Determination of National Income – CA Inter Economics Study Material

Determination of National Income – CA Inter Economics Study Material is designed strictly as per the latest syllabus and exam pattern.

Determination of National Income – CA Inter Economics Study Material

Theory Questions

Question 1.
Explain the leakages and injections in the circular flow of Income. (2 Marks May 2018)
Answer:
Leakages: Outflow or withdrawal of income from the circular flow is known as leakages like: savings, taxes and import etc. Leakages are money leaving the circular flow and therefore, not available for spending on currently produced goods and services. Leakages reduce the flow of income.

Injections: Addition of money in the circular flow is known as injections like: investment, government spending and export etc. It is a non-consumption expenditure. It is an expenditure on goods and services produced within the domestic territory but not used by the domestic household for consumption purposes. Injections are exogenous additions to the circular flow and add to the total volume of the basic circular flow.

In the two-sector model with households and firms, household saving is the only leakage and investment is the only injection. In the three-sector model which includes the government, saving and taxes are the two leakages and investment and government purchases are the two injections. In the four-sector model which includes foreign sector also, saving, taxes, and imports are the three leakages; investment, government purchases, and exports are the three injections.

The state of equilibrium occurs when the total leakages are equal to the total injections that occur in the economy.
Savings + Taxes + Imports = Investment + Government Spending + Exports

Determination of National Income – CA Inter Economics Study Material

Question 2.
Explain the Concept of Gross National Product at market price (GNPMp). (2 Marks Nov. 2018)
Answer:
Gross National Product (GNP): Gross National product is a measure of the market value of all final economic goods and services, gross of depreciation, produced within the domestic territory of a country by normal residents during an accounting year plus net factor incomes from abroad. Thus, GNP includes earnings of Indian corporations overseas and Indian residents working overseas.
GNPMP = GDPMP + Net Factor Income from Abroad

Net factor income from abroad is the difference between the income received from abroad for rendering factor services by the normal residents of the country to the rest of the world and income paid for the factor services rendered by non-residents in the domestic territory of a country.

Question 3.
Distinguish between Personal Income and Disposable Personal Income. (3 Marks Nov. 2018)
Answer:
Personal Income:
Personal Income refers to the income received by the household sector including Non-Profit organisations serving households. Thus, while national income is a measure of income earned and personal income is a measure of actual current income receipts of persons from all sources which may or may not be earned from productive activities during a given period of time.

Determination of National Income – CA Inter Economics Study Material

In other words, it is the income ‘actually paid out’ to the household sector, but not necessarily earned. Examples of this include transfer payments such as social security benefits, unemployment compensation, welfare payments etc. Individuals also contribute income which they do not actually receive; for example, undistributed corporate profits and the contribution of employers to social security. Personal income forms the basis for consumption expenditures and is derived from national income as follows:
PI = NI + income received but not earned – income earned but not received
PI = NI – Undistributed profits – Net interest payments made by households – Corporate Tax + Transfer Payments to the households from firms and Government

Disposable Personal Income (DI):
It is a measure of amount of the money in the hands of the individuals that is available for their consumption or savings. Disposable personal income is derived from personal income by subtracting the direct taxes paid by individuals and other compulsory payments made to the government.
DI = PI – Personal Income Taxes – Non tax payments

Question 4.
What are the conceptual difficulties in the measurement of national income? (2 Marks May 2019)
Answer:
Conceptual difficulties in the measurement of national income are:
(a) Lack of an agreed definition of national income,
(b) Accurate distinction between final goods and intermediate goods,
(c) Issue of transfer payments,
(d) Services of durable goods,
(e) Difficulty of incorporating distribution of income,
(f) Valuation of a new good at constant prices, and
(g) Valuation of government services rendered without remuneration.

Determination of National Income – CA Inter Economics Study Material

Question 5.
Explain the consumption function using a suitable table and diagram. (3 Marks Nov. 2019)
Answer:
Consumption function shows the functional relationship between aggregate consumption expenditure and aggregate disposable income, expressed as:
C = f(Y)
In case of low income, consumption expenditures of households will exceed their disposable income and households dis-save i.e. they either borrow money or draw from their past savings to purchase consumption goods. If the disposable income increases, consumers will increase their planned expenditures and current consumption expenditures rise, but only by less than the increase in income. This can be illustrated with the following table and diagram: The positive relationship between consumption spending and disposable income is described by the consumption function.

Disposable Income (Yd) Consumption (C)
0 400
1,000 1,200
2,000 2,000
3,000 2,800

The specific form of consumption income relationship termed the consumption function, proposed by Keynes is as follows:
C = a+bY
Where C = aggregate consumption expenditure; Y = total disposable income; a is a constant term which denotes the (positive) value of consumption at zero level of disposable income; and the parameter b, the slope of the function, (∆ C/ ∆ Y) is the marginal propensity to consume (MPC) i.e the increase in consumption per unit increase in disposable income.
Determination of National Income – CA Inter Economics Study Material 1

Determination of National Income – CA Inter Economics Study Material

Question 6.
Explain the circular flow of income in an economy. (3 Marks Nov. 2019)
Answer:
Circular flow of income refers to the continuous circulation of production, income generation and expenditure involving different sectors of the economy. There are three different interlinked phases in a circular flow of income, viz: production, distribution and disposition as can be seen from the following figure.

Circular Flow of Income
Determination of National Income – CA Inter Economics Study Material 2

  1. In the production phase, firms produce goods and services with the help of factor services.
  2. In the income or distribution phase, the flow of factor incomes in the form of rent, wages, interest and profits from firms to the households occurs.
  3. In the expenditure or disposition phase, the income received by different factors of production is spent on consumption goods and services and investment goods. This expenditure leads to further production of goods and services and sustains the circular flow.

It is clear from the above figure that income is first generated in production unit, then it is distributed to households in the form of wages, rent, interest and profit. This increases the demand for goods and services and as a result there is increase in consumption expenditure. This leads to further production of goods and services and thus make the circular flow complete. These processes of production, distribution and disposition keep going on simultaneously.

Determination of National Income – CA Inter Economics Study Material

Question 7.
Clarify the concept of ‘Average Propensity to Save’ with the help of formula and example. (2 Marks Nov. 2020)
Answer:
Average propensity to save: Average Propensity to Save (APS) is the ratio of total saving to total income or we can say, it is that part of total income which is saved.
APS = Total Saving/Total Income = S/Y
For example, if saving is ₹ 200 at national income of ₹ 1,000, then:
APS = S/Y = 20/100 = 0.20, i.e. 20%
The estimation of APS is illustrated with the help of the following table:

Income Saving APS = S/Y APS
0 -400
1,000 -200 (-200/1,000) -0.20
2,000 0 (0/2,000) 0
3,000 200 (200/3,000) 0.067
4,000 400 (400/4,000) 0.10

Determination of National Income – CA Inter Economics Study Material

Question 8.
Which method is used in India for measurement of National Income? Also, state the method which is considered the most suitable for measurement of National Income of the developed economies. (2 Marks Nov. 2020)
Answer:
The method is used in India for measurement of National Income: In India, the Central Statistics Office under the Ministry of Statistics and Programme Implementation is responsible for macro-economic data gathering and statistical record keeping. Since reliable statistical data are not available, it is not possible to estimate India’s national income wholly by one method.

Therefore, a combination of output method and income method is used. The value added method is used largely in the commodity producing sectors like agriculture and manufacturing. Thus, in agricultural sector, net value added is estimated by the production method, in small scale sector net value added is estimated by the income method and in the construction sector net value added is estimated by the expenditure method also.

The method which is considered suitable for measurement of National Income of developed economies: Income method may be most suitable for developed economies where data in respect of factor income are readily available. With the growing facility in the use of the commodity flow method of estimating expenditures, an increasing proportion of the national income is being estimated by expenditure method.

Determination of National Income – CA Inter Economics Study Material

Practical Problems

Question 1.
Calculate Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MP$) from the following data: (2 Marks May 2018)
Income – Consumption – Level
8,000 – 6,000 – Initial Level
12,000 – 9,000 – Changed Level
Answer:
(a) MPC(b) = ∆C/∆Y
= (9,000 – 6,000) ÷ (12,000 – 8,000) = 0.75

(b) MPS = 1 – b = 1 – 0.75 = 0.25

Question 2.
Suppose in an economy: (5 Marks May 2018)
Consumption Function = 150 + 0.75 Yd
Investment spending = 100
Government spending = 115
Tax (Tx) = 20 + 0.20Y
Transfer Payments (Tr) Exports (X) = 40
Imports (M) = 15 + 0.1Y
Where, Y and Yd are National Income and Personal Disposable Income respectively. All figures are in rupees.
(a) The equilibrium level of National Income,
(b) Consumption at equilibrium level,
(c) Net Exports at equilibrium level
Answer:
(a) The equilibrium level of National Income:
Y = C + I + G + (X – M)
= 165 + 0.6Y + 100 + 115 + [35 – (15 + 0.1Y)]
= 400 + 0.5Y
= 400 ÷ 0.5
= 800

Determination of National Income – CA Inter Economics Study Material

(b) Consumption at equilibrium level:
C = 150 + 0.75Yd
Yd = Y – Tax + Transfer Payments,
= Y – (20 + 0.2Y) + 40
= = 0.8Y + 20,
C = 150 + 0.75Yd
= 150 + 0.75 (0.8Y + 20) (where Yd = 0.8Y + 20)
= 150 + (0.75 × 0.8Y) + (0.75 × 20)
C = 165 + 0.6Y
C = 165 + 0.6 × 800
= 645

(c) Net Exports at equilibrium level:
X – M = 35 – (15 + 0.1Y)
= 35 – (15 + 0.1 × 800)
= – 60
There is adverse balance of trade

Question 3.
From, the following data, compute the Gross National Product at Market Price using Value Added method: (3 Marks May 2018)
(₹ in Crores)
Value of output in secondary sector – 1,000
Intermediate consumption in primary sector – 300
Value of output in tertiary sector – 3,000
Intermediate consumption in secondary sector – 400
Net factor income from abroad – 100
Value of output in primary sector – 800
Intermediate consumption in tertiary sector – 900
Answer:
Value Added Method:
GDPMP = (Value of output in primary sector – intermediate consumption of primary sector) + (value of output in secondary sector – intermediate consumption of secondary sector) + (value of output in tertiary sector – intermediate consumption of tertiary sector)
= 800 – 300 + 1,000 – 400 + 3,000 – 900
= 3,200 Crores
GNPMP = GDPMP + NFIA = 3,200 – 100 = 3,100 Crores

Determination of National Income – CA Inter Economics Study Material

Question 4.
In a two sector economy, the business sector produces 7,500 units at an average price of ₹ 7. (5 Marks Nov. 2018)
(a) What is the money value of output?
(b) What is the money income of households?
(c) If households spend 75 per cent of their income, what is the total consumer expenditure?
(d) What is the total money revenues received by the business sector?
(e) What should happen to the level of output?
Answer:
(a) The money value of output == 7,500 × 7 = ₹ 52,500

(b) In a two sector economy, households receive an amount equal to the money
value of output. Therefore, the money income of households is the same as the money value of output i.e 152,500.

(c) Total spending by households = ₹ 52,500 × 0.75 = ₹ 39,375

(d) The total money revenues received by the business sector is equal to aggregate spending by households i.e. ₹ 39,3 75.

(e) The business sector makes payments of ₹ 52,500 to produce output, whereas the households purchase only output worth ₹ 3 9,3 75 of what is produced. Therefore, the business sector has unsold inventories valued at ₹ 13,125. They should be expected to decrease output.

Question 5.
Calculate the Average Propensity to Consume (APC) and Average Propensity to Save (APS) from the following data: (2 Marks Nov. 2018)
Income – 4,000
Consumption – ₹ 3,000
Answer:
APC = C/Y = 3,000/4,000 = 0.75
APS = S/Y = 1,000/4,000 = 0.25

Determination of National Income – CA Inter Economics Study Material

Question 6.
Given:
Consumption function C = 300 + 0.75Y
Investment = ₹ 800
Net Imports = ₹ 100
Calculate equilibrium level of output. (3 Marks May 2019)
Answer:
Y = C + I + G + (X – M)
Y = (300 + 0.75Y) + 800 + 0 + (-100)
Y = 300 + 0.75Y + 800 – 100
0.25Y = 1,000
Y = ₹ 4,000

Question 7.
Compute GNP at factor cost and NDP at market price using expenditure method from the following data: (5 Marks May 2019)
Determination of National Income – CA Inter Economics Study Material 3
Answer:
GDPMP = Personal consumption expenditure + Government purchase of goods and services + gross public investment + inventory investment + gross residential construction investment + Gross business fixed investment + [export – import]
= 2,900 + 1,100 + 500 + 170 + 450 + 410 + (200 – 300) = ₹ 5,430 Crores
GNPFC = GDPMP + Net Factor Income from Abroad – Net Indirect Taxes
= 5,430 + (-30) + 80 = ₹ 5,480 Crores
NDPMP = GDPMP – Consumption of fixed capital
= 5430 – 60 = 5,370 Crores

Determination of National Income – CA Inter Economics Study Material

Question 8.
When investment in an economy increases from ₹ 10,000 crores to ₹ 14,000 crores and as a result of this national income rises from ₹ 80,000 crores to ₹ 92,000 crores, compute investment multiplier. (2 Marks May 2019)
Answer:
Investment Multiplier K = ∆Y/∆I = 12,000/4,000 = 3

Question 9.
Compute the amount of subsidies from the following data: (3 Marks Nov. 2019)
GDP at market price (₹ in crores) – 7,79,567
Indirect taxes (₹ in crores) – 4,54,367
GDP at factor cost (₹ in crores) – 3,60,815
Answer:
GDPMP = GDPFC + Indirect taxes – Subsidies
₹ 7,79,567 crores = ₹ 3,60,815 crores + ₹ 4,54,367 crores – Subsidies
Subsidies = ₹ 35,615 crores

Determination of National Income – CA Inter Economics Study Material

Question 10.
Compute NNP at factor cost or national income from the following data using income method: (3 Marks Nov. 2019)

(₹ In Crores)
Compensation of employees 3,000
Mixed income of self-employed 1,050
Indirect taxes 480
Subsidies 630
Depreciation 428
Rent 1,020
Interest 2,010
Profit 980
Net factor income from abroad 370

Answer:
GDPMP = Employee compensation (wages) + rent + interest + profits + mixed income + depreciation+net indirect taxes (Indirect taxes – subsidies)
= 3,000 + 1,020 + 2,010 + 980 + 1,050 + 428 + (480 – 630) = ₹ 8,338 crores
NNPFC = GDPMP – Net indirect taxes – Depreciation + NFIA
= 8,338 + 150 – 428 + 370 = ₹ 8,430 crores

Determination of National Income – CA Inter Economics Study Material

Question 11.
Compute the amount of depreciation from the following data: (3 Marks Nov. 2020)

(₹ in Crores)
GDP at Market Price (GDPMP)

Net factor income from abroad

Aggregate amount of Indirect Taxes

Subsidies

National Income (NNPFC)

8,76,532

(-) 232

564

30

8,46,576

Answer:
GDPMP = NNPFC – NFIA + NIT + Depreciation
8,76,532 = 8,46,576 – (-232) + (564 – 30) + Depreciation
8,76,532 = 8,46,576 + 232 + 534 + Depreciation
Depreciation = 29,190 Crores

Determination of National Income – CA Inter Economics Study Material

Question 12.
You are given the following information of an economy:
Consumption Function: C = 200 + 060 Yd
Government Spending’ G = 150
Investment Spending I = 240
Tar Tx = 10 + 0.20Y
TransferPayrnent: Tr = 50
Exports: X = 30 + 0.2Y
Imports M = 400
Where Y and Yd are National Income and Personal Disposable Income respectIvely.

Find:
(i) The equilibrium level of National Income.
(ii) Net Exports at equilibrium level.
(iii) Consumption at equilibrium level. (5 Marks Nov. 2020)
Answer:
(i) The equilibrium level of national income:
Y = C + I + G +(X – M)
= 200 + 0.60 (40 + 0.8Y) + 240 + 150 + (30 + 0.2 Y – 400)
= 200 + 24 +.48 Y + 240 + 150 + 30 + 0.2 Y – 400
= 244 + 0.68Y
Y = 244 ÷ 0.32 . = 762.5
Yd = Y + Tr – Tax
= Y + 50 – 10 – 0.2Y
Yd = 40+0.8 Y

(ii) Net exports ai equilibrium leveL
Net X – M = 30 + 0.2Y – 400
Exports
= 30 + 0.2 (762.5) – 400 = -217.5
There is adverse balance of trade

(iii) Consumption at equilibrium level:
C = 200 + 0.60 (40 + 0.8Y)
= 200 + 24 + 0.60 (40 + 0.8 × 762.5)
= 200 + 24 + 366 = 590

Determination of National Income – CA Inter Economics Study Material

Question 13.
Given the following equations:
C = 200 + 0.8Y
I = 1,200
Calculate equilibrium level of National Income and the Consumption Expenditure at equilibrium level of National Income. (3 Marks Jan. 2021)
Answer:
Y = C + I = 200 + 0.8Y + 1,200 = 1,400 + 0.8Y
Y = 1,400 ÷ 0.2 = 7,000
C = 200+ 0.8Y = 200 + 0.8 × 7,000 = 5,800

Question 14.
Calculate GNP at market price from the following data using Value Added Method. (5 Marks Jan. 2021)

(₹ in Crores)
Government Transfer Payments 1.800
Value of output in Primary Sector 1,500
Value of output in Secondary Sector 2.700
Value of output in Tertiary Sector 2,100
Net factor income from Abroad (-) 60
Intermediate Consumption in Primary Sector 750
Intermediate Consumption in Secondary Sector 1,200
Intermediate Consumption in Tertiary Sector 900

Answer:
GVAMP = Value of Output – Intermediate Consumption
= 1,500 + 2,700 + 2,100 – 750 – 1,200 – 900 = 3,450 Crores
GNPMP = GVAMP + Net factor Income from Abroad
= 3,450 + (-) 60 = 3,390 Crores

Determination of National Income – CA Inter Economics Study Material

Question 15.
Compute GDP at market price and Mixed Income of Self-Employed from the data given below: (3 Marks Jan. 2021)

(₹ in Crores)
Compensation of Employees 810
Depreciation 26
Rent, Interest and Profit 453
NDP at factor cost 1,450
Subsidies 18
Net factor Income from Abroad (-) 17
Indirect taxes 57

Answer:
GDPMP = NDPFC + Depreciation + Net Indirect Taxes
= 1,450+ 26+ (57- 18) = 1,515Crores
NDPFC = Compensation of employees + Operating Surplus + Mixed Income of Self Employed
1,450 = 810 + 453 + Mixed Income of Self Employed
187 Crores = Mixed Income of Self Employed

Determination of National Income – CA Inter Economics Study Material

Question 16.
Due to Recession in an economy, Government expenditure increases by ₹ 6 billion. If Marginal Propensity to Consume (MPC or b) in the economy is 0.8, compute the increase in GDP. (2 Murks Jan. 2021)
Answer:
Government Spending Multiplier = 1 ÷ (1 – b) = 1 ÷ (1 – 0.8) = 5
Increase in GDP = Increase in Government Expenditure × Multiplier
= 6 billion × 5 = 30 billion

Important Questions

Question 1.
The nominal and real GOP respectively of a country In a particular year are ₹ 3,000 Crores and ₹ 4,700 Crores respectively. Calculate GOP deflator and comment on the level of prices of the year In comparison with the base year.
Answer:
Nominal GDP = ₹ 3000 Crores
Real GDP = ₹ 4,700 Crores
GDP Deflator = \(\frac{\text { Nominal GDP }}{\text { Real GDP }}\) × 100
= \(\frac{3,000}{4,700}\) × 100
= 63.83
The price level has fallen since GDP deflator is less than loo at 63.83.

Determination of National Income – CA Inter Economics Study Material

Question 2.
In a two sector economy, the business sector produces 7,000 units at an average price of ₹ 5.
(a) What is the money value of output?
(b) What is the money income of households?
(c) If households spend 80 percent of their income, what is the total consumer expenditure?
(d) What is the total money revenues received by the business sector?
(e) What should happen to the level of output?
Answer:
(a) The money value of output equals total output times the average price per unit. The money value of output is: = 7,000 × 5 = ₹ 35,000

(b) In a two sector economy, households receive an amount equal to the money value of output. Therefore, the money income of households is the same as the money value of output i.e. 135,000.

(c) Total spending by households: =₹ 35,000 × 0.8 = ₹ 28,000

(d) The total money revenues received by the business sector is equal to aggregate spending by households i.e. ₹ 28,000.

(e) The business sector makes payments of ₹ 35,000 to produce output, whereas the households purchase only output worth₹ 28,000 of what is produced. Therefore, the business sector has unsold inventories valued at ₹ 7,000. They should be expected to decrease output.

Question 3.
Assume that an economy’s consumption function is specified by the equation C = 500 + 0.80Y.
(a) What will be the consumption when disposable income (Y) is ₹ 4,000, ₹ 5,000, and ₹ 6,000?
(b) Find saving when disposable income is ₹ 4,000, ₹ 5,000, and ₹ 6,000.
(c) What amount of consumption for consumption function C is autonomous?
(d) What amount is induced when disposable income is ₹ 4,000, ₹ 5,000, ₹ 6,000?
Answer:
(a) Consumption for each level of disposable income is found by substituting the specified disposable income level into the consumption equation.
When Y = ₹ 4,000
C = ₹ 500 + 0.80 (₹ 4,000) = ₹ 500 + ₹ 3,200 = ₹ 3,700
When Y = ₹ 5,000
C = ₹ 500 + 0.80 (₹5,000) = ₹ 500 + ₹ 4,000 = ₹ 4,500
When Y = ₹ 6,000
C = ₹ 500 + 0.80 (₹ 6,000) = ₹ 500 + ₹ 4,800 = ₹ 5,300

Determination of National Income – CA Inter Economics Study Material

(b) Saving is the difference between disposable income and consumption:
S = Y – C
= 4,000 – 3,700 = ₹ 300 (when Y is ₹ 4,000)
= 5,000 – 4,500 = ₹ 500 (when Y is ₹ 5,000)
= 6,000 – 5,300 = ₹ 700 (when Y is ₹ 6,000)

(c) Autonomous consumption is the amount consumed when disposable income is zero; autonomous consumption is ₹ 500, i.e. the consumption expenditure when the disposable income is 0. Since autonomous consumption is unrelated to income, autonomous consumption is ₹ 500 for all levels of income.

(d) Induced consumption is the amount of consumption that depends upon the level of income. Consumption is ₹ 3,700 when disposable income is ₹ 4,000. Since ₹ 500 is autonomous (i.e. consumed regardless of the income level), ₹ 3,200 out of the ₹ 3,700 level of consumption is induced by disposable income. Similarly, Induced consumption is ₹ 4,000 when disposable income is ₹ 5,000, and ₹ 4,800 when disposable income is ₹ 6,000.

Question 4.
Compute the amount of subsidies from the following data:
GDP at market price (₹ in crores) – 7,79,567
Indirect taxes (₹ in crores) – 4,54,367
GDP at factor cost (₹ in crores) – 3,60,815
Answer:
GDPMP = GDPFC + Indirect taxes – Subsidies
₹ 7,79,567 crores = ₹ 3,60,815 crores + ₹ 4,54,367 crores – Subsidies
Subsidies = ₹ 35,615 crores

Determination of National Income – CA Inter Economics Study Material

Question 5.
Calculate the aggregate value of depreciation when the GDP at market price of a country in a particular year was ₹ 1,100 Crores. Net Factor Income from Abroad was ₹ 100 Crores, The value of Indirect taxes – Subsidies was ₹ 150 Crores and National Income was ₹ 850 Crores,
Answer:
NNPFC = GDPMP – NIT + NFIA – Depreciation
850 = 1,100 – 150 + 100 – Depreciation
Depreciation = 1,050 – 850 = 200 Crores

Question 6.
Calculate ‘Sales’ from the following data:
Determination of National Income – CA Inter Economics Study Material 4
Answer:
NVAFC = Sales + Change in stocks – Intermediate consumption – depreciation – NIT
2,000 = Sales + (600 – 100) – 3,000 – 700 – (-200)
Sales = 2,000 – 500 + 3,000 + 700 – 200 = 5,000 Lakhs

Determination of National Income – CA Inter Economics Study Material

Question 7.
Compute GNP at factor cost and NDP at market price using expenditure method from the following data:
Determination of National Income – CA Inter Economics Study Material 5
Answer:
GDPMP = Personal consumption expenditure + Government purchase of goods and services + gross public investment + inventory investment + gross residential construction investment + Gross business fixed investment + [export-import]
= 2,900 + 1,100 + 500 + 170 + 450 + 410 + (200 – 300)
= ₹ 5,430 Crores
GNPFC = GDPMP + Net Factor Income from Abroad – Net Indirect Taxes
= 5,430 + (-30) + 80
= ₹ 5,480Crores
NDPMP = GDPMP – Consumption of fixed capital
= 5430 – 60
= ₹ 5,370 Crores

Determination of National Income – CA Inter Economics Study Material

Question 8.
From the following data, calculate NNPFC, NNPMP, GNPMP and GDPMP.
Determination of National Income – CA Inter Economics Study Material 6
Answer:
GDPMP = Compensation of employees + mixed income of self-employed + operating surplus + depreciation + net indirect taxes
GDPMP = 1,000 + 1,100 + 2,000 + 400+ 450 = 4,950 Crores
GNPMP = GDPMP + NFIA
= 4,950 + (50) = 4,900 Crores
NNPMP = GNPMP – Depreciation
= 4,900 – 400 = 4,500 Crores
NNPFC = NNPMP – Net indirect tax
= 4,500 – 450 = 4,050 Crores

Determination of National Income – CA Inter Economics Study Material

Question 9.
From the following data, estimate National Income and Personal Income
Determination of National Income – CA Inter Economics Study Material 7
Answer:
National = Net national product at market price – Indirect taxes + Subsidies Income
= 1,891 – 175 + 30 = 1,746 Crores
Personal Income = National income – Income from property and entrepreneurship accruing to government administrative departments – Saving of non-departmental enterprises + National debt interest + Current transfers from government + Current transfers from rest of the world – Saving of private corporate sector – Corporate profit tax
= 1,746 – 45 – 10 + 15 + 35 + 20 – 25 – 25
= 1,711 Crores

Determination of National Income – CA Inter Economics Study Material

Question 10.
On basis of following information, calculate NNP at market price and Disposable personal income
Determination of National Income – CA Inter Economics Study Material 8
Answer:
NNPMP = NDPFC + NFIA + NIT
= 14,900 + 80 + 335 – 262 = 15,053 Crores
Disposable personal income (DI):
DI = PI – Personal income tax
= NI + Income received but not earned – Income earned but not received – Personal Income Tax
= (14,900 + 80) + (170 + 60 + 30) – (150 + 222 + 105) – 100
= 14,663 Crores

Question 11.
Calculate National Income by Value Added Method with the help of following data:
Determination of National Income – CA Inter Economics Study Material 9
Answer:
GVAMP = Value of output- Intermediate consumption
= Sales + Change in stock – Intermediate consumption
= 700 + (400 – 500) – 350 = 250 Crores
NVAFC = GVAMP – Depreciation + NFIA – Net Indirect Tax
NI = 250 – 150 + 30 – (110 – 50) = 70 Crores

Determination of National Income – CA Inter Economics Study Material

Question 12.
Calculate the Operating Surplus with the help of following data:
Determination of National Income – CA Inter Economics Study Material 10
Answer:
GVAMP = Value Output – Intermediate consumption
= (Sales + Change in stock) – Intermediate consumption
= 4,000 – 600 = 3,400 Crores
NDPMP = GDPMP – Consumption of Fixed capital
= 3,400 – 200 = 3,200 Crores
NDPFC = NDPMP – NIT
= 3,200 – 500 = 2,700 Crores
NDPFC Compensation of employees + Operating surplus + Mixed income
2,700 = 800 + Operating Surplus + 400
Operating surplus = 1,500 Crores

Determination of National Income – CA Inter Economics Study Material

Question 13.
Calculate national Income by value added method
Determination of National Income – CA Inter Economics Study Material 11
Answer:
GDPMP = (Value of output in primary sector – intermediate consumption of primary sector) + (value of output in secondary sector – intermediate consumption of secondary sector) + (value of output in tertiary sector – intermediate consumption of tertiary sector)
= 2,000 – 200 + 2,800 – 800 + 1,600- 600 = 4,800 Crores
NNPFC = GDPMP + NFIA – NIT – Depreciation
= 4,800 + (-30) – 300 – 470 = 4,000 Crores

Question 14.
Calculate NNPFC by expenditure method with the help of following information:
Determination of National Income – CA Inter Economics Study Material 12
Answer:
GDPMP = Government final consumption expenditure (Public final consumption expenditure) + Private final consumption expenditure + Gross domestic capital formation (Gross domestic fixed capital formation + Change stock + Net acquisition of valuables) + Net export
= 5 + 10 + [350 + 30 + 10] + (- 20) = 385 Crores
NNPFC = GDPMP – Depreciation + Net factor income from abroad (Income from abroad – Income paid to abroad) – Net Indirect tax (Indirect tax – subsidies)
= 385 – 30 + [0 – 20] – [0 – 100] = 435 Crores

Determination of National Income – CA Inter Economics Study Material

Question 15.
Given the following data, determine the National Income of a country using expenditure method and income method;
₹ in Crores
Private Final Consumption Expenditure – 1,000
Government Final Consumption Expenditure – 550
Compensation of Employees – 600
Net Exports – 15
Net Indirect Taxes – 60
Net Domestic Fixed Investment – 385
Consumption of Fixed Capital Formation – 65
Net Factor Income from Abroad – 10
Interest – 310
Rent – 200
Mixed Income of Self-Employed – 350
Profit – 400
Answer:
Expenditure Method:
NNPFC = Private Final Consumption Expenditure + Net Domestic Fixed Investment + Government final consumption expenditure+Net Exports + Net factor income from abroad – Indirect Taxes
= 1,000 + 385 + 550 -15 – 10 – 60 = 1,850 Crores

Income Method:
NNPFC = Employee compensation + Profits + Rent + Interest + Mixed income + NFIA
= 600 + 400 + 200 + 310 + 350-10 = 1,850 Crores

Determination of National Income – CA Inter Economics Study Material

Question 16.
Suppose in an economy: C = 100 + b (Y – 50 – tY); I = 50; G = 50; X = 10; M = 5 + 0.1Y; MPC (b) = 0.8; Proportional income tax rate (t) = 0.25
(a) Find the equilibrium national income, foreign trade multiplier, equilibrium value of imports.
(b) If equilibrium national income falls short of full employment income by ₹ 50, how much government should increase its expenditure to attain full – employment?
Answer:
(a) Y = C + I + G + (X – M)
= 100 + b (Y – 50 – tY) + 50 + 50 + (10 – 5 – 0.1Y)
= 100 + 0.8 (Y – 50 – 0.25Y) + 105 – 0.1Y
= 100 + 0.8Y – 40 – 0.2Y + 105 – 0.1Y
= 165 + 0.5Y
Y = 165 ÷ 0.5 = 330
Foreign trade multiplier = \(\frac{1}{1-b(1-t)+m}\) = \(\frac{1}{1-0.8(1-0.25)+0.1}\) = 2
Equilibrium value of imports can be obtained by substituting the equilibrium income in the import function. Thus,
M = 5 + 0.1Y = 5 + 0.1 × 330 = 38

(b) Required increase in government expenditure to attain ₹ 50 increase in income can be obtained as under:
∆Y = Foreign trade multiplier × ∆G
= \(\frac{1}{1-b(1-t)+m}\) × ∆G
50 = 2 × ∆G
∆G = 50 ÷ 2 =25

Determination of National Income – CA Inter Economics Study Material

Question 17.
Suppose the consumption function is C = 50 + 0.8Yd, I = 180 crores, G = 190 crores, T = 0.20Y
(a) Find the equilibrium level of income.
(b) Find the revenue from taxes at equilibrium. Is the government budget balanced?
(c) Find the equilibrium level of income when investment increases by 120 crores.
Answer:
(a) Y = C + I + G + (X – M)
= 50 + 0.8(Y – 0.2Y) + 180 + 190
= 420 + 0.8Y – 0.16Y
Y = 420 ÷ 0.36 = 1,166.66 Crores

(b) T = 0.2Y
= 0.2 × 1,166.66 = 233.332 Crores
G i.e. 190 < T i.e. 233.332, thus, budget is not in balance. There exists a budget Surplus.

(c) Change in Y = Change in I/(1 – b + bt)
= 120/(1 – 0.8 + 0.16)
= 120/.36 = 333.33 Crores
So new Y equilibrium
Y new = 1,166.66 + 333.33 = 1,499.99 Crores

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