Top 60+ Important Questions and Numericals of National Income Accounting (Macroeconomics Chapter 2) Class 12 with Detailed Answers | Free PDF| Economics Class 12
Class 12 Macroeconomics: Chapter 2 (60 Verified FAQs)
Q1. What is meant by the circular flow of income?
It refers to the continuous cycle of generation of income in the production process, its distribution among factors of production, and its circulation from households to firms as consumption expenditure.
Q2. Name the three phases of the circular flow of income.
The three phases are Generation (production of goods), Distribution (flow of factor income), and Disposition (expenditure on consumption).
Q3. What is Real Flow?
Real flow refers to the physical flow of factor services from households to firms and the corresponding flow of goods and services from firms to households.
Q4. What is Money Flow?
Money flow refers to the monetary flow of factor payments from firms to households and the corresponding flow of consumption expenditure from households back to firms.
Q5. What comprises a two-sector economy?
A two-sector economy includes only the Household Sector and the Firm Sector, assuming no government intervention and no foreign trade.
Q6. What is a stock variable?
A stock variable is an economic quantity measured at a specific point in time, having no time dimension (e.g., wealth, money supply).
Q7. What is a flow variable?
A flow variable is an economic quantity measured over a specified period of time (e.g., monthly income, daily expenditure).
Q8. How does capital relate to investment?
Capital is a stock variable measured at a point in time, whereas investment is a flow variable that adds to the stock of capital over a period.
Q9. What are leakages (withdrawals) in the circular flow?
Leakages are the withdrawal of money from the circular flow, such as savings, taxes, and imports, which reduce the overall level of economic activity.
Q10. What are injections in the circular flow?
Injections are the introduction of new income into the circular flow, such as investments, exports, and government spending, which expand the economy.
Q11. Define Domestic Territory (Economic Territory).
It is the geographical territory administered by a government within which persons, goods, and capital circulate freely.
Q12. Who is considered a Normal Resident?
An individual or institution who ordinarily resides in the country and whose center of economic interest lies within that country.
Q13. Differentiate between a Normal Resident and a Citizen.
Citizenship is a legal status based on birth or law, while Normal Residentship is an economic concept based on the location of economic activities.
Q14. What are Final Goods?
Final goods are those goods that have crossed the boundary line of production and are ready for use by their final users (consumers or producers).
Q15. What are Intermediate Goods?
Intermediate goods are goods within the production boundary purchased by firms for resale or for further processing in the same accounting year.
Q16. What is the basis for classifying goods as final or intermediate?
The end-use of the product determines its classification. If used for final consumption or investment, it is final; if for resale or processing, it is intermediate.
Q17. Give an example where the same good is both final and intermediate.
Sugar bought by a household for tea is a final good, whereas sugar bought by a sweet shop to make sweets is an intermediate good.
Q18. What are Consumption Goods (Consumer Goods)?
These are goods that satisfy human wants directly and are purchased by ultimate consumers for personal use.
Q19. Differentiate between Durable and Non-durable consumer goods.
Durable goods can be used repeatedly for a long time (e.g., cars), while non-durable goods are used up in a single act of consumption (e.g., bread).
Q20. What are Capital Goods?
Capital goods are durable final goods used by producers in the production of other goods and services over multiple years (e.g., machinery).
Q21. Explain: All capital goods are producer goods, but all producer goods are not capital goods.
Producer goods include both single-use raw materials and durable capital goods. Since raw materials are not durable, they are not capital goods.
Q22. What is Investment or Capital Formation?
Investment refers to the addition made to the physical stock of capital (like machines, buildings, and inventory) during a given period of time.
Q23. Define Gross Investment.
Gross investment is the total addition made to the capital stock in a given period, which includes the replacement of worn-out capital (depreciation).
Q24. Define Net Investment.
Net investment is the actual, real addition made to the capital stock. It is calculated as Gross Investment minus Depreciation.
Q25. What is Depreciation (Consumption of Fixed Capital)?
Depreciation refers to the loss of value of fixed assets in use due to normal wear and tear, accidental damages, and expected obsolescence.
Q26. What is Expected Obsolescence?
It is the anticipated loss in the value of fixed assets due to changes in technology or shifts in market demand. It is included in depreciation.
Q27. What is Unexpected Obsolescence (Capital Loss)?
It is the sudden loss of value of fixed assets due to unforeseen circumstances like natural calamities. It is NOT included in depreciation.
Q28. What are Indirect Taxes?
Indirect taxes are taxes levied by the government on the production and sale of goods and services, which increase their market price (e.g., GST).
Q29. What are Subsidies?
Subsidies are financial assistance provided by the government to enterprises to lower the market price of essential goods for consumers.
Q30. Define Net Indirect Tax (NIT).
Net Indirect Tax is the difference between Indirect Taxes and Subsidies. It is added to Factor Cost to arrive at Market Price.
Q31. What is Factor Income?
Factor income is the income earned by the factors of production (land, labor, capital, enterprise) for rendering their productive services.
Q32. What is Transfer Income?
Transfer income is income received without rendering any productive service in return (e.g., old age pension, scholarships). It is not included in National Income.
Q33. Define Net Factor Income from Abroad (NFIA).
NFIA is the difference between factor income earned from the rest of the world by normal residents and factor income paid to non-residents within the domestic territory.
Q34. What are the three components of NFIA?
The three components are: Net compensation of employees, Net income from property and entrepreneurship, and Net retained earnings of resident companies abroad.
Q35. Differentiate between Current and Capital Transfers.
Current transfers are made from current income for consumption purposes, while capital transfers are made from wealth for the purpose of capital formation.
Q36. Define Gross Domestic Product at Market Price (GDPmp).
GDPmp is the gross market value of all final goods and services produced within the domestic territory of a country during an accounting year.
Q37. Define Net Domestic Product at Market Price (NDPmp).
NDPmp is the net market value of all final goods and services produced within the domestic territory. It is calculated as GDPmp minus Depreciation.
Q38. Define Net Domestic Product at Factor Cost (NDPfc) or Domestic Income.
NDPfc is the sum total of factor incomes (rent, wages, interest, profit) generated within the domestic territory of a country during an accounting year.
Q39. How do you convert GDPmp to Domestic Income (NDPfc)?
Domestic Income (NDPfc) is calculated by subtracting Depreciation and Net Indirect Taxes (NIT) from GDPmp.
Q40. Define Gross National Product at Market Price (GNPmp).
GNPmp is the gross market value of all final goods and services produced by the normal residents of a country. It equals GDPmp plus NFIA.
Q41. Define Net National Product at Factor Cost (NNPfc) or National Income.
NNPfc (National Income) is the sum total of factor incomes earned by normal residents of a country during an accounting year.
Q42. How is National Income calculated from Domestic Income?
National Income (NNPfc) is calculated by adding Net Factor Income from Abroad (NFIA) to Domestic Income (NDPfc).
Q43. Can Domestic Income be greater than National Income?
Yes, Domestic Income will be greater than National Income if the Net Factor Income from Abroad (NFIA) is negative.
Q44. What is the Value Added Method of calculating National Income?
It calculates national income by estimating the value added (contribution) by each producing enterprise in the domestic territory during an accounting year.
Q45. What is Value of Output?
Value of Output is the total market value of all goods and services produced by an enterprise. It equals Sales plus Change in Stock.
Q46. What is Intermediate Consumption?
It refers to the value of non-factor inputs (like raw materials, fuel, and power) that are completely used up in the process of production.
Q47. Define Gross Value Added at Market Price (GVAmp).
GVAmp is the difference between the Value of Output and Intermediate Consumption. The sum of GVAmp of all sectors equals GDPmp.
Q48. What is the problem of Double Counting?
Double counting occurs when the value of a product is counted more than once across various stages of production, causing overestimation of national income.
Q49. How can the problem of Double Counting be avoided?
It can be avoided by using the Final Output Method (counting only final goods) or the Value Added Method (counting only value added at each stage).
Q50. Are the sales of second-hand goods included in national income?
No, their value is not included as it was accounted for in the year they were produced. However, brokerage or commission earned on their sale is included.
Q51. What is the Income Method of measuring national income?
This method calculates national income from the distribution side, by summing up all the factor payments made to the owners of factors of production.
Q52. What is Compensation of Employees (COE)?
COE is the reward received by employees for their services, including wages and salaries (in cash and kind) and employers' contribution to social security.
Q53. Define Operating Surplus.
Operating surplus is the total income from property (Rent, Royalty, Interest) and income from entrepreneurship (Profit).
Q54. What are the three components of Profit?
The components of profit are: Corporate Tax (paid to the government), Dividend (distributed to shareholders), and Retained Earnings (kept as business reserves).
Q55. What is Mixed Income of Self-Employed?
It is the income generated by own-account workers (like farmers or doctors) where it is difficult to separate labor income from capital income.
Q56. Why are retirement pensions included in national income but old-age pensions are not?
Retirement pension is deferred compensation for past productive services (factor income), whereas an old-age pension is unilateral financial help (transfer income).
Q57. What is the Expenditure Method of measuring national income?
This method measures national income by summing up the total final expenditure made on final goods and services produced within the domestic territory.
Q58. Name the four components of Final Expenditure.
The components are Private Final Consumption, Government Final Consumption, Gross Domestic Capital Formation (Investment), and Net Exports.
Q59. What is Gross Domestic Capital Formation (GDCF)?
GDCF represents total investment in the economy. It is the sum of Gross Fixed Capital Formation and Inventory Investment (Change in Stock).
Q60. Are intermediate expenditures included in the Expenditure Method?
No, to strictly avoid the problem of double counting, only expenditures made on final goods and services are included in this method.
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