QUESTIONS
1. Explain how national income accounts are organized.
2. With the help of diagram explain the concept of social accounting in
a) Closed Economy
b) Open Economy
3. What are the items included in production and consumption sectors of the
economy.
4. Explain the problems of social accounting.
5. What is national income? Is it a reliable index of economic welfare?
6. Distinguish between :
(i)
Gross National Product and Net National Product.
(ii)
National Income at market prices and National Income at
‘Factor Cost’.
(iii)
National Income and Domestic Income.
(iv)
National Income at current prices and National Income at
constant prices.
7. Explain the following terms :
(i)
National Income.
(ii)
Personal Income.
(iii)
Disposable Income.
(iv)
Real Income.
8. Given N.N.P. at market prices, what adjustments will you make and why to get
N.I. at factor cost?
9. Define National Income. What are the various methods of estimating national
income? Point out its imperfections.
10. Explain how national income is a flow and not a stock; it is realized flow and not
any expected flow. What are the problems and difficulties in calculating its size?
11. Explain the ‘flow of product’ approach and the ‘income’ approach to the problem
of calculation of a country’s National Income. How are the following problems
dealt with, while calculation of country’s National Income. How are the following
problems dealt with, while calculating National Income: (a)Double counting ;
(b)Government transactions, taxes and transfer payments?
12. Discuss the importance and significance of national income estimates in modern
economic analysis.
13. Explain how the changes in the size and distribution of national income affect
economic welfare.
14. Macro Economics is useful in managing business organizations. How?
15. Which of the following activities/ transactions are included in the national income
and why?
(a) A father teaching his son
(b) A maid servant’s work in her employer’s house
(c) A vegetable vendor’s profit
(d) A worker’s wage on her employment
(e) Direct sale of an old car by Mohan to Mahesh
(f) Depreciation of machines due to wear, tear and
obsolescence
(g) An excise duty
(h) Profits of a foreign company
(i) Pension payments to retired employees
(j) Pollution caused by a recently established factory
(k) Students’ fees in a recently established primary school
(l) Earnings of a share broker
(m) Money received by Cronje from a bookie
(n) Monthly allowance that a child gets from his parents
(o) Travel Corporation of India purchases a new truck
(p) Pramod receives Rs.5000 by selling his holdings of
Reliance shares
16. Suppose the Happyland economy has the following national accounting data:
Personal Consumption- 19,500
Net Exports of good & services- 0
Net Domestic Savings- 9,750
Retained profit975
Capital consumption- 1,950
Corporate tax5,070
Govt. consumption
Govt. transfer payments to
expenditure7,800
households3,900
Indirect taxes net of
Personal(direct) taxes4,875
subsidies2,730
Net factor income from
Interest payments3,900
abroad0
Wages of employees- 26,000
(a) Find the values of the following national aggregates in Happyland:
Gross national product at market price
Gross domestic investment
Personal income from production
Personal savings
Fiscal deficit (surplus)
(b) Make a asources and uses of income chart and enter the relevant data and the
results of part (a) above on the chart.
17. The United States data on some national income and product accounts ($ billion)
in 1992 are as follows:
Personal consumption
4140
Employees’ compensation
3582
Gross private domestic investment
797
Proprietors’ income
414
Net exports of goods and services
-30
Corporate profits
407
Government purchases of goods and services
1132
Net interest
442
Net factor income from abroad
7
Net foreign investment
Consumption of fixed capital
Subsidies
Indirect taxes
-55
658
3
503
Determine the following magnitudes of the United States in 1992:
 GNP at market price
 GDP at market price
 National income
 Gross savings
 Rental income
18. Suppose the sources and uses of income with the production sector (all firms) of
an economy were the following:
Sources of Income
Sales to households
Sales to Government
Net (of imports) exports
Domestic gross investment
500
75
20
115
Uses of Income
Wages paid to residents
400
Wages paid to non-residents 20
Dividend paid to residents
40
Dividend paid to non-residents 2
Interest paid to residents
25
Interest paid to non-residents 3
Rent paid to residents
40
Retained profit
45
Corporate profit tax
60
Net (of subsidies)indirect taxes 25
Depreciation
50
Assume all other items, if any, as zero. Compute the economy’s GDP at market
price and national income.
19. GDP is a misleading measure of material well being. Is this true? How?
20. India’s GNP (PPP) is around one-fourth of that of the United States of America.
Thus,
(a) India possesses about 26 percent of the United States
material well being.
(b) Economic welfare of the Indian people is about 25 percent
of that of people living in the United States.
Comment on the above observations.
21. If a chicken is born, the per capita GDP goes up but if a child is born, the per
capita GDP goes down. How?
22. Given below is the data on the production structure in a cross section of countries
and the world.
Country
Value added by
________________________________________________________________
Agriculture
Industry
Manufacturing
Services
___________
___________
_____________
______________
1990 2004
1990 2004
1990 2004
1990 2004
India
USA
UK
Japan
Malaysia
China
Australia
Nigeria
Russian Fed
Germany
Brazil
World
31
2
2
2
15
27
4
33
17
2
8
5
21
1
1
1
10
13
3
17
5
1
8
4
28
28
35
39
42
42
29
41
48
38
39
34
27
22
26
31
50
46
26
57
35
29
40
28
17
20
23
27
24
33
14
6
--28
25
22
16
15
--21
31
--12
4
--23
11
18
41
70
63
58
43
31
67
26
35
60
53
60
52
77
73
68
40
41
71
27
60
70
50
68
Source: World Development Indicators, World Bank, 2006.
(a) Examine the Indian data for 2004 and see whether the sum of the value added by
various sectors equal the total output. If not, why? Repeat the exercise for a
couple of other countries.
23. The table below presents the data on the structure of demand in some select
countries and world:
Country
India
USA
UK
Japan
Malaysia
China
Australia
Nigeria
Russian Fed
Germany
Brazil
World
House
Final
Consumption
___________
1990
2004
Government’s
final
consumption
_____________
1990
2004
Gross
capital
formation
_____________
1990
2004
Exports
Imports
(of goods and services)
67
67
63
53
52
50
59
56
49
55
59
12
17
20
13
14
12
19
15
21
19
19
24
18
20
33
32
35
22
15
30
22
20
24
18
17
24
23
39
25
22
21
17
21
7
10
24
10
75
18
17
43
18
29
8
19
10
25
12
121
34
18
55
35
38
18
10
11
27
9
72
14
17
29
18
25
7
23
14
28
10
100
31
21
37
22
33
13
24
21
20
24
20
24
68
71
65
57
43
49
60
38
50
59
55
11
16
21
18
13
10
18
22
17
19
19
59
62
17
17
Source: World Development Indicators, World Bank, 2006
___________________________
1990
2004
1990 2004
(a) Verify the validity of the income identity for atleast two countries and in two
periods.
24. The marginal propensity to consume (MPC) for the United States as a whole is
roughly 0.90. Explain in words what this means. What is your personal MPC at
this stage in your life? How might that change by the time you are parents’ age?
25. What is a consumption function, and why is it a useful device for government
economists planning a tax cut?
26. Explain the difference between final goods and intermediate goods. Why is it
sometimes difficult to apply this distinction in practice? In this regard, why is the
concept of value added useful?
27. Explain why national income and gross domestic product would be essentially
equal if there were no depreciation/
28. Find the equilibrium level of GDP demended in an economy in which investment
is always $300, net exports are always -$50, the government budget is balanced
with purchases and taxes both equal tom $400, and the consumption function is
described by the following algebraic equation:
C= 150 + 0.75DI
29. Fredonia has the following consumption function:
C= 100+ 0.8 DI
Firms in Fredonia always invest $ 700 and net exports are 0, initially. The government
budget is balanced with spending and taxes both equal to $500.
a) Find the equilibrium level of GDP.
b) How much is saved? Is saving equal to investment?
c) Now suppose that an export-promotion drive succeeds in raising net exports to
$100. Answer (a) and (b) under these new circumstances.
30. Explain the basic logic behind the multiplier in words. Why does it require b, the
marginal propensity to consume, to be between 0 and 1?
31. From the following data, construct an expenditure schedule on a piece of graph
paper. Then use the income – expenditure (45 degree line) diagram to determine
the equilibrium level of GDP.
Income Consumption
Investment
Government
Net
Purchases
Exports
$3,600
$3,220
$240
$120
$40
3,700
3,310
240
120
40
3,800
3,400
240
120
40
3,900
3,490
240
120
40
4,000
3,580
240
120
40
Now suppose investment spending rises to $260, and the price level is fixed. By how
much will equilibrium GDP equilibrium increase? Derive the answer both
numerically and graphically.