Question 1

Q1: 1. What are the four factors of production and what are the remunerations to each of these called?

Accepted Answer

Based on the chapter, the four factors of production and their respective remunerations are:    Human Labour: The remuneration for the contribution made by human labour is called wage.    Capital: The remuneration for the contribution made by capital is called interest.    Entrepreneurship: The remu...

Question 2

Q10: 10. In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 4...

Accepted Answer

Based on the information provided, we can calculate Raju's contribution to the various measures of income. (a) Gross Domestic Product (GDP) GDP is the market value of final goods and services produced. Raju's service (haircuts) is a final service. Assuming no intermediate inputs, his contribution to...

Question 3

Q11: 11. The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evalua...

Accepted Answer

We are given the following information:    Nominal GNP = Rs 2,500 crores    Real GNP (GNP at base year prices) = Rs 3,000 crores Calculation of GNP Deflator: The formula for the GNP deflator is:    GNP Deflator = (Nominal GNP / Real GNP) × 100    GNP Deflator = (2,500 / 3,000) × 100    GNP Deflator...

Question 4

Q12: 12. Write down some of the limitations of using GDP as an index of welfare of a country.

Accepted Answer

While a higher GDP often corresponds to a higher standard of living, it is not a perfect measure of the welfare of a country's people. Some key limitations are:    Distribution of GDP: An increase in the total GDP does not reveal how that income is distributed among the population. If the rise in GD...

Question 5

Q2: 2. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Accepted Answer

The aggregate final expenditure of an economy must be equal to the aggregate factor payments because of the circular flow of income in an economy. The fundamental idea is that the revenue earned by all the firms in an economy must be distributed among the factors of production that contributed to th...

Question 6

Q3: 3. Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital wit...

Accepted Answer

Distinction between Stock and Flow:    Stock: A stock is a variable that is measured at a particular point in time. It does not have a time dimension. Examples include the amount of money in a bank account on a specific date, or the total number of machines in a factory at a given moment.    Flow: A...

Question 7

Q4: 4. What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added...

Accepted Answer

Difference between Planned and Unplanned Inventory Accumulation: Inventories are the stocks of unsold finished goods, semi-finished goods, or raw materials a firm carries. Change in inventory can be planned or unplanned.    Planned Inventory Accumulation: This occurs when a firm intentionally increa...

Question 8

Q5: 5. Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the...

Accepted Answer

The three methods of calculating the Gross Domestic Product (GDP) of a country are the Product (or Value Added) Method, the Expenditure Method, and the Income Method. The identity showing their equivalence is: $$\sum_{i=1}^{N} GVA_{i} \equiv C+I+G+X-M \equiv W+P+In+R$$ Where: 1.  Product Method: GDP...

Question 9

Q6: 6. Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The am...

Accepted Answer

The concepts of budget deficit and trade deficit, and the macroeconomic identity required to solve the numerical problem, are not discussed in Chapter 2 of the provided source text. The chapter focuses on the fundamental concepts of national income accounting, such as the three methods of calculatin...

Question 10

Q7: 7. Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value o...

Accepted Answer

We are given the following information:    GDP at market price (GDP_MP) = Rs 1,100 crores    Net Factor Income from Abroad (NFIA) = Rs 100 crores    Net Indirect Taxes (Indirect Taxes - Subsidies) = Rs 150 crores    National Income (NI or NNP at factor cost, NNP_FC) = Rs 850 crores We need to find t...

Question 11

Q8: 8. Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to...

Accepted Answer

We are given the following information:    Net National Product at Factor Cost (NNP_FC or NI) = Rs 1,900 crores    Personal Disposable Income (PDI) = Rs 1,200 crores    Personal Income Taxes = Rs 600 crores    Retained Earnings (Undistributed Profits + Corporate Tax) = Rs 200 crores    Net interest...

Question 12

Accepted Answer

We need to calculate Personal Income (PI) and Personal Disposable Income (PDI) from the given data. Step 1: Calculate National Income (NI) National Income (NI) is Net National Product at Factor Cost (NNP_FC).    NI = Net Domestic Product at factor cost (NDP_FC) + Net Factor Income from abroad (NFIA)...

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