CBSE Class 12 Economics National Income Accounting VBQs Set 05

Question. Economic territory of a country in which economic activities of the country generates its domestic income is called:
(a) national territory
(b) domestic territory
(c) political territory
(d) geographical territory
Answer: (b) domestic territory

Question. Which of the following is an example of normal residents of India?
(a) Foreign worker working in WHO located in India
(b) The German working as Director in IMF office located in India
(c) Ambassador in India from rest of the world
(d) Ambassador of India in rest of the world
Answer: (d) Ambassador of India in rest of the world

Question. Domestic income:
(a) is the sum total of factor incomes generated within the domestic territory of a country
(b) is generated by the normal residents as well as non-residents within the domestic territory of a nation
(c) is equal to national income when net factor income from abroad is zero
(d) All of the options
Answer: (d) All of the options

Question. Factor payment received by the households for rendering their services as employees of the producing units is called:
(a) compensation of employees
(b) rent
(c) interest
(d) profit
Answer: (a) compensation of employees

Question. Which of the following leads to market price?
(a) Factor cost - Indirect taxes
(b) Factor cost - Net indirect taxes
(c) Factor cost + Indirect taxes
(d) Factor cost + Net indirect taxes
Answer: (d) Factor cost + Net indirect taxes

Question. Net Indirect Taxes =
(a) Indirect taxes + Subsidies
(b) Direct taxes + Subsidies
(c) Indirect taxes - Subsidies
(d) Direct taxes - Subsidies
Answer: (c) Indirect taxes - Subsidies

Question. \( NDP_{FC} = \)
(a) Compensation of employees + Rent + Interest + Profit + Net factor income from abroad
(b) Compensation of employees + Rent + Interest + Profit + Mixed income of self-employed
(c) \( NDP_{MP} \) - Net indirect taxes
(d) both (b) and (c)
Answer: (d) both (b) and (c)

Question. Which of the following is correct?
(a) \( GDP_{FC} \) = Compensation of employees + Rent + Interest + Profit
(b) \( GDP_{FC} \) = Compensation of employees + Rent + Interest + Profit + Depreciation
(c) \( GDP_{FC} \) = Compensation of employees + Rent + Interest + Profit - Depreciation
(d) \( GDP_{FC} = NDP_{FC} \) - Depreciation
Answer: (b) \( GDP_{FC} \) = Compensation of employees + Rent + Interest + Profit + Depreciation

Question. Which of the following is incorrect?
(a) \( GDP_{MP} = NDP_{MP} \) + Depreciation
(b) \( GNP_{FC} = GNP_{MP} \) + Net indirect taxes
(c) \( NNP_{MP} = NDP_{MP} \) + Net factor income from abroad
(d) \( NDP_{FC} = GDP_{FC} \) - Depreciation
Answer: (b) \( GNP_{FC} = GNP_{MP} \) + Net indirect taxes

Question. Net Factor Income from Abroad =
(a) National income - Net indirect taxes
(b) National income - Indirect taxes
(c) National income - Domestic income
(d) Domestic income - National income
Answer: (c) National income - Domestic income

Question. Which of the following is a factor income?
(a) Interest
(b) Scholarship
(c) National debt interest
(d) Grants
Answer: (a) Interest

Question. Factor incomes are:
(a) earned incomes
(b) unearned incomes
(c) both earned as well as unearned incomes
(d) neither earned nor unearned incomes
Answer: (a) earned incomes

Question. Which of the following is not a transfer payment?
(a) Gifts from abroad
(b) Retirement pensions
(c) Donations
(d) Grants
Answer: (b) Retirement pensions

Question. When \( NNP_{MP} \) = Rs. 5,330, indirect taxes = Rs. 1,770 and consumption of fixed capital = Rs. 1,550, then: \( GNP_{FC} = \)
(a) Rs. 2,010
(b) Rs. 3,560
(c) Rs. 5,110
(d) Rs. 8,650
Answer: (c) Rs. 5,110

Question. If \( NDP_{FC} \) = Rs. 4,300, depreciation = Rs. 1,350, subsidies = Rs. 250, net factor income from abroad = Rs. 330, \( GDP_{MP} \) will be:
(a) Rs. 2,370
(b) Rs. 2,700
(c) Rs. 5,400
(d) Rs. 6,230
Answer: (c) Rs. 5,400
 

Fill in the Blanks
 

Question. By adding _______ to domestic income, we estimate national income. (net exports/net factor income from abroad)
Answer: net factor income from abroad

Question. Those residents who ordinarily reside in a country and whose centre of interest lies in that country are called _______. (normal residents of the country/citizens of the country)
Answer: normal residents of the country

Question. _______ income is an unearned income. (Factor/Transfer)
Answer: Transfer

Question. GDP at Market Price = NDP at Market Price + _______ (Indirect Taxes/Depreciation)
Answer: Depreciation

Question. _______ lower the market price of the goods. (Subsidies/Indirect taxes)
Answer: Subsidies

Question. _______ includes income generated both by the residents as well as non-residents of a country. (Domestic income/National income)
Answer: Domestic income

Question. _______ includes factor incomes only. (Domestic income/Personal income)
Answer: Domestic income
 

True or False
 

Question. GDP at Factor Cost = NDP at Factor Cost - Depreciation.
Answer: False

Question. National income is the sum total of factor incomes.
Answer: True

Question. Difference between indirect taxes and subsidies is called net indirect taxes.
Answer: True

Question. Ambassador from India in Japan is a non-resident of India.
Answer: False

Question. GNP at Market Price = GDP at Market Price + Net Factor Income from Abroad.
Answer: True

Question. Depreciation is not included in the Gross Domestic Product at Factor Cost.
Answer: False

Question. Domestic income includes net factor income from abroad.
Answer: False
 

Very Short Answer Questions
 

Question. What is meant by normal residents of a country?
Answer: Normal residents are those residents who ordinarily reside in the country concerned and whose centre of economic interest lies in that country.

Question. What is meant by domestic territory of a country?
Answer: Domestic territory of a country refers to economic territory of a country in which economic activities of the country generates its domestic income.

Question. What is factor income?
Answer: Factor income is the income received by owners of the factors of production in the form of rent, wages, interest and profit for the services rendered in the production process.

Question. Define domestic factor income.
Answer: Domestic factor income is income generated in the domestic territory of the country by all enterprises during one year.

Question. What are transfer payments or transfer expenditure?
Answer: Transfer payments (or transfer expenditure) are all those unilateral payments corresponding to which there is no value-addition in the economy. Examples: Gifts and donations.

Question. Define voluntary transfers.
Answer: Voluntary transfers are those transfers which flow on account of the free will of the payer and the recipient.

Question. Define forced transfers.
Answer: Forced transfers are compulsory payments, like income tax.

Question. Define current transfers.
Answer: Current transfers are those transfers which are paid from the current income of the payer and added to the current income of the recipient for consumption expenditure.

Question. What are capital transfers?
Answer: Capital transfers are the transfers made out of wealth or saving of the payer and included in the wealth or saving of the recipient.

Question. What are capital transfers from abroad?
Answer: Capital transfers from abroad are those transfers which are paid by rest of the world for purpose of gross capital formation or long-term expenditure.
 

National Income and Related Aggregates
 

Short Answer Questions

Question. Aggregate income, employment and output is subject matter of micro economics and macro economics ?
Answer: These variables represent key areas of study in macroeconomics. They concern the entire economic system rather than focusing on separate individual entities or specific markets.
In simple words: These concepts are part of macroeconomics because they look at the whole country's economy, not just single businesses or people.
Exam Tip: Remember that variables describing the economy at an aggregate or national level always fall under macroeconomics.

Question. Is employment an example of micro economic variable?
Answer: No, aggregate employment is not a microeconomic concept. It is classified as a macroeconomic variable since it measures the total number of employed individuals across the entire nation.
In simple words: No, employment is a macroeconomic topic because it looks at jobs across the entire country, not just at one business.

Exam Tip: Clarify the distinction - while individual employment is a micro concept, overall or national employment levels are always macroeconomic.

Question. Why is Aggregate income considered a macro economic variable ?
Answer: Aggregate income is classified under macroeconomics because it reflects the total earnings of all households and businesses in the entire country, rather than focusing on the income of a single person or individual firm.
In simple words: It is a macroeconomic variable because it measures the combined income of everyone in the country.

Exam Tip: When defining a macroeconomic variable, always highlight that it deals with the aggregate or sum total of the entire economy.

Question. What is the significance of national income accounting?
Answer: Measuring national income is important because it offers a structured way to evaluate how well a country's economy is doing. It also helps the government design better economic policies and makes it easier to compare growth across different time periods or with other countries.
In simple words: This method of accounting helps us see if a country's economy is growing or shrinking. It also helps the government plan for the future.

Exam Tip: Focus on key benefits such as policy formulation, performance measurement, and comparative analysis to get full marks.

Question. How do we study the economic performance of an economy?
Answer: To evaluate how well an economy is functioning, we look at national income metrics like Gross Domestic Product (GDP) and Gross National Product (GNP). We also analyze indicators such as inflation, total production, and employment trends.
In simple words: We check how healthy an economy is by looking at indicators like GDP, job rates, and how fast prices are rising.

Exam Tip: Mentioning "GDP" or "National Income" as the primary metric for economic performance is crucial for scoring well.

Question. What is the basic purpose of national income accounting?
Answer: The primary objective of national income accounting is to present a clear, organized overview of a country's economic activities. This involves tracking how goods, services, and money move across various sectors.
In simple words: Its main goal is to show a clear picture of how much money, goods, and services are moving through the economy.

Exam Tip: Emphasize the "systematic tracking of economic flows" as the central purpose.

Question. what criterion is used by the govt. to frame policies to maximize material welfare?
Answer: Governments rely on national income statistics, especially real per capita income and GDP growth rates, to guide policy decisions that aim to improve public material well-being.
In simple words: The government looks at the average income per person and overall economic growth to decide on policies that help people live better.

Exam Tip: Real GDP per capita is the standard economic yardstick for measuring material welfare.

Question. What is macro economic theory?
Answer: Macroeconomic theory is a field of economics that examines the overall behavior and functioning of the entire economy. It analyzes major aggregate indicators such as nationwide production, price levels, and employment rates.
In simple words: It is the study of how a whole country's economy works instead of looking at individual people or shops.

Exam Tip: Be sure to define macroeconomics using terms like "economy as a whole" and "aggregate variables."

Question. What do macroeconomic economic theory deal with ?
Answer: This branch of theory focuses on key areas such as how total output and job levels are determined, the stability of general prices, government budgeting, central bank policies, and global trade flows.
In simple words: It deals with big topics like total jobs, inflation, government taxes, and trade between countries.

Exam Tip: List at least three core areas of macroeconomics (such as employment, inflation, and national income) to write a complete answer.

Question. Define macroeconomics?
Answer: Macroeconomics can be defined as the study of economic phenomena, trends, and relationships on a national or global scale, rather than focusing on individual consumers or businesses.
In simple words: Macroeconomics is the study of the big picture of the economy, like national income and total employment.

Exam Tip: Highlight the contrast with microeconomics by stating that macroeconomics deals with the aggregate level.

Question. Discuss the subject matter of macroeconomics .
Answer: The scope of macroeconomics encompasses several major fields, including how national income is measured, how total employment is determined, the role of money and banks, inflation control, long-term economic development, and international transactions.
In simple words: Macroeconomics studies big-picture topics like how many jobs are available, how prices change, how banks work, and how a country trades with others.

Exam Tip: Structuring this answer with distinct sub-fields will make it clear and easy to read.

Question. What do you understand by microeconomics?
Answer: Microeconomics is the field of study that looks at how individual decision-makers, like a single household, buyer, or business, make choices and how prices are decided in specific markets.
In simple words: Microeconomics is about how single people or single companies make choices and set prices.

Exam Tip: Focus on "individual economic units" as the defining feature of microeconomics.

Question. What do microeconomic theory deal with ?
Answer: This area of economics focuses on how consumers choose what to buy, how businesses decide what to produce, how prices are set in markets, and how limited resources are divided among different needs.
In simple words: It deals with how people decide to spend their money, how companies make goods, and how market prices are set.

Exam Tip: The core of microeconomic theory is often called "Price Theory" - mentioning this can help you score extra marks.

Question. Give examples of microeconomic variables.
Answer: Some common examples of microeconomic variables are the output of a single business, the demand for a specific product, an individual's salary, and the spending choices of a single household.
In simple words: Examples include the price of an apple, the wage of one worker, or how much one family spends.

Exam Tip: Avoid macro aggregates like "national income" or "inflation" here; focus strictly on single-unit indicators.
 

National Income and Accounting
 

Short Answer Questions
 

Question. Name the process which transforms the resources?
Answer: The system through which raw materials and inputs are converted into finished goods and services is known as the production process.
In simple words: The process of turning raw materials into finished products is called production.
Exam Tip: "Production process" is the exact technical term needed for this question.

Question. What do you mean by production process?
Answer: By production process, we mean the method of combining resources like labor, machinery, and raw materials to make useful goods and services that meet people's needs.
In simple words: It is the steps we take to turn resources into things people can buy and use.

Exam Tip: Defining it as a value-addition process that turns inputs into outputs is highly effective.

Question. Name the factors of production that participates in the production process?
Answer: The primary factor inputs involved in production are land, labor, capital, and entrepreneurship (or organization).
In simple words: The four things needed to make goods are land, workers (labor), tools and money (capital), and a business owner (entrepreneurship).

Exam Tip: Listing all four factors clearly in order is essential for full marks.

Question. Which factor of production is responsible for combining the factors of production?
Answer: Entrepreneurship is the specific factor that takes the risk to bring land, labor, and capital together to start the production process.
In simple words: The entrepreneur or business owner is the one who brings all the other resources together to run a business.

Exam Tip: Remember that the entrepreneur is the decision-maker and risk-taker who coordinates the other three factors.

Question. Why do factors of production render their services in the production process?
Answer: These resources contribute to production in order to earn rewards or factor payments, which they use to purchase goods and services for their own needs.
In simple words: People and resources work in production so they can earn money like wages, rent, or profit to buy the things they need.

Exam Tip: The term "factor income" or "factor payment" must be highlighted in your answer.

Question. What do you mean by ‘labour’ as factor of production?
Answer: In economics, labor represents both the physical work and the intellectual effort that people put into creating products and services, for which they receive payment.
In simple words: Labor is any physical or mental work done by people to make things in exchange for pay.

Exam Tip: Make sure to mention that labor includes both physical and mental efforts; it is not just physical work.

Question. Do we consider the services of doctor as labour?
Answer: Yes, a doctor's work is classified as labor because it requires significant intellectual effort and specialized skills to provide healthcare services, for which they are paid.
In simple words: Yes, because a doctor uses mental skill and effort to treat patients in exchange for a fee.

Exam Tip: Explain that "mental labor" is a key component of the labor factor, using professional services like doctors or teachers as prime examples.

Question. Do we consider the services of potter as labour? Give reason in support of your answer?
Answer: Yes, we classify a potter's work as labor. This is because making pottery requires physical energy and craftsmanship to create useful goods, which are then sold to earn income.
In simple words: Yes, a potter's work is labor because they use physical effort and skill to make pots and earn money.

Exam Tip: Emphasize that physical work combined with skill to produce physical goods is a direct form of labor.

Question. Define the term ‘land’?
Answer: In economic terms, land includes all natural resources provided by nature that are utilized for production. This covers agricultural soil, mineral deposits, water, and forests.
In simple words: Land means all natural resources, like fields, forests, minerals, and water, that we use to produce things.

Exam Tip: Point out that in economics, "land" is much broader than just soil and includes all natural resources.

Question. What is the payment given to the land for utilizing its services?
Answer: Rent is the term used for the factor reward or payment made to landowners for using their natural resources.
In simple words: The money paid for using land or natural resources is called rent.

Exam Tip: "Rent" is the precise factor reward for land; do not confuse it with interest or wages.

Question. Name the reward for the use of capital in production process?
Answer: The factor payment received for lending or using capital in production is interest.
In simple words: The payment made for using capital is called interest.

Exam Tip: Remember that interest is the direct financial reward for the service of capital.

Question. Why an entrepreneur pays interest for the use of capital in production process?
Answer: An entrepreneur pays interest because capital is not unlimited. It represents a sacrifice by the lender, who gives up immediate spending and assumes the risk of lending their funds.
In simple words: Entrepreneurs pay interest because money and equipment are scarce, and lenders need to be rewarded for letting others use their resources.

Exam Tip: Frame interest as a compensation for capital productivity and the opportunity cost of deferred consumption.

Question. What is capital?
Answer: Capital consists of all human-made assets like tools, buildings, and equipment that are used to produce other products, rather than being used for direct personal enjoyment.
In simple words: Capital is man-made things, like tools, machines, and factories, that we use to make other goods.

Exam Tip: Clearly define capital as "man-made instruments of production" to distinguish it from land, which is a natural resource.

Question. Is money kept in the locker of your house capital?
Answer: No, cash stored away in a household locker does not count as capital. It is simply idle wealth because it is not being actively used in production to create more wealth or output.
In simple words: No, money sitting in a home safe is just idle wealth. It only becomes capital when it is invested or used to buy productive things like machines or tools.

Exam Tip: Highlight the key distinction - wealth is capital only when it is actively used for further production.

Question. Is the service of tractor used by farmer to plough the field be considered capital ?
Answer: Yes, the work done by a tractor on a farm is a form of capital service. The tractor itself is a manufactured tool used directly to help produce crops.
In simple words: Yes, using a tractor is considered capital because a tractor is a man-made tool that helps grow crops.

Exam Tip: Note that physical capital items like machinery and vehicles are prime examples of fixed capital used in production.

Question. What are the different components of profit?
Answer: Profit is split into three main parts: corporate tax paid to the government, dividends given out to shareholders, and retained earnings (undistributed profits) kept for future use.
In simple words: Profit is used for three things: paying tax, giving dividends to owners, and saving the rest for the business.

Exam Tip: Remembering the three parts - corporate tax, dividends, and retained earnings - is key to answering questions on national income calculation (income method).

Question. Name the tax deducted by the govt from the profit?
Answer: The levy that the government collects from the profits of companies is known as corporate tax.
In simple words: The tax paid by a company on its profits is called corporate tax.

Exam Tip: Ensure you specify "corporate tax" or "corporation tax" rather than general income tax.

Question. What is the name given to the residue which remains with the enterprise after paying dividend and corporation tax?
Answer: The money left over with a business after it pays its taxes and distributes dividends is called retained earnings or undistributed profit.
In simple words: The leftover profit after paying taxes and dividends is called retained earnings or undistributed profit.

Exam Tip: Learn all three terms (undistributed profit, retained earnings, corporate savings) as they are used interchangeably in exams.

Question. Why is the part of profit retained by the entrepreneur called undistributed profit?
Answer: This portion of profit is referred to as undistributed because it is kept inside the firm rather than being shared out as dividends to the owners or shareholders.
In simple words: It is called undistributed profit because it is saved inside the business instead of being handed out to the owners.

Exam Tip: Explain that "distribution" in corporate terms means paying out dividends to shareholders.

Question. What is the difference in the services of a doctor treating his own at home and patients in the hospital?
Answer: When a doctor cares for their own family at home, it is a non-economic act of love and is not counted in national income. When treating patients in a hospital, however, it is a paid professional service that counts as an economic activity and is included in national income.
In simple words: Caring for family at home is done for love and is not counted in national income. Treating hospital patients is a paid job, so it is counted.

Exam Tip: This is a classic question. Clearly contrast "non-economic/non-market" (for self-consumption/affection) with "economic/market" (for income generation).

Question. Give the definition of an economic activity?
Answer: An economic activity refers to any action taken by individuals or organizations that involves making, distributing, buying, or trading limited goods and services to earn money and meet needs.
In simple words: An economic activity is any work we do to produce, buy, sell, or use goods and services to earn a living.

Exam Tip: The keyword "scarce resources" and "earning a livelihood" should be part of your definition.

Question. What does an economic activity leads to?
Answer: Engaging in economic activities leads directly to the creation of jobs, the generation of income, and the production of goods and services across the economy.
In simple words: Economic activities create jobs, income, and goods for people to buy.

Exam Tip: Link economic activities directly to the concepts of "value addition" and "income generation."
 

Intermediate & Final Goods

Question. What is the difference in milk used by a house wife and in a restaurant?
Answer: When a homemaker buys milk, it is a final good meant for direct consumption. However, when a restaurant buys milk, it acts as an intermediate good because it serves as an input or raw material to make other drinks or dishes for customers.
In simple words: Milk used at home is a final good because we drink it. Milk used in a restaurant is an intermediate good because it is used to make other things to sell.

Exam Tip: Note that the classification of a good depends on its end-use, not on the product itself.

Question. What is the name given to the goods which are meant for resale in the market?
Answer: Products that are bought with the intention of being resold in the market are known as intermediate goods.
In simple words: Goods bought to be sold again are called intermediate goods.

Exam Tip: Resale is a primary characteristic of intermediate goods; final goods are never resold in the same accounting year.

Question. What are those goods called which are used for further production?
Answer: Items that are utilized as inputs or raw materials for further manufacturing in the same year are referred to as intermediate goods.
In simple words: Goods used as raw materials to make other things are called intermediate goods.

Exam Tip: Be careful: machines used for production are "capital goods" (final goods), whereas raw materials used up in production are "intermediate goods."

Question. How is an intermediate goods different from a final goods?
Answer: Intermediate goods are used up as raw materials or resold during the year, meaning their value is excluded from national income to avoid double counting. Final goods are ready for their ultimate users, whether for consumption or investment, and are counted in national income.
In simple words: Intermediate goods are used up to make other things, while final goods are ready to be used by the buyer and are not resold.

Exam Tip: Highlight that intermediate goods remain within the production boundary, while final goods have crossed it.

Question. What is the difference between sale of a shirt to a retailer& to an individual consumer?
Answer: Selling a shirt to a retail store makes it an intermediate good since the retailer plans to resell it. Selling that same shirt to an individual makes it a final good because the consumer will wear it.
In simple words: A shirt sold to a shop is an intermediate good because the shop will resell it. A shirt sold to you is a final good because you will wear it.

Exam Tip: Always use the "end-use classification" principle to justify your answers on intermediate versus final goods.

Question. Does the expenditure on fertilizers and pesticides by a farmer include the value of output of wheat? Give reasons
Answer: Yes, the money spent on fertilizers and pesticides is naturally included in the final market price of the wheat. Because these items are intermediate inputs, their costs are embedded in the final product's value.
In simple words: Yes, the cost of fertilizers is already included in the final price of wheat because a farmer adds all their costs together when pricing the crop.

Exam Tip: State clearly that intermediate costs are fully absorbed into the final value of the product, so we do not count them separately.

Question. What will you call it if the value of the commodity is counted more than once in the production process?
Answer: If the value of a product is registered multiple times during the production stages, this error is known as double counting.
In simple words: Counting the value of a good more than once is called double counting.

Exam Tip: Double counting leads to an overestimation of national income, which is a major conceptual error.

Question. Why is it necessary to avoid double counting?
Answer: We must avoid double counting because it falsely inflates the national income, creating an unrealistic and incorrect view of how much the economy is actually producing.
In simple words: We must avoid this mistake because it makes the country's national income look much higher than it really is.

Exam Tip: Use terms like "overestimation" and "distorted economic performance" to explain why avoiding double counting is crucial.

Question. How can double counting be avoided?
Answer: There are two ways to prevent double counting: we can either measure only the value of the finished products (final product method) or calculate the extra value created at each step of production (value added method).
In simple words: We can avoid this by either counting only the price of final goods, or by counting only the extra value added at each step of making a product.

Exam Tip: List both the "Final Product Method" and the "Value Added Method" as the two standard techniques.