Class | Subject | Book | Chapter | Session | Questions covered |
|---|---|---|---|---|---|
XII | Economics | Macroeconomics (NCERT) | 2 – National Income Accounting | 2026-27 | 12 of 12 |
Chapter at a glance
Concept | Key point |
|---|---|
Factors of production and rewards | Land – rent; labour – wages; capital – interest; entrepreneurship – profit |
Circular flow | Aggregate output = aggregate final expenditure = aggregate factor income |
Stock and flow | Stock: measured at a point of time (capital, wealth); flow: measured over a period (investment, income) |
Value added | Value of output – intermediate consumption;  |
Three methods of GDP | Product (value added), expenditure (), income ()   |
Aggregates | GNP = GDP + NFIA; NNP = GNP – depreciation; NNP (National Income) = NNP – (indirect taxes – subsidies)   |
Personal income | PI = NI – undistributed profits – net interest payments by households – corporate tax + transfer payments |
Personal disposable income | PDI = PI – personal tax payments – non-tax payments |
Deficits identity |  |
GDP deflator |  |
Exercises
What are the four factors of production and what are the remunerations to each of these called?
Answer
Answer
Factor of production | Remuneration |
|---|---|
Land | Rent |
Labour | Wages (salaries) |
Capital | Interest |
Entrepreneurship | Profit |
Land – rent, labour – wages, capital – interest, entrepreneurship – profit.
Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
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Answer
In a simple economy, firms produce final goods using factors of production supplied by households. Whatever firms earn by selling their output (aggregate final expenditure by households, firms, government and the rest of the world) is distributed entirely as factor payments – wages, rent, interest and profit (profit is the residual that goes to the entrepreneur). Since nothing is left over, the total revenue from final sales must equal the total payments to factors. This is the circular flow of income: expenditure on goods by one sector becomes income for another. Hence aggregate final expenditure = aggregate factor payments (= aggregate output).
Because the entire revenue firms earn from final expenditure is paid out as wages, rent, interest and profit (profit being the residual), so in the circular flow total expenditure equals total factor income.
Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.
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Answer
Basis | Stock | Flow |
|---|---|---|
Meaning | Quantity measured at a point of time | Quantity measured over a period of time |
Time dimension | No time dimension | Has a time dimension (per year, per month) |
Examples | Capital, wealth, money supply, population | Investment, income, consumption, depreciation |
Capital is a stock (e.g. machines worth ₹ 10 crore on 31 March); net investment is a flow (e.g. ₹ 1 crore added during the year).
Tank analogy: the water in the tank at any moment is like capital (stock). The water flowing in per minute (net of water flowing out) is like net investment (flow). Just as the inflow raises the level of water, net investment adds to the stock of capital. Gross investment is like the total inflow, and depreciation is like the leakage; net investment = gross investment – depreciation.
A stock is measured at a point of time, a flow over a period; capital is a stock and net investment a flow – like the level of water in a tank (capital) and the net rate at which water flows in (net investment).
What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
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Answer
- Planned inventory accumulation – a change in stock that the firm intended (e.g. a firm decides to raise its stock of finished goods from 100 to 200 units).
- Unplanned inventory accumulation – a change in stock that was not intended, caused by an unexpected change in sales (e.g. sales fall short of expectations, so unsold goods pile up). An unexpected rise in sales causes unplanned decumulation.
Relation with value added
Change in inventories (planned or unplanned) is treated as investment by the firm and is included in value added.
Planned accumulation is an intended rise in stock; unplanned accumulation is unintended, due to unexpected sales; Value added = Sales + Change in inventories – Intermediate consumption.
Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP.
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Answer
- Product (value added) method: , the sum of gross value added of all firms.
- Expenditure method: .
- Income method: (wages, profits, interest, rent).
Why equal: all three measure the same flow from different points in the circular flow. The value added by firms (product) is the value of goods available for final use; it is bought by households, firms, government and foreigners (expenditure); and the money received is paid out as factor incomes (income). Since what is produced is either sold or added to inventories (counted as investment), and all revenue is distributed as factor payments, the three totals must be equal.
GDP ≡ ΣGVA ≡ C + I + G + X – M ≡ W + P + In + R; they are equal because output produced is bought as final expenditure, and the proceeds are paid out as factor incomes.
Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was ₹ 2,000 crores. The amount of budget deficit was (–) ₹ 1,500 crores. What was the volume of trade deficit of that country?
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Answer
- Budget deficit = government expenditure – tax revenue = .
- Trade deficit = imports – exports = .
From the national income identity, , so
Trade deficit = (I – S) + (G – T) = 2,000 – 1,500 = ₹ 500 crore.
Suppose the GDP at market price of a country in a particular year was ₹ 1,100 crores. Net Factor Income from Abroad was ₹ 100 crores. The value of Indirect taxes – Subsidies was ₹ 150 crores and National Income was ₹ 850 crores. Calculate the aggregate value of depreciation.
Answer
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Depreciation = ₹ 200 crore.
Net National Product at Factor Cost of a particular country in a year is ₹ 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is ₹ 1,200 crores. The personal income taxes paid by them is ₹ 600 crores and the value of retained earnings of the firms and government is valued at ₹ 200 crores. What is the value of transfer payments made by the government and firms to the households?
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Personal income = PDI + personal taxes = 1,200 + 600 = ₹ 1,800 crore. PI = NNP – retained earnings + transfer payments (no net interest payments):
Transfer payments = ₹ 100 crore.
From the following data, calculate Personal Income and Personal Disposable Income (₹ crore): (a) Net Domestic Product at factor cost 8,000 (b) Net Factor Income from abroad 200 (c) Undisbursed Profit 1,000 (d) Corporate Tax 500 (e) Interest Received by Households 1,500 (f) Interest Paid by Households 1,200 (g) Transfer Income 300 (h) Personal Tax 500.
Answer
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National income = NDP + NFIA = 8,000 + 200 = ₹ 8,200 crore. Net interest payments made by households = 1,200 – 1,500 = – ₹ 300 crore.
Particulars | ₹ crore |
|---|---|
National income | 8,200 |
Less: Undisbursed profit | (1,000) |
Less: Corporate tax | (500) |
Less: Net interest payments by households (–300) | 300 |
Add: Transfer income | 300 |
Personal income | 7,300 |
Less: Personal tax | (500) |
Personal disposable income | 6,800 |
Personal income = ₹ 7,300 crore; personal disposable income = ₹ 6,800 crore.
In a single day Raju, the barber, collects ₹ 500 from haircuts; over this day, his equipment depreciates in value by ₹ 50. Of the remaining ₹ 450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹ 220 for improvement and buying of new equipment. He further pays ₹ 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.
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Answer
Measure | Working | ₹ |
|---|---|---|
(a) GDP (at market price) | Value of haircuts (no intermediate goods) | 500 |
(b) NNP at market price | 500 – depreciation 50 | 450 |
(c) NNP at factor cost | 450 – sales tax 30 | 420 |
(d) Personal income | 420 – retained earnings 220 | 200 |
(e) Personal disposable income | 200 – income tax 20 | 180 |
GDP ₹ 500; NNP ₹ 450; NNP ₹ 420; personal income ₹ 200; personal disposable income ₹ 180.
The value of the nominal GNP of an economy was ₹ 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was ₹ 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Answer
Answer
Since the deflator is less than 100, the price level has fallen (by about 16.67 %) between the base year and the current year; it has not risen.
GNP deflator = 83.33 %; the price level has fallen, not risen.
Write down some of the limitations of using GDP as an index of welfare of a country.
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- Distribution of GDP – GDP may rise while income is concentrated in a few hands; most people may not be better off.
- Non-monetary exchanges – services not traded for money (household work by homemakers, barter, self-consumption by farmers) are not counted, so GDP understates welfare.
- Externalities – harmful effects (pollution from factories) or beneficial effects not paid for are not reflected; GDP may overstate welfare when output causes pollution.
- Composition of GDP – a rise in output of harmful goods (weapons, alcohol) raises GDP but not welfare.
- Population growth – GDP may rise but per capita income may fall.
- Leisure and quality of life – longer working hours raise GDP but reduce welfare.
GDP ignores the distribution of income, non-monetary activities, externalities like pollution, the composition of output, population growth, and leisure and quality of life – so it is not a perfect index of welfare.
Topic checklist
- ☒ Factors of production, circular flow (Q 1, 2)
- ☒ Stock and flow; inventories and value added (Q 3, 4)
- ☒ Three methods of measuring GDP (Q 5)
- ☒ National income aggregates and personal income (Q 7–10)
- ☒ Budget and trade deficit identity (Q 6)
- ☒ GDP deflator and GDP and welfare (Q 11, 12)