National Income & Macroeconomics

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National Income & Macroeconomics — solved practice questions

8 Class 12 Economics questions with step-by-step solutions. Attempt each, then reveal the answer.

1. Q1easy

   National Income is best defined as the:

   • AGross Domestic Product at Market Price
   • BGross National Product at Market Price
   • CNet National Product at Factor Cost
   • DNet Domestic Product at Market Price
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   Correct answer: (C) Net National Product at Factor Cost

   National Income is Net National Product at Factor Cost (NNP at FC) — the sum of factor incomes (rent, wages, interest and profit) earned by normal residents of a country during an accounting year.

2. Q2medium

   Which of the following is NOT a factor income and is therefore excluded while estimating national income?

   • AWages and salaries
   • BRent on land
   • CInterest on capital
   • DOld-age pension (a transfer payment)
   Show answer & solution

   Correct answer: (D) Old-age pension (a transfer payment)

   Transfer payments such as old-age pensions, scholarships and unemployment allowances are not payments for any productive service, so they are excluded from national income. Rent, wages and interest are factor incomes and are included.

3. Q3easy

   The difference between Gross Domestic Product (GDP) and Net Domestic Product (NDP) is:

   • ADepreciation
   • BNet factor income from abroad
   • CNet indirect taxes
   • DNet exports
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   Correct answer: (A) Depreciation

   NDP = GDP minus depreciation (consumption of fixed capital). Depreciation is the fall in the value of fixed assets due to normal wear and tear and expected obsolescence.

4. Q4medium

   Gross National Product at Market Price (GNP at MP) equals GDP at Market Price plus:

   • ADepreciation
   • BNet factor income from abroad
   • CNet indirect taxes
   • DSubsidies
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   Correct answer: (B) Net factor income from abroad

   GNP at MP = GDP at MP + Net Factor Income from Abroad (NFIA). NFIA is the difference between factor income earned by residents from abroad and factor income paid to non-residents within the domestic territory.

5. Q5medium

   Net Indirect Taxes is equal to:

   • AIndirect taxes plus subsidies
   • BDirect taxes minus subsidies
   • CIndirect taxes minus subsidies
   • DSubsidies minus indirect taxes
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   Correct answer: (C) Indirect taxes minus subsidies

   Net Indirect Taxes = Indirect Taxes minus Subsidies. It is used to convert values from market price to factor cost: Factor Cost = Market Price - Net Indirect Taxes.

6. Q6hard

   If GDP at MP is Rs 5,000 crore, depreciation is Rs 500 crore, net factor income from abroad is Rs 200 crore and net indirect taxes are Rs 300 crore, then National Income (NNP at FC) is:

   • ARs 4,000 crore
   • BRs 4,400 crore
   • CRs 4,600 crore
   • DRs 5,400 crore
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   Correct answer: (B) Rs 4,400 crore

   NNP at FC = GDP at MP - Depreciation + NFIA - Net Indirect Taxes = 5000 - 500 + 200 - 300 = Rs 4,400 crore.

7. Q7medium

   Which of the following is a component of the expenditure method of estimating national income?

   • APrivate final consumption expenditure
   • BCompensation of employees
   • COperating surplus
   • DMixed income of self-employed
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   Correct answer: (A) Private final consumption expenditure

   The expenditure method sums up final expenditures: Private Final Consumption Expenditure, Government Final Consumption Expenditure, Gross Domestic Capital Formation (investment) and Net Exports. Compensation of employees belongs to the income method.

8. Q8medium

   The problem of double counting in national income estimation is avoided by:

   • AIncluding the value of all intermediate goods
   • BAdding depreciation to output
   • CCounting transfer payments
   • DTaking only the value of final goods (value-added method)
   Show answer & solution

   Correct answer: (D) Taking only the value of final goods (value-added method)

   Double counting is avoided by taking only the value of final goods and services, or equivalently by using the value-added method (summing the value added at each stage of production).

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