10 , subsidies 10 , interest 50 , royalty 110 , mixed income 800. Calculate
national income by income method and value added method

Q.19) calculate GDPmp by value added and income method.

Purchase of fuel and power 1200 , sales 1900 , closing stock 1000 , rent 10 , opening stock 300 ,
compensation of employees 950 , profits 285 , NFIA (-20) , corporate savings 35 , corporate taxes 200 ,
interest 5 , depreciation 40 , net indirect taxes 10 , mixed income 100

Q.20) sales 5500 , compensation of employees 1500 , change in stock 200 , rent and royalty
1000 , interest 450 ,national debt interest 380 , purchase of raw material 400 , direct taxes
450 , income of self employed 600 , corporate taxes 300 , corporate savings 250 , profit 550 ,
net exports (-150) , personal final consumption expenditure 3500 , government final
consumption expenditure 650 , net domestic fixed capital formation 600 , net indirect taxes
700 , depreciation 500 , NFIA 100 , wages and salaries in cash 800 , retirement pension 200 ,
savings of NPO 320 , provident funds 800 , miscellaneous receipts of govt. 200.

Calculate NATIONAL INCOME (NNPfc) by all three methods and corporate dividends

Q.21) consumption of fixed capital 600 Rs. , import duty 400Rs. , output sold 2000 units , price
per unit of output 10 Rs. , change in stock (-50) Rs. , intermediate cost 10,000 Rs. , subsidies
500 .

Calculate domestic income ( NDPfc )

Q.22) calculate the value of national income from following data:

Domestic sales 20,000 , purchase of tractor 65000 , closing stock 2500 , purchases 12000 ,
sales to abroad 13500 , rent and royalty 14500 , income of self employed 21500 , factor
income received from abroad 5000 , current replacement cost 550 , custom duty 1200 ,
subsidies 3500.

Q.23) wages and salaries in cash 2500, rent 1300, corporate taxes 300, retained earnings 600
, employer’s contribution in provident funds 5000, vouchers 1000 , royalty 3000 , retirement
pension 2500, corporate dividends 1400 , closing stock 700 , opening stock 500 , purchase of
fuel 1400 , consumption of fixed capital 100 , NFIA 1500 , subsidies 1100

Calculate SALES
Q.24) Calculate' Gross National product at Market Price' by the production method and
Income method.: -
ITEMS (Rs. in Crores)

i. Value of output of the primary sector 1000

ii. Indirect taxes 200

Iii Compensation of employee 780

iv. Net factor income to abroad. 100

v. Intermediate purchase by all the sector 2900

Vi. Rent 300

vii. Value of output by tertiary sector 2000

viii. Subsidies 50

ix. Interest 600

x. Consumption of fixed capital. 120

xi. Value of output of the secondary sector 3000

xii. Profit 320

xiii. Mixed income of self employed 830

Q.25) answer the following questions with REASONS;

(a) value of shares will be included in national income ( true or false )

(b) share of Rs. 120 is now in market for sale for Rs. 170. Profit of Rs. 50 will not be included
in national income ( true or false )

(c) taxes of rs 12000 will be included in national income ( true or false )

(d) ram produced goods for Rs. 5000 out of which half is self consumed and half is in stock.
How much will be part of national income

(e) dividend received on shares will not be included in national income ( true or false )

(f) income received from casino cards are part of national income ( true or false )