Very Short Question Answer
1. What is meant by two sector economy?
The economy which consists of only household and business sectors is called two sector economy. This is hypothetical concept. This is also known as the two sector closed economy.
2. Define the meaning of three sector economy.
The economy which consists of household, business and government sectors is called three sector economy. This is also known as three sector closed economy.
3. What do you mean by four sector economy?
The economy which consists of household, business, government and foreign sectors is called four sector economy. It is also known as the open economy.
4. What are the injections and withdraws or leakages in the circular flow of income and expenditure?
In the circular flow of income and expenditure, injections are investment, government spending and export where as withdraws or leakages are saving, taxes and import…
5. What is the circular flow of income and expenditure?
Circular flow of income and expenditure is the integrated flow of resources, goods and services among different sectors of the economy.
6. What do you mean by closed economy?
The economy which is not involved in international trade is called closed economy.
7. What is open economy?
The economy which is involved in international trade is called open economy. It = is also known as the four sector economy.
8.What is meant by net factor income from aboard?
Net factor income from abroad is the income earned by citizens of a country abroad less income earned by foreigners in that country.
Net factor income from abroad = Income earned from abroad – Income earned by foreigners in the country.
9. Define GDP.
GDP is defined as the market value of all final goods and services produced. within domestic territory of a country during a year. It is calculated as follows:
GDP = P₁Q₁ + P2Q2 + P3Q3 + … PnQn
Where, P =Price
Q = Quantity of goods and services produced
10. What is GNP?
GNP is the market value of all goods and services produced during a year by domestically owned factors of productions. In other words, it is the sum of GDP and net factor income from abroad.
GNP = GNP+ Net factor income from abroad
11. Define national product (NNP).
Net national product (NNP) is defined as the gross national product (GNP) minus depreciation.
NNP = GNP – Depreciation
12. What is per capita income?
Per capita income is the national income divided by total population of a country.
Per capita income = NI/ Total population
13. Define personal income.
Personal income (PI) is defined as the total sum of income received by all individuals of a country before payment of personal direct taxes in a year.
PI = NI – Corporate income tax – Undistributed corporate profit – Social security contribution + Transfer payment.
14. What is meant by double counting?
Double counting means value of the same product included more than once in the national income accounting. Because of double counting, national income is over estimated.
15. What is the solution to the problem of double counting in the estimation of national income?
The solution of double counting is the use of value added method in the estimation of national income.
16. What is meant by net value added?
Net value added is defined as the amount received after deducting depreciation of fixed capital from gross value added.
Net Value Added = Gross value added – Depreciation
17. What is the difference between real and nominal GDP?
Real GDP is the GDP calculated at any base year’s price where as nominal GDP is the GDP calculated at current year’s price.
18. What components do you include while calculating GDP at MP by expenditure method?
The following components are included while measuring GDP by expenditure method:
Consumption expenditure
Investment expenditure
Government expenditure
Net export
Short Question Answer
1. Explain the various concepts of national income.
The different concept of national income are as follows:
i. Gross domestic product (GDP): GDP is defined as the market value of all final goods and services produced within the domestic territory of a country during a year. It is calculated by the multiplication of all goods and services produced within the country with their respective prices.
GDP = P₁Q1+ P₂Q2 + P3Q3+… PnQn
Where,
P = Price
Q = Quantity of goods and services produced
ii. Net domestic product (NDP): NDP is defined as the GDP minus depreciation. Depreciation is the wear and tear of fixed capital assets or decrease in value of fixed capital assets.
NDP = GDP- Depreciation
iii. Gross national product (GNP): GNP is defined as the market value of all final of goods and services produced during a year by domestically owned factors production. In other words, it is the sum of GDP and net factor income from abroad. GNP = GDP+ Net factor income from abroad
iv. Net national product (NNP): NNP is defined as GNP minus depreciation.
NNP = GNP – Depreciation
v. National income (NI): National income is defined as the sum of earning of all factors of production in the form of wages and salaries, profits, rent and interest plus net factor income from aboard. The total sum of factor earning within the domestic territory of a country is the NDP at factor cost. When we sum up net factor income from abroad, we get NNP at factor cost, which is the national income at factor cost.
NDP at FC= Wages and salaries + Rent + Interest + Profit
NNP at FC= NDP at FC + Net factor income from abroad
NI = NNP at FC
vi. Personal income (PI): Personal income is defined as the total sum of income received by all individuals and households of a country before payment of direct taxes during a year. It is calculated as follows:
PI = NI – Undistributed corporate profit – Corporate income tax contribution + Transfer payments Social security
vii. Disposable income (DI): Disposable income is defined as the total sum of income received by all individuals and household of a country after payment of direct personal taxes during a year.
DI = PI – Direct taxes (Personal taxes)
Disposable income is available for households and persons for consumption. However, the total disposable income is not spent only on consumption because a part of it saved. Thus,
DI = S+ C
Where,
S =saving.
C= Consumption
viii. Per capita income (PCI): Per capital income is defined as the national income of a country divided by its total population.
Per capita income = NI/ Total population
2. Explain the concept of nominal GDP, real GDP and GDP Deflator.
Nominal GDP is defined as the GDP measured at current market prices. It includes all the changes in market prices that have occurred during current year due to inflation and deflation. Nominal GDP is measured by using following formula:
Nominal GDP = P₁Q1 + P₂Q2 + P3Q3 +… PnQn
Where,
P = Current price
Q = Quantity of goods and services produced in the current year
REAL GDP
Read GDP is defined as the GDP measured at the market price of any base year. For example, if 2013 is chosen as the base year, then real GDP of 2014 is calculated by taking the quantities of all goods and services produced in 2014 and multiplying them by the market prices of 2013. The following formula shows calculation of real GDP:
Real GDP= PoQ1 + PoQ2 + PoQ3 +… PoQn
Where,
Po=Base year’s Price
Q=Quantity of goods and services produced in the current year.
GDP deflator is defined as the technique which is used to measure relative change in current level prices in comparison to the level of prices in the base year. In other words, GDP deflator is the ratio of nominal GDP in a given year to real GDP of that year and multiplying it by 100. The following formula shows the calculation of GDP deflator:
GDP deflator= Nominal GDP/ Real GDP x100
Based on GDP deflator, real GDP can be calculated from the nominal GDP. The following formula shows the calculation of real GDP by the help of GDP deflator and nominal GDP:
Real GDP= Nominal GDP/ GDP Deflator x100
On the basis of GDP deflator, rate of inflation between any two periods can be calculated. The formula to calculate rate of inflation between any two periods is as follows:
Rate of Inflation = Change in GDP deflator / GDP deflator of the previous year x100
3. Explain the concept of GDP at market price and GDP at factor cost, GNP at market price and GNP at factor cost and national income.
GDP at MP is defined as the total a money value all final goods and services produced within a domestic territory of a country during a year. All goods and services produced during a year are multiplied by their respective prices and summed up in order to calculate GDP at MP.
Symbolically,
GDP at MP= P₁Q₁ + P₂Q₂ + P3Q3 + … PnQn
Where,
P = Price
Q= Quantity of goods and services produced
On the other hand, GDP at FC is defined as the total aunt of reward received by all factors of production in the form of wages and salaries, interest ,profit. and rent within the domestic territory of a country during a year Since it is measured by the total sum of income received by all factors of production it is called GDP at factor cost.
GDP at FC = Wages and salaries+ Rent +Profit+ Interest+ Depreciation
The difference between GDP at MP and GDP at FG arises from the fact that indirect taxes and subsides causes market price of output to be different from the factor cost. GDP at MP includes indirect taxes and subsidies where as GDP at FC does not include indirect taxes and subsidies. When indirect taxes are deducted and subsidies are summed up in GDP at MP, we get GDP at FC. The following formula shows calculation of GDP at FC from GDP at MP:
GDP at FC = GDP at MP – Net indirect taxes
Net indirect taxes are calculated by subtracting subsidies from indirect taxes.
Net indirect taxes = Indirect taxes – Subsidies
GNP at MP is defined as the GDP at MP plus net factor income from abroad. On the other hand, GNP at FC is the GDP at FC plus net factor income from abroad. GNP at MP is evaluated at the market price where as GNP at FC is calculated from the sum of reward paid to the factors of production for their contribution in the production process.
GNP at MP = GDP at MP + Net factor income from abroad
GNP at FC = GNP at MP – Net indirect taxes
National income is the total sum of income earned by all factors of production in the form of wages and salaries, rent, interest and profit plus net factor income from abroad. It is always measured at net factor cost. The following formula shows calculation of national income by factor income method:
NI = (Wages and salaries + Rent + Interest + Profit) + Net factor income from abroad = NDP at FC + Net factor income from abroad
= NNP at FC
From the above formula, it is clear that national income is the net national product at factor cost (NNP at FC):
The following formula shows how national income is measured by product method: GDP at MP = P1Q1 + P₂Q2 + P3Q3 +… PnQn
GNP at MP NNP at MP = GDP at MP + Net factor income from abroad
NNP at MP = GNP at MP – Depreciation
NNP at FC= NNP at MP – Net indirect taxes
NI= NNP at FC
4. Explain the expenditure method of calculating national income.
Or, How is national income computed by expenditure approach?
In the expenditure method, the economy is divided into four major sectors: household, business, government and foreign for the output produced in the economy. The total expenditure of these sectors on final output constitute GDP at market price. GDP at market price is, therefore, the sum of total expenditure made by households, government, business and foreign sectors.
The total expenditure of household sector is consumption expenditure; the total expenditure of business sector is investment expenditure, total spending of government sector is government expenditure and total expenditure of foreign sector is net export. Net export is equal to the total exports minus total imports. These are the four components of GDP at market price. Thus, GDP at market price is the total sum of consumption expenditure, investment expenditure. government expenditure and net export. When net factor income from aboard is added to GDP at MP, we get GNP at MP. GNP at MP is converted to NNP at MP by deducting depreciation. Again, NNP at MP is converted to NNP at FC by deducting net indirect taxes. NNP at FC is the national income. The various components of national income according to expenditure method are as follows:
i. Personal consumption expenditure (C): The Personal consumption expenditure consists of expenditure on consumer goods like food, clothes, automobiles medical care etc.
ii. Gross private domestic investment (): The gross private domestic investment includes investment spending by business firms. It is also known as the gross capital formation.
Gross domestic private investment (Gross domestic private capital formation) = Net fixed domestic private Investment (Net fixed private capital formation) + Depreciation + Change in stock
Change in stock = Closing stock – Opening stock
iii. Net export (X-M): Net export means total exports minus total imports. To measures GDP at MP in terms of total expenditure, net export is included in the measurement of national in income. Net export = Total export – Total import
iv. Government expenditure (G): Government expenditure includes expenditure on security, administration, infrastructure development, etc. But government expenditure on transfer payments are not included.
v. Net indirect taxes: Net indirect tax is equal to total indirect taxes minus subsidies. It is deducted from GDP at MP to get GDP at FC. Net indirect taxes = Indirect taxes – Subsidies
vi. Net income from abroad: The net income from abroad is equal to income received by citizens of a country aboard minus income paid to the foreigners. It is added to GDP at get GNP.
vii. Depreciation: Depreciation is also known as the capital consumption allowance. It is subtracted from gross income to get net income. The calculation of national income by expenditure method involves following steps:
GDP at MP= C+I+G+ (X-M)
GNP at MP= GDP at MP + Net factor income from abroad
NNP at MP= GNP at MP – Depreciation
NNP at FC= NNP at MP – Net indirect taxes
NI= NNP at FC
5. Explain the income method of calculating national income.
Income Method of Calculating OR Computing National Income In the income method, national income is calculated from the side of factor income. Therefore, this method is also known as factor payment method. According to this method, the total sum of income received by all factors of production in the form of wages and salaries, rent, interest and profit are summed up to get NDP at factor cost (FC). When net factor income from abroad is summed up, we get NNP at FC, NNP at FC is the national income. The important components of national income while calculating by income method are as follows:
i. Compensation of employees: Compensation of employees includes all forms of remuneration for work, such as wages and salaries, bonuses. employers’ contribution to social security contribution, provident funds, money commission value of other facilities, etc.
ii. Rent: Rent received from land, building, factory, etc. are included in national income. This components of national income includes estimated rent value of owner occupied dwellings and royalties received by persons from patents, copy rights etc.
iii. Interest: Interest received by capitals are included in the national income. It represents the business sectors total interest payments to other sectors minus their total interest payment to business sector.
iv. Profits: Profits include dividends, corporate profit taxes and undistributed profits. All these profits are included in the calculation of national income. Profit Dividends + Corporate profit taxes + Undistributed profits
v. Net indirect taxes: Net indirect tax is equal to indirect taxes minus subsides. Net indirect taxes are deduced from GDP at MP to get GDP at FC. Net indirect taxes Indirect taxes – Subsidies
vi. Net income from abroad: The net income from abroad is included in national income. Net income from aboard is equal to income received by citizens of a country aboard minus income paid to foreigners. It is added to GDP to get GNP.
vii. Depreciation: Depreciation amount is deducted to get net income from gross income. It is wear and tear of fixed assets and machineries.
viii. Income from self-employment: Income earned by self-employed persons or profit of small business or sole proprietorship or household industries is called income from self-employment. It is also known as the mixed income. It is also a part of national income.
The various steps of calculating national income by income method are as follows:
NDP at FC= Wages and salaries + Rent+ Profit + Interest Income from self employment
NNP at FC= NDP at FC + Net income from abroad
NI = NNP at FC
Alternative Method:
GDP at MP= Compensation of employees + Rent+ Profit +Interest+ Income from self-employment + Depreciation + Net indirect taxes
GNP at MP = GDP at MP + Net factor income from abroad
NNP at MP= GNP at MP – Depreciation
NNP at FC= NNP at MP – Net indirect taxes
NI = NNP at FC
6.Explain the difficulties encountered in measuring national income Or, What are the difficulties in measurement of national income? Explain
Difficulties in Measurement Of National Income:
Measurement of national income is very essential for every nation as a very important indicator of economic performance of an economy. However, there are many difficulties to measure accurate national income. Some of the important difficulties are as follows:
i. Double counting: It is one of major problem in the calculation of national Income. It refers to a commodity being included to the calculation of national income more than once. To solve this problem, only the value of final goods and services should be included in the national income accounting. The value of intermediate goods and services should be excluded from the calculation. The best way of avoiding double counting is value added method of calculating national income.
ii. Calculation of depreciation: The depreciation is deducted from gross national product to calculate net national product and national income. But it is difficult to estimate accurate depreciation. The depreciation charge differs from product to product. Sometimes similar capital goods are treated differently by the different firms. It becomes further complicated if the value of capital assets change every year.
iii. Change in value of money (or price level): National income is measured in monetary terms. The value of money keeps on changing with time because of change in price level. This creates problem to calculate national income because national income changes even without change in output.
iv. Illegal income: Income earned through illegal activities such as gambling, bribery, smuggling, etc. are not included in national income. By excluding such activities the national income is under-estimated.
v. Non-availability of reliable data: National income measurement requires correct and reliable data. But it is very difficult to get reliable data in order to calculate accurate national income. This difficulty is not only to the developing countries, but even developed countries are facing this problem.
vi. Choice of method: It is also difficult to decide which method is to be used in the calculation of national income. The general view is to use product, income and expenditure methods simultaneously depending upon the availability of statistical data.
vii. Non-market activities: The national income calculation is based on the information of the market. But there are many activities, which do not appear in the market. These activities are not included in the calculation of national income. The most common example is household work done by housewife. The exclusion of such not market activities make the calculated national income less than actual one.
viii. Inclusion of services: There has been some debate about whether to include services in the counting of national income, and if it counts as output. Marxian economists are of the belief that services should be excluded from national income, most other economists though are in agreement that services should be included.
ix. Unreported illegal income: Sometimes, people don’t provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income.
x. Intermediate goods: The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality it is very hard to draw a clear cut line as to what intermediate goods are. Many goods can be justified as intermediate as well as final goods depending on their use.
7. Explain the need or importance of national income accounting. NEED OR IMPORTANCE OF NATIONAL INCOME ACCOUNTING
The importance of national income accounting are as follows:
i. Indicator of economic structure: National income estimates are an important index of the economic structure of the economy. They tell us how income are earned and spent in the country. They provide knowledge about the relative importance of various sectors of the economy and their contribution to national income.
ii. Indicator of economic welfare and international comparison: National income figures are an indicator of the people’s welfare of a country. With the help of these figures, we can have a comparative study of the standard of living of the people living in different countries as well as the people living in the same country at different times.
iii. Helpful to formulate economic policy and planning: National income throws light on the level of aggregate economic activity in the economy. Its estimates are the important tools for economic planning and policies. On the basis of these estimates, the government makes future plans and policies for the development and growth of the country.
iv. inflationary and deflationary gaps: National income estimates provides information about the existence of inflationary and deflationary gaps in the economy. They are also helpful in formulating anti-inflationary and anti deflationary policies.
v. Basis of budgetary policies: Modern governments prepare their budgets on the basis of national income data and make necessary changes in taxation and borrowing policies so as to avoid fluctuations in national income.
vi. Importance in defense and development: National income estimates enable us to determine the proper allocation of national product between defense and development of the economy. It tells us how much of the national income can be spared for war purposes.
vii. Provision of depreciation: National income studies show as to how national income is divided into consumption expenditure and investment expenditure. It further guides us to make provision for reasonable depreciation to maintain the capital stock of the country. Inadequate depreciation allowance means living at the expense of capital, while excessive depreciation allowance leads to unnecessary reduction in consumption.
viii. Importance in developing countries: National income data are particularly important for developing countries like Nepal. They throw light on the importance and backwardness of various sectors of these economies and help in formulating appropriate economic policies.
ix. Basis of social accounting: National income figures form the basis of social accounting or national income accounting. Social accounts are the systematic records and presentation of national income data. The objective of social accounting is to signify the interrelations among various constituents of national income statistics.
x. Importance in economics analysis: National income estimates help us in analyzing the functioning, growth and anatomy of the economy. They are important in analyzing (a) the growth of the economy, (b) the trend of various sectors, (c) the trends of factor shares, and (d) the trend of various macro variables, such as, aggregate consumption, aggregate investment, and aggregate saving, etc.