Chapter 3 National Income & Related Aggregates and 4 Determination of Income and Employment class 12th Commerce

Introduction:

This is a numerical based chapter to calculate national income by different methods (Income, expenditure and value-added method, their steps and precautions). Numerically to determine private income, personal income, personal disposable income, National disposable income (net and gross) and their differences.

Definitions:
 

Goods: Goods is defined as any physical object, manmade, that could command a price in the market. they are the materials that satisfy human wants and provide utility.

Consumption goods: Those goods which satisfy human wants directly are called consumption goods. Eg milk, food grains etc

 

Capital goods: Those goods used for investment and help increase production are called capital goods: Eg plant, machinery.

 

Final goods: The goods that are used for final consumption or investment are called final goods. These goods won’t pass through any further stages of processing or transformation.

Intermediate goods: Those goods used as raw material for further production or resale are called intermediate goods. They do not fulfill the needs of mankind directly. Eg Lawyers, chartered accountants.

 

Investment: Investment refers to addition made to the physical stock of capital during a period of time.

 

Capital formation: Capital formation is the change in the change in the stock of capital.

Depreciation: A fall in the value of fixed capital goods due to normal wear and tear. It is also called the consumption of fixed capital.

 

Gross Investment: Gross investment refers to the total addition made to the physical stock of capital during a period of time. It includes depreciation.
OR
Net Investment + Depreciation

Net Investment : net investment is the net addition made to the real stock of capital during a period of time. It excludes depreciation.

Net Investment = Gross investment – Depreciation

 

Stocks: Stock variables are those variables whose magnitude is measured at a particular point in time. Eg National Wealth, Inventory etc 

 

Flows: Flow variables are those variables whose magnitude is measured over a period of time are called flow variables. Eg. National income, change in stock etc.

Circular flow of Income: Circular flow of Income refers to the continuous flow of goods and services and money income among different sectors in the economy. It doesn’t have an end or a beginning point. It helps us know the functioning of the economy.

 

Leakage: Leakage is the amount of money that is withdrawn from the circular flow of income. Eg Taxes, Savings etc. (reduces aggregate demand and level of income ) 

Injection: Injection refers to the amount of money that is added to the circular flow of income. Eg : govt, imports etc (increases aggregate demands and levels of income)

 

Economic Territory: Economic refers to the geographical territory administered by a Government within which persons, goods, and capital circulate freely.

Scope of economic territory:
(a) Political frontiers, including territorial waters and airspace.
(b) Embassies, consulates, military bases etc., located abroad.
(c) Ships and aircraft operated by the residents between two or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the international waters.

 

Normal Resident of a country: A person or an institution who normally resides in a country and whose Centre of economic interest lies in that country is called a normal resident. However, the exceptions to normal residents of a country are Diplomacy/officials of a foreign embassy.
Travellers, tourists, students.
Those working in international organizations like WHO, IMF, UNESCO

 

Meaning of Gross and Net:

1. Gross means the value of product including depreciation. Net means the value of product excluding depreciation.
2. The difference between these two terms is depreciation.

3. Where depreciation is the expected decrease in the value of fixed capital assets due to its general use.
4. It is the result of production process.
Gross = Net + Depreciation Net = Gross – Depreciation
Note: Other names of depreciation are:
(a) Consumption of fixed capital (b) Capital consumption allowance
(c) Current replacement cost.

 

National Income and Domestic Income:

1. National Income refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.
2. Domestic Income refers to a total factor incomes earned by the factor of production within the domestic territory of a country during an accounting year.

3. The difference between these two incomes is Net Factor Income from abroad (NFIA), which is included in National Income (NY) and excluded from Domestic Income (DY).
4. Where NFIA is the difference between income earned by normal residents from rest of the world and similar payments made to Non residents within the domestic territory. NFIA = Income earned by Residents from rest of the world (ROW) – Payments to
Non-Residents within Domestic territory.
NY = DY + NFIA DY = NY – NFIA

 

Factor Cost and Market Price:

1. Factor Cost (FC): It refers to amount paid to factors of production for their contribution in the production process.
2. Market Price (MP): It refers to the price at which product is actually sold in the market. The difference between these two is Net Indirect Taxes (NIT) which is included in MP and excluded from FC. Where NIT is the difference between indirect taxes and subsidies.
NIT = IT – Subsidies
Where, Indirect Taxes are the taxes which are levied by the government on production and sale of commodity. Sales tax, excise duty, custom duty, etc. are some of the indirect taxes, and subsidies are the cash grants given by the government to the enterprises to encourage production of certain commodities, to promote exports or to sell goods at prices lower than the free market Price. In India, LPG cylinder is sold at subsidized rates.
MP = FC + NIT (Indirect Taxes – Subsidies)
FC = MP – NIT (Indirect Taxes – Subsidies)

 

Aggregate Of National Income

1. Gross Domestic Product at Market Price (GDP_MP ): GDP_MP  is defined as the gross market value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units.
(a) ‘Gross’ in GDP_MP signifies that depreciation is included, i.e., no provision has been made for depreciation.

(b) ‘Domestic’ in GDP_MP  signifies that it includes all the final goods and services produced by all the production units located within the economic territory (irrespective of the fact whether produced by residents or non-residents).
(c) ‘Market Price’ in GDP_MP  signifies that indirect taxes are included and subsidies are excluded, i.e., it shows that Net Indirect Taxes (NIT) have been included.
(d) ‘Product’ in GDP_MP  signifies that only final goods and services have to be included and intermediate goods should not be included to avoid the double counting.

2. Gross Domestic Product at Factor Cost ( GDP_FC): GDP_FC is defined as the gross factor value of the final goods and services produced within the domestic territory of a country during an accounting year by all production units excluding Net Indirect Tax.
GDP_FC = GDP_MP  – Net Indirect Taxes

3. Net Domestic Product at Market Price (NDP_MP ).
NDP_MP  is defined as the net market value of all the final goods and services produced within the domestic territory of a country by its normal residents and non-residents during an accounting year.
NDP_MP =GDP_MP – Depreciation

4. Net Domestic Product at Factor Cost (NDP_FC ).
NDP_FC refers to a total factor income earned by the factor of production within the domestic territory of a country during an accounting year.
NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes NDP_FC is also known as Domestic Income or Domestic factor income.

5. Gross National Product at Market Price (GNP_MP).
GNP_MP refers to market value of all the final goods and services produced by the normal residents of a country during an accounting year.
GNP_MP = GDP_MP + Net factor income from abroad It must be noted that GNP_MP can be less than GDP_MP when NFIA is negative. However, GNP_MP will be more than GDP_MP  when NFIA is positive.

 

6. Gross National Product at Factor Cost (GDP_FC ) or Gross National Income GNP_FC  refers to gross factor value of all the final goods and services produced by the normal residents of a country during an accounting year.
GDP_FC  = GNP_MP  – Net Indirect Taxes
7. Net National Product at Market Price (NNP_MP ).
NNP_MP  refers to net market value of all the final goods and services produced by the normal residents of a country during an accounting year.
NNP_MP = GNP_MP – Depreciation

8. Net National Product at Factor Cost (NNP_FC ).
NNP_FC  refers to net money value of all the final goods and services produced by the normal residents of a country during an accounting year.
NNP_FC = GNP_MP  – Depreciation – Net Indirect Taxes It must be noted that NNP_FC  is also known as National Income.

 

Problem of Double Counting

According to national income and related aggregates class 12 notes, counting the value of a commodity more than once while estimating national income is double counting. It leads to overestimation of national income. So, it is called the problem of double counting. Ways to solve the problem of double counting are mentioned below.

(a) By taking the value of only final goods.

(b) By value added method.

 

Components of Final Expenditure

Moving further in national income and related aggregates class 12 notes, we examine the components of final expenditure. They are:

1. Final Consumption Expenditure
   • Private Final Consumption Expenditure(C)
   • Government Final Consumption Expenditure(G)
2. Gross Domestic Capital Formation
3. Gross Domestic Fixed Capital Formation
4. Gross Business Fixed Investment
5. Gross Residential Construction Investment
6. Gross Public Investment
   • Change in Stock or Inventory Investment.
7. Net Export

 

Components of Domestic Income

• Compensation of Employees
  • Wages and salaries(Cash/or kinds)
  • Employers Contribution to Social security Schemes
• Operating surplus
  • Rent
  • Interest
  • Profit
    It is further divided into:
    • Corporate Tax
    • Dividend
    • Undistributed corporate profit
• Mixed income for a self-employed person
• Net Factor Income from Abroad NFIA = It is the difference between factor income received/earned by normal residents of a country and factor income paid to non-residents of the country.

 

Components of NFIA:

• Net Compensation of Employees
• Net Income from Property and entrepreneurship
• Net Retained earning of resident companies abroad

NFIA: Net Factor Income Earned from Abroad.

NFIA = Factor Income Received from Abroad –Factor Income Paid to Abroad.
OR
NFIA = Net compensation of Employees
Net income from property and entrepreneurship + Net retained earnings of resident companies abroad.

• Net National Disposable Income (NNDI): It is defined as the net national product at the Market price plus net current transfer from the rest of the world.

NNDI = NNPMP + Net current transfers from the rest of the world
=National income + net indirect tax + net current transfers from the rest of the world.

• Private income – It is the estimation of income of factors and transfer incomes from all sources to the private sector within and outside the country.
• Personal income – It is income received by a household from all sources. It includes factor income and transfer income.
• Personal Disposable Income – It is referred to as Personal income which is available to the households for disposal as they like.
• GDP and welfare: There is a direct relationship between GDP and welfare. There are 2 main types of GDP, namely

Welfare: This refers to the material well being of the people and is dependent on factors like national income, consumption level, quality of goods etc. and non-economic factors like environmental pollution, law and order etc. Additionally, welfare depends on a non-economic factor called non-economic welfare. Social welfare is the total of economic and non-economic welfare.

 

Determination of Income and Employment

Income Method:- According to this method, all the incomes that accrue to the factors of production by way of wages, profits ,rent ,interest etc. are summed up to obtain the national income. It is also known as distributive share method or factor payment method.

The sum total of all the factor incomes earned within the domestic territory of a country is known as domestic income (NDP at FC).

  

Components of factor Income:-

1.  compensation of employees (COE)

It refers to amount paid to employees by employer for rendering productive services.

It consists of three elements..

 

(i)wages and salaries in cash :-

             It includes all monetary benefits like wages, salaries ,bonus ,dearness allowances, commission ,etc.

Any reimbursement of business expenses incurred by the employees will be excluded from the COE as such expenses are part of intermediate consumption of business enterprises.

    

(ii) wages and salaries in kind:-

 It includes all non-monitory benefits like rent free home, free car, free medical and educational facilities, etc.. An imputed value of these benefits should be included in the national income. 

 However it does not include any facility which is necessary for work in which employees do not have any discretion.

 

(iii) employers contribution to social security schemes:-

It includes contributions made by employer for the Social Security of employees like contribution to Provident fund, gratuity, labour welfare funds, etc.. the main objective of such contribution is to ensure safety and security of life of the employees.

Any contribution by third-party like insurance company to an employee is not the part of COE because insurance company is not the employer of the injured worker… and also any contribution by employees is also not included as such payments are made by the employees not the employer so COE counts only payment or benefits provided by the employer to employees.

 

2. rent and royalty:-

      Rent is that part of national income which arises from ownership of land and building.

  It includes both actual rent (rent of let out property) as well as imputed rent (rent of self occupied properties).

               Imputed rent of owner occupied houses is calculated on the basis of market rental value of the house.

   Royalty refers to income received for granting leasing rights of subsoil assets.

    Example, owners of mineral deposits like coal iron or natural gas etc can earn income by giving rights of my name to the contractors.

 

3. Interest:-

      It refers to amount received for lending funds to a production unit.   

      It includes both actual interest as well as imputed interest funds funds provided by the entrepreneur.   

     It includes interest on loan taken for productive services only.

    It does not include

1. interest paid on loans taken for consumption purposes like interest rate the government on public debt and interest paid by consumers.
2. interest paid by one form to another fir

 

  ​ 4. Profit:-

      It is the reward to the intrapreneur for his contribution to the production of goods and services.

    It is the remaining income which an entrepreneur has after paying all the other factors of production.

   The profit earned by an enterprise is used for three purposes;

1. corporate tax :- it is the direct tax paid by an enterprise to the government on the total profit earned by it.               it is also known as profit tax or business tax.
2. Dividend:- it refers to that part of profit which is paid to shareholders in the ratio of their shareholding.               it is also known as distributed profits.
3. Retained earnings :- it refers to that part of profit which is kept as reserve to meet unexpected contingencies or for business expansion..                            it is also known as undistributed profits or savings of private sector or reserves and surplus. 

In short.. Profit = corporate tax + dividend + retained earnings.

 

5. Mixed Income:-

     It is the income generated by own account workers like farmers, barbers etc..  and unincorporated enterprises like retail traders, small shopkeepers etc.

  It includes more than one type of factor income,  that’s why here we use the term mixed income.

  It arises from productive services of self employed persons whose income includes wages, rent ,interest and profits and these elements cannot be separated from each other.

  Example, income of a doctor running a clinic at his residence… CA practicing at his own residence .. Consultants  consulting from their residence ..

   Why we need the concept of mixed income???

    See due to different accounting practices,  it is not possible for the estimators to clearly identify the components of different factor incomes.

   So when total factor payment can be estimated but cannot be segregated into separate heads like COE, rent and royalty, interest and profit… then a different term for this overall factor payment is used which known as mixed income.

   

Operating Surplus:- It refers to the sum total of income from property which includes rent plus royalty plus interest income from entrepreneurship which includes profit.

These kind of Surplus generate in both private and government enterprises. but generally it does not generate in the general government sector because its objective is to operate for the benefit of public … With the motive of social welfare..  so income like rent, interest and profit are Nil in general government sector.

 

Steps for estimating national income by income method:-

1. identify and classify the production units like primary, secondary and tertiary sectors.
2. Estimate the factor income paid by each sector like COE, Rent & royalty ,interest ,profit and mixed income.
3. by adding all factor incomes.. calculate domestic income( NDP at FC.)
4. Add NFIA to domestic income to arrive at national income NNP at FC.

 

Precautions of income method

Following precautions are to be considered while estimating national income by income method:-

1. transfer incomes like scholarship, donations, charity ,old-age pensions ..are not included in the national income because such receipts are not connected with any productive activity and there is no value addition .
2. Income from sale of second-hand goods will not be included:- same as under value addition method.
3. Income from sale of shares ,bonds and debentures will not be included because such transactions do not contribute to current flow of goods and services & also these financial assets are just paper claims and involves a change of title only.

However any commission or brokerage on such financial asset is included ..as it is a productive service .

Whenever we sell Second hand goods like old car.. and financial assets likebonds, debentures…then there is income which is called as capital gain … such income is not a factor income as these transactions are not productive transactions and do not add to the current flow of goods and services in the economy ..so it will not be included while calculating national income.

4. Windfall gains like income from lotteries, horse race.. etc are not included because there is no productive activity connected with them.
5. imputed value of services provided by owners of production units will be included… like imputed value of owner occupied houses, interest own capital.. Production for self consumption ..etc because these are productive activities and add to the flow of goods and services.  
6. Payment out of past savings ..like gift tax, death duties, interest tax ..etc …are not included in the national income… because they are paid out of wealth or past savings and do not add to the current flow of goods and services.

 

PRACTICAL QUESTIONS

 

Question. Calculate the value-added method by firm A and firm B.

Particulars	Rs in cr
Domestic sales by firm A	4000
Exports by firm A	1000
Purchases by firm A	200
Sales by firm B	2940
Purchase by firm B	1300

 

Solution:

value added by firm A

 = domestic sales by firm A +export by firm A-purchase by firm A

= 4000 +1000 -200

= Rs 4800cr

Note: 'Exports by firm A' will be included as domestic sales are specifically mentioned.

   Value added by firm B

= sales by firm B – purchase by firm B

= 2940 -1300

= Rs1640cr

 

Question .from the following data about firm X calculate gross value added at factor cost by it.

Particulars	Rs in thousands
(i)sales	500
(ii)Opening stock	30
(iii)closing stock	20
(iv)Purchase of intermediate products	300
(v)Purchase of machinery	150
(vi)Subsidy	40

 

Solution : gross value added at factor cost

= sales + (closing stock – opening stock)-purchase of intermediate products +subsidy

= 500 + (20-30) -300 +40

=Rs 230 thousands.

 

Question. From the following data calculate ‘gross value added at factor cost”

Particulars	Rs in cr
(i) sales	180
(ii)rent	5
(iii)subsidies	10
(iv)change in stock	15
(v)purchase of raw material	100
(vi) profits	25

Solution: gross added at factor cost

=sales + change in stock- purchase of raw material

= 180+15-100+10

= Rs105 cr

 

Question. From the following data calculate net value added at factor cost.

particulars	Rs in lakhs
(i) subsidy	40
(ii)sales	800
(iii)depreciation	30
(iv)exports	100
(v)closing stock	20
(vi) opening stock	50
(vii) intermediate purchase	500
(viii) purchase of machinery of own use	200
(ix) import of raw material	60

 

Solution: net value added at factor cost

= (ii)+(v)-(vi)-(vii)-(iii)+(i)

= 800+20-50-500-30+40

= Rs280lakhs

Question. calculate value of output from the following data :

Particulars	Rs in lakhs
(i)net value added at factor cost	100
(ii)intermediate consumption	75
(iii)goods and services tax(gst)	20
(iv)subsidy	5
(v)depreciation	10

 

Solution : value of output

=net value added at factor coast +intermediate consumption +depreciation+GST-subsidy

=100+75+10+(20-5)

=rs200lakhs

Note :value of output always means gross value of the output at market price unless stated otherwise.

 

Question. Calculate intermediate consumption from the following data.

particulars	Rs in lakhs
(i)value of output	200
(ii)net value added at factor cost	80
(iii)goods and services tax (GST)	15
(iv)subsidy	5
(v)depreciation	20

 

Solution: intermediate consumption

=value of output – net value added at factor cost – depreciation – (GST -subsidy)

=200-80-20-(15-5)

=rs90lakhs

 

Question. From the following data calculate the (a)value of output (B) intermediate consumption (c)net value added at factor cost .

Particulars	Rs in cr
(i)purchase of raw material from domestic market	400
(ii)increase in the unsold stock	60
(iii)import of raw material	120
(iv)domestic sale	1200
(v)replacement of fixed capital	50
(vi)power charges	20
(vii)exports	200
(viii)import of machinery	40
(ix)goods and services tax (GST)	10
(x)subsidy	30
(xi)goods used for self-consumption	10

 

Solution: (A) value of output

= domestic sales + exports + increase in unsold stock + goods used for Self Consumption

=1200+200+60+10

=Rs1470cr

Note: 1.exports will be included as domestic sales are given.

2. Goods used for self-Consumption will also be included in as it adds to current flow of goods and services.

(B) Intermediate consumption

= purchase of raw material from domestic market + import of raw material+ power charges

=400+120+20

=Rs540cr

(C) net value added at factor cost

=value of output – intermediate consumption – (goods and service tax – subsidy)- replacement of fixed capital 

= 1470-540-(10-30)-50

=Rs900cr

 

Note : Replacement of fixed capital is an another name for depreciation

 

Question. Calculate the net value added at the market price of a firm:

Particulars	Rs in cr
(i) Sale (ii) Change in stock (iii) Depreciation (iv) Net indirect taxes (v) Purchase of machinery (vi) Purchase of an intermediate product	400 -20 30 40 200 250

Answer:

Value of Output = Sale + Change in Stock

= 400 + (-) 20

= ₹380cr

Gross Value added at MP = Value of output – Purchase of an intermediate product

= 380 – 250

= ₹130cr

Net value added at MP = Gross value added at MP – Depreciation

= 130 – 30

 = ₹ 100cr

 

Question. Calculate sales from the following data

Particulars	Rs in lakhs
(i)net value added at factor cost	300
(ii)net addition to stock	-20
(iii)goods and services tax(GST)	30
(iv)depreciation	10
(v)intermediate consumption	100
(vi)subsidy	5

 

Solution: sales

GDPmp = NVAfc -subsidy + depreciation

=300-5+10

=Rs305lakh

GDPmp =sales +change in stock- intermediate consumption

305=sales+(-20)-100

 

Concept Income method

formulas ok :

Formula:

National income = NDPfc +net factor income from abroad

NDPfc=compensation of employee + rent and royalty +interest + profit + mixed income

                                            Or

NDPfc = compensation of employess + operating surplus +mixed income

Operating surplus = rent and royalty +interest +profit

Compensation of employee = wages and salaries in cash +wages and salary in kind + employers contribution to social security scheme

 

Question. Calculate NDPfc.

particulars	Rs in cr
(i) rent	400
(ii)royalty	200
(iii)interest	500
(iv)compensation of employee	1000
(v)profit	500
(vi)mixed income	1000

 

Solution: NDP at fc

NDPfc= rent +royalty +interest +compensation of employees+ profit +mixed income

NDPfc=400+200+500+1000+500+1000

NDPfc=Rs3600cr

 

Question. Calculate GDP at market price. From the following data.

Particular	Rs in cr
(i)net indirect tax	900
(ii)depreciation	400
(iii)net factor income from abroad	-20
(iv)rent	1000
(v)dividend	500
(vi)mixed income	200
(vii)saving of private corporate sector	400
(viii)interest	200
(ix)compensation of employees	100

 

Solution: GNP at mp

= rent +dividend+ mixed income + saving private corporate sector+ interest +compensation of employees + net indirect tax+ depreciation +net factor income from abroad

=1000+500+200+400+200+100+900+400+(-)20

=Rs3680cr

 

Question. calculate operating surplus.

Particulars	Rs in cr
(i)sales	4000
(ii)compensation of employees	800
(iii)intermediate consumption	600
(iv)rent	400
(v)interest	300
(vi)net indirect taxes	500
(vii)consumption of fixed capital	200
(viii)mixed income	400

 

Solution: operating surplus

=sales – intermediate consumption – compensation of employees – net indirect tax – consumption of fixed capital – mixed income

= 4000 – 600 - 800 -500 – 200 -400

=Rs 1500cr

 

Question. Calculate operating surplus .

 

Particulars	Rs in cr
(i)compensation of employees	110
(ii)net indirect tax	150
(iii)depreciation	50
(iv)net factor income from rest of the world	155
(v)income from enterprenureship and property from rest of the world	75
(vi)gross domestic product at market price	1050
(vii)mixed income of self employed	500

 

Solution : operating surplus

= (vi)-(iii)-(ii)-(i)-(vii)

= 1050-50-150-110-500

=Rs240cr.

 

Question. calculate national income .

 

Particular	Rs in cr
(i)rent	60
(ii)interest	40
(iii)profit net of corporate profit tax	20
(iv)corporate profit tax	5
(v)net factor income received from abroad .	-5
(vi)compensation of employees	600
(vii)indirect taxes	80
(viii)subsidies	10
(ix)dividends	7

 

Solution: national income

=(i)+(ii)+(iii)+(iv)+(vi)+(v)

= 60+40+5+20+600+(-)5

=Rs720cr.

 

Concept expenditure method

Formulas

National Income: GDPmp – depreciation – net indirect tax – net factor income from abroad

GDPmp = private final consumption expenditure + government final consumption expenditure + gross domestic capital formation +net exports

Gross domestic capital formation: gross fixed capital formation + change in stock

Gross domestic capital formation= net domestic formation + depreciation

Net export=exports -import

 

Question. Calculate GDP at MP.

particulars	Rs in cr
(i)private final consumption expenditure	1200
(ii)government final consumption expenditure	200
(iii)gross fixed capital formation	300
(iv)change in stock	400
(v)imports	500
(vi)exports	600

 

Solution: GDP at MP

=private final consumption + government final consumption expenditure + gross fixed capital formation +change in stock +(exports- imports)

=1200+200+300+400+(600-500)

=Rs2200cr.

 

Question Calculate GNP at FC

particulars	Rs in cr
(i)net domestic fixed capital formation	350
(ii)closing stock	100
(iii)government final consumption expenditure	200
(iv)net indirect taxes	40
(v)opening stock	60
(vi)consumption of fixed capital	50
(vii)net exports	-10
(viii)private final consumption expenditure	1500
(ix)imports	20
(x)net factor income from abroad	-30

 

Solution: GNP at FC

=(i) +{(ii) - (v)} +(iii) + (viii) + (vii) + (vi) - (iv) + (x)

= 350+{100-60}+200+1500+(-)10+50-40+(-)30

=Rs2060cr.

 

Question. calculate gross domestic product at factor cost from the following data.

Particulars	Rs in cr
(i)private final consumption expenditure	800
(ii)net domestic capital formation	150
(iii)change in stock	30
(iv)net factor income from abroad	-20
(v)net indirect tax	120
(vi)government final consumption expenditure	450
(vii)net exports	-30
(viii)consumption of fixed capital	50

 

Solution: gross domestic product at factor cost (GDPfc)

=(i) + (vi) + (ii) + (vii) + (viii) - (v)

= 800 + 450+150+(-30)+50-120

=Rs1300cr

 

Question. Calculate gross fixed capital formation from the following data .

particular	Rs in cr
(i)private final consumption expenditure	1000
(ii)government final consumption expenditure	500
(iii)net exports	-50
(iv)net factor income from abroad	20
(v)gross domestic product at market price	2500
(vi)opening stock	300
(vii)closing stock	200

 

Solution gross fixed capital formation

=(v)-(i)-(ii)-(iii)-{(vii)-(vi)}

=2500-1000-500-(-)50-{200-300}

=Rs1150cr

 

Income method

Expenditure method

Particulars	Rs in cr
(i)compensation of employees	250
(ii)imports	20
(iii)mixed income of self employed	50
(iv)gross fixed capital formation	120
(v)private final consumption expenditure	550
(vi)consumption of fixed capital	10
(vii)net factor income from abroad	20
(viii)indirect taxes	100
(ix)change in stock	20
(x)subsidies	20
(xi)rent	100
(xii)interest	200
(xiii)profits	50
(xiv)exports	10
(xv)government final consumption expenditure	60

 

Solution: national income by income method

= compensation of employees + mixed income of self-employed + rent +interest +profit + net factor income from abroad

= 250+50+100+200+50+20

=Rs 670cr.

 

National income by expenditure method

=gross fixed capital formation + change in stock +private final consumption+ (export-import)+government final consumption expenditure – consumption of fixed capital +net factor income from abroad –(indirect taxes- subsidy)

= 120+20+550+(10-20)+60-10+20-(100-20)

= Rs670cr

 

Question. Calculate GNP at FC by

Income method

Expenditure method

particulars	Rs in cr
(i)compensation of employees	1000
(ii)operating surplus	500
(iii)employers contribution to social security scheme	120
(iv)net exports	-30
(v)net indirect taxes	40
(vi)mixed income of the self employed	600
(vii)net factor income from abroad	20
(viii)consumption of fixed capital	40
(ix)private final consumption expenditure	1440
(x)govt. final consumption expenditure	490
(xi)gross fixed capital formation	250
(xii)change in  stock	30
(xiii)interest on national debt	25

 

Solution: GNP at FC

= (i)+(ii)+(vi)-(vii)+(viii)

= 1000+500+600-20+40

= Rs2120cr

 

Note: net factor income from abroad means that the paid amount is more than received amount.

GNP at FC by expenditure method

= (ix)+(x)+(xi)+(xii)+(iv)-(v)-(vii)

= 1440+490+250+30+(-30)-40-20

= rs2120cr.

 

Question. From the information given below, calculate:

• Value added by firm A and firm B;
• Gross Domestic Product at market price’
• Net Domestic Product at factor cost

Particulars	₹ In crores
Sales by firm B to general government	100
Sales by firm A	500
Sales by firm B to households	350
Change in stock of firm A	20
Closing stock of firm B	40
Opening stock of firm B	30
Purchases by firm A	320
Indirect Taxes paid by both the firms	75
Consumption of fixed capital	120
Sales by firm A to B	200

Solution:

Value added by firm A

 = Sales by firm A + Change in stock of firm A – Purchases by firm A

= 500 + 20 – 320

= ₹ 200 crores

Ans. ₹200 crores

Note: Total sales of firm A are given. So, sales by firm A to firm B of ₹200 crores are not taken separately in value of output of firm A. however, it will be taken in intermediate consumption of firm B.

Value added by firm B

 = Sales by firm B to general government + Sales by firm B to households + (Closing stock of firm B – Opening stock of firm B) – Purchases by firm B from firm A

 = 100 + 350 + (40 – 30) – 200

 = ₹ 260 crores

 

Gross Domestic Product at market price

 = Value added by firm A + Value added by firm B

= 200 + 260 = ₹460 crores

Ans. ₹460 crores

 

Net Domestic Product at factor cost

= Gross Domestic product at market price – Consumption of fixed capital – Indirect Taxes paid by both the firms.

 = 460 – 120 – 75

= ₹ 265 crores

Ans. ₹265 crores

 

Question. From the following data about a firm ‘X’ for the year 2000-01, calculate the net value added at market price during that year:

 

Particulars	₹ In crores
(i) Sales	90
(ii) Closing Stock	25
(iii) Opening stock	15
(iv) Indirect taxes	10
(v) Depreciation	20
(vi) Intermediate consumption	40
(vii) Purchase of raw materials	15
(viii) Rent	5

 

 

 

Solution:

Net Value added at Market Price

 = Sales + (Closing stock – Opening stock) – Intermediate consumption – Depreciation

 = 90 + (25-15) – 40 – 20 = ₹40 crores

Ans. ₹40 crores

Note : Purchases of raw materials is not included separately as it is already included in intermediate consumption.

 

Gross Value Added at Factor Cost

= Sales + (Closing stock – Opening stock) – Purchase of intermediate products

- NIT (Indirect taxes (0) – Subsidies (40))

= 500 + (20-30) – 300 + 40

= 500 – 10 – 300 + 40

₹ 230 Thousands

Note : Purchase of machinery is not considered as it is not a part of intermediate consumption.

 

Question. From the following data relating to a firm, calculate its net value added at factor cost:

Particulars	₹ In Lakhs
(i) Subsidy	40
(ii) Sales	800
(iii) Depreciation	30
(iv) Exports	100
(v) Closing stock	20
(vi) Opening stock	50
(vii) Intermediate purchases	500
(viii) Purchases of machinery for own use Explore All Chapters Triggers of Change Dominant Economic Features of the Industry Meaning of Corporate Strategy Business Environment and Impact of Business Environment on Strategy Strategy is Partly Proactive and Partly Reactive Three Basic Definition of strategy or corporate strategy Other Important Definition or Characteristics of Strategy Neutralize Competitors Dynamic and Flexible Strategies Level of management Role of Corporate Level inOrganization Role of Functional Level Strategy Meaning of Strategic Management Meaning of SWOT Examples of strength, weakness, opportunities and threats Purpose of SWOT Analysis Significance of SWOT Analysis or Importance of SWOT Analysis Tows Matrix Meaning of Portfolio Type of concept of portfolio and Meaning of Strategic Business Unit Techniques or Methods of Portfolio Analysis Different strategies pursued under BCG Ansoff’s Product Market Growth Matrix ADL Matrix General Electric Matrix Meaning of Competition Context in which Competitive Strategy is formulated Steps in Understanding the Competitive Landscape Meaning of Strategy Origin of Strategy Strategic Group Mapping Key Factors for Competitive Success OR Key success factors Prospects and Financial Attractiveness of Industry Characteristics of resource and capabilities that decides the sustainability of competitive advantages to earn profit Value Creation Theory of Core Competency as Per C K Prahalad and Gary Hamel Value Chain Issues to be considered in Strategic Analysis Meaning of Globalization MNC vs TNC Why do companies go global? 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