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Deciphering the Economics

TOP 21 QUESTIONS OF NATIONAL INCOME & RELATED AGGREGATES

Q1. Explain the Domestic Territory (Economic Territory) ?

Ans. In layman’s language, domestic territory means the political frontiers of a country.  However, for the purpose  of national income accounting, it is used in a wider sence

In addition to political frontiers, domestic territory also includes :

  1. Ships and aircrafts owned and operated by normal residents between two or more countries. For example, planes operated by Air India between Russia and Japan are part of the domestic territory of India.
  2. Fishing vessels, oil and natural gas rigs operated by residents of a country in international waters or engaged in extraction in those arreas, where a country has exclusive rights of operation.
  3. Embassies, consulates and military estabilishmetns of a country located aborad.  For example, Indian Embassy in Russia is a part of the domestic territory of India.

Domestic Territory does not include :

  1. Embassies, consulates and military establishments of a country. For example, Japanese Embassy in India is a part of domestic territory of Japan.
  2. International organisations like UNO, WHO, etc. located within the geographical boundries of a country.

Q2. Which of the following are covered under the domestic territory of India?

  1. An Indian Company in London.
  2. Microsoft Office in India.
  3. Company in India owned by an Japanese.
  4. Office of Reliance Industries in New York.
  5. Branch of Foreign Bank in India.
  6. Indian Embassy in Japan
  7. Branch of State Bank of India in China
  8. Russian Embassy in India.
  9. Tata rented its building to Google in America.

Ans.Domestic Territory : 2, 3, 5, 6

Q3. Explain the term Normal Residents.

Ans. A normal residents of a country refers to an individual or an institution who ordinarily resides in the countries for a period than one year and whose

centre of Economic Interest also lies in that country. Normal residents include both, individuals and institutions.

‘Centre of Economic Interest’ implies two things :

  1. The resident lives or is located within the Domestic Territory for more than one year
  2. The resident carries out basic economic activities of earnings, spending and accumulation from the location

Following are not included under the category of Normal residents:

  1. Foreign tourists and visitors who visits a country for recreation, holidays, medical treatment, study, sports, conferences, etc.
  2. Foreign staff of Embassies, officials, deplomates and members of the armed forces of a foreign country, located in the given country.
  3. International organisations like UNO, WHO, etc. are not considered as normal residents of the country in which they opeate.  They are treated as the normal residents  of international area.

Employees of international organisations are considered as residents of the countries to which they belong and not of the international area. For example, an American working in UNO (located in India) will be treated as normal resident of America.

Crew members of foreign vessels, commercial travelers and seasonal workers, provided their stay is less than one year

Border workers who live near the international border and cross the border on a regular basis to work in the other country. They are treated as normal residents of the country where they live, and not where they work.

Q4. Identify the following as Normal Residents of India :

  • Indian officials working in the Indian Embassy in USA.
  • A Japanese tourist who stays in India for  2 months.
  • Indian going to Pakistan for watching the cricket match.
  • Indians working in the UNO office, located in America.
  • Indian employees working in WHO, located in India.
  • Foreign tourists visiting India for a month to see the Taj Mahal.
  • Indian Muslims going for the Haj pilgrimage.

Ans.Normal Residents : a, c, d, e, g

Citizenship and Residentship are two different terms

Citizenship

It is basically a legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen. It means, Indian citizenship can arise in two ways :

  • When a person is born in India, he acquires automatic citizenship of India.
  • A person born outside India applies for citizenship and Indian Law allows him to become Indian Citizen.

Residentship

  • It is an economic concept based on the basic economic activities performed by a person.
  • An individual is a normal resident of a country if he ordinarily resides in the country for a period more than one year and his centre of economic interest also lies in that country.

Example : A Chinese living in India for more than one year is a normal resident of India. However, he is not a citizen (or national) of India as he does not hold citizenship of India. It means, a person can be a citizen of one country and at the same thing, a resident of another country.

Q5. Define Factor Income.

Ans. Factor Income refers to the income received by the factors of production for rendering factor services in the process of production.  For example, rent, wages, interest and profit. Such factor incomes are received for providing factor services of land, labour, capital and enterprise. Factor income of the normal residents of a country is included in the National Income.

Q6. Define Transfer Income

Ans. Transfer income refers to the income received without rendering any productive service in return. For example, old age pension, scholarship, unemployment allowance, pocket money, etc.  Transfer income is a unilateral (one-sided) payment.  Transfer incomes are not included in National Income as they do not reflect any production of goods and service.

  • Old age pension is a transfer income because the person receiving it does not participate in the production process but, receives the income by virtue of being at a certain age.
  • Taxes received by the government are the transfer incomes of the government as they are received without productive service in return. Similarly, subsides paid by the government are transfer payments of the government.

Q7. Difference between Current Transfer Vs Capital Transfer.

Ans. Transfer receipts are two types (i) Current Transfer  (ii) Capital Transfer

  1. Current transfers are made out of income, whereas, capital transfers are made out of the wealth of the payer
  2. Current transfers are generally regular in nature, whereas, capital transfers are irregular.
  3. Current transfers are meant for consumption purposes, whereas, capital transfers are meant for capital formation.
  4. Examples of Current transfers : Old age pension, gifts, unemployment allowance, etc. Examples of Capital transfers : Investment grant, capital gains tax, war damages, etc.

Q8. Difference between Factor Income and Transfer Income.

national income - theniconomics

Q9. Define final goods.

Ans. Final goods refer to those goods which are used either for consumption or for investments. Therefore, all the goods that for purchased by consumer households are final goods as they are meant for final consumption. Similarly, the goods purchased by firms for capital formation (investment) are also final goods. For example, milk used by households for consumption or machinery purchased as an investment. Final goods are neither result nor used for any further transformation in the process of production.

Q10. Define intermediate goods.

Ans. Intermediate goods refer to those goods which are used either for resale or for further production in the same year.  For example, milk used in dairy shop for resale or coal used in factory for further production.  Intermediate goods are generally purchased by one production unit from another production unit.  Demand for intermediate goods is derived from the demand for final goods.

Intermediate goods lose their identity when undergo the production process. For instance, when a miller converts wheat into flour, then wheat loses its intenty. In such case, what is intermediate good and four is a fianl good.


National Income – Niconomics

Q11. How to classify as : Intermediate Goods  and Final goods.

Ans. Goods cannot be absolutely classified as intermediate goods or final goods. A commdity can be an intermediate good as wella s a final good, depending open its nature of use.

For exmaple

  • Sugar is an intermediate goods when it is used for making sweets.

However, if it is used by the consumers, then it becomes a final good.

  • Similarly, milk is an intermediate good wehn it used in dairy shops for resale. However, it becomes a final good when it used by the households.

Q12. Why national income includes only final goods ?

Ans. Intermediate goods are not included in the national income. Only final goods are included. The value of intermediate goods is already included in the final goods. If value of intermediate goods is added again, it will lead to double counting.

For example, the value of flour (final goods) already includes the value of wheat (intermediate good). So, if we include the value of wheat along with the value of flour, it will lead to double counting.

Q13. Distinguish betwleen final goods and intermediate goods

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National Income

Q14. Classify the following as intermediate Goods and Final Goods :

  1. Paper purchased by a publisher.

It is an intermediate product as paper is used for further production during the same year

  • Furniture purchased by a school.

It is a final product because it is purchased for investment.

  • Milk purchased by households.

It is a final product as it is used by households for final consumption.

  • Purchase of rice by a grocery shop.

These are intermediate products because these are purchased for resale.

  • Coal used by manufacturing firms.

It is an intermediate product as coal is used for further production during the same year

  • Computers installed in an office. It is a final product because it is purchased for investment.
  1. Coal used by consumer households.

It is a final product as it is used by households for final consumption.

  • Mobile sets purchased by a mobile dealer.

These are intermediate products because these are purchased for resale.

  • Chalks, dusters, etc. purchased by a school.

These are intermediate products because these are taken to be used up completely during the same year

  • Fertilizers used by the farmers.

These are intermediate products because fertilizer is used for further production during the same year

  • Printer purchased by a lawyer.

It is a final product because it is purchased for investment.

  • Unsold coal with trader at year end.

It is a final product as the unsold coal is an investment for the trader

  • Refrigerator installed by a firm.

It is a final product because it is purchased for investment.

  • Sugar used by a sweet shop.

It is an intermediate product as sugar is used for further production during the same year

Q15. Define Consumption Goods and Capital Goods.

Ans. Final goods can be broadly classified into two groups : Consumption Goods and Capital Goods. Consumption Goods : Consumption goods refer to those goods which satisfy the wants of the consumers directly.  For example, Bread, butter, shirts, pens, television, furniture.

National income - Theniconomics
National Income

Consumption goods can further be subdivided into the following categories.

  1. Durable goods :  It refers to those goods which can be used again and again in consumption over a considerable period of time. For example, Television, refrigerator,.
    1. Semi-durable goods : Goods which can be used for a limited period of time are terms as semi-durable goods. For example clothes, crockery.

These goods have a life span of around one year.

  • Non-durable goods : Goods which are used in a single act of consumption are known as non-durable goods. For example, milk, bread, foodgrains, paper etc.  These goods cannot be used more than once, i.e., they lose their identity in single act of consumption.
  1. Services : The services which are rendered for the direct consumption by ultimate consumers are called services. For example, services of teachers, doctors banks, etc.

Capital Goods : Capital Goods are those final goods which help in production of other goods and services. For example, machinery, equipments, plants etc.

Some points about Capital goods

  • Capital goods are used in future for productive purposes and have expected life capital time of serveral years.
    • Capital goods do not lose their identify in the prouduction process, i.e., they do not get merged in the process of production.
    • Capital goods need repairs or replacement over time as they depreciate over a period of time.
    • Capital goods have derived demand as their demand is derived from the demand for other goods, which they help to produce.

Q16. How to clasisfy goods as : Consumption Goods and Capital Goods.

Ans. There is no clear cut line of demarcation between consumption goods and capital goods. The same good can be consumption good and also capital good. It depends on the ultimate use of the good. For example, a machine purchased by a household is consumption good. If it is purchased by a firm for use in the business, then it is a capital goods.  However, if the machinery is brought by the firm for resale, then it will be treated as an intermediate good.

Q17. Differentiate between Consumption Goods and Capital Goods

national income - theniconomics
National Income

Q18. Define Gross Investment, Net Investment and Depreciation.

Ans. Investment or capital formation refers to addition to the capital stock of economy. For example, construction of building, purchase of machinery, addition to inventories of goods, etc. Investment can be looked up in two forms.

  • Gross Investment
  • Net Investment

Gross Investment : The total addition made to the capital stock of economy in a given period is termed as Gross Investment.  So, gross investment is the expenditure on  purchase of fixed assets and unsold stock during the accounting year.

During the production process, some amount of economy’s stock of capital goods is used up. This loss of fixed capital is known as depreciation. By subtracting depreciation from gross investment, we get Net Investment. Net Investment : The actual addition made to the capital stock of economy in a given period is termed as Net Investment.

Net Investment = Gross Investment – Depreciation

Depreciation (Consumption of Fixed Capital) : Depreciation refers to a fallin the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence or change in technology.

‘Gross’ is inclusive of depreciation, whereas, ‘net’ excludes it.

Gross Value = Net Value + Depreciation.

Depreciation is also known as (i) Current Replacement Cost; (ii) Replacement cost of Fixed Capital; (iii) Capital Consumption Allowance.

Q19. Define Net Indirect Tax (NIT).

Sol. Net indirect tax refers to the difference between indirect taxes and subsidies. Net Indirect Tax = Indirect taxes – Subsidies

So, the two components of Net Indirect Tax are (i) Indirect Taxes (ii) Subsidies.

  • Indirect Tax : It refers to those taxes which are imposed by the government on the production and sale of goods and services. Sales Tax, excise duty, custom duty etc.

Interest tax increases the price of the product in the market.

  • Subsidies : Subsidies refer to the finanical assistance given by the government to an enterprise on the production of a certain commodity.

In India, LPG cylinder is sold at subsidized rates.

Subsidies are opposite to indirect taxes as they reduce the market price of the commodity.

Factor cost vs Market Price

  • Factor Cost (FC) : It refers to amount paid to production for their contribution in the production process.
  • Market Price (MP) : It refers to price at which product is actually sold in the market.
    • Market Price = Factor Cost + (Indirect Tax – Subsidies)
    • Market Price = Factor Cost + Net Indirect Taxes

When only subsidies are given : In such case, there are two alternative treatments.

  • Add subsidies, if factor cost is to be calculated from market price and subtract subsidies, if market price is to be calculated from factor cost.
  • Write the formula as : (Indirect taxes – Subsidies) and put value of indirect taxes as zero.

Q20. What is meant by Net Factor Income from Abroad (NFIA) ? State its components ?

Ans. It refers to the difference between factor income received from the rest of the world and factor income paid to the rest of the world.

NFIA = Factor income earned from abroad – Factor income paid abroad NFIA can be positive, Negative or Zero

  • NFIA is positive when income earned from abroad is more than income to abroad.
  • NFIA is negative when income earned abroad is less than income paid to abroad.
  • NFIA is zero when income earned from abroad is equal to income paid to abroad.

Components of NFIA

There are three main components of NFIA :”

  1. Net compensation of employees : It refers to the difference between income from work received by resident workers from abroad and similar payments made to the non-resident.
  2. Net income from property and enterpreneurship : It refers to the difference between income from property and enterpreurship (in the form of rent, interest and profit) received by the residents of the country and smaller  payments made to the rest of the world.
  3. Net retained earnings : It refers to the difference between retained earnings of the resident companies located abroad and retained earnings

National Income

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