FOR UNDER ACHIEVERS Part B MACRO ECONOMICS UNIT VI: NATIONAL INCOEM AND RELATED AGGREGATES ( 15 MARKS) 1 MARKS

S QUESTIONS 1. Define macro Economics. Ans: The branch of economics deals with the the economic parameters at the level of the economy as a whole. 2. Give two examples of Macro economic variables. Ans: ational income! "overnment b#d"etin"! $%&E' (. )hat is domestic territory* Ans. All those areas from where an economy "ets its domestic income. +t incl#des political bo#ndaries! embassies! $leets! aircrafts ! shippin" vassals of a concerned co#ntry f#nctionin" in other co#ntries. ,. To whom yo# called the resident of a co#ntry* Ans. A person or the firm wor-in" in a co#ntry for more than a year and his.its economic interests lie in that co#ntry. /. )hat are finished "oods* Ans : Goods which are directly cons#med by the ho#sehold or the firms and are not resold. 0. )hat are intermediate "oods* Ans: The non d#rable "oods which are #sed to prod#ce other "oods. 1. Define capital "oods. Ans. The d#rable "oods which are #sed to prod#ce other "oods. 2. Define circ#lar flow of +ncome. Ans. The flow of income from one sector to another sector of the economy. 3. )hat are three phases in which the income flow in an economy* Ans. +ncome! disposition and prod#ction. 14. )hat is the difference between national prod#ct and domestic prod#ct. Ans. Domestic prod#ct is the val#e of final "oods and services prod#ced by residents and the nonresidents with in the domestic territory of a co#ntry in a year where as national income is prod#ct is the val#e of final "oods and services prod#ced by residents of a co#ntry in a year.

11. Define ational income Ans +t is the s#m total of factor income "enerated by the normal residents of a co#ntry in a year. 12. Define personal income. Ans +t is the total income received by the ho#seholds of a co#ntry from all the so#rces.5 Earned as well as Transfers6 1(. Define private income. Ans. +t is the total income received by the private sector of a co#ntry from all the so#rces.5 Earned as well as Transfers6 1,. )hat is personal disposable income* Ans. +t is the total income received by the ho#seholds that they can #se for cons#mption expendit#re and savin"s. 1/. )hat are transfer payments* Ans. They are the #nilateral payments. o "ood or the service is exchan"ed for them. ( ! " #ar$% &'(%t)*+%) 1. Distin"#ish between real flow and money flow. Ans. &eal flow is the flow of "oods and services from one sector to another sector of the economy. The monetary flow is the flow of money from one sector to another sector of the economy. 2. Distin"#ish between domestic income and national income. Ans. Domestic income is the income "enerated by residents and the nonresidents with in the domestic territory of a co#ntry in a year where as national income is the income "enerated by the residents of a co#ntry in a year. (. )hen will be domestic factor income "reater than national income* Ans. )hen the net factor income from abroad is ne"ative. ,. Differentiate between nominal national income and real national income. Ans. )hen national income is calc#lated on the basis of c#rrent year prices it is nominal national income and when it is estimated on base year prices it is real national income. /. )hat are the components of private income* Ans +t is s#m total of $actor income received by private sector from D7 at $8! net domestic prod#ct at factor cost! 8#rrent transfers from "ovt. and abroad and interest on p#blic debt.

0. )hat is difference between personal disposable income and national disposable income* Ans. 7ersonal disposable income is the income from all so#rces at the disposal of ho#se holds which they #se for cons#mption expendit#re or savin"s. ational disposable income is the income from all so#rces at the disposal of an economy. 1. 9how how the s#m of val#e added is e:#al to s#m of factor incomes. Ans. et val#e added at factor cost is always e:#al to s#m total of factor income i.e. compensation of employee! rent! interest and profit. 2. )hat are the components of a""re"ate expendit#re* Ans. 7rivate final cons#mption expendit#re! Government;s final cons#mption expendit#re! Gross domestic capital formation and net exports. 3. $rom followin" data! calc#late :<

a6

7$8

and

b6

D7 at $8

&s. in crores

+6 ++6 +++6 +=6 =6

Depreciation +ndirect taxes 9#bsides G 7 at M7 et factor income from abroad

2,44 (044 (44 11,/4 1044

Ans. a6 7 > fc? +=<+ <++@+++ A6 D7 > fc? +=<+<=<++@+++

14.

1.GD7 at $8 2. et indirect taxes (.Depreciation ,. et factor income from abroad 8alc#late i6GD7M7 ii6 G 7M7 iii6 v6 D7M7 vi6 D7$8
Ans. i6 1 @ 2 ii6 1 @ , < 2 iii6 1 B ( @ , @ 2 iv6 1 B ( @ ,
v6 1 B ( @ 2 vi6 1 B (

2/!21/ 1!/1/ 1!444 ,4 7M7 iv6 7$8

11. 8alc#late 5i67rivate income! 5ii6 7ersonal income! and 5iii67ersonal disposable income.
rs. in crores

i6 ational income ii6 8orporate profit tax iii6 ational debt interest iv6 Direct personal tax v6 9avin" of private corporate sector vi6 8#rrent transfer from rest of world. vii6 9avin" of non departmental p#blic enterprises viii6 8#rrent transfer form Govt. administrative departments ix6 +ncome from property and entreprene#rship accr#in" to "ovt. administrative departments. Ans: 5i6 i B vii B ix @ vi @viii @ iii 5ii6 7rivate income B ii B v 5iii6 7ersonal income B iv 1,. 8alc#late net national disposable income. i6 Gross factor prod#ct at M7 ii6 et factor income from abroad iii6 et indirect taxes! iv6 8ons#mption of fixed capital v6 et c#rrent transfer form rest of world. Ans. i B iv @ ii @ v

2/44 2/ (4 1/ /4 (4 14 14 1/

1444 <24 124 144 /4

1/.

Explain the main steps in income method of estimatin" national income. Ans. a6 8lassification of the Economy 57rimary! 9econdary and tertiary sector6 b6 8lassification of factor income c6 Estimatin" factor income in three sectors d6 Estimation of national income from D7 > fc 8ate"ories the followin" into intermediate "oods and final "oods. Give reasons for yo#r answer. i6 A new car p#rchased by Taxi<Driver ii6 9tationery p#rchased by Govt. iii6 )heat p#rchased by ho#sehold. i6 $inal "ood beca#se it is capital. ii6 +ntermediate "ood iii6 $inal "ood

10.

Ans.

(,- Mar$% &'(%t)*+%) 16 Explain the circ#lar flow of income in a three sector economy.

Ans: Ta-e ho#se hold sector! 7rod#cin" sector and the Government 9ector and show the flow of income between them. 26 Explain the income method of estimatin" national income. Ans. a6 8lassification of the Economy 57rimary! 9econdary and tertiary sector6 b6 8lassification of factor income c6 Estimatin" factor income in three sectors d6 Estimation of national income from D7 > fc (. Explain the expendit#re method of estimatin" national income. i6 8lassification of expendit#re ii6 8alc#lation of GD7 iii6 Estimation of national income. ,. Differentiate between factor payment and transfer income. Explain briefly the concept of mixed income of self employed. Ans. $actor payment is the bilateral income received by the factors of prod#ction for their services in the prod#ction where as transfer income is the #nilateral payment. o "ood or the service is exchan"ed for it. Mixed income is the income of self employed persons which can not be separated in different factor incomes. /. 9tate the preca#tions that m#st be ta-en in income method. a6 Transfer income sho#ld not be incl#ded. b6 +ncome received after sellin" second hand "oods sho#ld not be incl#ded. c6 +mp#ted rent of self occ#pied ho#ses sho#ld be incl#ded. 9tate the preca#tions that m#st be ta-en in expendit#re method. a6 Transfer payments sho#ld not be incl#ded. b6 Expendit#re made on second hand "oods sho#ld not be incl#ded. c6 +mp#ted rent of self occ#pied ho#ses sho#ld be incl#ded. 9tate the preca#tions that m#st be ta-en in val#e added method. a6 =al#e of second hand "oods sho#ld not be incl#ded b6 =al#e of services for self cons#mption sho#ld not be incl#ded. c6 +mp#ted rent of self occ#pied ho#ses sho#ld be incl#ded. 8alc#late ational +ncome by i6 +ncome Method ii6 Expendit#re Method. R%. I+ /r*r(% 1444 144 114 1/44 <24 1244 244 214 (4

0.

1.

2.

i6 Govt. final cons#mption expendit#re ii6 7rofits iii6 et +ndirect tax iv6 7rivate final cons#mption expendit#re v6 et exports vi6 8ompensation of employees vii6 &ent viii6 +nterest ix6 et factor income from abroad.

x6 Mixed income xi6 Gross domestic capital formation xii6 et domestic capital formation Ans. a6 ational income by income method: vi @ vii @viii @ ii @ x @ ix b6 ational income by expendit#re method: i @ iv @ xii @ v @ ix B iii

044 144 044

Ba%)/ 0*r#'1a( *0 Nat)*+a1 I+/*#( A//*'+t)+2 1. G&%99 B Depreciation ? ET 2. ET @ Depreciation ? G&%99 (. D%ME9T+8 7&%DC8T @ net factor income from abroad ? AT+% AD 7&%DC8T. ,. AT+% AD 7&%DC8T < net factor income from abroad ? D%ME9T+8 7&%DC8T /. MA&EET 7&+8E B net indirect taxes ? $A8T%& 8%9T 0. $A8T%& 8%9T @ net indirect taxes ? MA&EET 7&+8E

1. 8%M7E 9AT+% %$ EM7D%FEE ? wa"es and salaries in cash and in -ind @ employer;s contrib#tion to social sec#rity @ retirement pension 2. %7E&AT+ G 9C&7DC9 ? rent @ interest @ profit 3. 7&%$+T ? dividends @ corporate tax @ #ndistrib#ted profit 14. =ADCE %$ %CT 7CT ? sales @ chan"e in stoc11. 8GA GE + 9T%8E ? closin" stoc- B openin" stoc12. G&%99 =ADCE ADDED ? val#e of o#tp#t B intermediate cons#mption 1(. ET + D+&E8T TA'E9 ? indirect taxes B s#bsidies 1,. ET $A8T%& + 8%ME $&%M AA&%AD ? factor income received from abroad B factor income paid to abroad. 1/. ET E'7%&T9 ? exports B imports 10. G&%99 D%ME9T+8 8A7+TAD $%&MAT+% ? "ross domestic fixed capital formation @ chan"e in stoc-

CALCULATION OF NATIONAL INCOME B3 INCOME METHOD 8%M7E 9AT+% %$ EM7D%FEE9 @ &E T @ + TE&E9T @ 7&%$+T @ M+'ED + 8%ME 5+$ G+=E 6 HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? D7 > fc @ ET $A8T%& + 8%ME $&%M AA&%AD HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? 7 > fc CALCULATION OF NATIONAL INCOME B3 VALUE ADDED METHOD =ADCE %$ %CT7CT < + TE&MED+ATE 8% 9CM7T+% HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? GD7 > mp < 8% 9CM7T+% %$ $+'ED 8A7+TAD HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? D7 > mp @ ET $A8%& + 8%ME $&%M AA&%AD HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? 7 > mp < ET + D+&E8T TA'E9 HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? 7 > fc

CALCULATION OF NATIONAL INCOME B3 VALUE ADDED METHOD 7&+=ATE $+ AD 8% 9CM7T+% E'7E D+TC&E @ G%=T. $+ AD 8% 9CM7T+% E'7E D+TC&E @ G&%99 D%ME9T+8 8A7+TAD $%&MAT+% @ ET E'7%&T9 ? GD7 > mp (I0 D*#(%t)/ /a4)ta1 0*r#at)*+ )% NET t5( )t /*#(% NDP 6 #4) < 8% 9CM7T+% %$ $+'ED 8A7+TAD HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? D7 > mp @ ET $A8%& + 8%ME $&%M AA&%AD HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

? 7 > mp < ET + D+&E8T TA'E9 HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ? 7 > fc CALCULATION OF NET NATIONAL DISPOSABLE INCOME AND GROSS NATIONAL DISPOSABLE INCOME 7 > mp @ ET 8C&&E T T&A 9$E&9 $&%M AA&%AD ? ET AT+% AD D+97%9AADE + 8%ME @ DE7&E8+AT+% ? G&%99 AT+% AD D+97%9AADE + 8%ME CALCULATION OF PRIVATE INCOME7 PERSONAL INCOME NAD PERSONAL DISPOSABLE INCOME AT+% AD + 8%ME 5 7 > fc6 < + 8%ME $&%M 7&%7E&TF A D E TE&7&E EC&9G+7 %$ G%=T DE7A&TME TAD E TE&7&+9E9 < 9A=+ G9 %$ % DE7A&TME T E TE&7&+9E9 ? $A8T%& + 8%ME $&%M AT+% AD 7&%DC8T A88&C+ G T% 7&+=ATE 9E8T%& @ ET 8C&&E T T&A 9$E&9 $&%M G%=T. @ ET 8C&&E T T&A 9$E&9 $&%M AA&%AD. @ 7CAD+8 DEAT + TE&E9T ? 7&+=ATE + 8%ME < 8%&7%&ATE TA'. 7&%$+T TA' < 8%&7%&ATE 9A=+ G9. C D+9T&+ACTED 7&%$+T.&ETA+ ED EA& + G9 ? 7E&9% AD + 8%ME < D+&E8T TA'E9 < M+98EDDA E%C9 &E8E+7T9 %$ G%=T ADM+ +9T&AT+=E DE7A&TME T9 5 +f "iven6 7E&9% AD D+97%9AADE + 8%ME

7E&9% AD D+97%9AADE + 8%ME ? 8% 9CM7T+% E'7E D+TC&E AF G%C9EG%DD9 @ G%C9EG%DD 9A=+ G9

FOR UNDER ACHIEVERS Part B MACRO ECONOMICS UNIT ,8 DETERMINATION OF INCOME AND EMPLOPMENT ( 19 Mar$%) ,1 MARKS QUESTIONS 1. )hat is a""re"ate demand * Ans: 9#m total of cons#mption expendit#re and investment expendit#re )hat is a""re"ate s#pply* Ans. 9#m total of cons#mption expendit#re and savin"s )hat is cons#mption f#nction* Ans. $#nctional relationship between cons#mption and the income. )hat is meant by avera"e propensity to cons#me * Ans. &atio of 8ons#mption and income )hat is the relation between M79 and M78* Ans. M79 @ M78 ? 1 )hat is the val#e of M78 when M79 is Iero* Ans. 1 )hat can be maxim#m val#e of M79* Ans. 1 )hat is meant by f#ll employment* A sit#ation where all those who want to wor- at the prevailin" wa"e rate are wor-in" except those who are frictionally and str#ct#rally #nemployed. )hat is investment m#ltiplier* Ans. +t is the ratio of chan"e in income and chan"e in investment.

2. (. ,. /. 0. 1. 2.

3.

14.

ame the components of AD. Ans. 7rivate 8ons#mption! "ovt. cons#mption! investment expendit#re and net exports )hat is relationship between A78 and A79* Ans. A78 @ A79 ? 1 +f A79 is 4.0! how m#ch will be A78 * Ans. A78 ? 1 B A79 +f A78 is 4.1! how m#nch will be A79* Ans 4.( +f M78 is 4.1/! what will be M79* Ans. 4.2/ The disposable income is &s. 1244 crores and the level of cons#mption is &s. 244 crores. 8alc#late A78. Ans. A78 ? 8 . F )hat is meant by investment* Ans. Expendit#re made on capital "oods Give the form#la of investment m#ltiplier in term of M78. Ans. E ? 1 . 1 B M78 Give the form#la of investment m#ltiplier in the term of M79. Ans. E ? 1. M79 +f the val#e of m#ltiplier is ,! what will be M78! M79 * M78 ? 4.1/ and M79 ? 4.2/ )hat is deficient demand* Ans. AD less than its level of f#ll employment. )hat is excess demand* Ans. )hen AD is more than its level of f#ll employment. )hat is fiscal policy* Ans. The policy re"ardin" the "ovt. estimates re"ardin" its income and expendit#re. )hat is monetary policy* Ans. The policy re"ardin" the controllin" of credit and money s#pply. ame two meas#res to red#ce inflationary "ap*

11. 12. 1(. 1,. 1/.

10. 11. 12. 13. 24. 21. 22.

2(.

2,.

Ans. &aisin" the reserve ratios! ban- rate! increasin" the taxes or red#ction in "ovt. expendit#re. 2/. 20. ame two meas#res to red#ce deflationary "ap. Ans. &ed#cin" reserve ratios! Decreasin" taxes ! increasin" p#blic expendit#re. )hy is inflationary "ap arisin"* +ncrease in ho#sehold cons#mption expendit#re! +ncrease in "ovt. expendit#re! increase in investment! increase in exports and decrease in imports.

! " #ar$% &'(%t)*+%) 1. )hat are the components of demand* Ans. 7rivate 8ons#mption! "ovt. cons#mption! investment expendit#re and net exports )hat is e:#ilibri#m income * Ans. +ncome where AD ? A9 Distin"#ish between A78 and M78. The val#e of which of these two can be "reater than one and when * Ans. A78 ? 8 . F where as M78 ? 8 . F The val#e of A78 can be "reater than one if cons#mption is more than income Explain vol#ntary and invol#ntary employment. Ans. =ol#ntary #nemployment means people are #nemployed as they are not ready to wor- on prevailin" wa"e rate. +nvol#ntary #nemployment means people are ready to wor- at prevailin" wa"e rate b#t do not find "ainf#l employment for themselves. )hat is meant by investment m#ltiplier* Explain the relationship between M78 and m#ltiplier. E ? chan"e in income . chan"e in investment. E is positively related with M78. Explain briefly the effect of excess demand on o#tp#t! employment and price. Ans. %nly the price level will increase and the rest two remain same as there is f#ll employment sit#ation. Explain briefly the effect of deficient demand on o#tp#t! employment and price. Ans. All the three will fall. )ith the help of dia"ram! explain the concept of inflationary "ap. Ans. The "ap between excess demand and the f#ll employment level AD.

2. (.

,.

/.

0. 1.

2.

3.

Differentiate between inflationary "ap and deflationary "ap. Ans. The "ap between deficient demand and the f#ll employment level AD.