Category: Important Questions

We have given these Business Studies Class 12 Important Questions Chapter 3 Business Environment to solve different types of questions in the exam. Go through these Business Environment Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Business Environment Class 12 Business Studies Chapter 3

Question 1.
What is meant by business environment? (All India 2015)
Or
Give the meaning of the term ‘business environment’. (Comportment 2013.2012)
Answer:
‘Business environment’ is the totality of all external forces that are affecting the performance of business, viz general forces (economic, social, political, legal and technological) and specific forces (investors, customers, competitors and suppliers).

Question 2.
Define liberalisation as a process of economic reforms. (All India 2015:2011 (C); Delhi 2010)
Answer:
Liberalisation refers to an end of licence, quotas and many more restrictions and controls which were put on industries before 1991.

Question 3.
Why is it said that business environment is uncertain? (Compartment 2014)
Answer:
Business environment is uncertain as it is difficult to predict future happenings when environmental changes are taking place frequently.

Question 4.
What is included in political environment of business? State. (Delhi 2014)
Answer:
The following components are included in political environment of business:

• Constitutional framework
• Political system
• Political structure
• Government interventions in business
• Foreign policy and defence policy of the country

Question 5.
What is included in legal environment of business? State. (All India 2014)
Answer:
Legal environment includes:

• Several acts passed by the government
• Court judgements
• Statutory warnings prescribed under law
• Legislations passed by the government, e.g. essential commodities, etc

Question 6.
What is included in the technological environment of business? State. (Comportment 2014)
Answer:
Technological environment includes scientific improvements and innovations, which provide new ways of producing goods and services. It also includes new methods and techniques of operating a business.

Question 7.
Why is business environment called dynamic? State. (Comportment 2014)
Or
State how business environment is dynamic in nature. (Comportment 2012)
Answer:
Business environment is dynamic as it keeps on changing. It is not static and its components are highly flexible, e.g. technological improvements, increase in competition, etc.

Question 8.
Why is it said that ‘business environment’ is complex? (Comportment 2013)
Answer:
Business environment is complex, as to understand it in totality, e.g. it becomes difficult to know the extent of relative impact of social, economic, political, legal and technological factors on change in demand of a product.

Question 9.
What is meant by ‘globalisation’? (Comportment 2012)
Answer:
Globalisation refers to integrating our economy with the world’s economy. It is the system of interaction among countries of the world in order to develop the global economy.

Question 10.
Business environment includes both specific and general forces. List any four specific forces. (Delhi 2011)
Answer:
Specific forces of business environment are:

• Suppliers
• Investors
• Customers
• Competitors

Question 11.
Business environment includes both specific and general forces. List any four general forces. (All India 2011)
Answer:
General forces of business environment are:

• Social
• Political
• Technological
• Legal

Question 12.
The understanding of business environment helps the managers to identify threats. What is meant by ‘threats’ here? (Delhi 2011)
Answer:
Threats refer to the external environment trends and changes that will hinder a firm’s performance.

Question 13.
The understanding of business environment enables the firm to identify the opportunities. What is meant by ‘opportunities’ here? (All India 2011)
Answer:
Opportunities refer to the positive external trends or changes that will help a firm to improve its performance.

Question 14.
Define privatisation as a process of economic reforms in one sentence. (Delhi (C) 2011; All India 2010)
Answer:
Privatisation refers to giving greater role to private sector and reducing the role of public sector in the nation-building process.

Question 15.
‘Accent Electronics Ltd.’ was operating its business in Malaysia. The company started exporting its products to India when the Prime Minister announced relaxation in import duties on electronic items. The company appointed retailers in India who had direct on-line links with the suppliers to replenish stocks when needed.
Identify and explain the dimensions of business environment discussed in the above case. (Foreign 2016)
Answer:
The dimensions of business environment referred in the above case are:
(i) Political environment It is the outcome of a combination of various ideologies advocated by different political parties. Every political party has a different attitude towards business community. A live example of this can be seen during elections, when there is a fluctuation in the share market.

(ii) Economic environment It consists of economic factors that influence the business in a country. These factors include Gross National Product (GNP), corporate profits, inflation rate, employment, Balance of Payments (BoP), interest rates, consumer income, etc. Economic environment in a country has strong influence on the business in that country.

(iii) Social environment It describes the characteristics of the society in which the organisation exists. Literacy rate, customs, value beliefs, lifestyle, demographic features and mobility of population are the part of the social environment. The trend of change can be predicted well in advance. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario.

Question 16.
What is meant by business environment? Explain dynamic nature and uncertainty as features of business environment. (Delhi 2011)
Answer:
Business environment is the sum total of all individuals, institutions and other forces like customers, competitors, suppliers, distributors, industry trends, substitutes, regulations, government activities, social and cultural factors that are outside the control of the business enterprise but may affect its performance.

Features of business environment are:
Dynamic nature Business environment is dynamic as it keeps on changing. It is not static and its components are highly flexible, e.g. technological improvements, increase in competition, etc.
Uncertainty Business environment is uncertain as it is difficult to predict future happenings when environment changes are taking place frequently.

Question 17.
Explain any two impacts of government policy changes on business and industry. (All India 2011; Delhi 2011)
Answer:
Impacts of government policy changes in India are:

• Increasing competition As a result of changes in the rules of industrial licensing, entry of foreign firms creates competition for Indian firms, especially in service industries like telecommunication, airlines, banking, insurance, etc which were earlier placed in the public sector.
• More demanding customers Customers today have become more demanding because they are well informed. Cut-throat competition in the market gives the customers wider choice in purchasing better quality of products and services.

Question 18.
Explain ‘necessity for change’ and ‘need for developing human resources’ as impacts of government policy changes on business and industry. (Foreign 2011)
Answer:
Impacts of government policy changes on business and industry are:

• Necessity for change After 1991, the market forces have become turbulent. As a result, business enterprises have to continuously modify their operations.
• Need for developing human resources The new market conditions require people with higher competence and greater commitment. Hence, there is a need of developing human resources.

Question 19.
Explain any four characteristics of business environment. (Delhi 2019; Compartment 2014)
Or
What is meant by “business environment’? Explain any three features of business environment. (All India 2014; Foreign 2014)
Or
Describe any five features of business environment. (Foreign 2012; All India 2012)
Or
State any five features of business environment. (Delhi 2012, 2012)
Answer:
Business environment is the sum total of all individuals, institutions and other forces like customers, competitors, suppliers, distributors, industry trends, substitutes, regulations, government activities, social and cultural factors that are outside the control of the business enterprise but may affect its performance.

The main features of business environment are:

• Totality of external forces Business environment is the sum total of all external forces outside the control of a business.
• Consists of specific and general forces Specific forces are those, which affect the individual enterprises, viz competitors, customers, investors, and suppliers. Whereas general forces have an impact on all business enterprises. The general forces comprise of social, political, legal, economic and technological forces,
• Complexity Business environment is complex, as to understand it in totality, e.g. it becomes difficult to know the extent of relative impact of social, economic, political, legal and technological factors on change in demand of a product.
• Uncertainty Business environment is largely uncertain, as it is very difficult to predict future happenings, especially when changes takes place at a fast pace.
• Relativity Business environment is relative as it differs from place to place and region to region.

Question 20.
Explain any four features of Demonetisation. (All India 2019)
Answer:
Characteristics of demonetisation are:

• Change in currency It is the act of stripping or discontinuing a currency unit of its legal status by government.
• Contingent Success or failure of demonetisation is dependent upon various factors.
• Objective The objective of demonetisation can be curbing corruption, fake currency, illegal activity and making cashless economy
• Crunches Generally after demonetisation, people face cash crunches for a shorter period.

Question 21.
Explain the following dimensions of business environment.
(a) Pobtical environment
(b) Social environment (All India 2019)
Answer:
(a) Refer to Ans 1 (i) on page 48.
(b) Refer to Ans 1 (iii) on page 48.

Question 22.
Explain any four impacts of government policy changes on business and industry. (All India 2019, Compartment 2012)
Or
The Indian corporate sector has come face-to-face with several challenges due to government policy changes in business and industry. Explain any four such changes. (Compartment 2014)
Or
State any five impacts of government policy changes on business and industry. (Foreign 2012; AH India 2012; Delhi 2012)
Or
Explain, by giving any five reasons, why understanding of business environment is important for managers. (Foreign 2011; All India 2010; Delhi 2010)
Or
Giving any four points, explain the impact of government policy changes of business and industry. (Foreign 2014)
Or
The Indian corporate sector has come face-to-face with several challenges due to government policy change. Explain any four such challenges. (Delhi (c) 2010)
Answer:
Following challenges were faced by the business enterprises:

• Rapidly changing technological environment Increased competition force the firms to develop new ways to survive and grow in the market. Thus, there is a need to adopt the new technologies in order to survive in the long-run.
• Need for developing human resources The new market conditions require people with higher competence and greater commitment. Hence, there is a need of developing human resources.
• Market-orientation The business enterprises start focusing on market-oriented techniques rather than production-oriented techniques.
• Necessity for change After 1991, the market forces have become turbulent. As a result, business enterprises have to continuously modify their operations.
• Increasing Competition With the opening of the economy, globalisation, entry of foreign firms in the country, it has increased competition for domestic players, as they have to compete with them. MNCs are at an advantage due to large financial resources, technological advancement and branded goods, thus posing a serious challenge and threat to domestic players.

Question 23.
Explain the following reforms which had an impact on Indian Business and Industry.
(a) Liberalisation
(b) Globalisation All India 2019
Answer:
(a) Refer to text on page 46.
(b) Refer to text on page 46.

Question 24.
Mahinder Agro Ltd. started a new venture for distribution of harmful and chemical fertilizers free vegetables. They conducted a survey to find out consumer preferences for such vegetables. They found that most of the consumers were concerned about the harmful chemicals being used in growing the vegetables. They found that 90% of the households were searching for its alternatives. The company contacted a group of agriculture experts to lay down the procedure for growing the vegetables by the farmers. They decided to train the farmers in new technology to grow chemical free vegetables according to new innovative methods. The experts also suggested soil management techniques through which farmers would be able to create an abundant and lasting harvest.
Identify and explain the two dimensions of business environment highlighted in the above para. (Delhi 2019)
Answer:
The dimensions of business environment highlighted here are:

• Social environment
• Technological environment
  For explanation, refer to text on page 45.

Question 25.
‘Konark Ltd.’ is an electronic goods manufacturing enterprise situated in Shivpuri, Madhya Pradesh. It is earning a very low revenue in comparison to a competing electronic goods manufacturing enterprise, ‘Nova Ltd.’ situated in Mumbai. Both Konark’s and Nova’s operations are affected directly by the investors, customers, competitors and suppliers, which are unique to their respective locations. In addition to this, individuals firms of this field are affected indirectly by the factors like the money supply in the economy, composition of the families, the technological changes, etc.
(a) Identify and state the feature of the concept discussed in the above paragraph.
(b) Also, state any four points of importance of this concept. CBSE 2018
Answer:
(a) The concept discussed here is ‘Business Environment’ and the feature is ‘Relativity’. Relativity Business enviroment is a relative concept as it differ from country-to-country and region-to-region. e.g. Demand for sarees is quite high in India but in foreign countries it has no existence. Similarly, regulations, policies, consumers’ preference, etc all differ from one region to another.

(b) Four points of importance of this concept are:
(i) It enables the firm to identify opportunities and get the first mover advantage Opportunities are the positive trends that help firms to grow. A good knowledge of business environment helps a manager to identify such opportunities earlier to take its benefit, rather than losing it to other competing enterprises. For example, Maruti Udyog was the first automobile company in India to recognise the opportunity to develop small cars, due to which, it is still one of the market leaders in that segment.

(ii) It helps the firm to identify threats and early warning signals Threats refer to the negative trends, which will hinder the performance of the enterprise. The businessmen, who are able to scan and understand the business environment on time get a warning signal to deal with such negative changes.

(iii) It helps in tapping useful resources Environment is a source of various resources for business like finance, machinery, raw materials, etc. Contrary to this, business enterprise supplies goods and services to the society in the form of taxes, products, return on investment, etc. A good understanding of environment helps the firm to convert such resources into output required by the environment and society.

(iv) It helps in coping with rapid changes Business environment is fast changing due to turbulent market conditions, more demanding customers, changing technology and increasing global competition. In order to cope up with such changes and derive benefit from them, managers must examine their environment and develop suitable action.

Question 26.
Narendrachal Networks and Technologies Ltd. is a leatder in technology innovation in U.S.A. creating products and solutions for a connected world. It has a large Research and Development team which invented the first smart watch W-I, which besides showing the time would also monitor few health parameters like heart beat, blood pressure, etc. While in search of markets abroad, the company found that in India, the reform process was underway with the aim of accelerating the pace of economic growth.

The company decided to take advantage of the fact that licensing requirements had been abolished. The company was also aware that there had been increased level of interaction and interdependence among the various nations of the world and India could be made a base for its international trade. It set up its office in Gujarat with a view to capture the Indian market. In a short span of time, the company emerged as a market leader. Success of the company attracted many other players to enter the market. Competition resulted in reduction in prices, thereby benefitting the customers.
(i) In the above paragraph, two major concepts related to government policy have been discussed. Identify and explain those concepts.
(ii) Also, explain briefly any three impacts of these concepts on Indian business and industry. (All Indio 2017; Delhi 2017)
Answer:
(i) The two major concepts related to government policy are:

• Liberalisation It refers to an end of licence, quota and many more restrictions and controls which were put on industries before 1991. The reforms aimed at deregulation and reduction of government controls, greater autonomy of private investment and less dependence on public sector.
• Globalisation It refers to integrating our economy with the world’s economy. It is the system of interaction among countries of the world in order to develop the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve in a distant geographical market.

(ii) Three impacts of these reforms on Indian business and industry are:

• Technological environment: Increased competition force the firms to develop new ways to survive and grow in the market. Thus, there is a need to adopt the new technologies in order to survive in the long-run.
• Need for developing human resources: The new market conditions require people with higher competence and greater commitment. Hence, there is a need of developing human resources.
• Market-orientation The business enterprises start focusing on market-oriented techniques rather than production-oriented techniques.

Question 27.
A recent rate cut in the interest on loans announced by the banks encouraged Amit, a science student of Progressive School to take a loan from State Bank of India to experiment and develop cars to be powered by fuel produced from garbage. He developed such a car and exhibited it in the Science Fair organised by Directorate of Education. He was awarded first prize for his invention. Identify and explain the dimensions of business environment discussed in the above case. Delhi 2016
Answer:
Business environment consists of factors that influences many enterprises at the same time. These are called dimensions of business environment. These factors are categorised as social, economic, political, legal and technological environment which are considered relevant for decision-making and improving the performance of an enterprise, The dimensions of business environment discussed in the above case are:
(i) Economic environment Refer to ans no. 1 on page 48.

(ii) Technological environment It refers to the change, taking place in the method of production and use of equipment to improve the quality of product. In other words, we can say technological environment includes forces relating to scientific improvements and innovations, which provide new ways of producing goods and services and methods and techniques of operating a business.

(iii) Political environment Refer to ans no. 1 on page 48.

Question 28.
With change in the consumption habits of people, Neelesh, who was running a sweets shop shifted to chocolate business. On the eve of Diwali, he offered chocolates in attractive packages at reasonable prices. He anticipated huge demand and created a website ‘chocolove.com’ for taking orders online. He got lot of orders online and earned huge profit by selling chocolates.
Identify and explain the dimensions of business environment discussed in the above case. (All India 2016)
Answer:
Business environment consists of factors that influences many enterprises at the same time. These are called dimensions of business environment. These factors are categorised as social, economic, political, legal and technological environment which are considered relevant for decision-making and improving the performance of an enterprise.
The dimensions of business environment discussed in the above case are

• Economic environment Refer to ans no. 1 on page 48.
• Social environment Refer to ans no. 1 on page 48.
• Technological environment Refer to ans , no. 9 on page 52.

Question 29.
How does the understanding of business environment help the management in the following
(i) Identification of threats and early warning signals and
(ii) Improving performance (Comportment 2015)
Or
What is meant by business environment ? State any three points of its importance. (Delhi 2015)
Or
How does understanding of business environment help the managers? Explain with the help of any five points. (Delhi 2014, 2012)
Or
Understanding of environment by I business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms? In the light of the statement, explain any four points of importance of business environment. (compartment 2014)
Or
Explain any four points of importance of business environment. (Compartment 2014; All India 2011; Delhi 2011)
Or
Explain by giving any four points, why in the present day competitive market, it is essential for a business to remain alert and aware of its environment? (All Indio 2010: Delhi (C) 2010)
Answer:
In the present day of competitive market, it is essential for a business to remain alert and aware of its environment, because of the following points:
(i) Identify opportunities and getting the first mover advantage Awareness of environment helps an enterprise to identify the opportunities prevailing in the market and they can make strategies to capitalise such opportunities at the earliest, e.g. Maruti Udyog became the leader in the small car market because it was the first company who recognised the need for small cars in the environment.

(ii) Identify threats and early warning signals Environmental awareness helps an enterprise in identifying possible threats in future, so that the enterprise can take timely measures to minimise the threats and its adverse effects, if any, e.g. when the new firms entered in the mid segment cars (threat), Maruti Udyog increased the production of its Esteem car. Increase in production enabled the company to make faster delivery. As a result, the company captured a substantial share of the market and became a leader in this segment.

(iii) Assist in planning and policy formulation Environment awareness helps a business unit to identify opportunities and threats in the market. These serve as a basis for planning future course of action and making policies for the same.

(iv) Tapping useful resources A business environment is an open system which gets resources such as capital, labour, machines, materials, etc from the environment, converts them into goods and services desired by the customers and then supplies its output to the environment. Thus, a business firm depends on its external environment for tapping various resources and for the sale of its output.

(v) Improving performance An enterprise that monitors its environment continuously, is in a position to improve not only its present performance, but also improve its future performance. This ensures success of the business in the long-run.

Question 30.
The court passed an order that all schools must have water purifiers for the school children as
(i) Society in general is more concerned about quality of life.
(ii) Innovative techniques are being developed to manufacture water purifiers at competitive rates.
(iii) Incomes are rising and children at home are also drinking purified water.
(iv) The government is also showing positive attitude towards the water purifier business.
Identify the different dimensions of business environment by quoting from the above details. (Delhi 2013)
Answer:
‘The court passed an order that all schools must have water purifier’. The quoted line is depicting legal environment. Business has to function within the framework of laws and regulations of the country. Legal environment exercises significant influence on business activities.
(i) ‘Society in general is more concerned about quality of life’. The quoted line is depicting the social environment as this environment consists of all the social and cultural forces within which business firms operate.

(ii) ‘Innovative techniques are being developed to manufacture water purifiers at competitive rates’.
The quoted line is depicting the technological environment. It includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services.

(iii) ‘Incomes are rising and children at home are also drinking purified water’. The quoted line is depicting the economic environment. It consists of the factors and forces concerning means of production and distribution of wealth. It includes all such forces of economic development which influence the product’s market scope of business.

(iv) ‘The government is also showing positive attitude towards the water purifier business’. The quoted line is depicting the political environment. It is concerned with the forces related with political stability and political conditions that have strong impact on business.

Question 31.
As per directions issued by Supreme Court, the government passed an order to ban the sale of tobacco products within the area of 200 metres of all educational institutions as
(i) its consumption is injurious to health.
(ii) people are becoming more conscious about health and fitness.
It is indicating the government’s attitude towards this business. Identify the ’business environment’ under four different dimensions quoting the lines from the above para. (Comportment 2013)
Answer:
The dimensions of business environment referred to here are:
(i) Social environment Refer to ans no. 1 (in) on page 48.

(ii) Political environment Refer to ans no. 1 (i) on page 48.

(iii) Legal environment It consists of legislation that is passed by the Parliament and State Legislatures. This component sets the framework of law within which the business is free to operate. Example of such legislation specifically aims at business operations which include the Trade Marks Act, 1969, Essential Commodities Act, 1955, Standards of Weights and Measures Act, 1969 and Consumer Protection Act, 1986.

(iv) Economic environment Refer to ans no. 1 (ii) onpage48.

Question 32.
The government encouraged foreign companies to invest in some sectors of retailing. The argument is
(i) Customers can purchase the products of these companies as their incomes are rising.
(ii) It will increase innovations which will provide new ways of producing goods. This will ultimately improve the quality of life.
Identify and explain the “business environment’ under four different dimensions quoting the lines from the above description, (comportment 2013)
Answer:
The dimensions of business environment referred to here are:
(i) Social environment Refer to ans no. 1 (iii) on page 48.
(ii) Political environment Refer to ans no. 1 (i) on page 48.
(iii) Economic environment Refer to ans no. 1 (ii) on page 48.
(iv) Technological environment Refer to ans no. 9 (ii) on page 52.

Question 33.
The court passed an order to ban polythene bags as
(i) These bags are creating many environmental problems which affect the life of people in general. Society in general is more concerned about quality of life.
(ii) The government decided to give subsidy to jute industry to promote this business.
(iii) Innovative techniques are being developed to manufacture jute bags at low rates.
(iv) Incomes are rising and people can afford to buy these bags.
Identify the different dimensions of business environment by quoting the lines from the above particulars. (All India 2013)
Answer:
(i) ”The court passed an order to ban polythene bags’. The quoted line is depicting the legal environment. Business has to function within the framework of laws and regulations of the country. Legal environment exercises significant influence on business activities.

(ii) ‘Polythene bags are creating many environmental problems which affect the life of people in general’ and society in general is more concerned about quality of life’. These quoted lines are depicting the social environment, which consists of all the social and cultural forces within which business firms operate.

(iii) ‘Government decided to give subsidy to jute industry to promote this business’. The quoted line is depicting the political environment, which is concerned with the forces related with political stability and political conditions that have strong impact on business.

(iv) ‘Innovative techniques are being developed to manufacture jute bags at low rates’. The quoted line is depicting the technological environment. It includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services.

(v) ‘Incomes are rising and people can afford to buy these bags’. The quoted line is depicting the economic environment. It consists of the factors and forces concerning means of production and distribution of wealth. It includes all such forces of economic development which influence the product’s market scope of business.

Question 34.
Explain with an example the impact of legal environment on business performance (ompartment 2012)
Or
Management of every enterprise can be benefited from being aware of different dimensions of business environment. Explain any four such dimensions. (All India 2010)
Answer:
For impact and dimensions of business environment, refer to ans no. 13 on page 54.

Question 35.
When government policy changed, it laid some positive and negative impact on the business. Discuss some of them. (Delhi 2012, 2010; All India 2011)
Answer:
Positive impacts of government policy changes are:
(i) Market orientation Earlier, production was done and whatever was produced was sold. But with the New Industrial Policy leading to increased competition, there is a shift towards customer orientation, where study and analysis of market is done before anything is produced, so that the products are according to the needs and demands of customers.

(ii) Development of human resource The new market conditions require people with higher competence and greater tommitment. This has necessitated development of human resource.

Negative impacts of government policy changes are:
(i) Rapidly changing technological environment Due to increased competition, technological advancement are taking very fast. This is specifically a disadvantage to small firms who are not able to cope up with these changes and sometimes are even forced to shut down their business.

(ii) Increasing competition With the opening of the economy, globalisation, entry of foreign firms in the country, it has increased competition for domestic players, as they have to compete with them. MNCs are at an advantage due to large financial resources, technological advancement and branded goods, thus posing a serious challenge and threat to domestic players.

Question 36.
With rapid advancements in the field of replacing manual work with machines, a robot named ‘Sujan’ has been invented and developed and is likely to get the citizenship of the country of its origin.
It has led to a stage where machines are being used in place of human beings. ‘Sujan’ is doing all types of work whether routine or hazardous and even answering the queries of people. However, this issue has to be carefully looked into keeping in mind the consumer attitude towards product innovations, problem of unemployment and its impact on the quality of life. Through the orders and decisions of various commissions and agencies at Centre, State or local level the Indian Government is playing a very significant role in balancing the use of human and machine power.
Various dimensions of business environment are being discussed in the above para.
By quoting the fines from the above identify and explain any three dimensions. (Comportment 2018)
Answer:
Dimensions highlighted are:

• Technological environment With rapid its origin.
• Social environment However, this of life.
• Political environment Through the machine power.

For explanation of these dimensions, refer to text on page 45.

Multiple Choice Questions

Question 1.
Which of the following is not the importance of business environment?
(a) It helps the firm to identify threats and early warning signals
(b) It helps in coping with rapid changes
(c) It has a lower rate of capital formation and less economic growth
(d) It helps in tapping useful resources
Answer:
(c) It has a lower rate of capital formation and less economic growth

Question 2.
Which of the following statements is incorrect?
(a) Business environment is aggregative in nature
(b) Business environment is dynamic in nature
(c) Business environment does not include both specific and general forces
(d) Business environment is a relative concept
Answer:
(c) Business environment does not include both specific and general forces

Question 3.
“Demand for reservation in jobs for minorities refer to an example of key component of general environment of business”. Name this component.
(a) Economic environment
(b) Political environment
(c) Legal environment
(d) Social environment
Answer:
(d) Social environment

Question 4.
Give the name of environment that provides the framework, of laws within which the business has to operate.
(a) Political environment
(b) Social environment
(c) Technological environment
(d) Legal environment
Answer:
(d) Legal environment

Question 5.
……….. builds up confidence among business people to invest in the long-term projects.
(a) Political outlook
(b) Political stability
(c) Political ideology
(d) None of these
Answer:
(b) Political stability

Question 6.
What makes the business free from rules, procedures and instructions?
(a) Privatisation
(b) Globalisation
(c) Liberalisation
(d) None of these
Answer:
(c) Liberalisation

Question 7.
Analysing process of change in the business environment involves conceptualizing it as
(a) divisible in nature
(b) complex in nature
(c) dynamic concept
(d) static concept
Answer:
(c) dynamic concept

Question 8.
Does study of business environment help in maintaining image in market?
(a) Yes, study of business environment is necessary for maintaining good image in market.
(b) No, study of business environment is not necessary for maintaining good image in market.
(c) Study of social environment is necessary instead of business environment, for maintaining good image in market.
(d) None of the above
Answer:
(a) Yes, study of business environment is necessary for maintaining good image in market.

Question 9.
“Equal pay for equal work” is an example of which dimension of business environment?
(a) Economic environment
(b) Legal environment
(c) Social environment
(d) None of the above
Answer:
(c) Social environment

Question 10.
An enterprise that monitors its environment continuously, is in a position to improve its future performance. Identify the importance of business environment.
(a) It helps in coping with rapid changes
(b) It helps in tapping useful resources
(c) It helps in improving performance
(d) None of the above
Answer:
(c) It helps in improving performance

Question 11.
“The understanding of business environment enables the firm to identify opportunities”. What is meant by opportunities here?
(a) Negative changes in external environment
(b) Positive changes in external environment
(c) Negative changes in internal environment
(d) None of the above
Answer:
(b) Positive changes in external environment

Question 12.
“Environment provides both constraints and opportunities”. What is your opinion?
(a) Yes, it provides both constraints and opportunities
(b) It neither provides constraints nor provide opportunities
(c) It provides opportunities but not constraints
(d) None of the above
Answer:
(a) Yes, it provides both constraints and opportunities

We have given these Business Studies Class 12 Important Questions Chapter 1 Nature and Significance of Management to solve different types of questions in the exam. Go through these Nature and Significance of Management Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Nature and Significance of Management Class 12 Business Studies Chapter 1

Question 1.
Das is the Managing Director of ‘Gamut Ltd.’ manufacturing different varieties of cheese. He has an efficient team working under him consisting of Raj at the Production manager, Vinay the Marketing manager and Adit the Finance manager. They understand and interpret the policies made by Das, ensure that their departments have adequate manpower, assign them the necessary duties and motivate them to achieve the desired objectives. State one more function other than those mentioned above, that this team may perform at the level they are working. (All India 2019)
Answer:
The team working at middle level should ensure that there is interdepartmental coordination in the organisation.

Question 2.
“Is management concerned only with doing the right task, completing activities and achieving goals without taking into consideration the cost benefit?” Give reason in support of your answer. (All India 2016; Foreign 2016)
Answer:
As per the modem concept, management is concerned with achieving goals effectively as well as efficiently i.e. with least cost. So, management takes into consideration the cost benefit also.

Question 3.
‘Management is the process of getting things done.’ State the meaning of the term ‘process’ used in this statement. (Delhi 2016)
Answer:
The term ‘process’ used in this statement refers to the functions of planning, organising, staffing, directing and controlling which have to be performed by the manager.

Question 4.
Why is management called an intangible force? state. (All india (C) 2015)
Answer:
Management is intangible as it does not have a physical existence, one can only feel its presence by the way the organisation functions.

Question 5.
What is meant by ‘efficiency1 in management? (Compartment 2015: Delhi 2015)
Answer:
Efficiency means doing the task correctly and with minimum cost, least wastage and maximum utilisation of resources.

Question 6.
How does management help in achieving personal objectives? State. (Delhi 2015)
Answer:
These objectives are related with satisfying the personal needs of the employees. Management must seek to satisfy the diverse needs of employees in the following manner:

• Financial needs By giving competitive salary and perks.
• Social needs By peer recognition.
• Higher level needs By providing opportunities for personal growth and development.

Question 7.
Explain, how management helps in the development of society. (All India 2015)
Answer:
Management helps in development of society by producing quality goods at fair and competitive prices, providing employment and adopting new technologies to raise the living standard of the society.

Question 8.
What is meant by effectiveness in management? (Delhi 2015, 2011)
Answer:
Effectiveness in management is concerned with doing the right task/completing activities/ achieving goals within the prescribed time. In other words, it is concerned with end results.

Question 9.
Which level managers are responsible for coordination? State. (All India (C) 2015)
Answer:
Top level management of an organisation is responsible to coordinate the activities of various departments.

Question 10.
Define ‘coordination’. (All India 2015)
Or
What is meant by ‘coordination’ in management? (Delhi 2015)
Answer:
Coordination is a continuous process by which a manager integrates the inter-related activities of different departments in order to achieve the common organisational goals.

Question 11.
How does coordination integrate group efforts? State. (Compartment 2015)
Answer:
Integration of group efforts All business activities are interdependent. Therefore, there should be coordination among them. Coordination enables the business to make efficient use of its available resources.

Question 12.
What is meant by management of work? (All India 2014)
Answer:
Every organisation exists to achieve certain goals. Management sets and plans certain activities, which are to be performed, so that the goals can be achieved. This is considered as management of work.

Question 13.
What is meant by management of people? (Delhi 2014)
Answer:
Management of people is an art of getting things done through others. A manager deals with individuals who have different needs and behaviour. He directs and motivates them to work towards the organisational goals.

Question 14.
What is meant by management of operations? (Foreign 2014)
Answer:
Every organisation provides some basic product or service,.for the production of which there is a process of flow of input material and technology for transforming this input into output for consumption. Thus, management involves management of operations for converting input into output.

Question 15.
Identify the basic characteristic of management involved in the statement. ‘The activities involved in managing an organisation are common to all organisations, whether economic, social or political’. (Delhi (C) 2014)
Answer:
Management is all pervasive.

Question 16.
Name the level of management that is responsible for the welfare and survival of the organisation. (All India (C) 2014)
Or
At which level of management, the managers are responsible for the welfare and survival of the organisation? (Delhi 2012; All India 2012)
Answer:
At the top level of management, the managers are responsible for the welfare and survival of the organisation.

Question 17.
One of the objectives of management is to consistently create economic value for various constitutes of the society. Give two examples of this objective. (Comportment 2013)
Or
List any two social objectives of management. (All India 2011,2010: Delhi 2010)
Answer:
Two social objectives of management are as follows

• Using environment friendly methods of production.
• Giving employment opportunities to the disadvantaged sections of the society.

Question 18.
“One of the organisational objectives of management is ‘growth’ of a business.” How can growth of a business be measured? Give any two examples. (All India (C) 2013)
Answer:
Growth of a business can be measured:

• in terms of sales volume.
• increase in the number of employees.

Question 19.
Identify the nature of management when it is said to be a systematised body of knowledge that explains certain general truths. (Delhi 2012)
Answer:
Management as a science

Question 20.
Identify the nature of management when it is practised as personal application of existing knowledge to achieve desired results. (All India 2012)
Or
Identify the nature of management when a manager applies the existing theoretical knowledge in his own unique manner. (Foreign 2012)
Answer:
Management as an art.

Question 21.
At which level of management are the managers responsible for maintaining the quality of output and the safety standards? Foreign 2012
Answer:
Lower level/Supervisory level/Operational level.

Question 22.
Name the level of management at which the managers are responsible for implementing and controlling the plans and strategies of the organisation. (All India 2012)
Answer:
Middle level management

Question 23.
What is meant by management? (Delhi 2011)
Answer:
Management is the process of planning, organising, staffing, directing and controlling the enterprise resources efficiently and effectively for achieving the goals of the organisation.

Question 24.
What should an organisation do to achieve the basic objective of ‘survival’? (Foreign 2011)
Answer:
An organisation must earn revenues equal to its cost in order to survive in the market.
Survival: Revenues = Costs

Question 25.
Explain in one sentence how management increases efficiency? (Delhi (C) 2011)
Answer:
Management increases efficiency by reducing cost and increasing productivity through better planning, organising, directing, staffing and controlling the activities of the organisation.

Question 26.
Explain in one sentence how management helps in achieving group goals? (All India 2011)
Answer:
Management helps in achieving group goals by directing the individual efforts in achieving the overall goal of the organisation.

Question 27.
Your grandfather has retired as the director of a manufacturing company. At which level of management was he working? Different type of functions are performed at this level. State any one function. (Delhi 2011)
Answer:
He was working at the top level of management. A function performed at the top level is to set objectives for the organisation, e.g. in the following year, the sales of the company will have to cross ₹ 1,000 crore.

Question 28.
Your grandfather has retired from an organisation in which he is responsible for implementing the plans developed by the top management. At which level of management was he working? State one more function performed at this level. (All India 2011)
Answer:
He was working at the middle level of management. One more function performed by the middle level managers is to interpret the policies framed by the top level of management.

Question 29.
Your grandfather has retired from an organisation in which he is responsible for overseeing the efforts of the workforce. At which level of management was he working? State one more function performed at this level. (Foreign 2011)
Answer:
He was working at supervisory/operational/lower level of management. At this level, he was required to ensure quality output, minimum wastage and safety standards.

Question 30.
List any two functions of top level management. (Delhi (C) 2011)
Answer:
The two functions of top level management are

• Laying down the overall objectives and framing policies of the enterprise.
• Coordinating the activities of different departments and assembling all resources.

Question 31.
List any two organisational objectives of management. (All India 2010; Delhi 2010; Foreign 2010)
Answer:
Two organisational objectives of management are as follows

• Survival
• Earning profit

Question 32.
List any two personal objectives of management. (All India 2010; Delhi 2010)
Answer:
Personal objectives of management are as follows

• Competitive salaries and perks.
• Personal growth and development of employees.

Question 33.
Hero Ltd’s target is to produce 10,000 shirts per month at a cost of ₹ 150 per shirt. The production manager could achieve this target at a cost of ₹ 160 per shirt. Do you think the production manager is effective? Give reason in support of your answer. (All India 2010)
Answer:
Yes, the manager is effective as he has been able to achieve the target by producing 10,000 shirts in time but he is not efficient as he is producing the same at a higher production cost.

Question 34.
Hero Ltd’s target is to produce 20,000 shirts per month at cost ₹ 150 per shirt. The Production Manager could achieve this target at a cost of ₹ 170 per shirt.
Do you think the Production Manager is ‘efficient’? Give reason in support of your answer. (Foreign 2010)
Answer:
No, the manager is not efficient as he is unable to produce the shirts within the prescribed cost i. e. ₹ 150 per shirt.

Question 35.
Volvo Ltd’s target is to produce 10,000 shirts per month at a cost of ₹ 100 per shirt. The production manager achieved this target at a cost of ₹ 90 per shirt. Do you think the Production Manager is effective? Give one reason in support of your answer. (Delhi 2010)
Answer:
Yes, the production manager is both efficient and effective. He is effective because he has achieved the target in time and is efficient because he has produced the shirts at a lower production cost.

Question 36.
Mita has successful ice cream business at Bikaner, namely ‘Smartflavours’. Her ice creams are utterly delicious. She makes ice creams from fresh milk and the same are available in a wide range of flavours and packs. She sets viable business objectives and works with the same in mind in order to ensure that the customers will come back for purchasing.
Having the first mover advantage, her business was doing well. To earn higher profits, she started cutting costs. This would sometimes lead to delay in delivery and the ice cream was not reaching the market in time. Over a period of time, the demand for her ice cream declined and because of it the competitors entered the market. She lost some of her market share to competitors.
At the beginning of summer season, she got back to back orders for supply of 4,000 ice cream packs of different flavours for special occasions. To ensure that the task was completed and orders delivered in time she hired additional workers. She was, thus able to produce and deliver the ice cream packs but at a high production cost. While completing activities and finishing the given task for achieving goals, Mita realised that she was ignoring one of the important aspects of management.
Identify the aspects of management that has been ignored by Mita. Also explain the same with the help of an example. (Delhi 2019)
Answer:
She has ignored the concept of ‘Effectiveness vs Efficiency’. The purpose of management is to achieve the goals/ objectives set for the organisation. These goals have to be achieve efficiently and effectively. While efficiency means attaining objectives with specified cost, effective means achieving goals within specific time limit.

For example, A company’s target is to produce 5,000 units of goods per year at a cost of ₹ 5 per unit. In order to achieve the target he employs extra labour force which results in increasing the cost per unit to ₹ 550. Thus, the manager is effective but not efficient. If, however, he works with same manpower to keep the cost at ₹ 5.00 per unit, he is unable to attain the target in a year. Thus, he becomes ineffective. Therefore, in order to be successful, it is necessary that he is efficient and effective in his operations at the same time.

Question 37.
Management is a complex activity that has three main dimensions. Explain these dimensions. (Delhi 2019)
Answer:
Management is a complex activity which is concerned with people, work and operations. It comprises of
(i) Management of work It is concerned with performance of various activities/tasks in an organisation, e.g. Manufacturing a product in a factory, treating patients in a hospital, etc.

(ii) Management of people It refers to management of human resources which are the most important asset for an organisation. Management of people implies two things

• Dealing with employees as individuals with diverse needs and behaviour.
• Dealing with individuals as a group of people.

(iii) Management of operations It refers to the activities of production cycle, which entails the flow of input material and transforms the input into desired output. It is interlinked with both management of work and management of people.

Question 38.
‘Science is a systematic body of knowledge that explains certain general truths or the operation of general laws’. In the light of this statement, describe management as a science. (Delhi 2019)
Or
What is meant by management as a science? Explain with the help of any three features. (All India 2010)
Answer:
Management as a Science Science is a systematised body of knowledge which establishes the relationship between causes and their effects. Management is regarded as a Science because of the following features of management:
(i) Existence of systematic body of knowledge Like Science, management has its own theory and principles that have developed over a period of time. Thus, we can say, management has a systematised body of knowledge.

(ii) Scientific methods of observation Certain management principles are evolved from scientific methods of observation. The cause and effect relationship is the part of science and it is applicable in management also. Therefore, management principles are accurate and reliable.

(iii) Universally accepted principles Certain management principles are universally valid. The established principles of modem management have universal applicability. Principle of division of labour and specialisation, unity of command, etc. are accepted everywhere.

Though management has certain features of science, still it is considered as an inexact science, because management principles may not produce same results everytime in all situations, due to the presence of human element.

Question 39.
Coordination is the essence of management. (Delhi 2019)
Answer:
Coordination is needed to perform all the functions of management. They are:
(i) Coordination in planning In planning, coordination is needed

• between overall plan of the organisation and the departmental plans.
• between objectives and available physical and human resources, e.g. coordination between production department and sales department targets.

(ii) Coordination in organising In organising, coordination is required

• between resources of an organisation and activities to be performed.
• among authority, responsibility and accountability, e.g. if a supervisor is given responsibility to get the work done, he should also be given the authority to divide the work among his subordinates.

(iii) Coordination in staffing In staffing, coordination is needed

• between the skills of the workers and the jobs assigned to them, e.g. a Chartered Accountant should be given work of financial nature.
• between the efficiency of the workers and the compensation, etc.

(iv) Coordination in directing In directing, coordination is required-

• among orders, instructions, guidelines and suggestions.
• between superiors and subordinates, e.g. a manager instructs the subordinates, motivates them and also supervises their work.

(v) Coordination in controlling In controlling, coordination is required-

• between the standard and the actual performance.
• between correction of deviations and achievement of objectives, e.g. If production target for workers is set as 80 units per hour, while they are able to produce only 60 units per hour, then there is a need to coordinate the plans with actual performance.

Thus, coordination can be considered as the core function of management which ensures that all the factors in the business work together smoothly.

Question 40.
Coordination is needed at all levels of management and is the responsibility of all managers. Explain.
Answer:
Coordination is needed at all the three levels of management. The work at every level is performed by a group of people, that is why, it is required at all the three levels viz

• Top level It requires coordination to integrate all the activities performed by middle and lower level of management.
• Middle level This level requires coordination to balance the activities performed by different individuals.
• Lower level This level requires coordination to bind the efforts of all workers towards the achievement of goals.

Question 41.
‘Art is concerned with personal application of knowledge.’ In the light of this statement compare all the features of management with art and prove that it is an art. (Delhi 2019)
Or
What is meant by management as an art? Explain with the help of any three features. (Delhi (C) 2010)
Answer:
Art is the skillful and personal application of existing knowledge to achieve desired goals. Management is said to be an art, since it satisfies the following features of an art:

• Manager practices the art of management in day-to-day job of managing an enterprise on the basis of study, observation and experience.
• Because of the availability of the theoretical knowledge of management, a manager is able to apply it in a personalised manner.
• Art requires creativity, similarly manager also requires creativity to apply the acquired knowledge in a personalised and skilful manner in real situations.

Question 42.
What is meant by ‘management’? Explain any two points of its importance. Foreign 2012
Answer:
According to Drucker, “Management is the dynamic life-giving element in every organisation. Without it, the resources of production remain resources.” It is the activating force that gets things done through people.

The importance of management can be understood from the following points:

• Management helps in achieving group goals An organisation sets certain goals. Management aims at achieving such goals by directing the individual efforts.
• Management increases efficiency With proper planning, organising, staffing, directing and controlling the activities of the organisation, management increases the efficiency by producing maximum output with minimum cost.

Question 43.
State any three organisational objectives of management. (Compartment 2012)
Answer:
Three organisational objectives are as follows:

• Survival The most important objective of every business is to survive and in order to survive, it should earn enough revenue to cover its costs.
• Profit It is the incentive or reward for the efforts put in by an entrepreneur. Moreover, it is the reason behind carrying out a business.
• Growth It is an extension of the objective of survival and profit. It can be measured in terms of increase in sales volume, number of employees, capital, machinery, etc.

Question 44.
Explain any three points of importance of coordination. (Compartment 2012)
Answer:
Importance of coordination can be understood by following points:
(i) Growth in size As the organisations grow in size, the number of people in the organisation also increase. Different individuals have different objectives. Coordination is needed to integrate diverse individual objectives with organisational objectives.

(ii) Functional differentiation Different departments in the organisation have their own set of objectives, policies, etc. This creates conflicting situations many a times. Coordination seeks to intergrate the efforts and activities of various departments.

(iii) Specialisation In modern organisations, high level of specialised activities take place, which are performed by specialists. Specialists often consider themselves to be supreme and are not open to suggestions and advice. This brings conflicting situations, which can be resolved by coordination.

Question 45.
Explain any five features of management. (All India 2019; Delhi 2013)
Or
Explain any four features of management. (Foreign 2016)
Or
State any four points that highlight the characteristics of management. (Delhi (C) 2013)
Or
State any five characteristics of management. (All India 2013)
Or
“Management is the process of working with and through others to effectively achieve organisational objectives by efficiently using limited resources in the changing environment.’ In the light of the above statement, explain any four features of management. (Delhi (c) 2010)
Answer:
Features of management are as follows:

• Goal-oriented process Every organisation has a set of economic and social goals and management is meant to achieve these goals. Management ensures efficiency and economy in the utilisation of human, physical and financial resources.
• Group activity An organisation is a group of different individuals with different skills. Management directs and uses all such skills and activities of different individuals towards the achievement of common organisational goals.
• Intangible force Management is an intangible force as it cannot be seen but its presence can be felt, when targets are achieved as per the pre-determined plAnswer:
• All pervasive Management is all pervasive as it is applicable in all types of organisation, in all activities and at all levels.
• Multi-dimensional Management is multi-dimensional as it comprises of three dimensions, viz management of work, people and operations.

Question 46.
State five points, which highlight the importance of management. (All India 2019,2013 (C))
Or
Describe any five reasons, which clarify that ‘management is gaining importance day-by-day.’ (Delhi 2019,2013)
Or
Explain any four points that highlight the importance of management. (Foreign 2016)
Or
‘Success of every organisation depends upon its management.’ Explain any five reasons to justify the above statement. (Delhi (C) 2011)
Or
‘Lack of proper management results in wastage of time, money and efforts’. In the light of this statement, explain any four points of importance of management. (Delhi (C) 2010)
Answer:
According to Drucker, “Management is the dynamic life-giving element in every organisation. Without it, the resources of production Temain resources.” It is the activating force that gets things done through people.

The importance of management can be understood from the following points:
(i) Management helps in achieving group goals An organisation sets certain goals. Management aims at achieving such goals by directing the individual efforts.

(ii) Management creates a dynamic organisation With the ever changing needs and demands of the environment, an organisation needs to adopt those changes.

(iii) Management helps people to adopt such changes easily, so that the organisation is able to sustain successfully in the competitive market.

(iv) Management increases efficiency With proper planning, organising, staffing, directing and controlling the activities of the organisation, management increases the efficiency by producing maximum output with minimum cost.

(v) Management helps in achieving personal objectives A manager motivates its subordinates in such a manner that it boosts their morale and enable them to achieve their personal objectives such as competitive salary, peer recognition, etc while contributing to the organisational objectives.

(iv) Management helps in development of society Management in an organisation helps the society by way of supplying quality products at reasonable price. It also contributes towards society by providing basic amenities such as schools, hospitals, dispensaries etc. Moreover, it also generates employment opportunities for the disadvantaged sections of the society.

Question 47.
State any five features of ‘coordination’. (Delhi 2019, 2018,2018 (C); All India 2016, 2013)
Or
Explain any four features of coordination. (Foreign 2016)
Or
Explain any four characteristics of coordination. (All India (C) 2014)
Or
Explain any five characteristics of coordination. (Delhi (C) 2013)
Or
Explain any five features of coordination. (All India 2012; Foreign 2012)
Answer:
Coordination is a continuous process, by which a manager integrates the inter-related activities of different departments in order to achieve the common organisational goals. Features of coordination are as follows:

• Integration of group efforts All business activities are interdependent. Therefore, there should be coordination among them. Coordination enables the business to make efficient use of its available resources.
• Unity of action Coordination enables the manager to secure unity of action in the direction of a common purpose.
• Continuous process It is a continuous process and not a one-time task. A manager has to continuously coordinate the activities of different departments in order to meet the targets by using the available resources efficiently.
• All pervasive function It is an all pervasive function, which runs through all managerial functions from planning till controlling. It is not only needed among different departments but also within the departments at all levels.
• Deliberate function A manager has to coordinate the efforts of different individuals working in an organisation in a conscious and deliberate manner.

Question 48.
Rishitosh Mukherjee has recently joined AMV Ltd, a company manufacturing refrigerators. He found that his department was under-staffed and other departments were not cooperating with his department for smooth functioning of the organisation. Therefore, he ensured that his department has the required number of employees and its cooperation with other departments is improved.
(i) Identify the level at which Rishitosh Mukherjee was working.
(ii) Also state three more functions required to be performed by Rishitosh Mukherjee at this level. (All India 2017)
Answer:
(i) Rishitosh Mukherjee is working at the middle level of management.

(ii) Three more functions required to be performed by Rishitosh Mukherjee at this level are:

• To interpret the policies framed by the top level of management.
• To assign necessary duties and responsibilities to the employees of his department for implementation of the plans.
• To motivate employees of his respective department to achieve the desired objectives.

Question 49.
Ashutosh Goenka was working in ‘Axe Ltd.’, a company manufacturing air purifiers. He found that the profits had started declining from the last six months. Profit has an implication for the survival of the firm, so he analysed the business environment to find out the reasons for this decline.
(i) Identify the level of management at which Ashutosh Goenka was working.
(ii) State three other functions being performed by Ashutosh Goenka. (Delhi 2017)
Answer:
(i) Ashutosh Goenka is working at the top level of management.

(ii) The other three functions being performed by Ashutosh Goenka are:

• To set objectives for the organisation
• To analyse, evaluate and deal with the external forces.
• To formulate the policies of business.

Question 50.
Define management. Explain the features that establish it as a social science. (All India 2016)
Answer:
Harold Koontz and Heinz Weithrich define management as, “Management is the process of designing and maintaining an environment in which individuals, working together in groups, efficiently accomplish selected aims.”
The features of management that establish it as a social science are:

• It has systematised body of knowledge consisting of theories, principles and concepts.
• Principles of management are evolved after continuous observations and experimentations.
• These principles are not universally applicable as management involves study of human behaviour. They are applied differently in different situations and produce different results everytime.

Question 51.
What is meant by management? Explain its any three features that establish it as an art. (All India 2016)
Answer:
Management is an activity which is necessary wherever there is a group of people working in an organisation, towards a common goal.
It is a process of planning, organising, actuating and controlling the organisation’s operations and activities, effectively and efficiently.
Thus, management means to manage men tactfully in the organisation to achieve group goals.

Three features that establish it as an art are:

• Manager practices the art of management in day-to-day job of managing an enterprise on the basis of study, observation and experience.
• Because of the availability of the theoretical knowledge of management, a manager is able to apply it in a personalised manner.
• Art requires creativity, similarly manager also . requires creativity to apply the acquired knowledge in a personalised and skillful manner in real situations.

Question 52.
Explain the features of management that do not establish it as a profession. (All India 2016)
Or
Management does not have some features of a profession. Explain those features. (Compartment 2012)
Or
Management is a profession like medical or legal profession. Do you agree with this statement? Give any four reasons in support of your answer. (All India 2011; Foreign 2011)
Or
Is management a full fledged profession? Give any three reasons in support of your answer. (Delhi 2010; Foreign 2010)
Answer:
No, management is not a full fledged profession like legal and medical profession because of the following reasons:
(i) Restricted entry The entry to any profession is restricted through a prescribed qualification. But there is no restriction on anyone being appointed as a manager in any business enterprise.

(ii) Professional association Though AIMA is an association for management graduates, it is not obligatory for managers to get registered with any professional body like the Medical Council or Bar Council of India, which regulates the professional conduct of doctors and lawyers respectively.

(iii) Ethical code of conduct Legal and medical professions are bound by a code of conduct, which guides the behaviour of its members. AIMA has devised a code of conduct for Indian managers but there is no statutory backing for this code.

(iv) Service motive The motive of legal and medical profession is to serve their client’s interests by rendering dedicated and committed service. The basic purpose of management is to help the organisation to achieve its goals by providing good quality products at reasonable prices. A manager is expected to adopt the service motive but the basic motive remains profit maximisation.

Question 53.
What is meant by ‘management’? State any three objectives of management. (All India 2015)
Answer:
According to Harold Koontz, “Management is the process of designing and maintaining an environment in which individuals working together in groups, efficiently accomplish selected aims.”

Three objectives of management are:
(i) Organisational objectives It refers to the goals for the benefit of all stakeholders such as employees, government, shareholders and investors.
The organisational objectives are:

• Survival When the organisation earns enough revenue to cover its cost.
• Profit When the organisation earns enough revenue to cover costs and risks of the business.
• Growth It implies growth in terms of sales, profit, number of workers, products produced and sold etc.

(ii) Social objectives Since, business organisations are social units, their objectives should be in line with general needs of the society.
Some of the social objectives of an organisation are:

• Supply of quality products.
• Using environment friendly methods of production.
• It should provide employment opportunities to the disadvantaged sections of society.

(iii) Personal objectives These objectives are related with satisfying the personal needs of the employees, which may be in terms of financial needs, social needs or higher level needs.

Question 54.
Science is a systematised body of knowledge that explains certain general truths or the operation of general laws? In the light of this statement, describe whether management is a science. (Delhi (C) 2014)
Answer:
Management as a Science Science is a systematised body of knowledge which establishes the relationship between causes and their effects. Management is a science but not an exact science. The reasons are
(i) Systematised body of knowledge Like science, management is a systematic body of knowledge with its own theories and principles that have developed over a period of time.
So, this feature is present in management.

(ii) Principles based on observation and experimentation Like science, management principles are derived through observation and repeated experimentation. So, this feature is present in management. However, since management deals with human beings, the outcome of these experiments are not capable of being accurately predicted.

(iii) Universal validity Principles of management like principles of pure science provide managers with certain standardised techniques that can be used in different situations. Since, they have to be modified according to given situation, their application and use is not universal. So, this feature of science is not fully present in management.

Question 55.
‘The skilful and personal application of existing knowledge to achieve desired results is called art.’ In the light of this statement, describe whether management is an art or not. (Delhi (C) 2014)
Or
Art is concerned with personal application of knowledge’. In the light of this statement, compare all the features of art with management and prove that it is an art. (Delhi (C) 2010)
Answer:
Basic features of art are as follows

• Existence of theoretical knowledge.
• Personalised application.
• Based on practice and creativity.

Management can be said as an art, since it satisfies the following features:
(i) A successful manager practices the art of management in the day-to-day job of managing an enterprise which is based on study, observation and experience. There are lot of literature available in various areas of management like marketing, finance and human resource which the manager has to specialise in.

(ii) There are various theories of management propounded by many management thinkers, which prescribe certain universal principles. A manager applies these scientific methods and body of knowledge to a given situation, issue or a problem in his own unique manner.

(iii) A manager applies his acquired knowledge in a personalised and skilful manner in the light of the realities of a given situation. He is involved in the activities of the organisation, studies critical situations and apply his own theories in a given situation.

(iv) Like any other art, a manager, after studying various situations, formulates his own theories for use in given situation. This gives rise to different styles of management.

Question 56.
What is meant by ‘coordination’? Explain why coordination is important in an organisation. (All India (C) 2014)
Or
What is meant by ‘Coordination’? Explain any two points of its importance in management. (Foreign 2012)
Answer:
Coordination is the orderly arrangement of group efforts to provide unity of action in pursuit of common purpose. It-involves unifying, integrating and harmonising the activities of different departments and individuals for the achievement of common goal.

Importance of coordination can be understood by following points:

• Growth in size As the organisations grow in size, the number of people in the organisation also increase. Different individuals have different objectives. Coordination is needed to integrate diverse individual objectives with organisational objectives.
• Functional differentiation Different departments in the organisation have their own set of objectives, policies, etc.
  This creates conflicting situations many a times. Coordination seeks to intergrate the efforts and activities of various departments.
• Specialisation In modem organisations, high level of specialised activities take place, which are performed by specialists.
  Specialists often consider themselves to be supreme and are not open to suggestions and advice. This brings conflicting situations, which can be resolved by coordination.

Question 57.
Coordination in the essence of management. Explain how? (All India (C) 2014)
Answer:
Coordination is a function that is inherent and pervasive. Coordination is not a separate function of management.
It is the essence of management.
Refer to ans 4 on page 10.

Question 58.
State any four characteristics of profession. (All India (C) 2013)
Answer:
The four characteristics of a profession are:

• Systematised body of knowledge A profession is based on a systematised body of knowledge.
• ‘Restricted entry Entry into a profession is restricted through an examination or degree, as in medical, law profession, etc.
• Professional association All professionals are bound to be a part of a professional association which regulates entry, grants certificate of practice and enforces a code of conduct, e.g. All lawyers have to be member of Bar council to pursue their profession.
• Code of conduct All professionals are subject to an ethical code of conduct, as laid down by the association.

Question 59.
Give the meaning of management and explain how it creates a dynamic organisation and helps in the development of society. (Delhi 2012)
Answer:
Management is the process of planning, organising, staffing, directing and controlling the enterprises’ resources efficiently and effectively for achieving the goals of the organisation. The traditional viewpoint of the management is concerned with the opinion that’Management is the art of getting things done through others.’ On the other hand, as per the modem concept, ‘Management is a process of getting things done through others with the aim of achieving goals effectively and efficiently.’

Management creates a dynamic organisation All organisations operate in a constantly changing environment. However, individuals in an organisation usually resist change. Management persuades people to adopt environmental changes so that the organisation can maintain its competitive edge in the market.

Management helps in the development of society Management helps to provide good quality products and services, creates employment opportunities, adopt new technology for the betterment of the people and lead the path towards growth and development. Thus, it helps in the development of society.

Question 60.
Explain how management increases efficiency and helps in the development of society? (All India 2012)
Answer:
Increases efficiency The aim of a manager is to reduce costs and increase productivity through better planning, organising, staffing, directing, and controlling the activities of the organisation.

Helps in the development of society:
Management helps in the development of society by providing good quality products and services, creating employment opportunities, providing fair remuneration, adopting new technology, etc. for the betterment of people.

Question 61.
What is meant by coordination? How it integrates group efforts and ensures unity of action. Explain. (Delhi 2012)
Answer:
Coordination is the integration, synchronisation or orderly arrangement of group efforts to provide unity of action, directed towards the accomplishment of common objectives. Coordination integrates group efforts and ensures unity of action in the following way:
(i) Coordination integrates group efforts It integrates group efforts by unifying diverse interests, thereby giving them a common focus to ensure that performance is in accordance with pre-determined plans.

(ii) Coordination ensures unity of action The purpose of coordination is to ensure unity of action for the realisation of a common purpose. It acts as the binding force between departments and ensures that all actions are aimed at achieving the goals of the organisation.

Question 62.
“Management is regarded as an art by some, as science or as inexact science by others. The truth seems to be somewhere in between In the light of this statement, explain the true nature of management. (All India 2011: Delhi 2011)
Answer:
Management is an art as well as a science but an inexact science.
Management as an art Management may be regarded as an art because of the following reasons:

• Existence of theoretical knowledge: A successful manager practices the art of management in the day-to-day job of managing an enterprise based on study, observation and experience.
• Personalised application The use of basic knowledge varies from individual to individual, therefore, it is a personalised concept, e.g. two dancers, two speakers will always differ in demonstrating their art.
• Based on practice and creativity A good manager works through a combination of practice, creativity, imagination, initiative and innovation. He, uses tact and creativity to develop his own style. Thus, management is an art because it satisfies all the characteristics of an art.

Management as a science Management may be regarded as a science because it fulfils the following characteristics of science:

• Systematised body of knowledge As science, management has a systematised body of knowledge. It has its own theories and principles that have developed over a period of time. It also draws some principles from other disciplines such as economics, sociology, psychology and mathematics.
• Principles based on scientific observation and experiments Like science, management principles cure based on scientific enquiry and observations.
• Universal validity and application like science, principles of management are universally applicable. Thus, we can say that management is also a science.

However, the principles of management are not as exact as the principles of Physics or Chemistry. Management principles are flexible and can be modified to suit different situations. Thus, management can be called as an inexact science also.

In the light of both the above statement, the true nature of management can be defined as, management is both an art and a science. Principles of management constitute the science of management and the practice of management principles is the art of management.

Question 63.
‘Coordination is a synchronisation of group efforts to achieve organisational objectives’. In the light of this statement, highlight any three features of coordination. (All India 2011)
Or
‘Coordination is the orderly arrangement of group efforts to provide unity of action in the pursuit of common purpose.’
In the light of this statement, explain the nature of coordination. (Foreign 2011)
Answer:
Coordination is the process whereby an excecutive develops an orderly pattern of group efforts among his subordinates and ensures unity of action in the pursuit of common purpose.
The features or nature of coordination are as follows:
(i) Integration of group efforts All business activities are interdependent. Therefore, there should be coordination among them. Coordination enables the business to make efficient use of its available resources.

For example, supply of material should come, when production needs it. If there is a mismatch in the time schedule, it is an instance of lack of coordination. It is the central task of the manager to reconcile differences in approach, timing, efforts or interests to harmonise individual goals with organisational goals. Coordination is the effort to ensure a smooth interplay of the functions and forces of all the different components of an organisation so that its purpose will be realised with minimum friction and maximum collaborative effectiveness.

(ii) Coordination is needed at all levels Coordination is an essential function which is required at all levels of management. The content and scope of coordination will vary at different levels. However, it is a part of duty which should be performed by every managerial personnel right from operational level to the top management.

(iii) Coordination ensures unity of action The purpose of coordination is to unite the efforts of every individual in the realisation of common purpose.

Question 64.
“Management seeks to achieve certain objectives which must be derived from basic purpose of the business.’ In the light of the above statement, explain organisational and social objectives of management. (All India 2010)
Answer:
Organisational objectives Management is responsible for setting and achieving the organisational objectives. It helps to achieve the objectives in such a manner that the human and financial resources are acquired, used and maintained in the most economic and efficient manner.

Organisational objectives are as follows:

• Survival The most important objective of any business is to survive and in order to survive, it should earn enough revenue to cover costs.
• Profit It is the incentive or reward for the efforts put in by an entrepreneur. Moreover, it is the reason behind carrying out a business.
• Growth A business needs to add to its prospects in the long-run and for this it needs to grow and expand its activities. The success of every business is measured by the growth rate and growth is measured in terms of sales, profits, number of products produced and sold, etc.

Social objectives Since, organisations are social units, their objectives should be in line with general needs of the society.
Some of the social objectives of an organisation are given below:

• Supply of quality products at reasonable prices.
• Using environment friendly methods of production.
• Providing employment opportunities to the disadvantaged sections of the society.

Question 65.
Is management a science? Give any three reasons in support of your answer. (Delhi 2010)
Answer:
Yes, management is a science but not an exact science. Science is the systematised body of knowledge which establishes the cause and effects relationship. Management is regarded as a science, because the following characteristics of science are applicable to management as well.

Management as a Science Science is a systematised body of knowledge which establishes the relationship between causes and their effects. Management is a science but not an exact science. The reasons are:
(i) Systematised body of knowledge Like science, management is a systematic body of knowledge with its own theories and principles that have developed over a period of time. So, this feature is present in management.

(ii) Principles based on observation and experimentation Like science, management principles are derived through observation and repeated experimentation. So, this feature is present in management. However, since management deals with human beings, the outcome of these experiments are not capable of being accurately predicted.

(iii) Universal validity Principles of management like principles of pure science provide managers with certain standardised techniques that can be used in different situations. Since, they have to be modified according to given situation, their application and use is not universal. So, this feature of science is not fully present in management.

Question 66.
Is management an art? Give any three reasons in support of your answer. (Delhi 2010)
Answer:
Yes, management is an art, because practical application of knowledge is an art and management is also the application of skill and knowledge to achieve the desired results. Basic features of art are as follows

• Existence of theoretical knowledge.
• Personalised application.
• Based on practice and creativity.

Management can be said as an art, since it satisfies the following features:

• A successful manager practices the art of management in the day-to-day job of managing an enterprise which is based on study, observation and experience. There are lot of literature available in various areas of management like marketing, finance and human resource which the manager has to specialise in.
• There are various theories of management propounded by many management thinkers, which prescribe certain universal principles. A manager applies these scientific methods and body of knowledge to a given situation, issue or a problem in his own unique manner.
• A manager applies his acquired knowledge in a personalised and skilful manner in the light of the realities of a given situation. He is involved in the activities of the organisation, studies critical situations and apply his own theories in a given situation.
• Like any other art, a manager, after studying various situations, formulates his own theories for use in given situation. This gives rise to different styles of management.

Question 67.
Explain any four characteristics of management. (Delhi 2016)
Answer:
Features of management are as follows:

• Goal-oriented process Every organisation has a set of economic and social goals and management is meant to achieve these goals. Management ensures efficiency and economy in the utilisation of human, physical and financial resources.
• Group activity An organisation is a group of different individuals with different skills. Management directs and uses all such skills and activities of different individuals towards the achievement of common organisational goals.
• Intangible force Management is an intangible force as it cannot be seen but its presence can be felt, when targets are achieved as per the pre-determined plAnswer:
• All pervasive Management is all pervasive as it is applicable in all types of organisation, in all activities and at all levels.

Question 68.
Explain any four points of importance of management. (Delhi 2016)
Answer:
Four points which highlight the importance of management are enumerated below:
(i) Management helps in achieving group goals Every organisation has a set of goals to be achieved. Management is required in an organisation to achieve the goals by giving proper direction to the efforts of all individuals.

(ii) Management increases efficiency By making optimum utilisation of all resources such as men, money and material, management increases efficiency. A manager achieves efficiency and reduces costs through proper planning, organising, staffing, directing and controlling.

(iii) Management creates a dynamic organisation Every organisation works in an ever-changing environment and it is generally seen that individuals resist change. Thus, management helps people to adapt to these changes, so that an organisation is able to maintain its competitive edge.

(iv) Management helps in achieving personal objectives Every individual who is working in an organisation desires handsome salary, peer recognition, profit sharing, etc. Through motivation and leadership, management helps an individual to achieve his/her personal objectives, alongwith attainment of organisational objectives.

Question 69.
Kamal, Khan and Devid are partners in a firm engaged in the distribution of dairy products in Madhya Pradesh. Kamal is a holder of Senior Secondary School Certificate from Central Board of Secondary Education with Business Studies as one of his elective subjects. Khan had done his post graduation in Hindi literature and Devid in Dairy Farming. One day there was a serious discussion between Khan and Devid regarding the nature of ‘Management as a Science’. Khan argued that management was not a science whereas Devid was of the opinion that Management is a Science. Kamal intervened and corrected both Khan and Devid about the nature of Management as a Science with the help of his knowledge of Business Studies. Explain, how Kamal would have been able to satisfy both Khan and Devid? (All India (C) 2015)
Answer:
Management as a Science Science is a systematised body of knowledge which establishes the relationship between causes and their effects. Management is regarded as a Science because of the following features of management:
(i) Existence of systematic body of knowledge Like Science, management has its own theory and principles that have developed over a period of time. Thus, we can say, management has a systematised body of knowledge.

(ii) Scientific methods of observation Certain management principles are evolved from scientific methods of observation. The cause and effect relationship is the part of science and it is applicable in management also. Therefore, management principles are accurate and reliable.

(iii) Universally accepted principles Certain management principles are universally valid. The established principles of modem management have universal applicability. Principle of division of labour and specialisation, unity of command, etc. are accepted everywhere.

Though management has certain features of science, still it is considered as an inexact science, because management principles may not produce same results everytime in all situations, due to the presence of human element.

Question 70.
Aman, Ahmad and Ally are partners in a firm engaged in the distribution of dairy products in Maharashtra state. Aman is a holder of Senior Secondary School Certificate from Central Board of Secondary Education with Business Studies as one of his elective subjects. Ahmad had done his post graduation in History and Ally in dairy farming. One day there was a serious discussion between Ahmad and Ally regarding the nature of management. Ahmad argued that management was a profession. Whereas Ally argued against it saying that the legal and medical profession are the only professions because they fulfill all the conditions of profession. Aman on the basis of his knowledge of Business Studies explained the nature of management as a profession to Ahmad and Ally. Explain, how Aman would have satisfied both Ahmad and Ally. (Delhi 2015)
Answer:
For satisfying both Ahmad and Ally, Aman should explain nature of management given in text on page 4.

Multiple Choice Questions

Question 1.
Which of the following is not a dimension of management?
(a) Management of work
(b) Management of people
(c) Management of operations
(d) Management of Ideas
Answer:
(d) Management of Ideas

Question 2.
Name the level of management involved in taking key decisions.
(a) Top level management
(b) Middle level management
(c) Lower level management
(d) Either (b) or (c)
Answer:
(a) Top level management

Hint:
Top management is made up of senior level executives of an organisation. They integrate and coordinate the activities of different departments.

Question 3
………… helps in achieving group goals by giving proper direction to the efforts of all individuals.
(a) Work
(b) Management
(c) Society
(d) None of these
Answer:
(b) Management

Hint:
(b) Management helps in achieving group goals as it helps in optimum utilisation of resources and reducing costs through planning, organising, directing and controlling.

Question 4.
Identify the social objectives from the following.
(a) Providing good quality products at reasonable prices.
(b) Conducting business in fair and lawful manner.
(c) Expansion of the organisation.
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Hint:
Social objectives deal with the commitment of an organisation towards the society. So, providing good quality products at reasonable prices and conducting business in fair manner results in creation of benefits for the society.

Question 5.
At which level of management, managers are responsible for maintaining the quality output and safety standards?
(a) Top level management
(b) Middle level management
(c) Lower level management
(d) Both (b) and (c)
Answer:
(c) Lower level management

Hint:
Lower level management refers to the groups or members, who are concerned with execution of the work. They supervise and control the workers and arrange materials and tools to start the process.

Question 6.
Which of the following statements is incorrect?
(a) Every individual who is working in an organisation desires handsome salary, peer recognition, etc.
(b) Every organisation has a set of goals to be achieved.
(c) Management has some social responsibilities towards society.
(d) None of the above
Answer:
(d) None of the above

Question 7.
Identify the nature of management when it is practiced as personal application of existing knowledge to achieve desired results.
(a) Management as a science
(b) Management as an art
(c) Management as a profession
(d) All of the above
Answer:
(b) Management as an art

Hint:
An art may be defined as personalised application of general theoretical principles for achieving best possible results. Art requires creative power and skillful application of knowledge. Therefore, it can be said that when it comes to practical application of existing knowledge, management is an art.

Question 8.
“Management is the process of working with and through others to effectively achieve organisational objectives by efficiently using limited resources in the changing environment”, is given by
(a) Henry Fayol
(b) Harold Koontz
(c) Kreitner
(d) None of these
Answer:
(c) Kreitner

Question 9.
Why is co-ordination needed in large enterprises?
(a) To minimise their profits
(b) To perform their task slowly
(c) To bind the efforts of all individuals
(d) All of the above
Answer:
(c) To bind the efforts of all individuals

Hint:
Co-ordination is needed in large enterprises to bind the efforts of all individuals as it is difficult to establish the personal contacts with each and every employee in an organisation.

Question 10.
What is the main focus of management?
(a) To complete task efficiently and effectively
(b) To complete task efficiently but not effectively
(c) To complete task effectively but not efficiently
(d) None of the above
Answer:
(a) To complete task efficiently and effectively

Question 11.
An organisation is a collection of diverse activities and different individuals. Which characteristic of management is defined by this statement?
(a) Intangible force
(b) Group activity
(c) Goal oriented process
(d) All of these
Answer:
(b) Group activity

Question 12.
…………. refers to the management of human resources, which are the most important assets for an organisation.
(a) Management of work
(b) Management of operations
(c) Management of people
(d) None of the above
Answer:
(c) Management of people

Question 13.
Aafat Ltd. is a MNC which produces cellphones. Currently Aafat Ltd. is under huge losses due to the failure of its much hyped product in the market. R and D department and marketing department are blaming each other for this failure. In your opinion Aafat Ltd. is lacking which quality of management?
(a) Planning
(b) Controlling
(c) Co-ordination
(d) Directing
Answer:
(c) Co-ordination

Hint:
Co-ordination is needed to perform all the functions of management. In this case, it is clearly evident that there is lack of co-ordination between departments of business organisation.

We have given these Economics Class 12 Important Questions Macroeconomics Chapter 2 National Income Accounting to solve different types of questions in the exam. Go through these National Income Accounting Class 12 Important Questions and Answers Solutions & Previous Year Questions to score good marks in the board examination.

Important Questions of National Income Accounting Class 12 Macroeconomics Chapter 2

Question 1.
Give one example of negative externality. (April re-exam 2018)
Answer:
“Environmental pollution caused by industrial plants” is an example of negative externalities.

Question 2.
Give the meaning of depreciation. (All India (C) 2014)
Or
Define ‘depreciation’. (All India 2011)
Answer:
Depreciation can be defined as a fall in the value of fixed assets due to normal wear and tear due to usage, passage of time or obsolesence.

Question 3.
Define national income. (Delhi 2014)
Answer:
National income can be defined as the sum total of factor incomes accruing to normal residents of a country within the domestic territory and from the rest of the world, in a period of one financial year.

Question 4.
Define national product. (Delhi 2014)
Answer:
National product can be defined as the money value of all goods and services produced by the normal residents of a country during a period of one financial year.

Question 5.
Define domestic product. (All India (C) 2014, 2011, 2010)
Answer:
The value of all factor incomes generated during an accounting year within the domestic territory of a country is termed as domestic product or domestic income of a country.

Question 6.
What is Nominal Gross Domestic Product? (Delhi 2011)
Answer:
Nominal Gross Domestic Product (GDP) refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the current year prices. It is also called GDP at current price.

Question 7.
What is meant by Real Gross Domestic Product? (Delhi (C) 2011)
Answer:
Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.

Question 8.
What is transfer payment? (All India 2011)
Answer:
Transfer payments are all those unilateral payments corresponding to which there is no value addition in the economy, e.g. gifts, donations etc.

Question 9.
Define the problem of double counting in the computation of national income. State any two approaches to correct the problem of double counting. (Delhi 2019)
Answer:
Problem of double counting means including the value of some goods and services more than once in estimation of national income. In other words, the counting of the value of commodity more than once is called double counting. This leads to over estimation of the value of goods and services produced.

To avoid the problem of double counting, following two methods are used

• Final output method According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered.
• Value added method Another method to avoid the problem of double counting is to estimafe the total value added at each stage of production.

Question 10.
“Gross Domestic Product (GDP) does not give us a clear indication of economic welfare of a country.” Defend or refute the given statement with valid reason. (Delhi 2019)
Answer:
I defend the above statement. GDP does not give us a clear indication of economic welfare of a country because it does not take into account the following

• GDP does not throw light on equitable distribution of income.
• It does not take into account non-monetary exchanges.
• It does not consider the effect of positive and negative externalities.

Question 11.
Given nominal income, how can we find real income? Explain. (March 2018)
Answer:
Nominal income measures income at current year prices with no adjustment for the effect of inflation while real income is measured on base year prices which show real growth of economy. We can explain it with the help of numeric example given below
Assume,
Nominal Income = 270 crore
Price Index = 135
Real Income = \(\frac { Nominal Income }{ Price Index }\) × 100
= \(\frac { 270 }{ 135 }\) × 100 = ₹ 200 crore

Question 12.
If the Real GDP is ₹ 400 and Nominal GDP is ₹ 450, calculate the Price Index (base = 100). (All India 2015)
Answer:
Real GDP = ₹ 400
Nominal GDP = ₹ 450
Price index = \(\frac { Nominal. GDP }{ Real. GDP }\) × 100
= \(\frac { 450 }{ 400 }\) × 100 = ₹ 112.5

Question 13.
If the Real GDP is ₹ 500 and Price Index (base = 100) is 125, calculate the Nominal GDP. (All India 2015)
Answer:
Real GDP = ₹ 500 Price Index = 125
Nominal GDP = ?
Price index = \(\frac { Nominal. GDP }{ Real. GDP }\) × 100
125 = \(\frac { Nominal. GDP }{ 500 }\) × 100
∴ Nominal GDP = 125 × 5 = ₹ 625

Question 14.
If the Nominal GDP is ₹ 600 and Price Index (base = 100) is 120, calculate the Real GDP. (All India 2015)
Answer:
Nominal GDP = ₹ 600 Price Index = 120
Real GDP = ?
Price Index = \(\frac { Nominal. GDP }{ Real. GDP }\) × 100
120 = \(\frac { 600 }{ Real. GDP }\) × 100
Real GDP = \(\frac { 600 }{ 120 }\) × 100
= ₹ 500

Question 15.
If Real GDP is ₹ 200 and Price Index (with base = 100) is 110, calculate Nominal GDP. (Delhi 2015)
Answer:
Solve as Q. No. 5 on page 17.
Nominal GDP = ₹ 220

Question 16.
If the Nominal GDP is ₹ 1,200 and Price Index (with base = 100) is 120, calculate Real GDP. (Delhi 2015)
Answer:
Solve as Q. No. 6 on page 17.
Real GDP = ₹ 1,000

Question 17.
If the Real GDP is ₹ 300 and Nominal GDP is ₹ 330, calculate Price Index (base = 100). (Delhi 2015)
Answer:
Solve as Q. No. 4 on page 17.
Price Index = 110

Question 18.
If the Nominal Gross Domestic Product = ₹ 4,400 and the Price Index (base = 100) = 110, calculate the Real Gross Domestic Product. (Foreign 2015)
Answer:
Solve as Q. No. 6 on page 17.
Real GDP = ₹ 4,000

Question 19.
Distinguish between real and nominal gross domestic product. (All India (C) 2014, All India 2010)
Answer:
Differences between real and nominal gross domestic product are:

Basis	Real GDP	Nominal GDP
Definition	It refers to the total market value of the output at the base year prices.	It refers to the total market value of the output at the current year prices.
Changes	Its value can change only when the volume or quantity of output changes overtime.	Its value can change only with change in the prices overtime.
Indication	It can be treated as an index of economic growth i.e. higher real GDP indicates higher economic growth.	It can not be treated as an index of economic growth. Infact, it indicate inflation.

Question 20.
“Higher Gross Domestic Product (GDP) means greater per capita availability of goods in the economy.” Do you agree with the given statement? Give valid reason in support of your answer. (All India 2019)
Answer:
GDP is the sum total of value of goods and services created by a country in a particular year. So, we may be tempted to treat higher level of GDP of country as an index of greater well being of the people of that country. But, these are the reasons why this may not be correct

• Distribution of GDP – how uniform is it
• Non-monetary exchanges
• Externalities
• Composition of GDP

Question 21.
Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic Product, using a numerical example. (All India 2019)
Answer:
Real gross domestic product:
Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.

Nominal gross domestic product:
Nominal Gross Domestic Product (GDP) refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the current year prices. It is also called GDP at current price.

The following numerical example will help in understanding this concept:
Real GDP = Nominal GDP/Deflator
e.g. If Real GDP was 11.84 trillion in 2017 and the nominal GDP was 19.39 trillion, then the deflator was 1.13, i.e. 11.84 trillion = 19.39 trillion/1.13

Question 22.
How is Real Gross Domestic Product different from Nominal Gross Domestic Product? Explain using a numerical example. (All India 2019)
Or
Distinguish between Real Gross Domestic Product and Nominal Gross Domestic Product. Which of these is a better index of welfare of the people and why? (All India 2013)
Or
Distinguish between Real and Nominal Gross Domestic Product. (Delhi 2010)
Answer:
Differences between real and nominal gross domestic product:

Basis	Real GDP	Nominal GDP
Definition	It refers to the total market value of the output at the base year prices.	It refers to the total market value of the output at the current year prices.
Changes	Its value can change only when the volume or quantity of output changes overtime.	Its value can change only with change in the prices overtime.
Indication	It can be treated as an index of economic growth i.e. higher real GDP indicates higher economic growth.	It can not be treated as an index of economic growth. Infact, it indicate inflation.

Numerical Example:
The following numerical example will help in understanding this concept:
Real GDP = Nominal GDP/Deflator
e.g. If Real GDP was 11.84 trillion in 2017 and the nominal GDP was 19.39 trillion, then the deflator was 1.13, i.e. 11.84 trillion = 19.39 trillion/1.13

Real GDP is a better index of welfare of the people. When Real GDP rises, flow of goods and services tends to rise, other things remaining constant. This means greater availability of goods per person, implying higher level of welfare.

Question 23.
What is real GDP? State three limitations of GDP as an index of economic welfare. (Delhi (C) 2016)
Answer:
Real GDP:
Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.

The three limitations of using GDP as an index of welfare are:

• It fails to indicate the distribution of income among the residents of the country.
• Non-monetary transactions are ignored.
• Externalities are not considered.

Question 24.
Explain why subsidies are added to and indirect taxes are deducted from domestic product at market price to arrive at domestic product at factor cost? (Delhi (C) 2010)
Answer:
Subsidies by government are grants that decrease the price of a commodity, whereas indirect taxes are paid by a firm and households that increase the final price of a commodity. So, subsidies basically reduce the market price and indirect taxes increase the market price. Hence, to derive Gross Domestic Product at Factor Cost from Gross Domestic Product at Market Price, we deduct indirect taxes and add subsidies.

It may be expressed as
GDP_FC = GDP_MP – Indirect Tax + Subsidies

Question 25.
Giving reasons, state whether the following statements are true or false,
(i) Real gross domestic product can be equal to nominal gross domestic product.
(ii) Savings are a stock.
(iii) Butter is only a final product. (Delhi (C) 2012)
Answer:
(i) The statement is true. Real gross domestic product and nominal gross domestic product will be equal if price level remains constant. However, this holds true only theoretically.
(ii) The statement is false. Savings are always with reference to a time period. In other words, savings are a flow concept.
(iii) The statement is false. Butter is only a final product when purchased by households for consumption. Butter purchased by bakeries for making cakes and pastries is not a final product. Butter for them is an intermediate good as it is used as raw material for further production.

Question 26.
Find Net Value Added at Factor Cost. (Delhi 2016)
Answer:

Items	₹ (in lakh)
(i) Durable Use Producer Goods with a Life Span of 10 Years	10
(ii) Single Use Producer Goods	5
(iii) Sales	20
(iv) Unsold Output Produced During the Year	2
(v) Taxes on Production	1

Answer:
Net Value Added at Factor Cost (NVA_FC)
= Sales + Unsold Output Produced During the Year – Single use Producer Goods – Depreciation on Durable use Producer Goods – Taxes on Production
= 20 + 2 – 5 – 1 – 1 = ₹ 15 lakh

Question 27.
Find Net Value added at Market Price. (Delhi 2016)

Items	₹ (in lakh)
(i) Fixed Capital Good with a Life Span of 5 Years	10
(ii) Raw Materials	5
(iii) Sales	20
(iv) Net Change in Stock	2
(v) Taxes on Production	1

Answer:
Net Value Added at Market Price (NVA_MP)
= Sales + Net Change in Stock – Raw Materials – Depreciation on Fixed Capital Good
= 25 + (-2) – 6 – 3 = ₹ 14 lakh

Question 28.
Find Gross Value Added at Market Price. (Delhi 2016)

Items	₹ (in lakh)
(i) Depreciation	20
(ii) Domestic Sales	200
(iii) Net Change in Stocks	(-)10
(iv) Exports	10
(v) Single Use Producer Goods	120

Answer:
Gross Value Added at Market Price (GVA_MP)
(Domestic Sales + Exports) + Net Change in Stocks – Single use Producer Goods
= (200 +10) + (-10) – 120 = ₹ 80 lakh

Question 29.
Calculate Gross Value Added at Factor Cost. (Delhi 2012)

Contents	₹ (in crore)
(i) Units of Output Sold (units)	1000
(ii) Price Per Unit of Output	30
(iii) Depreciation	1000
(iv) Intermediate Cost	12000
(v) Closing Stock	3000
(vi) Opening Stock	2000
(vii) Excise Duty	2500
(viii) Sales Tax	3500

Answer:
Sales = Units of Output x Price Per Unit of Output
= 1,000 × 30
= ₹ 30,000 crore
Value of Output
= Sales + Change in Stock = 30000 + (1000)
= ₹ 31,000 crore, Where
Change in Stock = Closing Stock – Opening Stock
= 3000 – 2,000 = ₹ 1000 crore
Hence, Gross Value Added at Factor Cost
(GVA_FC) = Value of Output – Intermediate Cost – Net Indirect Taxes (Excise Duty + Sales Tax)
= 31,000 – 12,000 – (2,500 + 3,500)
Gross Value Added at Factor Cost (GVA_FC)
= ₹ 13,000 crore

Question 30.
Calculate Net Value Added at Factor Cost. (Delhi 2012)

Contents	₹ (in crore)
(i) Consumption of Fixed Capital	600
(ii) Import Duty	400
(iii) Output Sold (units)	2000
(iv) Price Per Unit of Output	10
(v) Net Change in Stocks	(-)50
(vi) Intermediate Cost	10000
(vii) Subsidy	500

Answer:
Sales = Output Sold × Price Per Unit of Output
= ₹ 2000 × 10 = ₹ 20,000 crore
Now, Value of Output = Sales + Change in Stock
= ₹ 20000 + (-50)
= ₹ 19,950 crore
Gross Value Added at Market Price (GVA_MP)
= Value of Output – Intermediate Cost
= ₹ 19,950 – 10,000
= ₹ 9,950 crore
Hence,
Net Value Added at Factor Cost (NVA_FC)
= GVA_MP – Consumption of Fixed Capital – Net Indirect Tax
= 9,950 – 600 – (400 – 500) = ₹ 9,450 crore
[Where, Net Indirect Tax = Import Duty – Subsidy] [As import duty is an indirect tax]

Question 31.
Find Net Value Added at Market Price. (Delhi 2012)

Contents	₹ (in crore)
(i) Output Sold (units)	800
(ii) Price Per Unit of Output	20
(iii) Excise	1600
(iv) Import Duty	400
(v) Net Change in Stock	(-)500
(vi) Depreciation	1000
(vii) Intermediate Cost	8000

Answer:
Sales = Output Sold × Price Per Unit of Output = 800 × 20 = ₹ 16,000 crore
Now, Value of Output = Sales + Net Change in Stock
= 16000 + (-500)
= ₹ 15,500 crore
Now, Gross Value Added at Market Price (GVA_MP) = Value of Output – Intermediate Cost
= 15,500 – 8,000 = ₹ 7,500 crore
Hence, Net Value Added at Market Price
(NVA_MP) = GVA_MP – Depreciation
= 7,500 – 1,000 crore = ₹ 6,500 crore

Question 32.
Find Net Value Added at Market Price. (All India 2012)

Contents	₹ (in crore)
(i) Depreciation	700
(ii) Output Sold (units)	900
(iii) Price Per Unit of Output	40
(iv) Closing Stock	1000
(v) Opening Stock	800
(vi) Sales Tax	3000
(vii) Intermediate Cost	20000

Answer:
Net Value Added at Market Price = (Output Sold × Price Per Unit of Output) + (Closing Stock – Opening Stock) – Intermediate Cost – Depreciation
= (900 × 40) + (1,000 – 800) – 20,000 – 700
= 36,000 + 200 – 20,000 – 700 = 36,200 – 20,700
= ₹ 15,500 crore

Question 33.
Find Gross Value Added at Factor Cost. (All India 2012)

Contents	₹ (in crore)
(i) Units of Output Sold	2000
(ii) Price Per Unit of Output	20
(iii) Depreciation	2000
(iv) Change in Stock	(-)500
(v) Intermediate Cost	15000
(vi) Subsidy	3000

Answer:
Gross Value Added at Factor Cost
(GVA_PC) = (Output Sold × Price Per Unit) + Change in Stock – Intermediate Cost + Subsidy
= 2000 × 20 + (-500) – 15000 + 3000
= ₹ 40,000 – 15,500 + 3,000
= ₹ 27,500 crore

Question 34.
Find out Net Value Added at Factor Cost. (All India 2012)

Contents	₹ (in crore)
(i) Price Per Unit of Output	25
(ii) Output Sold (units)	1000
(iii) Excise Duty	5000
(iv) Depreciation	1000
(v) Change in Stock	(-)500
(vi) Intermediate Cost	7000

Answer:
Net Value Added at Factor Cost
(NVA_PC) = (Price Per Unit of Output x Output Sold) + Change in Stock – Intermediate Cost – Depreciation – Excise Duty
= (25 × 1,000) – 500 – 7,000 – 1,000 – 5000
= 25,000 – 13,500 = ₹ 11,500 crore

Question 35.
From the following data, calculate Net Value Added at Factor Cost. (Delhi 2011)

Contents	₹ (in crore)
(i) Purchase of Intermediate Goods	500
(ii) Sales	750
(iii) Import of Raw Materials	50
(iv) Depreciation	60
(v) Net Indirect Taxes	100
(vi) Change in Stock	(-)30
(vii) Exports	20

Answer:
Net Value Added at Factor Cost
(NVA_FC) = Value of Output (Sales + Change in Stock) – Purchase of Intermediate Goods – Depreciation – Net Indirect Taxes
= 750 + (-30) – 500 – 60 – 100
= 750 – 690 = ₹ 60 crore

Question 36.
Why are net exports included in national income? Explain. (Delhi 2012)
Answer:
Net exports represent the excess of exports over imports. The goods exported are a part of domestic product of India. National income is the sum total of all goods and services i.e. the domestic product, produced by the residents. Tharefore, net exports are included in national income.

Question 37.
Classify the following statements as revenue receipts or capital receipts. Give valid reasons in support of your answer. (All India 2019)
(a) Financial help from a multinational corporation for victims in a flood affected area.
(b) Sale of shares of a Public Sector Undertaking (PSU) to a private company, Y Ltd
(c) Dividends paid to the Government by the State Bank of India.
(d) Borrowings from International Monetary Fund (IMF).
Answer:
(a) Revenue receipt as neither impacts assets nor liabilities of the government.
(b) Capital receipt as it reduces assets of the government.
(c) Revenue receipt as if was no impact on assets or liabilities.
(d) Capital receipt as it increases liabilities.

Question 38.
State any four precautions that are taken while calculating national income by expenditure method. (Delhi (C) 2016)
Or
What precautions (any four) should he taken while estimating national income by expenditure method? (All India (C) 2015)
Answer:
While using expenditure method, the following precautions are required to be taken, related to the calculation of National Income

• Only final expenditure is to be taken into account to avoid error of double counting.
• Expenditure on second hand goods is not to be included, because value of second hand goods has already been accounted for during the year of their production.
• Expenditure on shares and bonds is not to be included in total expenditure, as these are mere paper claims and are not related to the production of final goods and services.
• Expenditure on transfer payments by the government is not to be included.
• Imputed value/estimated value of expenditure on goods produced for self-consumption should be taken into account, as these goods are reflected in the estimation of Gross Domestic Product (GDP).

Question 39.
How are the following treated while calculating national income? Give reasons for your answer. (All India (C) 2016)
(i) Receipts from sale of land.
(ii) Profits earned by the branch of an Indian bank in France.
Answer:
(i) Receipts from sale of land Land is a free gift of nature and hence its sale would not be included while calculating national income.
(ii) Profits earned by the branch of an Indian bank in France Since profit is being earned by a normal resident of India, therefore it will be included as factor income earned from abroad.

Question 40.
How should the following be treated while calculating national income? Give reasons for your answer. (All India (C) 2016)
(a) Profits earned by a branch of foreign bank in India.
(b) Salary received by Indian employees working in American embassy in India.
Answer:
(a) Profits earned by a branch of foreign bank in India Since the profit is being earned by a branch of foreign bank, it will be considered as factor income to abroad and hence will not be included.
(b) Salary received by Indian employees working in American embassy in India As this salary is being received by an Indian employee (normal resident of India) from a foreign country in India, therefore it will be included as factor income from abroad.

Question 41.
How should the following be treated while calculating national income? Give reasons for your answer. (All India (C) 2016)
(i) Interest received by households from banks.
(ii) Dividend received by shareholders.
Answer:
(i) Interest received by households from banks Money deposited with banks is used for productive purposes. Bank is a production unit. Therefore, interest received is a factor income and hence should be included.
(ii) Dividend received by shareholders is a part of the profits of production units which is distributed to the owners or shareholders. Therefore, it is included as it is a component of national income.

Question 42.
How should the following be treated in the calculation of national income? Give reasons for your answer. (Delhi (C) 2016)
(i) Government expenditure on street lighting.
(ii) Sale of an old house.
Answer:
(i) Government expenditure on street lighting It is government’s final consumption expenditure and is included while calculating national income as a component of expenditure method.
(ii) Sale of an old house It does not add to the current flow of goods and services. Its value was included in the national income during the year when it was newly constructed.

Question 43.
How should the following be treated while calculating national income? Give reasons for your answer.
(i) Purchases by foreign tourists.
(ii) Purchase of shares by a domestic firm. (Delhi (C) 2016)
Answer:
(i) Purchases by foreign tourists Such expenditure by foreign tourists on domestic product is treated as export of goods and services. Therefore, it is included while calculating national income.
(ii) Purchase of shares by a domestic firm Purchase of shares is merely a financial transaction not resulting in any production of goods and services, therefore, it is not included while calculating national income.

Question 44.
How should the following be treated in the calculation of national income? Give reasons for your answer. (Delhi (C) 2016)
(i) Interest on public debt
(ii) Bonus given to railway employees
Answer:
(i) Interest on public debt It is not included in the calculation of national income because interest on public debt is interest on loan taken by the government for consumption purpose and not for investment.
(iii) Bonus given to railway employees It is included in the estimation of national income because bonus given to employees is a part of compensation of employees which is a component of income method of calculating National Income.

Question 45.
From the following data, calculate Net Value Added at Factor Cost. (Delhi (C) 2015)

Contents	₹ (in lakhs)
(i) Sales	300
(ii) Opening Stock	10
(iii) Depreciation	30
(iv) Intermediate Consumption	120
(v) Exports	50
(vi) Change in Stock	20
(vii) Net Indirect Taxes	15
(viii) Net Factor Income to Abroad	10

Answer:
Net Value Added at Factor Cost (NVA_FC)
= Sales + Change in Stock – Intermediate Consumption – Depreciation – Net Indirect Taxes
= 300 + 20 – 120 – 30 – 15 = ₹ 155 lakh

Question 46.
Describe the expenditure method of calculating Gross Domestic Product at Market Price. (All India (C) 2015)
Answer:
For calculating Gross Domestic Product at Market Price (GDP_MP) by this method, following steps should be taken-
Step I Estimation of final expenditure
It is the expenditure on the purchase of final goods and services during an accounting year. It is broadly classified into four categories

• Estimation of private final consumption expenditure The total expenditure on final goods and services by individuals, households and non-profit private institution which are serving society are termed as private final consumption expenditure.
• Estimation of government final consumption expenditure The expenditure on final goods and services by the government and government organisations are termed as government final consumption expenditure.
• Estimation of investment expenditure The expenditure incurred by the firms (producers) on capital goods are termed as investment expenditure. It is also referred to as gross domestic capital formation.
• Estimation of net export It is the difference between exports and imports during an accounting year.

Step II Summation of above expenditures
The sum of all the above expenditure on final products of all the sectors of the economy gives us Gross Domestic Product at Market Price (GDP_MP).

Question 47.
Calculate Gross Value Added at Factor Cost. (All India (C) 2015)

Contents	₹ (in lakhs)
(i) Domestic Sales	3000
(ii) Change in Stock	(-)100
(iii) Depreciation	300
(iv) Intermediate Consumption	2000
(v) Exports	500
(vi) Indirect Taxes	250
(vii) Net Factor Income from Abroad	(-)50

Answer:
Gross Value Added at Factor Cost (GVA_PC)
= (Domestic Sales + Exports) + Change in Stock – Intermediate Consumption – Indirect Taxes
= (3,000 + 500) + (-100) – 2,000 – 250
= ₹ 1150 lakh

Question 48.
What precautions should be taken while estimating national income by income method? (All India (C) 2015)
Answer:
While using income method for computing National Income, the following precautions should be taken (any 4)

• Income from illegal activities like smuggling, theft, gambling etc, should not be included.
• Corresponding to production for self consumption, the generation of income should be taken into account.
• Brokerage on the sale/purchase of shares and bonds is to be included.
• Income in terms of windfall gains should not be included.
• Transfer earnings like old age pensions, unemployment allowances, scholarships, pocket expenses etc, should not be included.

Question 49.
Calculate Net Value Added at Market Price. (All India (C) 2015)

Contents	₹ (in lakhs)
(i) Intermediate Consumption	1000
(ii) Consumption of Fixed Capital	50
(iii) Net Indirect Taxes	150
(iv) Sales	2000
(v) Exports	200
(vi) Net Factor Income to	(-)100
(vii) Change in Stock	(-)50

Answer:
GVA_MP = Sales + Change in Stock – Intermediate Consumption
= 2,000+ (-50) – 1,000 = ₹ 950 lakh
NVA_MP = GVA_MP – Consumption of Fixed Capital
= 950 – 50 = ₹ 900 lakh

Question 50.
What (any four) precautions should be taken while estimating national income by production method? (All India (C) 2015)
Or
Explain the precautions that are taken while estimating national income by value added method. (All India 2017)
Answer:
While using value added/production method for computing national income, the following precautions should be taken (any 4)

• The value of intermediate goods should not be included.
• Purchase and sale of second hand goods should be excluded.
• Imputed value of self-consumed goods should be included.
• Value of own account production should be included.
• Value of self-consumed services should not be included in the estimation of National Income.
• Commission earned on account of sale and purchase of second hand goods is included.
• Imputed rent on the owner occupied house is also taken into the account.
• The value added in the government sector is equal to compensation of employees only.

Question 51.
From the following data, calculate “Net Value Added at Factor Cost”. (All India (C) 2014)

Contents	₹ (in lakhs)
(i) Sales	400
(ii) Change in Stock	-20
(iii) Intermediate Consumption	200
(iv) N&t Indirect Taxes	40
(v) Exports	50
(vi) Depreciation	30

Answer:
Value of Output = Sales + Change in Stock
= 400 – 20 = ₹ 380 lakh
GVA_MP = Value of Output – Intermediate Consumption
= 380 – 200 = ₹ 180 lakh
NVA_FC = GVA_MP – Depreciation – Net Indirect Taxes
= 180 – 30 – 40 = ₹ 110 lakh

Question 52.
Calculate Net Value Added at Factor Cost from the following data. (Delhi 2014)

Contents	₹ (in lakhs)
(i) Intermediate Consumption	300
(ii) Change in Stock	50
(iii) Net Indirect Taxes	70
(iv) Sales	500
(v) Consumption of Fixed Capital	20
(vi) Imports	40

Answer:
Value of Output = Sales + Change in Stock
= 500 + 50 = ₹ 550
Gross Value Added at Market Price (GVA_MP)
= Value of output – intermediate Consumption
= 550 – 300 = ₹ 250 lakh
Net Value Added at Factor Cost (NVA_FC) = GVA_MP – Consumption of Fixed Capital – Net Indirect Taxes (NIT)
NVA_FC = 250 – 20 – 70 = ₹ 160 lakh

Question 53.
Calculate sales from the following data. (All India 2013)

Contents	₹ (in lakhs)
(i) Subsidies	200
(ii) Opening Stock	100
(iii) Closing Stock	600
(iv) Intermediate Consumption	3000
(v) Consumption of Fixed Capital	700
(vi) Profit	750
(vii) Net Value Added at Factor Cost	2000

Answer:
Gross Value Added at Market Price (GVA_MP)
= Net Value Added at Factor Cost (NVA_FC) – Subsidies + Consumption of Fixed Capital
GVA_MP = 2,000 – 200 + 700 = ₹ 2,500 lakh
Also, (GVA_MP) = Value of Output (Sales + Change in Stock) – Intermediate Consumption
2,500 = Sales + (600 – 100) – 3,000 Sales
= 2,500 + 3,000 – 500
= 5,500 – 500
Sales = ₹ 5,000 lakh

Question 54.
Calculate sales from the following data. (Delhi 2013)

Contents	₹ (in lakhs)
(i) Intermediate Cost	700
(ii) Consumption of Fixed Capital	80
(iii) Change in Stock	(-)50
(iv) Subsidy	60
(v) Net Value Added at Factor Cost	1300
(vi) Exports	50

Answer:
Gross Value Added at Market Price (GVA_MP)
= Net Value Added at Factor Cost (NVA_FC) – Subsidies + Consumption of Fixed Capital
GVA_MP = ₹ 1,300 -60 + 80 = ₹ 1,320 lakh
Also, GVA_MP = Value of Output (Sales + Change in Stock) – Intermediate Cost
1,320 = Sales + (-50) – 700
Sales = 1,320 + 50 + 700
Sales = ₹ 2,070 lakh

Question 55.
Calculate sales from the following data. (Delhi 2013)

Contents	₹ (in lakhs)
(i) Net Value Added at Factor Cost	560
(ii) Depreciation	60
(iii) Change in Stock	(-)30
(iv) Intermediate Cost	100
(v) Exports	200
(vi) Indirect Taxes	60

Answer:
Gross Value Added at Market Price (GVA_MP)
= Net Value Added at Factor Cost (NVA_FC) + Net Indirect Taxes (NIT) + Depreciation
= 560 + 60 + 60 = ₹ 680 lakh, Where
NIT = Indirect Tax – Subsidies = 60 – 0 = ₹ 60 lakh
Also, GVA_MP = Value of Output (Sales + Change in Stock) – Intermediate Cost
680 = Sales + (- 30) – 1,000
Sales = 680 + 1,000 + 30 = ₹ 1,710 lakh

Question 56.
Giving reason, explain how should the following be treated in estimating National Income. (Delhi 2012)
(i) Expenditure on fertilisers by a farmer.
(ii) Purchase of tractor by a farmer.
Answer:
(i) Expenditure on fertilisers by a farmer It is ‘not included’ in the estimation of National Income as it is an intermediate consumption, as fertilisers are used for furthei; production.
(ii) Purchase of a tractor by a farmer It is included’ in the estimation of National Income as it is capital formation or investment expenditure.

Question 57.
Giving reason, explain how should the following be treated in the estimation of National Income. (Delhi 2012)
(i) Payment of bonus by a firm.
(ii) Payment of interest on loan taken by an employee from the employer.
Answer:
(i) Payment of bonus by a firm: It is ‘included’ in the estimation of National Income as it is a part of compensation of employee.
(ii) Payment of interest on loan taken by an employee from the employer It will ‘not included’ in the estimation of National Income as it will be treated as transfer income and also loan is taken for consumption purpose.

Question 58.
Giving reason, explain how should the following be treated in estimation of National Income. (Delhi 2012)
(i) Interest paid by banks on deposits by individuals.
(ii) National debt interest.
Answer:
(i) Interest paid by banks on deposits by individuals It should be ‘included’ in estimation of National Income as it will be treated as factor income.
(ii) National debt interest It should ‘not be included’ in estimation of National Income as it is assumed that government borrows for consumption and hence, it is treated as transfer income.

Question 59.
Giving reason, explain how should the following be treated while estimating National Income. (All India 2012)
(i) Expenditure on free services provided by government.
(ii) Payment of interest by a government firm.
Answer:
(i) Expenditure on free services provided by government It should be ‘included’ in the estimation of National Income, as it is a final expenditure of the government.
(ii) Payment of interest by a government firm It should ‘not be included’ in the estimation of National Income, as it is a transfer payment.

Question 60.
How should the following be treated while estimating National Income? Give reasons. (All India 2012)
(i) Expenditure on education of children by a family.
(ii) Payment of electricity bill by a school.
Answer:
(i) Expenditure on education of children by a family It is ‘included’ in the estimation of National Income as it is a part of final consumption expenditure by the household,
(ii) Payment of electricity bill by a school It is ‘not included’ in the estimation of National Income as it is a part of intermediate consumption.

Question 61.
Giving reason, explain the treatment assigned to the following while estimating National Income. (All India 2011)
(i) Family members working free on the farm owned by the family.
(ii) Payment of interest on borrowings by general government.
Answer:
(i) Family members working free on the farm owned by the family It should be ‘included’ as it is a part of mixed income of self employed.
(ii) Payment of interest on borrowings by general government It should ‘not be included’ in the estimation of National Income as it is not mentioned and not clear 1 whether the government has borrowed for consumption purpose or for production purpose.

Question 62.
Giving reason, explain the treatment assigned to the following while estimating National Income. (All India 2011)
(i) Social security contributions by employees.
(ii) Pension paid after retirement.
Answer:
(i) Social security contributions by employees It is ‘included’ in the estimation of National Income, as it is a part of compensation of employees and it is an earned income.
(ii) Pension paid after retirement It is ‘included’ in the estimation of National Income as it is a kind of deffered payment to employees.

Question 63.
Giving reasons, explain the treatment assigned to the following while estimating National Income
(i) Expenditure on maintenance of a building.
(ii) Expenditure on adding a floor to the building. (All India 2011)
Answer:
(i) Expenditure on maintenance of a building It will ‘not be included’ in national income because it is an intermediate expenditure.
(ii) Expenditure on adding a floor to the building It will be included because it is a part of domestic capital formation.

Question 64.
Giving reason, explain how are the following be treated in estimation of National Income by income method. (All India 2010)
(i) Interest paid by banks on deposits.
(ii) National debt interest.
Answer:
(i) Interest paid by banks on deposits It will be ‘included’ while estimating National Income by income method, as it is an income earned by depositors and bank use these deposits for commercial purposes.
(ii) National debt interest It will ‘not be included’ while estimating National Income by income method, as the government takes loan for both productive and non-productive activities.

Question 65.
Giving reason, explain how are the following treated in estimating National Income method. (Delhi (C) 2010)
(i) Interest on a car loan paid by an individual.
(ii) Interest on a car loan paid by a government owned company.
Answer:
(i) Interest on a car loan paid by an individual It should ‘not be included’ while estimating National Income as the loan is taken for consumption purpose.
(ii) Interest on a car loan paid by a government owned company It should be ‘included’ while estimating National Income as it is a part of government final consumption expenditure.

Question 66.
Define the following.
(a) Value addition
(b) Gross domestic product
(c) Flow variables
(d) Income from property and entrepreneurship (All India 2019)
Answer:
(a) Value addition: It refers to difference in the value of output and intermediate expenses in the production. We arrive at this by using product method of national income measurement.
Value Added = Value of Output- Intermediate Cost
Value of Output = Sales + Change in Stock Change in Stock = Closing Stock – Opening Stock
(b) Gross Domestic Product (GDP) It refers to total value of final goods and services produced within the domestic territory of an economy in a fiscal year. It only includes the value of final goods.

(c) Flow variable It refers to a variable which is measured over a period of time, it is dynamic in nature, e.g. Savings.

(d) Income from property and entrepreneurship It refers to income received in the form of factor income from labour services on capital invested abroad, e.g. Rent received by an indian from its property abroad.

Question 67.
Given the following data, find the values of “Gross Domestic Capital Formation” and “Operating Surplus”. (All India 2019)

Particulars	₹ (in Crore)
(i) National Income	22,100
(ii) Wages and Salaries	12,000
(iii) Private Final Consumption Expenditure	7,200
(iv) Net Indirect Taxes	700
(v) Gross Domestic Capital Formation	?
(iv) Depreciation	500
(vii) Government Final Consumption Expenditure	6,100
(viii) Mixed Income of Self-Employed	4,800
(ix) Operating Surplus	?
(x) Net Exports	3,400
(xi) Rent	1,200
(xii) Net Factor Income from Abroad	(-)150

Answer:
Let Gross Domestic Capital Formation = x
Operating Surplus = y
We know,
(a) GDP_MP = Private Final Consumption Expenditure (PFCE) + Government Final Consumption Expenditure (GFCF) + Net Exports (NX) …….(i)
Also,
GDP_MP = NNP_FC + Depreciation – Net Factor Income from Abroad (NFIA) + Net Indirect Taxes (NIT)
= 22,100 + 500 – (-150) + 700 = ₹ 23,450 crore
Now, putting values in eq. (i)
23,450 = 7,200 + 26,100 + x + 3,400
x = 6,750 crore

(b) NDP_FC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income ……(i)
Also,
NDP_FC = NNP_FC – NFIA ⇒ 22,100 – (-150) = ₹ 22,250 crore
Now, putting value in eq. (i)
22,250 = 12,000 + y + 4800
∴ y = ₹ 5,450 crore

Question 68.
(a) Define ‘Net Factor Income from Abroad’. How is it different from ‘Net Exports’?
(b) Calculate the value of “Rent” from the following data (All India 2019)

Particulars	₹ (in Crore)
(i) Gross Domestic Product at Market Price	18,000
(ii) Mixed Income of Self-employed	7,000
(iii) Subsidies	250
(iv) Interest	800
(v) Rent	?
(vi) Profit	975
(vii) Compensation of Employees	6,000
(viii) Consumption of Fixed Capital	1,000
(ix) Indirect Tax	2,000

Answer:
(a) Net Factor Income from Abroad (NFIA) is the difference between the factor income earned by domestic residents from abroad, i.e. factor income received and factor income paid to non-residents for their services in the domestic country.
On the other hand. Net Exports refers to the difference between the value of exports and value of imports of goods, i.e. visible trade.

(b) By Income method
NDP_FC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income … (i)
‘Operating Surplus = Rent + Interest + Profits
And NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes (NIT)
= 18,000 – 1,000 – (2,000 – 250)
= ₹ 15,250 crore
Now, putting values in eq. (i)
15,250 = 6,000 + Rent + 800 + 975 + 7000
15,250 = 14,775 + Rent
∴ Rent = ₹ 475 crore

Question 69.
(a) Define Net Exports. How is it different from Net Factor Income from Abroad?
(b) Calculate value of “Interest” from the following data (All India 2019)

Particulars	₹ (in Crore)
(i) Indirect tax	1,500
(ii) Subsidies	700
(iii) Profits	1,100
(iv) Consumption of Fixed Capital	700
(v) Gross Domestic Product at Market Price	17,500
(vi) Compensation of Employees	9,300
(vii) Interest	?
(viii) Mixed Income of Self-employed	3,500
(ix) Rent	800

Answer:
(a) Net Factor Income from Abroad (NFIA) is the difference between the factor income earned by domestic residents from abroad, i.e. factor income received and factor income paid to non-residents for their services in the domestic country.
On the other hand. Net Exports refers to the difference between the value of exports and value of imports of goods, i.e. visible trade.

(b) Let interest be x
We know,
NDP_FC = Compensation of Employees (COE) + Rent + Interest + Profits + Mixed Income … (i)
Also, NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes (NIT)
= 17,500 + 1,100 – (1,500 – 700)
= ₹ 15,600 crore
Now, putting values in eq. (i)
15600 = 9300 + 800 + x + 1,100 + 3,500
∴ x = ₹ 900 crore

Question 70.
(a) Define “Value of Output’. How is it different from “Value Addition’?
(b) Calculate the value of “Mixed Income of Self-employed” from the following data (All India 2019)

Particulars	₹ (in Crore)
(i) Compensation of Employees	17,300
(ii) Interest	1,200
(iii) Consumption of Fixed Capital	1,100
(v) Mixed Income of Self-employed	?
(v) Subsidies	750
(vi) Gross Domestic Product at Market	27,500
(vii) Indirect Taxes	2,100
(viii) Profit	1,800
(ix) Rent	2,000

Answer:
(a) Value of Output refers to the total value of production, which is equal to
Value of Output = Sales + Change in Stock + Production for Self-consumption Value Added refers actual value of production i.e. net of intermediate expenses Value added = Value of Output – Intermediate Cost (b) Let Mixed Income = x We know,
NDP_FC = Compensation of Employees (CoE) + Rent + Operating Surplus + Mixed Income …….(i)
Also,
NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes (NIT)
= 27,500 – 1,100 – (2200 – 750)
= ₹ 25050 crore
Now, putting values in eq. (i)
25050 = 17300 + (200 + 1200 + 1300) + x
∴ x = ₹ 4350 crore

Question 71.
Given the following data, find the missing value of ‘Government final Consumption Expenditure’ and ‘Mixed Income of Self Employed’. (Delhi 2019)

Particulars	₹ (in Crore)
(i) National Income	71,000
(ii) Gross Domestic Capital Formation	10,000
(iii) Government Final Consumption Expenditure	?
(iv) Mixed Income of Self-employed	?
(v) Net Factor Income from Abroad	1,000
(vi) Net Indirect Taxes	2,000
(vii) Profits	1,200
(viii) Wages and Salaries	15,000
(ix) Net Exports	5,000
(x) Private Final Consumption Expenditure	40,000
(xi) Consumption of Fixed Capital	3,000
(xii) Operating Surplus	30,000

Answer:
NNP_FC = 71,000 (given)
GDP_MP = NNP_FC – Net Factor Income from Abroad + Depreciation + Net Indirect Taxes
= 71,000 – 1000 + 3000 + 2000 = ₹ 75000
Now, Let Government Final Consumption Expenditure = x
GDP_MP = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports
75000 = 40000 + x + 10000 + 5000
x = 20000
Also, Let Mixed Income = y
NDP_FC = Wages and Salaries + Operating Surplus + Mixed Income
70000 = 15000 + 30000 + y
So, y = 25000

Question 72.
Given the following data, find the missing values of ‘Private Final Consumption Expenditure’ and ‘Operating Surplus’. (Delhi 2019)

Particulars	₹ (in Crore)
(i) National Income	50,000
(ii) Net Indirect Taxes (NIT)	1,000
(iii) Private Final Consumption Expenditure	?
(iv) Gross Domestic Capital Formation	17,000
(v) Profits	1,000
(vi) Government Final Consumption Expenditure	12,500
(vii) Wages and Salaries	20,000
(viii) Consumption of Fixed Capital	700
(ix) Mixed Income of Self-employed	13,000
(x) Operating Surplus	?
(xi) Net Factor Income from Abroad	500
(xii) Net Exports	2,000

Answer:
Private Final Consumption Expenditure = y, Operating Surplus = x
We know,
NDP_FC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income
Also, NDP_FC = NNP_FC – Net Factor Income from Abroad (NFIA)
= 50000 – 500 = ₹ 49,500 crore
9,500 = Wages and Salaries + x + 13000
49,500 = 20O00 + 13000 + x
49,500 = 33000 + x
x = 49,500 – 33000 = ₹ 16,500 crore
Also, GDP_MP = Private Final Consumption Expenditure (PFCE) + Government Final Consumption Expenditure + (GFCE) + Gross Domestic Capital Formation + Net Exports
GDP_MP = NNP_FC + Depreciation+Net Indirect Taxes (NIT) = 49,500 + 700 + 100 = ₹ 51,200 crore
51,200 = y + 12,500 + 17,00 + 2,000
y = ₹ 19,700 crore

Question 73.
Given the following data, find the missing values of ‘Gross Domestic Capital Formation’ and ‘Wages and Salaries’. (Delhi 2019)

Particulars	₹ (in Crore)
(i) Mixed Income of Self-employed	3,500
(ii) Net Indirect Taxes	300
(iii) Wages and Salaries	?
(iv) Government Final Consumption Expenditure	14,000
(v) Net Exports	3,000
(vi) Consumption of Fixed Capital	300
(vii) Net Factor Income from Abroad	700
(viii) Operating Surplus	12,000
(ix) National Income	30,000
(x) Profits	500
(xi) Gross Domestic Capital Formation	?
(xii) Private Final Consumption Expenditure	11,000

Answer:
Let Gross Domestic Capital Formation = x
Wages and Salaries = y
We know, NDP_FC = Compensation of Employees (COE) + Operating Surplus + Mixed Income
NDP_FC = NNP_FC – Net Factor Income from Abroad (NFIA)
= 30,000 – 700 = ₹ 29300 crore
29300 = y + 12,000 + 35,000
y = ₹ 13,800 crore
Also, GDP_MP = Private Final Consumption Expenditure (PFCE) + Govt. Final Consumption Expenditure (GFCE) + Gross Domestic Capital Formation + Net Exports
GDP_MP = NDP_FC + Depreciation + Net Indirect Tax
= 29300 + 300 + 300 = ₹ 29,900 crore
29,900 = 11000 + 14000 + x + 3000
x = ₹ 1,900 crore

Question 74.
Calculate (a) Operating Surplus, and (b) Domestic Income. (April re-exom 2018)

Particulars	₹ (in Crore)
(i) Compensation of Employees	2,000
(ii) Rent and Interest	800
(iii) Indirect Taxes	120
(iv) Corporation Tax	460
(v) Consumption of Fixed Capital	100
(vi) Subsidies	20
(vii) Dividend	940
(viii) Undistributed Profits	300
(ix) Net Factor Income to Abroad	150
(x) Mixed Income	200

Answer:
(a) Operating Surplus = Rent and Interest + Corporation Tax + Dividend + Undistributed Profits
= 800 + 460 + 940 + 300 = ₹ 2,500 crore

(b) Domestic Income (NDP_FC)
= Compensation to Employees + Operating Surplus + Mixed Income
= 2,000 + 2,500 + 200 = ₹ 4,700 crore

Question 75.
Calculate (a) Net National Product at market price, and (b) Gross Domestic Product at factor cost. (March 2018)

Particulars	₹ (in Crore)
(i) Rent and Interest	6,000
(ii) Wages and Salaries	1,800
(iii) Undistributed Profit	400
(iv) Net Indirect Taxes	100
(v) Subsidies	20
(vi) Corporation Tax	120
(vii) Net Factor Income to Abroad	70
(viii) Dividends	80
(ix) Consumption of Fixed Capital	50
(x) Social Security Contribution by Employers	200
(xi) Mixed Income	1,000

Answer:
(a) NNP_MP = Compensation of Employee + Operating Surplus + Mixed Income + NFIA + Net Indirect Taxes
= 1300 +200 + (6,000 +400 + 120 + 80) + (1000) + (-70) + 100
= ₹ 9630 crore

(b) GDP_FC = Compensation of Employees + Operating Surplus + Mixed Income + Consumption of Fixed Capital
= (1300 + 200) + (6000 + 400 + 120 + 80) + (1000) + 50 = ₹ 9650 crore

Question 76.
Explain the precautions that should be taken while estimating national income by expenditure method. (All India 2017)
Answer:
While using expenditure method, the following precautions are required to be taken, related to the calculation of National Income (any 4)

• Only final expenditure is to be taken into account Lo avoid error of double counting.
• Expenditure on second hand goods is not to be included, because value of second hand goods has already been accounted for during the year of their production.
• Expenditure on shares and bonds is not to be included in total expenditure. as these are mere paper claims and are not related to the production of final goods and services.
• Expenditure on transfer payments by the government is not to be included.
• Imputed value/estimated value of expenditure on goods produced for self-consumption should be taken into account, as these goods are reflected in the estimation of Gross Domestic Product.

Question 77.
Will the following be included in the domestic product of India? Give reasons for your answer. (All India 2017)
(i) Profits earned by foreign companies in India.
(ii) Salaries of Indians working in the Russian Embassy in India.
(iii) Profits earned by a branch of State Bank of India in Japan.
Answer:
(i) Profits earned by foreign companies in India This will be included in the estimation of domestic product, as these companies have earned profit in India, i.e. from the domestic territory of India.
(ii) Salaries of Indians working in Russian Embassy in India This will not be included in the domestic product of India as Russian Embassy in India is not a part of India’s domestic territory.
(iii) Profits earned by a branch of State Bank of India in Japan This will not be included in the domestic income of India as it is not located within the domestic territory of India.

Question 78.
Calculate (i) National Income, and (ii) Net National Disposable income. (All India 2017)

Particulars	₹ (in Crore)
(i) Compensation of Employees	2,000
(ii) Rent	400
(iii) Profit	900
(iv) Dividend	100
(v) Interest	500
(vi) Mixed Income of Self-employed	7,000
(vii) Net Factor Income to Abroad	50
(viii) Net Exports	60
(ix) Net Indirect Taxes	300
(x) Depreciation	150
(xi) Net Current Transfer to Abroad	30

Answer:
Net Domestic Product at Factor Cost (NDP_FC)
= Compensation of Employees + (Rent + Interest + Profit) + Mixed Income of Self-employed
= 2000 + (400 + 500 + 900) + 7000
= ₹ 10,800 crore
(i) National Income = NDP_FC – Net Factor Income to Abroad = 10,800 – 50 = ₹ 10,750 crore
(ii) Net National Disposable Income – Not in Syllabus.

Question 79.
Will the following be included in the national income of India? Give reasons for your answer.
(i) Financial assistance to flood victims.
(ii) Profits earned by the branches of a foreign bank in India.
(iii) Salaries of Indians working in the American Embassy in India. (All India 2017)
Answer:
(i) Financial assistance to flood victims It will ‘not be included’ in the national income of India as it is a form of transfer payment. It does not add to the stock of goods and services in the economy.
(ii) Profits earned by foreign companies in India This will be included in the estimation of domestic product, as these companies have earned profit in India, i.e. from the domestic territory of India.
(iii) Salaries of Indians working in the American Embassy in India It will be ‘included’ in national income because it is a part of net factor income from abroad (NFIA).

Question 80.
Calculate the (i) Net National Product at Market Price, and (ii) Gross National Disposable Income. (All India 2017)

Particulars	₹ (in Crore)
(i) Mixed income of Self-employed	2,000
(ii) Depreciation	400
(iii) Profit	900
(iv) Rent	100
(v) Interest	500
(vi) Compensation of Employees	7,000
(vii) Net Indirect Taxes	50
(viii) Net factor income to Abroad	60
(ix) Net Exports	300
(x) Net Current Transfers to Abroad	150

Answer:
Net Domestic Product at Factor Cost (NDP_FC)
= Compensation of Employees + Rent + Interest + Profit + Mixed Income of Self-employed
= 3,000 + 600 + 700 + 1,000 + 8,000
= ₹ 13,300 crore

(i) Net National Product at Market Price
(NNP_MP) = NDP_FC – Net Factor Income to Abroad + Net Indirect Taxes
= 13,300 – 60 + 500
= ₹ 13,740 crore

(ii) Gross National Disposable Income – Not in Syllabus.

Question 81.
Explain non-monetary exchanges as a limitation of using gross domestic product as an index of welfare of a country. (Delhi 2017)
Answer:
Gross Domestic Product (GDP) is the total value of all the final goods and services produced by all the enterprises (both resident and non-resident) within the domestic territory of a country in a particular year. GDP is considered as one of the best indicators of judging the economic performance of a country. GDP may be a good indicator of economic growth, but not of economic welfare or economic development. One of the reason for this is that non-monetary transactions are ignored, while calculating GDP.

The non-monetary exchanges which take place in the informal sectors are not included in the calculation of Gross Domestic Product (GDP) since money is not being used.
For example, service of a housewife while teaching her children or while cooking food in kitchen. This results in under estimation of GDP. Hence, GDP calculated in the standard manner may not give us a clear indication of the productive activity and actual welfare of the country.

Question 82.
How will you treat the following while estimating domestic product of a country? Give reasons for your answer. (Delhi 2017)
(i) Profits earned by branches of country’s bank in other countries.
(ii) Gifts given by an employer to his employees on Independence Day.
(iii) Purchase of goods by foreign tourists.
Answer:
(i) Profits earned by branches of country’s bank in other countries It is not included while estimating the domestic product of a country as these profits are not earned within the domestic territory of the country.
(ii) Gifts given by an employer to his employees on Independence Day It is not included while estimating the domestic product of a country as it is a transfer payment.
(iii) Purchase of goods by foreign tourists It will be included in the estimation of domestic product of a country as the goods have been produced and sold within the domestic territory of the country.

Question 83.
Calculate (i) Net Domestic Product at Factor Cost and (ii) Gross National Disposable Income. (Delhi 2017)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	8000
(ii) Government Final Consumption Expenditure	1000
(iii) Exports	70
(iv) Imports	120
(v) Consumption of Fixed Capital	60
(vi) Gross Domestic Fixed Capital Formation	500
(vii) Change in Stock	100
(viii) Net Factor Income to Abroad	40
(ix) Net Factor Income from Abroad	90
(x) Indirect Taxes	700
(xi) Subsidies	50
(xii) Net Current Transfers to Abroad	(-)30

Answer:
Gross Domestic Product at Market Price
(GDP_MP) = Private Final Consumption
Expenditure + Government Final Consumption
Expenditure + Gross Domestic Fixed Capital
Formation + Change in Stock + (Exports – Imports)
= 8,000 + 1,000 + 500 + 100 + (70 – 120)
= ₹ 9,550 crore

(i) Net Domestic Product at Factor Cost
(NDP_FC)
= GDP_MP – Consumption of Fixed Capital – Net Indirect Taxes
= 9,550 – 60 – (700 – 50)
= ₹ 8,840 crore

(ii) Gross National Disposable Income – Not in Syllabus.

Question 84.
Calculate (i) National Income (ii) Net National Disposable Income. (Delhi 2017)

Particulars	₹ (in Crore)
(i) Net Factor Income to Abroad	(-) 50
(ii) Net Indirect Taxes	800
(iii) Net Current Transfers form Rest of the World	100
(iv) Net Imports	200
(v) Private Final Consumption Expenditure	5,000
(Vi) Government Final Consumption Expenditure	3,000
(vii) Gross Domestic Capital Formation	1,000
(viii) Consumption of Fixed Capital	150
(ix) Change in Stock	(-) 50
(x) Mixed Income	4,000
(xi) Scholarship to Students	80

Answer:
Gross Domestic Product at Market Price
(GDP_MP) = Private Final Consumption Expenditure + Government Final Consumption
Expenditure + Gross Domestic Capital Formation – Net Imports
= 5,000 + 3,000 + 1000 – 200
= ₹ 8,800 crore

(i) National Income = GDP_MP – Consumption of Fixed Capital – Net Factor Income to Abroad – Net Indirect Taxes
= 8,800 – 150 – (-50) – 800 = ₹ 7,900 crore

(ii) Net National Disposable Income – Not in Syllabus.

Question 85.
Calculate (i) Net National Product at Market Price and (ii) Gross National Disposable Income. (Delhi 2017)

Particulars	₹ (in Crore)
(i) Gross Domestic Fixed Capital Formation	400
(ii) Private Final Consumption Expenditure	8,000
(iii) Government Final Consumption Expenditure	3,000
(iv) Change in Stock	50
(v) Consumption of Fixed Capital	40
(vi) Net Indirect Taxes	100
(vii) Net Exports	(-) 60
(viii) Net Factor Income to Abroad	(-) 80
(ix) Net Current Transfers from Abroad	100
(x) Dividend	100

Answer:
Gross Domestic Product at Market Price
(GDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock + Net Exports
= 8,000 + 3,000 + 400 + 50 + (-60)
= ₹ 11,390 crore

(i) Net National Product at Market Price
(NNP_MP) = GDP_MP – Consumption of Fixed Capital – Net Factor Income to Abroad
= 11,390 – 40 – (-80)
= ₹ 11,430 crore

(ii) Gross National Disposable Income – Not in Syllabus.

Question 86.
Find National Income and Private Income. (Delhi 2016)

Particulars	₹ (in Crore)
(i) Wages and Salaries	1,000
(ii) Net Current Transfers to Abroad	20
(iii) Net Factor Income Paid to Abroad	10
(iv) Profit	400
(v) National Debt Interest	120
(vi) Social Security Contributions by Employers	100
(vii) Current Transfers from Government	60
(viii) National Income Accruing to Government	150
(ix) Rent	200
(x) Interest	300
(xi) Royalty	50

Answer:
National Income or Net National Product at Factor Cost (NNP_FC)
= Wages and Salaries + Social Security Contributions by Employers + Rent + Interest + Royalty + Profit – Net Factor Income Paid to Abroad
= 1,000 + 100 + 200 + 300 + 50 + 400 – 10
= ₹ 2,040 crore
Private Income – Not in Syllabus.

Question 87.
Find Net Domestic Product at Factor Cost and Personal Income. (Delhi 2016)

Particulars	₹ (in Crore)
(i) Rent	200
(ii) Net Current Transfers to Abroad	10
(iii) National Debt Interest	60
(iv) Corporate Tax	100
(v) Compensation of Employees	900
(vi) Current Transfers by Government	150
(vii) Interest	400
(viii) Undistributed Profits	50
(ix) Dividend	250
(x) Net Factor Income to Abroad	(-) 10
(xi) Income Accruing to Government	120

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Compensation of Employees + Rent + Interest + Corporate Tax + Undistributed Profits + Dividend
= 900 + 200 + 400 +100 + 50 + 250
= ₹ 1,900 crore

‘Personal Income – Not in Syllabus.

Question 88.
Find Gross National Product at Market Price and Private Income. (Delhi 2016)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	800
(ii) Net Current Transfers to Abroad	20
(iii) Net Factor Income to Abroad	(-)10
(iv) Government Final Consumption Expenditure	300
(v) Net Indirect Tax	150
(vi) Net Domestic Capital Formation	200
(vii) Current Transfers from Government	40
(viii) Depreciations	100
(ix) Net Imports	30
(x) Income Accuring to Government	90
(xi) National Debt Interest	50

Answer:
Gross National Product at Market Price
(GNP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Depreciation – Net Imports – Net Factor Income to Abroad
= 800 + 300 + 200 + 100 – 30 – (-10)
= ₹ 1,380 crore

Private Income – Not in Syllabus.

Question 89.
Calculate (i) Net Domestic Product at Market Price and (ii) Net National Disposable Income. (All India (C) 2016)

Particulars	₹ (in Crore)
(i) Compensation of Employees	4,000
(ii) Dividend	500
(iii) Mixed Income	8,000
(iv) Social Security Contribution by Employers	400
(v) Net Factor Income to Abroad	600
(vi) Net Indirect Taxes	1,000
(vii) Rent	800
(viii) Consumption of Fixed Capital	1,200
(ix) Profit	1,500
(x) Net Current Transfers to Rest of the World	200
(xi) Interest	70

Answer:
(i) Net Domestic Product at Market Price
(NDP_MP) = Compensation of Employees + Mixed Income + Rent + Profit + Interest + Net Indirect Taxes
= 4,000 + 8,000 + 800 + 1,500 + 70 + 1,000
= ₹ 5,370 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 90.
Calculate (i) Gross National Product at Factor Cost and (ii) Net National Disposable Income. (Delhi (C) 2016)

Particulars	₹ (in Crore)
(i) Compensation of Employees	3000
(ii) Profit	800
(iii) Opening Stock	200
(iv) Closing Stock	150
(v) Indirect Taxes	700
(vi) Rent	600
(vii) Interest	900
(viii) Subsidies	100
(ix) Consumption of Fixed Capital	850
(x) Net Exports	(-)250
(xi) Net Factor Income to Abroad	300
(xii) Net Current Transfers from Rest of the World	400
(xiii) Mixed Income of Self-employed	5000

Answer:
(i) Gross National Product at Factor Cost
(GNP_MP) = Compensation of Employees + Rent + Interest + Profit + Mixed Income of Self-employed + Consumption on Fixed Capital – Net Factor Income to Abroad
= 3,000 + 600 + 900 + 800 + 5,000 + 850 – 300
= ₹ 10,850 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 91.
Find Net National Product at Market Price and Personal Disposable Income. (Delhi 2016)

Particulars	₹ (in Crore)
(i) Personal Taxes	200
(ii) Wages and Salaries	1,200
(iii) Undistributed Profit	50
(iv) Rent	300
(v) Corporate Tax	200
(vi) Personal Income	2,000
(vii) Interest	400
(viii) Net Indirect Tax	300
(ix) Net Factor Income from Abroad	20
(x) Profit	500
(xi) Social Security Contribution by Employers	250

Answer:
Net National Product at Market Price
(NNP_MP) = Wages and Salaries + Social Security Contribution by Employers + Rent + Interest + Profit + Net Factor Income from Abroad + Net Indirect Tax
= 1200 + 250 + 300 + 400 + 500 + 20 + 300
= ₹ 2,970 crore

Personal Disposable Income – Not in Syllabus.

Question 92.
Calculate (i) Gross National Product at Factor Cost and (ii) Net National Disposable Income (Delhi 2016)

Particulars	₹ (in Crore)
(i) Rent	400
(ii) Compensation of Employees	3,000
(iii) Dividend	200
(iv) Change in Stock	300
(v) Net Factor Income to Abroad	700
(vi) Net Indirect Taxes	800
(vii) Consumption of Fixed Capital	1,000
(viii) Interest	600
(ix) Profits	800
(x) Mixed Income	6,000
(xi) Net Current Transfers to Rest of the World	(-) 200

Answer:
(i) Gross National Product at Factor Cost (GNP_FC) = Compensation of Employees + Rent + Interest + Profits + Mixed Income + Consumption of Fixed Capital – Net Factor Income to Abroad
= 3,000 + 400 + 600 + 800 + 6,000 + 1,000 – 700
= ₹ 11,100 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 93.
From the following data calculate
(i) Net Domestic Product at Market Price (ii) Net National Disposable Income (Delhi (C) 2016)

Particulars	₹ (in Crore)
(i) Interest	600
(ii) Net Current Transfers from Rest of the World	200
(iii) Consumption of Fixed Capital	800
(iv) Rent	700
(v) Net Factor Income from Abroad	100
(vi) Net Indirect Taxes	850
(vii) Profit	1,200
(viii) Social Security Contribution by Employers	700
(ix) Mixed Income of Self-employed	8000
(x) Compensation of Employees	5,000
(xi) Dividend	400

Answer:
(i) Net Domestic Product at Market Price (NDP_MP)
= Compensation of Employees + Rent + Interest+Profit + Mixed Income of Self-employed + Net Indirect Taxes
= 5,000 + 700 + 600 + 1,200 + 8,000 + 850
= ₹ 16,350 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 94.
Giving reason, explain how the following should be treated in the estimation of National Income. (All India 2015)
(i) Payment of interest by a firm to a bank.
(ii) Payment of interest by a bank to an individual.
(iii) Payment of interest by an individual to a bank.
Answer:
(i) It will be ‘included’ in the estimation of National Income, as it is a factor income. Also, firms take loans for investment purposes.
(ii) It will be ‘included’ in the estimation of National Income as it is a factor income.
(iii) It will ‘not be included’ in the estimation of National Income as consumer takes loan for consumption
purposes.

Question 95.
Calculate the ‘National Income’ and ‘Private Income’. (All India 2015)

Particulars	₹ (in Crore)
(i) Rent	600
(ii) Net Factor Income to Abroad	200
(iii) National Debt Interest	800
(iv) Wages and Salaries	700
(v) Current Transfers from Government	100
(vi) Undistributed Profits	850
(vii) Corporation Tax	1,200
(viii) Interest	700
(ix) Social Security Contributions by Employers	8000
(x) Net Domestic Product Accruing to Government	5,000
(xi) Net Current Transfers to Rest of the World	400
(xii) Dividends

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Rent + Wages and Salaries + Corporation Tax Social Security Contribution by Employers + Dividends + Undistributed Profits NDPpc = 200 +700 +30 +150 +100 + 50 + 20
= ₹ 1,250 crore
National Income (NNP_FC) = NDP_FC + Net Factor Income from Abroad (NFIA)
= 1,250 + (-10) = ₹ 1,240 crore

Private Income – Not in Syllabus.

Question 96.
Calculate Net National Product at Market Price and Personal Income. (All India 2015)

Particulars	₹ (in Crore)
(i) Transfer Payments by Government	7
(ii) Government Final Consumption Expenditure	50
(iii) Net Imports	(-)10
(iv) Net Domestic Fixed Capital Formation	60
(v) Private Final Consumption Expenditure	300
(vi) Private Income	280
(vii) Net Factor Income to Aboad	(-)5
(viii) Closing Stock	8
(ix) Opening Stock	8
(x) Depreciation	12
(xi) Corporate Tax	60
(xii) Retained Earnings of Corporations	20

Answer:
Net Domestic Product at Market Price (NDP_MP) = Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock + Private Final Consumption Expenditure – Net Imports NDP_MP
= 50 + 60 + (8 – 8) 300 – (-10) = ₹ 420 crore
Net National Product at Market Price (NNP_MP)

= NDP_MP + Net Factor Income from Abroad (NFIA)
= 420 + (-5) = ₹ 415 crore

Personal Income – Not in Syllabus.

Question 97.
Calculate Net Domestic Product at Market Price and Gross National Disposable Income. (All India 2015)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	400
(ii) Opening Stock	10
(iii) Consumption of Fixed Capital	25
(iv) Imports	15
(v) Government Final Consumption Expenditure	90
(vi) Net Current Transfers to Rest of the World	5
(vii) Gross Domestic Fixed Capital Formation	80
(viii) Closing Stock	20
(ix) Exports	10
(x) Net Factor Income to Abroad	(-) 5

Answer:
Gross Domestic Product at Market Price ( GDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock + Net Exports
= 400 + 90 + 80 + (20 – 10) + (10 – 15)
= 490 + 80 + 5
= ₹ 575 crore
Net Domestic Product at Market Price (NDP_MP) = GDP_MP – Depreciation
= 575 – 25
= ₹ 550 crore

Gross National Disposable Income – Not in Syllabus.

Question 98.
Giving reason, explain how should the following be treated in estimation of National Income.
(i) Expenditure by a firm on payment of fees to a Chartered Accountant.
(ii) Payment of corporate tax by a firm.
(iii) Purchase of refrigerator by a firm for own use. (Delhi 2015)
Answer:
(i) Expenditure by a firm on payment of fees to a Chartered Accountant, will ‘not be included’ while estimation of National Income as it is an intermediate cost.
(ii) Corporate profit already forms part of national income. Hence, payment of corporate tax is ‘not included’ in national income as it is a mere transfer payment.
(iii) Purchase of refrigerator by a firm for own use will be ‘included’ while estimation of National Income, as it is a part of Private Final Consumption Expenditure.

Question 99.
Calculate National Income and Personal Disposable Income. (Delhi 2015)

Particulars	₹ (in Crore)
(i) Personal Tax	7
(ii) Private Final Consumption Expenditure	50
(iii) Undistributed Profits	(-)10
(iv) Private Income	60
(v) Government Final Consumption Expenditure	300
(vi) Corporate Tax	280
(vii) Net Domestic Fixed Capital Formation	(-)5
(viii) Net Indirect Tax	8
(ix) Depreciation	8
(x) Change in Stocks	12
(xi) Net Imports	60
(xii) Net Factor Income to Abroad	20

Answer:
Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stocks + Net Exports
= 600 +100 + 70 + (-10) + (-20)
= 700 + 70 – 30 = 700 + 40
= ₹ 740 crore
National Income (NNP_FC)=NDP_MP + Net Factor Income from Abroad – Net Indirect Tax
= 740 + (-10) – 60
= 740 – 70 = ₹ 670 crore
‘Personal Disposable Income – Not in Syllabus.

Question 100.
Calculate ‘Gross National Product at Market Price’ and ‘Net National Disposable Income’. (Delhi 2015)

Particulars	₹ (in Crore)
(i) Rent	100
(ii) Net Current Transfers to Rest of the World	30
(iii) Social Security Contributions by Employers	47
(iv) Mixed Income	600
(v) Gross Domestic Capital Formation	140
(vi) Royalty	20
(vii) Interest	110
(viii) Compensation of Employees	500
(ix) Net Domestic Capital Formation	120
(x) Net Factor Income from Abroad	(-) 10
(xi) Net Indirect Tax	150
(xii) Profit	200

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Rent + Mixed Income + Royalty + Interest + Compensation of Employees + Profit
= 100 + 600 + 20 + 110 + 500 + 200
= ₹ 1,530 crore
Gross Domestic Product at Market Price (GDP_MP) = NDP_FC + Depreciation + Net Indirect Tax
= 1,530 + 20 + 150 = ₹ 1,700 crore
Gross National Product at Market Price (GNP_MP) =GDP_MP + Net Factor Income from Abroad
= 1,700 + (-10) = ₹ 1,690 crore

Net National Disposable Income – Not in Syllabus.

Question 101.
Calculate ‘Net Domestic Product at Factor Cost’ and ‘Gross National Disposable Income’. (Delhi 2015)

Particulars	₹ (in Crore)
(i) Net Current Transfers to Abroad	15
(ii) Private Final Consumption Expenditure	800
(iii) Net Imports	(-)20
(iv) Net Domestic Capital Formation	100
(v) Net Factor Income to Abroad	10
(vi) Depreciation	50
(vii) Change in Stocks	17
(viii) Net Indirect Tax	120
(ix) Government Final Consumption Expenditure	200
(x) Exports	30

Answer:
Net Domestic Product at Market Price (NDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation – Net Imports
NDP_MP = 800 + 200 + 100 – (-20) = ₹ 1,120 crore
Net Domestic Product at Factor Cost (NDP_FC) = NDP_MP – Net Indirect Tax
NDP_FC = 1,120 – 120 = ₹ 1,000 crore

Gross National Disposable Income – Not in Syllabus.

Question 102.
Giving reasons explain how should the following be treated in estimation of National Income. (Foreign 2015)
(i) Payment of corporate tax by a firm.
(ii) Purchase of machinery by a factory for own use.
(iii) Purchase of uniforms for nurses by a hospital.
Answer:
(i) Corporate profit already forms part of national income. Hence, payment of corporate tax is ‘not included’ in national income as it is a mere transfer payment.
(ii) Purchase of machinery by a factory for own use is ‘included’ in the estimation of National Income as it is an investment expenditure.
(iii) Purchase of uniforms for nurses by a hospital will ‘not be included’ in the computation of National Income as it is a part of intermediate consumption.

Question 103.
Calculate the Gross National Product at Market Price and Personal Income. (Foreign 2015)

Particulars	₹ (in Crore)
(i) Wages and Salaries	800
(ii) Personal Tax	150
(iii) Operating Surplus	200
(iv) Undistributed Profits	10
(v) Social Security Contributions by Employers	100
(vi) Corporate Tax	50
(vii) Net Factor Income to Abroad	(-) 20
(viii) Personal Disposable Income	1200
(ix) Net Indirect Tax	70
(x) Consumption of Fixed Capital	30
(xi) Mixed Income of Self-employed	500
(xii) Royalty	9

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Wages and Salaries + Social Security contribution by employers + Operating Surplus + Mixed Income of Self-employed
NDP_FC = 800 + 100 + 200 + 500
= ₹ 1,600 crore
Gross National Product at Market Price
(GNP_MP) = NDP_FC + Consumption of Fixed Capital – Net Factor Income to Abroad + Net Indirect Tax
= 1,600 + 30 – (-20) + 70
= ₹ 1,720 crore

Personal Income – Not in Syllabus.

Question 104.
From the following data calculate (i) Gross National Product at Market Price and (ii) Net National Disposable Income. (All India (C) 2015)

Particulars	₹ (in Crore)
(i) Dividends	300
(ii) Compensation of Employees	3,000
(iii) Rent	500
(iv) Depreciation	200
(v) Interest	800
(vi) Net Factor Income to Abroad	100
(vii) Mixed Income	5,000
(viii) Net Indirect Taxes	400
(ix) Profit	1,500
(x) Net Current Transfers to Abroad	(-) 50

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Compensation of Employees + Rent + Interest + Profit + Mixed Income
= 3000 + 500 + 800 + 1,500 + 5,000
= ₹ 10,800 crore
(i) Gross National Product at Market Price (GNP_MP) = NDPFC + Depreciation – Net Factor Income to Abroad + Net Indirect Taxes
= 10300 + 200 – 100 + 400
= ₹ 11300 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 105.
Calculate (i) National Income and (ii) Gross National Disposable Income. (Delhi to 2015)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	500
(ii) Net Domestic Fixed Capital Formation	100
(iii) Net Factor Income from Abroad	30
(iv) Change in Stock	20
(v) Net Exports	40
(vi) Net Indirect Taxes	50
(vii) Mixed Income	300
(viii) Government Final Consumption Expenditure	200
(ix) Consumption of Fixed Capital	60
(x) Net Current Transfers to Abroad	(-) 10

Answer:
Net Domestic Product at Market Price (NDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock + Net Exports
= 500 + 200 + 100 + 20 + 40
= ₹ 860 crore
(i) National Income (NNP_FC) = NDP_MP. + Net Factor Income from Abroad – Net Indirect Taxes
= 860 + 30 – 50
= ₹ 840 crore

(ii) Gross National Disposable Income – Not in Syllabus.

Question 106.
Calculate Net Domestic Product at Factor Cost and Net National Disposable Income from the following. (Delhi 2014)

Particulars	₹ (in Crore)
(i) Net Current Transfers to Abroad	5
(ii) Government Final Consumption Expenditure	100
(iii) Net Indirect Tax	80
(iv) Private Final Consumption Expenditure	300
(v) Consumption of Fixed Capital	20
(vi) Gross Domestic Fixed Capital Formation	50
(vii) Net Imports	10
(viii) Closing Stock	25
(ix) Opening Stock	25
(x) Net Factor Income to Abroad	10

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock (Closing Stock – Opening Stock) – Net Imports – Net Indirect Taxes – Consumption of Fixed Capital
= 300 + 100 + 50 + (25 – 25) – (-10) – 80 – 20
=460 – 100 = ₹ 360 arab

Net National Disposable Income (NNDI) – Not in Syllabus.

Question 107.
Giving reason explain how should the following be treated in estimating Gross Domestic Product at Market Price? (Delhi 2014)
(i) Fees to a mechanic paid by a firm.
(ii) Interest paid by an individual on a car loan taken from a bank.
(iii) Expenditure on purchasing a car for use by a firm.
Answer:
(i) It is not included’ in the GDP_MP, as it is an intermediate expenditure incurred by firm.
(ii) It is not included’ in the estimation of GDP_MP because loan is not being used for production purpose.
(iii) It is ‘included’ in the estimation of GDP_MP because it is a part of final expenditure by a firm.

Question 108.
Calculate Net National Product at Factor Cost and Private Income from the following. (Delhi 2014)

Particulars	₹ (in Crore)
(i) National Debt Interest	60
(ii) Wages and Salaries	600
(iii) Net Current Transfers to Abroad	20
(iv) Rent	200
(v) Transfer Payments by Government	70
(vi) Interest	300
(vii) Net Domestic Product at Factor Cost Accruing to Government	400
(viii) Social Security Contributions by Employers	100
(ix) Net Factor Income Paid to Abroad	50
(x) Profits	300

Answer:
Net National Product at Factor Cost (NNP_FC)
= Wages and Salaries + Rent + Interest + Profits + Social Security Contributions by Employers – Net Factor Income Paid to Abroad
= 600 + 200 + 300 + 300 + 100 – 50
= 1,500 – 50 = ₹ 1,450 arab

‘Private Income – Not in Syllabus.

Question 109.
Calculate National Income and Net National Disposable Income from the following. (All India 2014)

Particulars	₹ (in Crore)
(i) Net Change in Stocks	50
(ii) Government Final Consumption Expenditure	100
(iii) Net Current Transfers to Abroad	30
(iv) Gross Domestic Fixed Capital Formation	200
(v) Private Final Consumption Expenditure	500
(vi) Net Imports	40
(vii) Depreciation	70
(viii) Net Factor Income to Abroad	(-)10
(ix) Net Indirect Tax	120
(x) Net Capital Transfers to Abroad	25

Answer:
National Income (NNP_FC)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Net Change in Stocks – Net Imports – Depreciation – Net Indirect Tax – Net Factor Income to Abroad
= 500 + 100 + 200 + 50 – 40 – 70 – 120 – (-10)
= 860 – 230
= ₹ 630 arab

Net National Disposable Income (NNDI) – Not in Syllabus.

Question 110.
Calculate Net National Product at Market Price and Gross National Disposable Income from the following. (All India 2014)

Particulars	₹ (in Crore)
(i) Closing Stock	10
(ii) Consumption of Fixed Capital	40
(iii) Private Final Consumption Expenditure	600
(iv) Exports	50
(v) Opening Stock	20
(vi) Government Final Consumption Expenditure	100
(vii) Imports	60
(viii) Net Domestic Fixed Capital Formation	80
(ix) Net Current Transfers to Abroad	(-)10
(x) Net Factor Income to Abroad	30

Answer:
Net National Product at Market Price (NNP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock (Closing Stock – Opening Stock) + Net Exports (Exports – Imports) – Net Factor Income to Abroad
= 600 + 100 +80 + (10 – 20) + (50 – 60) – 30
= 780 – 50 = ₹ 730 arab

Gross National Disposable Income (GNDI) – Not in Syllabus.

Question 111.
How should the following be treated in estimating National Income of a country? You must give reason for your answer.
(i) Taking care of aged parents.
(ii) Expenditure on providing police services by the government. (All India 2014)
Answer:
(i) It is ‘included’in the estimation of National Income. Component of care that can be monetised is included in national income as payment is being made, so that parents can consume final goods and services.
(ii) It is ‘included’ in the estimation of National Income as it is a part of government final consumption expenditure.

Question 112.
Calculate Net National Product at Factor Cost and Gross National Disposable Income from the following. (All India 2014)

Particulars	₹ (in Crore)
(i) Social Security Contributions by Employees	90
(ii) Wages and Salaries	800
(iii) Net Current Transfers to Abroad	(-)30
(iv) Rent and Royalty	300
(v) Net Factor Income to Abroad	50
(vi) Social Security Contributions by Employers	100
(vii) Profit	500
(viii) Interest	400
(ix) Consumption of Fixed Capital	200
(x) Net Indirect Tax	250

Answer:
Net National Product at Factor Cost (NNP_FC) = Wages and Salaries + Social Security Contribution by Employers + Rent and Royalty + Profit + Interest – Net Factor Income to Abroad
= 800 + 100 + 300 + 500 + 400 – 50
= ₹ 2,050 arab

Gross National Disposable Income (GNDI) – Not in Syllabus.

Question 113.
Calculate National Income and Gross National Disposable Income from the following. (Delhi 2014)

Particulars	₹ (in Crore)
(i) Net Current Transfers to Abroad	(-) 15
(ii) Private Final Consumption Expenditure	600
(iii) Subsidies	20
(iv) Government Final Consumption Expenditure	100
(v) Indirect Tax	120
(vi) Net Imports	20
(vii) Consumption of Fixed Capital	35
(viii) Net Change in Stocks	(-) 10
(ix) Net Factor Income to Abroad	5
(x) Net Domestic Capital Formation	110

Answer:
National Income (NNP_FC)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation – Net Imports – Net Indirect Tax – Net Factor Income to Abroad
= 600 + 100 + 110 – 20 – (120 – 20) – 5
= 810 – 125 = ₹ 685 arab

Gross National Disposable Income (GNDI) – Not in Syllabus.

Question 114.
Calculate National Income: (All India (C) 2014)

Particulars	₹ (in Crore)
(i) Net Current Transfer from Rest of the World	30
(ii) Private Final Consumption Expenditure	400
(iii) Net Domestic Capital Formation	100
(iv) Change in Stock	50
(v) Depreciation	20
(vi) Government Final Consumption Expenditure	200
(vii) Net Exports	40
(viii) Net Indirect Taxes	80
(ix) Net Factor Income Paid to Abroad	10

Answer:
Net Domestic Product at Market Price (NDP_MP) = Private Final Consumption Expenditure
+ Net Domestic Capital Formation + Government Final Consumption Expenditure + Net Exports
= 400 + 100 + 200 + 40 = 1740 crore
Net National Product at Factor Cost (NNP_FC or National Income)
= NDP_MP – Net factor income paid to abroad – Net indirect taxes
= 740 – 10 – 80 = ₹ 650 crore

Question 115.
Calculate National Income. (Delhi (C) 2014)

Particulars	₹ (in Crore)
(i) Net Domestic Capital Formation	150
(ii) Government Final Consumption Expenditure	300
(iii) Net Factor Income from Abroad	(-) 20
(iv) Private Final Consumption Expenditure	600
(v) Depreciation	30
(vi) Net Exports	50
(vii) Net Indirect Taxes	90
(viii) Net Current Transfers from Rest of the World	40

Answer:
National Income (NNP_FC)
= Government Final Consumption Expenditure + Private Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports – Net Indirect Taxes + Net Factor Income from Abroad
= 300 + 600 +150 + 50 – 90 + (-20) = ₹ 990 crore

Question 116.
How should the following be treated while estimating National Income? You must give reason in support of your answer. (Foreign 2014)
(i) Bonus paid to employees.
(ii) Addition to stocks during a year.
(iii) Purchase of taxi by a taxi driver.
Answer:
(i) Yes, it is ‘included’ while estimation of National Income as it is a part of compensation of employees.
(ii) Yes, it is ‘included’ while estimation of National Income as it is considered as a change in stock during the year.
(iii) Yes, it is ‘included’ while estimation of National Income as it is an investment expenditure by the producer.

Question 117.
Calculate Gross National Product at Market Price and Net National Disposable Income from the following. (Foreign 2014)

Particulars	₹ (in Crore)
(i) Net Factor Income to Abroad	(-) 10
(ii) Net Current Transfers to Abroad	20
(iii) Wages and Salaries	400
(iv) Corporation Tax	50
(v) Profit after Corporation Tax	150
(vi) Social Security Contributions by Employers	50
(vii) Rent	100
(viii) Interest	70
(ix) Mixed Income of Self-employed	300
(x) Net Indirect Tax	140
(xi) Consumption of Fixed Capital	80

Answer:
Gross National Product at Market Price (GNP_MP)
= Wages and Salaries + Profit after Corporation Tax + Corporation Tax + Social Security Contributions by Employers + Rent + Interest + Mixed Income Self-employed + Net Indirect Taxes (NIT) + Net Factor Income from Abroad + Consumption of Fixed Capital
= 400 + 150 + 50 + 50 + 100 + 70 + 300 + 140 + (-10) + 80
= ₹ 1,330 arab

Net National Disposable Income (NNDI) – Not in Syllabus.

Question 118.
Calculate National Income from the following data. (Delhi 2013)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	900
(ii) Profit	100
(iii) Government Final Consumption Expenditure	400
(iv) Net Indirect Taxes	100
(v) Gross Domestic Capital Formation	250
(vi) Change in Stock	50
(vii) Net Factor Income from Abroad	(-) 40
(viii) Consumption of Fixed Capital	20
(ix) Net Imports	30

Answer:
National Income (NNP_FC)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation – Net Imports – Net Indirect Taxes – Consumption of Fixed Capital + Net Factor Income from Abroad
= 900 + 400 + 250 – 30 – 100 – 20 + (-40)
= 1,550 – 190 = ₹ 1,360 crore

Question 119.
Giving reason explain how should the following be treated in estimating national income
(i) Electricity consumed by a firm
(ii) Pension paid to the retired employees
(iii) Free treatment of the poor in hospitals (Delhi (C) 2013)
Answer:
(i) Electricity consumed by a firm It will ‘not be included’ in national income because it is an intermediate product and if included will create the problem of double counting.
(ii) Pension paid to the retired employees It is ‘included’ in national income because it is part of compensation of employees.
(iii) Free treatment of the poor in hospitals It is not included in national income because poor people are provided free treatment not in return of any productive service. This is a transfer payment.

Question 120.
Calculate Gross National Product at Market Price from the following data. (All India 2013)

Particulars	₹ (in Crore)
(i) Compensation of Employees	200
(ii) Interest	500
(iii) Rent	700
(iv) Profits	800
(v) Employers Contribution to Social Security Schemes	200
(vi) Dividends	300
(vii)	100
(viii) Net Indirect Taxes	250
(ix) Net Exports	70
(x) Net Factor Income to Abroad	150
(xi) Mixed Income of Self-employed	1500

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Compensation of Employees + Interest + Rent + Profits + Mixed Income of Self-employed
= 2,000 + 500 + 700 + 800 + 1,500 = ₹ 5,500 crore
Gross National Product at Market Price (GNP_MP) = NDP_FC + Net Indirect Taxes – Net Factor Income to Abroad + Consumption of Fixed Capital
= 5,500 + 250 – 150 + 100
= 5,850 – 150 = ₹ 5,700 crore

Question 121.
Find out (i) Net National Product at Market Price and (ii) Gross National Disposable Income from the following data. (Delhi 2012)

Particulars	₹ (in Crore)
(i) Net Current Transfers from Abroad	(-) 10
(ii) Wages and Salaries	1,000
(iii) Net Factor Income from Abroad	(-) 20
(iv) Social Security Contributions by Employers	100
(v) Net Indirect Tax	80
(vi) Rent	300
(vii) Consumption of Fixed Capital	120
(viii) Corporation Tax	50
(ix) Undistributed Profits	60
(x) Dividend	200
(xi) Interest	400

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Wages and Salaries + Social Security Contributions by Employers + Rent + Corporation Tax + Dividend + Undistributed Profit + Interest
= 1,000 + 100 + 300 + 50 + 200 + 60 + 400
= ₹ 2,110 crore

(i) Net National Product at Market Price (NNP_MP) = NDP_FC + Net Indirect Tax + Net Factor Income from Abroad
= 2,110 + 80 + (-20) = ₹ 2,170 crore

(ii) Gross National Disposable Income (GNDI) – Not in Syllabus.

Question 122.
Find out
(i) National Income
(ii) Net National Disposable Income (Delhi 2012)

Particulars	₹ (in Crore)
(i) Factor Income from Abroad	15
(ii) Private Final Consumption Expenditure	600
(iii) Consumption of Fixed Capital	50
(iv) Government Final Consumption Expenditure	200
(v) Net Current Transfer to Abroad	(-) 5
(vi) Net Domestic Fixed Capital Formation	110
(vii) Net Factor Income to Abroad	10
(viii) Net Imports	(-) 20
(ix) Net Indirect Tax	70
(x) Change in Stock	(-) 10

Answer:
Net Domestic Product at Market Price (NDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock – Net Imports
NDP_MP = 600 + 200 + 110 + (-10) – (-20)
= ₹ 920 crore

(i) National Income (NNP_FC) = NDP_MP – Net Factor Income to Abroad – Net Indirect Taxes
= 920 – 10 – 70 = ₹ 840 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 123.
Find out
(i) Gross National Product at Market Price
(ii) Net Current Transfers from Abroad (All India 2012)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	1,000
(ii) Depreciation	100
(iii) Net National Disposable Income	1,500
(iv) Closing Stock	20
(v) Government Final Consumption Expenditure	300
(vi) Net Indirect Tax	50
(vii) Opening Stock	20
(viii) Net Domestic Fixed Capital Formation	110
(ix) Net Exports	15
(x) Net Factor Income to Abroad	(-) 10

Answer:
(i) Gross National Product at Market Price
(GNP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock (Closing Stock – Opening Stock) + Depreciation + Net Exports – Net Factor Income to Abroad
= 1,000 + 300 +110 + (20 – 20) +100 + 15 – (-10)
= ₹ 1,535 crore

(ii) Net Current Transfer from Abroad- Not in Syllabus.

Question 124.
Find out
(i) National Income
(ii) Net National Disposable Income (All India 2012)

Particulars	₹ (in Crore)
(i) Net Imports	(-) 10
(ii) Net Domestic Fixed Capital Formation	100
(iii) Private Final Consumption Expenditure	600
(iv) Consumption of Fixed Capital	60
(v) Change in Stock	(-) 50
(vi) Government Final Consumption Expenditure	200
(vii) Net Factor Income to Abroad	20
(viii) Net Current Transfers to Abroad	30
(ix) Net Indirect Tax	70
(x) Factor Income from Abroad	10

Answer:
(i) Gross Domestic Product at Market Price
(GDP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in Stock + Consumption of Fixed Capital – Net Imports
= 600 + 200 + 100 + (-50)+ 60 – (-10) = 970 – 50 = ₹ 920 crore
Again,
National Income (NNP_FC) = GDP_MP – Net Factor Income to Abroad – Net Indirect Tax – Consumption of Fixed Capital
= ₹ 920 – 20 – 70 – 60
= ₹ 770 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

Question 125.
How will you treat the following in the calculation of Gross Domestic Product of India? Give reasons for your answer. (AII India (C) 2012)
(i) Profits earned by a branch of foreign bank in India.
(ii) Salaries of Indian employees working in embassy of Japan in India.
(iii) Salary of residents of Japan working in Indian embassy in Japan.
Answer:
(i) Profits earned by a branch of foreign bank in India will be included in the domestic product of India as the foreign bank is located within the domestic territory of India.
(ii) Salaries of Indian employees working in embassy of Japan in India is not a part of domestic product of India because Embassy of Japan in India is not a part of domestic territory of India.
(iii) Indian embassy in Japan is a part of domestic territory of India, therefore salaries paid to the residents of Japan working in Indian embassy is a part of domestic product of India.

Question 126.
From the following data calculate Gross National Product at Factor Cost by (i) Income method, and (ii) Expenditure method. (All India (C) 2012)

Particulars	₹ (in Crore)
(i) Government Final Consumption Expenditure	200
(ii) Private Final Consumption Expenditure	400
(iii) Profits	160
(iv) Net Indirect Taxes	60
(v) Rent	70
(vi) Interest	50
(vii) Compensation of Employees	300
(viii) Exports	65
(ix) Imports	95
(x) Gross Domestic Capital Formation	80
(xi) Consumption of Fixed Capital	10
(xii) Net Factor Income to Abroad	50

Answer:
(i) Gross National Product at Factor Cost (GNP_FC) by Income Method
= Profits + Rent + Interest + Compensation of Employees – Net Factor Income to Abroad + Consumption of Fixed Capital
= 160 + 70 + 50 + 300 – 50 + 10 = ₹ 540 crore

(ii) Gross National Product at Factor Cost (GNP_FC) by Expenditure Method
= Government Final Consumption Expenditure + Private Final Consumption Expenditure + Exports – Imports + Gross Domestic Capital Formation – Net Indirect Taxes – Net Factor Income to Abroad
= 200 + 400 + 65 – 95 + 80 – 60 – 50 = ₹ 540 crore

Question 127.
Calculate National Income by (i) Income method and (ii) Expenditure method from the following data. (All India (C) 2012)

Particulars	₹ (in Crore)
(i) Profits	200
(ii) Private Final Consumption Expenditure	440
(iii) Government Final Consumption Expenditure	250
(iv) Compensation of Employees	350
(v) Gross Domestic Capital Formation	90
(vi) Consumption of Fixed Capital	20
(vii) Net Exports	(-) 20
(viii) Interest	60
(ix) Rent	70
(x) Net Factor Income to Abroad	50
(xi) Net Indirect Taxes	60

Answer:
(i) National Income by Income Method
= Profits + Compensation of Employees + Interest + Rent – Net Factor Income to Abroad
= 200 + 350 + 60 + 70-50 = ₹ 630 crore

(ii) National Income by Expenditure Method
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports – Net Indirect Taxes – Consumption of Fixed Capital – Net Factor Income to Abroad
= 440 + 250 + 90 + (-20) – 60 – 20 – 50 = ₹ 630 crore

Question 128.
Calculate National Income by (i) income method and (ii) expenditure method from the following data. (All India (C) 2012)

Particulars	₹ (in Crore)
(i) Government Final Consumption Expenditure	2,000
(ii) Net Domestic Capital Formation	600
(iii) Consumption of Fixed Capital	70
(iv) Net Exports	60
(v) Net Indirect Taxes	200
(vi) Private Final Consumption Expenditure	4,000
(vii) Net Factor Income to Abroad	60
(viii) Compensation of Employees	3,660
(ix) Profits	1,500
(x) Rent	500
(xi) Interest	800
(xii) Dividend	300

Answer:
National Income by Income Method = Compensation of Employees + Profits + Rent + Interest – Net Factor Income to Abroad
= 3,660 + 1,500 + 500 + 800 – 60 = ₹ 6,400 crore
National Income by Expenditure Method = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports – Net Indirect Taxes – Net Factor Income to Abroad
= 4,000 + 2,000 + 600 + 60 – 200 – 60 = ₹ 6,400 crore

Question 129.
Calculate Gross National Product at Factor Cost by (i) Income method, and (ii) expenditure method, from the following data. (Delhi (C) 2012)

Particulars	₹ (in Crore)
(i) Private Final Consumption Expenditure	800
(ii) Government Final Consumption Expenditure	300
(iii) Compensation of Employees	600
(iv) Net Imports	50
(v) Gross Domestic Capital Formation	150
(vi) Consumption of Fixed Capital	20
(vii) Net Indirect Taxes	100
(viii) Net Factor Income from Abroad	(-) 70
(ix) Dividend	150
(x) Rent	120
(xi) Interest	80
(xii) Undistributed Profits	80
(xiii) Social Security Contributions by Employers	60
(xiv) Corporate Tax	50

Answer:
(i) Gross National product at Factor Cost (GNP_FC) by Income method
= Compensation of Employees + Dividend + Undistributed Profits + Corporate Tax + Rent+Interest + Net Factor Income from Abroad + Consumption of Fixed Capital
= 600 + 150 + 80 + 50 + 120 + 80 + (-70) + 20
= ₹ 1,030 crore

(ii) Gross National Product at Factor Cost (GNP_FC) by Expenditure method
= Private Final Consumption Expenditure+Government Final Consumption Expenditure – Net Imports + Gross Domestic Capital Formation – Net Indirect Tax+Net Factor Income from abroad
= 800 + 300 – 50 + 150 – 100 + (-70) = ₹ 1,030 crore

Question 130.
Calculate (i) Net Domestic Product at Factor Cost and (ii) Private Income from the following data. (All India 2011)

Particulars	₹ (in Crore)
(i) Domestic Product Accruing to Government	300
(ii) Wages and Salaries	1,000
(iii) Net Current Transfers to Abroad	(-) 20
(iv) Rent	100
(v) Interest Paid by Production Units	130
(vi) National Debt Interest	30
(vii) Corporation Tax	50
(viii) Current Transfers by Government	40
(ix) Contribution to Social Security Schemes by Employers	200
(x) Dividends	100
(xi) Undistributed Profits	20
(xii) Net Factor Income from Abroad	0

Answer:
(i) Net Domestic Product at Factor Cost (NDP_FC) = Wages and Salaries + Rent + Interest Paid by Production Units + Corporation Tax + Dividends + Undistributed Profits + Contribution to Social Security Schemes by Employers
= 1,000 + 100 + 130 + 50 + 100 + 20 + 200
= ₹ 1,600 crore

(ii) Private income – Not in Syllabus.

Question 131.
Calculate (i) Net National Product at Market Price and (ii) Private Income from the following data. (All India 2011)

Particulars	₹ (in Crore)
(i) Net Current Transfers to Abroad	30
(ii) Mixed Income	600
(iii) Subsidies	20
(iv) Operating Surplus	200
(v) National Debt Interest	70
(vi) Net Factor Income to Abroad	10
(vii) Compensation of Employees	1,400
(viii) Indirect Tax	100
(ix) Domestic Product Accruing to Government	350
(x) Current Transfers by Government	50

Answer:
(i) Net National Product at Market Price (NNP_MP) = Compensation of Employees + Operating Surplus + Mixed Income + (Indirect Tax – Subsidies) – Net Factor Income to Abroad
= 1,400 + 200 + 600 + (100 – 20) – 10
= ₹ 2,270 crore

(ii) Private Income – Not in Syllabus.

Question 132.
Calculate (i) Gross National Product at Market Price and and (ii) Personal Disposable Income from the following data. (All India 2011)

Particulars	₹ (in Crore)
(i) Net Factor Income to Abroad	10
(ii) Private Income	1,700
(iii) Operating Surplus	300
(iv) Corporation Tax	150
(v) Undistribued Profits	30
(vi) Mixed Income	500
(vii) Consumption of Fixed Capital	100
(viii) Personal Taxes	200
(ix) Compensation of Employees	1,200
(x) Net Indirect Tax	250

Answer:
(i) Gross National Product at Market Price (GNP_MP) = Operating Surplus + Mixed Income + Compensation of Employees + Net Indirect Tax – Net Factor Income to Abroad + Consumption of Fixed Capital
= 300 + 500 + 1,200 + 250 – 10 + 100 = ₹ 2340 crore

(ii) Personal Disposable Income – Not in Syllabus.

Question 133.
Calculate National Income and Gross National Disposable Income from the following. (Delhi 2011)

Particulars	₹ (in Crore)
(i) Net Current Transfers to the Rest of the World	(-) 5
(ii) Private Final Consumption Expenditure	500
(iii) Consumption of Fixed Capital	20
(iv) Net Factor Income to Abroad	(-) 10
(v) Government Final Consumption Expenditure	200
(vi) Net Indirect Tax	100
(vii) Net Domestic Fixed Capital Formation	120
(viii) Net Imports	30
(ix) Change in Stock	(-) 20

Answer:
National Income (NNP_FC) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in S took+Consumption of Fixed Capital – Net Imports – Net Indirect Tax – Net Factor Income to Abroad – Consumption of Fixed Capital
= 500 + 200 + 120 + (-20) + 20 – 30 – 100 – (-10) – 20
= 700 + 100 + 10 – 130
= ₹ 680 crore

Gross National Disposable Income (GNDI) – Not in Syllabus

Question 134.
Calculate Net National Product at Market Price and Gross National Disposable Income. (Delhi 2011)

Particulars	₹ (in arab)
(i) Consumption of Fixed Capital	40
(ii) Change in Stocks	(-) 10
(iii) Net Imports	20
(iv) Gross Domestic Fixed Capital Formation	100
(v) Private Final Consumption Expenditure	800
(vi) Net Current Transfer to Rest of the World	5
(vii) Government Final Consumption Expenditure	250
(viii) Net Factor Income to Abroad	40
(ix) Net Indirect Tax	130

Answer:
Net National Product at Market Price (NNP_MP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock – Consumption of Fixed Capital – Net Factor Income to Abroad – Net Imports
NNP_MP = 800 + 250 + 100 + (-10) – 40 – 40 – 20
= 1,150 – 110
= ₹ 1,040 arab

Gross National Disposable Income (GNDI) – Not in Syllabus.

Question 135.
Find out Gross National Product at Market price and Net National Disposable Income from the following. (Delhi 2011)

Particulars	₹ (in arab)
(i) Opening Stock	50
(ii) Private Final Consumption Expenditure	1,000
(iii) Net Current Transfers to Abroad	5
(iv) Closing Stock	40
(v) Net Factor Income to Abroad	(-) 10
(vi) Government Final Consumption Expenditure	300
(vii) Consumption of Fixed Capital	30
(viii) Net Imports	20
(ix) Net Domestic Fixed Capital Formation	150

Answer:
Gross National Product at Market Price (GNP_MP)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Closing Stock – Opening Stock – Net Imports – Net Factor Income to Abroad + Consumption of Fixed Capital
= 1,000 + 300 + 150 + 40 – 50 – 20 – (-10) + 30
= 1,530 – 70 = ₹ 1,460 arab

Net National Disposable Income – Not in Syllabus.

Question 136.
Calculate (i) Gross Domestic Product at Market Price and (ii) Factor Income from Abroad, from the following data. (All India 2010)

Particulars	₹ (in Crore)
(i) Profits	500
(ii) Exports	40
(iii) Compensation of Employees	1,500
(iv) Gross National Product at Factor Cost	2,800
(v) Net Current Transfers from Rest of The World	90
(vi) Rent	300
(vii) Interest	400
(viii) Factor Income to Abroad	120
(ix) Net Indirect Taxes	250
(x) Net Domestic Capital Formation	650
(xi) Gross Fixed Capital Formation	700
(xii) Change in Stock	50

Answer:
(i) Gross Domestic Product at Market Price (GDP_MP) = Compensation of Employees + Profits + Rent + Interest + Gross Fixed Capital Formation + Change in Stock – Net Domestic Capital Formation + Net Indirect Taxes
= 1,500 + 500 + 300 + 400 + 700 + 50 – 650 + 250 = ₹ 3,050 crore

(ii) Gross National Product at Factor Cost (GNP_FC) = GDP_MP – Net Indirect Taxes + Factor Income from Abroad – Factor Income to Abroad
2,800 = 3050 – 250 + Factor Income from Abroad – 120
2,800 = 2680 + Factor Income from Abroad
⇒ Factor Income from Abroad = 2,800 – 2,680 = ₹ 120 crore

Question 137.
How will you treat the following while estimating National Income of India?
(i) Dividend received by an Indian firm from its investment in shares of a foreign company.
(ii) Money received by a family in India from relatives working abroad.
(iii) Interest received on loan given to a friend for purchasing a car. (Delhi 2010)
Answer:
(i) Dividend received by an Indian firm from its investment in shares of a foreign company will be ‘included’ in the estimation of National Income, as dividend is a part of profit and treated as factor income from abroad which is added to domestic income.
(ii) Money received by a family in India from relatives working abroad will ‘not be included’ while
estimating National Income, as it is merely remittance from abroad and no flow of goods or services are involved.
(iii) Interest received on loan given to a friend for purchasing a car will ‘not be included’ in the estimation of National Income as loan is given for consumption purpose.

Question 138.
How will you treat the following while estimating National Income of India? Give reasons for your answer. (All India 2010)
(i) Dividend received by a foreigner from investment in share of an Indian company.
(ii) Profits earned by a branch of an Indian bank in Canada.
(iii) Scholarship given to Indian students studying in India by a foreign company.
Answer:
(i) Dividend received by a foreigner from investment in shares of an Indian company ‘will be deducted’ from National Income as it is factor income to abroad.
(ii) Profits earned by a branch of Indian bank in Canada is factor income received from abroad. It is ‘included’ in National Income.
(iii) Scholarship given to Indian students studying in India by a foreign firm will ‘not be included’ while estimating National Income, as it is a transfer payment.

Question 139.
Explain the problem of double counting in estimating National Income, with the help of an example. Also explain, two alternative ways of avoiding the problem while estimation of National Income. (All India 2010)
Answer:
The counting of the value of a commodity more than once while estimation of National Income is called double counting. This leads to over estimation of the value of goods and services produced. In other words, problem of double counting arises when the value of intermediate goods is also added in total output, e.g. suppose if we include the price of wheat, in the price of flour and also in price of bread, then It will lead to the problem of double counting, as the price of wheat is included three time and that of flour two times.

The problem of double counting can be avoided by the use of following methods of calculating Gross Domestic Product (GDP)
(i) Final output or final product method In this method, only final products (goods and services) are added to obtain the GDP. Intermediate products are ignored. Here, final products are only those products which are ready for end use or consumption by their final users (consumers or producers).

(ii) Value added method The value added by a firm is the difference between value of output and the value of intermediate products of each firm of the country. The sum of ‘value added’ by all the firms gives us the GDP of the country. Hence, the problem of double counting is avoided.
Value Added by a Firm = Value of Output of the Firm – Intermediate Consumption of the Firm.

Question 140.
Calculate (i) Gross Domestic Product at Market Price and (ii) Factor Income to Abroad from the following data. (All India 2010)

Particulars	₹ (in Crore)
(i) Compensation of Employees	1,000
(ii) Net Exports	(-) 50
(iii) Profits	400
(iv) Interest	250
(v) Rent	150
(vi) Gross National Product at Factor Cost	1,850
(vii) Gross Domestic Capital Formation	220
(viii) Net Fixed Capital Formation	150
(ix) Change in Stock	20
(x) Factor Income from Abroad	30
(xi) Net Indirect Taxes	100

Answer:
Net Domestic Product at Factor Cost (NDP_FC) = Compensation of Employees + Rent + Interest +Profit
= 1,000 + 150 + 250 + 400 = ₹ 1,800 crore
(i) Gross Domestic Product at Market Price (GDP_MP) = NDP_FC + Net Indirect Taxes + Depreciation
= 1,800 + 100 +50 = ₹ 1,950 crore
Depreciation = 220 – (150 + 20) = 220 -170 = ₹ 50 crore

(ii) Gross National Product at Factor Cost (GNP_FC)= GDP_MP – Net Indirect Taxes + (Factor Income from Abroad – Factor Income to Abroad)
1,850 = 1,950 – 100 + (30 – Factor Income to Abroad)
⇒ Factor Income to Abroad = 1,850 – 1,820 = ₹ 30 crore

Question 141.
From the following data calculate (i) Gross Domestic Product at Market Price and (ii) Factor Income from Abroad. (All India 2010)

Particulars	₹ (in Crore)
(i) Gross National Product at Factor Cost	6,150
(ii) Net Exports	(-) 50
(iii) Compensation of Employees	3,000
(iv) Rent	800
(v) Interest	900
(vi) Profit	1,300
(vii) Net Indirect Taxes	300
(viii) Net Domestic Capital Formation	800
(ix) Gross Fixed Capital Formation	850
(x) Change in Stock	50
(xi) Dividend	300
(xii) Factor Income to Abroad	80

Answer:
(i) Gross Domestic Product at Market Price (GDP_MP) = Compensation of Employees + Rent + Interest + Profit + Net Indirect Tax + (Gross Fixed Capital Formation + Change in Stock – Net Domestic Capital formation)
= 3,000 + 800 + 900 + 1,300 + 300 + (850 + 50 – 800)
= 6,300 + 100 = ₹ 6,400 crore

(ii) Factor Income from Abroad
= GNP_FC – GDP_MP + Net Indirect Tax+Factor Income to Abroad
= 6,150 – 6,400 + 300 + 80 = 6,530 – 6,400 = ₹ 130 crore

Question 142.
From the following data, calculate (i) Gross Domestic Product at Factor Cost and (ii) Factor Income to Abroad. (Delhi 2010)

Particulars	₹ (in Crore)
(i) Compensation of Employees	800
(ii) Profits	200
(iii) Dividends	50
(iv) Gross National Product at Market Price	1,400
(v) Rent	150
(vi) Interest	100
(vii) Gross Domestic Capital Formation	300
(viii) Net Fixed Capital Formation	200
(ix) Change in Stock	50
(x) Factor Income from Abroad	60
(xi) Net Indirect Taxes	120

Answer:
(i) Gross Domestic Product at Factor Cost (GDP_FC) = Compensation of Employees + Profits + Rent + Interest + Gross Domestic Capital Formation – Net Fixed Capital Formation – Change in Stock
= 800 + 200 + 150 + 100 + 300 – 200 – 50 = 1,550 – 250 = ₹ 1,300 crore

(ii) Factor Income to Abroad GDP_FC = GNP_MP – Net Factor Income from Abroad – Net Indirect Taxes
1,300 = 1,400 – (Factor Income from Abroad – Factor Income to Abroad) – 120
1,300 = 1,400 – (60 – Factor Income to Abroad) – 120
Factor Income to Abroad = 1,300 – 1,400 + 60 + 120 = ₹ 80 crore

Question 143.
From the following data, calculate (i) Gross Domestic Product at Factor Cost and (ii) Factor Income to Abroad. (Delhi 2010)

Particulars	₹ (in Crore)
(i) Gross Domestic Capital Formation	600
(ii) Interest	200
(iii) Gross National Product at Market Price	2,800
(iv) Rent	300
(v) Compensation of Employees	1,600
(vi) Profits	400
(vii) Dividends	150
(viii) Factor Income from Abroad	50
(ix) Change in Stock	100
(x) Net Indirect Taxes	240
(xi) Net Fixed Capital Formation	400
(xii) Net Exports	(-) 30

Answer:
(i) Gross Domestic Product at Factor Cost (GDP_FC) = Compensation of Employees + Rent + Profits + Interest + (Gross Domestic Capital Formation – Net Fixed Capital Formation – Change in Stock
= 1,600 + 300 + 400 + 200 + (600 – 400 – 100)
= ₹ 2,600 crore

(ii) Net Factor Income to Abroad
GNP_MP = GDP_FC + NFIA + Net Indirect Tax
2,800 = 2,600 + (50 – Factor Income to Abroad) + 240
Factor Income to Abroad = 2,600 – 2,800 + 50 + 240 = ₹ 90 crore

Multiple Choice Questions

Question 1.
Which of the following affects national income? (Choose the correct alternative) (March 2018)
(a) Goods and Services tax
(b) Corporation tax
(c) Subsidies
(d) None of the above
Answer:
(d) None of the above

Question 2.
National Income is the sum of factor incomes securing to (Choose the correct alternative) (All India 2016)
(a) nationals
(b) economic territory
(c) residents
(d) both residents and non-residents
Answer:
(c) residents

Question 3.
Depreciation of fixed capital assets refers to (Choose the correct alternative) (Delhi 2016)
(a) normal wear and tear
(b) foreseen obsolescence
(c) Both (a) and (b)
(d) unforeseen obsolescence
Answer:
(c) Both (a) and (b)

Question 4.
………… is not included in National Income.
(a) Salary of an employee
(b) Interest on capital
(c) Profits of a company
(d) Prize won in a lottery
Answer:
(d) Prize won in a lottery

Question 5.
Under National Income accounting, those foreigners are known as non-residents of a country, who visit that country for
(a) travelling and holidays
(b) studies and sports
(c) medical treatment
(d) All of these
Answer:
(d) All of these

Question 6.
Area of operation generating domestic income refers to as
(a) production territory of a country
(b) operating territory of a country
(c) domestic territory of a country
(d) income territory of a country
Answer:
(c) domestic territory of a country

Question 7.
Under National Income concept, foreign ambassador in India is an example of
(a) resident
(b) non-resident
(c) agents
(d) normal resident
Answer:
(b) non-resident

Question 8.
Net Factor Income from Abroad (NFIA) includes
(a) net compensation of employees
(b) net income from property and entrepreneurship
(c) net retained earnings
(d) All of the above
Answer:
(d) All of the above

Question 9.
If the value of Real GDP is ₹ 1,25,000 crore and nominal GDP is ₹ 1,00,000 crore. Find the value of Current Price Index.
(a) 80
(b) 100
(c) 125
(d) 150
Answer:
(a) 80

Question 10.
From the following data, find Net National Product at Factor Cost (NNP_FC).

Items	GNPMP	Depreciation	Indirect Taxes	Subsidies
₹ (in crore)	15,000	1,000	500	150

(a) ₹ 1,400 crore
(b) ₹ 13,650 crore
(c) ₹ 1,300 crore
(d) ₹ 14,350 crore
Answer:
(b) ₹ 13,650 crore

Question 11.
If Net National Product at Factor Cost (NNP_FC) is ₹ 25,000 and Net Factor Income from Abroad (NFIA) is ₹ 4,000, then find Net Domestic Product at Factor Cost (NDP_FC)?
(a) ₹ 4,000
(b) ₹ 21,000
(c) ₹ 25,000
(d) ₹ 29,000
Answer:
(b) ₹ 21,000

Question 12.
National Income of a country can be calculated as
(a) sum total of value added by all producing units in the economy
(b) sum total of factor incomes generated in the economy
(c) sum total of expenditure on the final goods and services produced in the economy
(d) All of the above
Answer:
(d) All of the above

Question 13.
Mixed income of self-employed includes
(a) wages
(b) interest and profit
(c) rent
(d) All of these
Answer:
(d) All of these

Question 14.
Under expenditure method, the sum total of private final consumption expenditure government final consumption expenditure, gross domestic capital formation and net exports is equal to
(a) GDP_FC
(b) GDP_MP
(c) NNP_MP
(d) NDP_MP
Answer:
(b) GDP_MP

Question 15.
“National Income = National Product = National Expenditure”. This shows
(a) triplets
(b) equilibrium
(c) triple method
(d) triple identity
Answer:
(d) triple identity

Question 16.
Which of the following items are excluded in calculation of National Income under Value Added method?
i. Imputed rent of owner occupied house
ii. Purchase and sale of second hand goods
iii. Value of intermediate goods
iv. Own account production Codes
(a) (i), (ii), (iii) and (iv)
(b) Both (i) and (iv)
(c) Both (ii) and (iii)
(d) (i), (ii) and (iv)
Answer:
(c) Both (ii) and (iii)

Question 17.
Which among the given would not be included in National Income?
(a) A teacher teaching students under Sarva Shiksha Abhiyan Scheme
(b) A teacher teaching students in his college
(c) A teacher teaching in a coaching centre
(d) A teacher teaching his own daughter at home
Answer:
(d) A teacher teaching his own daughter at home

We have given these Economics Class 12 Important Questions Macroeconomics Chapter 4 Determination of Income and Employment to solve different types of questions in the exam. Go through these Determination of Income and Employment Class 12 Important Questions and Answers Solutions & Previous Year Questions to score good marks in the board examination.

Important Questions of Determination of Income and Employment Class 12 Macroeconomics Chapter 4

Question 1.
Why does consumption curve not start from the origin? (March 2018)
Answer:
Consumption curve does not start from origin due to autonomous consumption which is minimum level of consumption even when income is zero.

Question 2.
Define Aggregate Supply. (April Re-exam 2018, Delhi 2014)
Or
What is Aggregate Supply in macroeconomics? (Delhi 2015)
Or
Give the meaning of Aggregate Supply. (Foreign 2014)
Answer:
Aggregate Supply is the money value of the final goods and services or national product produced in an economy during an accounting year. It is equal to income generated.

Question 3.
Define Marginal Propensity to Consume. (All India 2017; Delhi 2014)
Answer:
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume. Symbolically,
Marginal Propensity to Consume (MPC)
= \(\frac { change in consumption (ΔC) }{ change in income(ΔY) }\)

Question 4.
What is Aggregate Demand in macroeconomics? (All India 2015)
Or
Give the meaning of Aggregate Demand. (Delhi 2012,2010)
Answer:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.

Question 5.
Name any two components of ‘Aggregate Demand’. (Foreign 2015)
Answer:
Two components of Aggregate Demand are
(i) Household consumption expenditure
(ii) Net exports

Question 6.
What is excess of exports of goods over the imports of goods called? Foreign 2014
Answer:
It is referred to as ‘net exports’.

Question 7.
Define investment. (Delhi 2014)
Answer:
Investments are additions made to the present stock of capital. They lead to an increase in capital assets, i.e. capital formation.

Question 8.
Define Average Propensity to Consume. (Delhi (C) 2012)
Answer:
The ratio between the consumption expenditure and income is known as Average Propensity to Consume. Symbolically,
= \(\frac { Consumption Expenditure (C) }{ Income (Y) }\)

Question 9.
How is the value of Marginal Propensity to Save calculated? (Delhi (C) 2012)
Or
Give the meaning of Marginal Propensity to Save. (All India 2010)
Or
Define Marginal Propensity to Save. (All India 2010)
Answer:
Marginal Propensity to Save is the ratio of change in saving with the change in income. Symbolically,
Marginal Propensity to Save (MPS)
= \(\frac { change in saving (ΔS) }{ change in Income (ΔY) }\)

Question 10.
The consumption function of an economy is : C = 40 + 0.8 Y (amount ₹ in crores). Determine that level of income where Average Propensity to Consume will be one. (All India 2019)
Answer:
APC is equal to one when Consumption (C) is equal to Income (Y), i.e. C = Y
Therefore, Y = 40 + 0.8Y
Y – 0.8Y = 40
0. 2 Y = 40
Y = \(\frac { 40 }{ 0.2 }\)
= 200
So, when income is 200, then APC will be one.

Question 11.
Which of the two, Average Propensity to Consume or Average Propensity to Save, can be negative and why? (All India 2019)
Answer:
Out of Average Propensity to Consume (APC) and Average Propensity to Save (APS), APC can never be zero as consumption is always positive. APS can be zero or negative as it depends upon saving which is zero when income is equal to consumption and negative when income is less than consumption.

Question 12.
Distinguish between Marginal Propensity to Consume and Average Propensity to Consume. Give a numerical example. (Delhi 2016)
Answer:
Differences between Marginal Propensity to Consume and Average Propensity to Consume are (any 2)

The numerical example given below will help to understand the computation of MPC and APC

Income (Y)	Consumption (C)	APC (C/Y)	ΔC	ΔY	MPC (ΔC/ΔY)
0	0	–	–	–	–
200	200	1.75	50	200	0.25
400	400	1	50	200	0.25

Question 13.
Calculate consumption expenditure in the economy whose equilibrium level of income is ₹ 20,000, autonomous consumption is ₹ 500 and Marginal Propensity to Save is 0.5. (All India 2016)
Answer:
Given, Income (Y) = ₹ 20,000; Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS ) = 0.5; Consumption Expenditure (C) = ?
We know that,
MPC = 1 – MPS = 1 – 0.5 = 0.5 C
C = C̅ + MPC(Y)
= 500 + (0.5)20,000
∴ C = 500 + 101)00
= ₹ 10,500

Question 14.
From the following data calculate Marginal Propensity to Consume.
Equilibrium level of income = ₹ 2,000
Autonomous consumption = ₹ 200 Investment expenditure = ₹ 800 (Delhi (C) 2016)
Answer:
Given Income (Y) = ₹ 2,000; Autonomous Consumption (C̅) = ₹ 200;
Investment (I) = ₹ 800
We know that. Consumption Expenditure (C) = C̅ + (MPC)Y and Y = C + I
∴ Y = C̅ + (MPC )Y + I
2,000 = 200 + (MPC) 2000 + 800
∴ MPC = \(\frac { 1000 }{ 2000 }\) = 0.5

Question 15.
What is Aggregate Demand? State its components. (All India 2016)
Answer:
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.

Following are the components of Aggregate Demand

• Household consumption expenditure
• Private investment expenditure
• Government expenditure
• Net exports

Question 16.
Which of the following cannot have a negative value? Give reasons.
(i) Average Propensity to Save
(ii) Marginal Propensity to Save (All India (C) 2015)
Answer:
(i) Average Propensity to Save (APS) represents the ratio between savings and income. When consumption expenditure is more than indome, then it gives rise to negative savings or dis-savings. In this case, APS will be negative.

(ii) Marginal Propensity to Save (MPS) represents the ratio between change in savings and change in income. As such, its value cannot be negative. It’s value ranges between 0 and 1. If the whole of income is spend on consumption, then MPS is zero. On the other hand, if whole of income is saved then MPS is one.

Question 17.
Give the meaning of Average Propensity to Save. What is its relation with Average Propensity to Consume? (Delhi (C) 2014)
Answer:
The ratio between total savings and total income in an economy at a given level of income is termed as Average Propensity to Save. Symbolically,
Average Propensity to Save (APS) = \(\frac { Saving (S) }{ Income (Y) }\)

Average Propensity to Consume (APC) is the ratio of the total consumption to total income and Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
\(\frac { Y }{ Y }\) = \(\frac { C }{ Y }\) + \(\frac { S }{ Y }\)
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC

Question 18.
Explain the distinction between ‘Autonomous Investment’ and ‘Induced investment’. (Delhi (C) 2013)
Answer:
Differences between Autonomous Investment and Induced Investment are

Basis	Autonomous Investment	Induced Investment
Motive	It is done to promote social welfare.	It is driven by profit motive.
Sector	It is generally undertaken by the government sector.	It is generally done by private sector.
Income Elasticity	It is not affected by the changes in income level.	It is affected by the changes in the income level.

Question 19.
Find consumption expenditure from the following.
Autonomous Consumption = ₹ 100 Marginal Propensity to Consume = 0.70 National Income = ₹ 1,000 (Delhi 2012)
Answer:
Here, Autonomous Consumption
(C̅) = ₹ 100,
MPC (b) = 0.70 and Income (Y) = ₹ 1,000
So, Consumption Expenditure (C) = C̅ + bY
= 100 + 0.7 × 1,000
= 100 + 700 = ₹ 800

Question 20.
Find consumption expenditure from the following.
National Income = ₹ 5,000 Autonomous Consumption = ₹ 1,000 Marginal Propensity to Consume = 0.8 (All India 2012)
Answer:
Here, Y = ₹ 5,000, C̅ = ₹ 1,000, MPC or b = 0.8
So, Consumption Expenditure (C) = C̅ + bY
= 1000 + [0.8 × 5,000]
= 1,000 + 4,000 = ₹ 5,000

Question 21.
Outline the steps taken in deriving consumption curve from the saving curve. Use diagram. (Delhi 2012)
Or
Given saving curve, derive the consumption curve and state the steps in doing so. Use diagram. (All India 2016)
Answer:
Various steps to be taken for derivation of consumption curve from saving curve are

(i) At zero level of income, savings is negative (i.e. dissavings) represented by OS. This is equal to the autonomous consumption level equal to OC̅.
(ii) We draw a 45° line passing through the origin which shows that C = Y. This is the income line.
(iii) Now, we draw a vertical line from the point E, where saving is zero. At zero level of saving, C = Y, so B is the break-event point.
(iv) The consumption curve is derived by joining C̅ and B and extending it forward.

Question 22.
Explain the relationship between Average Propensity to Consume and Average Propensity to Save. Which of these can have a negative value and when? (All India 2011)
Answer:
Relationship between average propensity to Consume and Average Propensity to Save:
The ratio between total savings and total income in an economy at a given level of income is termed as Average Propensity to Save. Symbolically,
Average Propensity to Save (APS) = \(\frac { Saving (S) }{ Income (Y) }\)

Average Propensity to Consume (APC) is the ratio of the total consumption to total income and Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
\(\frac { Y }{ Y }\) = \(\frac { C }{ Y }\) + \(\frac { S }{ Y }\)
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC

Average Propensity to Save can have negative value, when the amount of consumption expenditure is more than the income.

Question 23.
Given that National Income is ₹ 80 crore and consumption expenditure is ₹ 64 crore, find out Average Propensity to Save. When income rises to ₹ 100 crore and consumption expenditure to ₹ 78 crore, what will be the Average Propensity to Consume and Marginal Propensity to Consume? (Delhi 2011)
Answer:
Here, in first condition, Income (Y) = ₹ 80 crore
Consumption (C) = ₹ 64 crore Hence, Savings (S) = Y – C = 80 – 64 = ₹ 16 crore
Now, Average Propensity to Save (APS) = \(\frac { S }{ Y }\)
= \(\frac { 16 }{ 80 }\) = 0.20
Again, when income and consumption expenditure rises.
New Income (Y) = ₹ 100 crore; Change in Income (ΔY) = ₹ 20 crore (100 – 80)
New Consumption (C) = ₹ 78 crore; Change in Consumption (ΔC) = ₹ 14 crore (78 – 64)
So, Average Propensity to Consume (APC) = \(\frac { C }{ Y }\)
= \(\frac { 78 }{ 100 }\) = 0.78
And, Marginal Propensity to Consume (MPC)
\(\frac { ΔC }{ ΔY }\) = \(\frac { 14 }{ 20 }\)
= 0.70

Question 24.
If National Income is ₹ 90 crore and consumption expenditure is ₹ 81 crore, find out Average Propensity to Save. When income rises to ₹ 100 crore and consumption expenditure to ₹ 88 crore, what will be the Marginal Propensity to Consume and Marginal Propensity to Save? (Delhi 2011)
Answer:
Here, in first condition. Income (Y) = ₹ 90 crore and Consumption (C) = ₹ 81 crore
Average Propensity to Save (APS) = \(\frac { S }{ Y }\) = \(\frac { Y-C }{ Y }\)
= \(\frac { 91-81 }{ 90 }\) = 0.10
Again, when the income and consumption expenditure rises,
New Income (Y) = ₹ 100 crore;
Change in Income (ΔY) = ₹ 10 crore (100 – 90)
New Consumption (C) = ₹ 88 crore; Change in Consumption (ΔC) = ₹ 7 crore (88 – 81)
So, Marginal Propensity to Consume (MPC)
= \(\frac { ΔC }{ ΔY }\) = \(\frac { 91-81 }{ 90 }\) = 0.70
And, Marginal Propensity to Save (MPS) = 1 – MPC = 1 – 0.7 = 0.3

Question 25.
In an economy, the Marginal Propensity to Consume is 0.75. Investment expenditure in the economy increases by ₹ 75 crore. Calculate the total increase in National Income. (All India 2011)
Answer:
Here, Marginal Propensity to Consume (MPC) = 0.75, and Change in Investment = ₹ 75 crore We know that change in investment equals to change in savings,
Change in Saving (ΔS) = ₹ 75 crore
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.75 = 0.25

Or 0.25 = \(\frac { 75 }{ ΔY }\)
Or ΔY = \(\frac { 75 }{ 0.25 }\)
Or Total increase in National Income (ΔY)
= ₹ 300 crore

Question 26.
Explain the meaning of Marginal Propensity to consume. What is its relationship with Marginal Propensity to Save? (Delhi (C) 2011)
Answer:
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.
Symbolically,
Marginal Propensity to Consume (MPC)

Relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is explained below
As we know that. Change in Income (ΔY) = Change in Consumption (ΔC) + Change in Saving (ΔS)
So, \(\frac { ΔY }{ ΔY }\) = \(\frac { ΔC }{ ΔY }\) + \(\frac { ΔS }{ ΔY }\)
(on dividing throughout by ΔY)
Hence, 1 = MPC + MPS
Or MPS = 1 – MPC
And MPC = 1 – MPS

Question 27.
In an economy, total savings are ₹ 2,000 crore and the ratio of Average Propensity to Save and Average Propensity to Consu’me is 2 : 7. Calculate the level of income in an economy. (All India 2010)
Answer:
Here, Total Saving (S) = ₹ 2,000 crore

Or APS = \(\frac { Saving(S) }{ Income (Y) }\)
= \(\frac { 2 }{ 7+2 }\) = \(\frac { 2 }{ 9 }\)
Also, S = \(\frac { 2 }{ 9 }\) × Y
Or 2,000 = \(\frac { 2 }{ 9 }\) × Y
Or Y = \(\frac { 9 }{ 2 }\) × 2,000
Or National Income = ₹ 9,000 crore

Question 28.
In an economy, the consumption expenditure is ₹ 8,750 crore and the ratio of Average Propensity to Consume and Average Propensity to Save is 7 : 1. Calculate the level of income in the economy. (All India 2010)
Answer:
Here, Consumption Expenditure (C)
= ₹ 8,750 crore

So, ratio of consumption to income (APC)
= \(\frac { 7 }{ 7+1 }\) = \(\frac { 7 }{ 8 }\)
Also, C = \(\frac { 7 }{8 }\) × Y
[Where, Income (Y) = Consumption (C) + Saving (S)]
Or Y = \(\frac { 8 }{ 7 }\) × 8,750
National Income = ₹ 10,000 crore

Question 29.
In an economy, the ratio of Average Propensity to Consume and Average Propensity to Save is 5 : 3. The level of income is ₹ 6,000. How much are the savings? Calculate. (Delhi (C) 2010)
Answer:
Here

and Income (Y) = ₹ 60,000
Now, as \(\frac { APC }{ APS }\) = \(\frac { 5 }{ 3 }\)
So, ratio of consumption to income (APC) = \(\frac { 5 }{ 5+3 }\) = \(\frac { 5 }{ 8 }\)
[As, Income (Y) = Consumption (C) + Saving (S)]
So, C = \(\frac { 5 }{ 8 }\) × 60,000
= ₹ 3,750
Hence, Saving (S) = Y – C = 6,000 – 3,750 = ₹ 2,250

Question 30.
State and discuss the components of Aggregate Demand in two sector economy. (Delhi 2019)
Answer:
A two sector economy comprises of households and firms components of Aggregate Demand (AD) in such an economy are as follows:
(i) Consumption Expenditure (C) It refers to the total expenditure incurred by all the household in an econpmy on final goods and services in order to satisfy their wants.
(ii) Investment (I) It refers to planned investment expenditure by the firms. It includes addition to stock of physical capital like machines, equipments etc and change in inventory.

Question 31.
What is mean by Aggregate Demand? State its components. March 2018
Answer:
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.

Following are the components of Aggregate Demand

• Household consumption expenditure
• Private investment expenditure
• Government expenditure
• Net exports

Question 32.
What is Ex-ante consumption? Distinguish between Autonomous Consumption and Induced Consumption. (April re-exam 2018)
Answer:
Ex-ante consumption refers to planned (desired) consumption expenditure of households (in two sector economy). In other words, it is one which is expressed in terms of what the people had planned to consume in the same period.

Differences between Autonomous and Induced Consumption are

Basis	Autonomous Consumption	Induced Consumption
Meaning	Autonomous consumption is the minimum level of consumption required for sustenance.	Iduced consumption is that part of consumption that varies directly with disposable income. With increase in income, autonomous consumption also increases and vice-versa.
Representation in Consumption Equation	In a consumption equation, autonomous consumption is represented by C̅.	In a consumption equation, induced consumption is represented as by, where b is the MPC and Y is the income.
Zero Level	It is not zero at zero income.	It is zero at zero income.

Question 33.
The value of Marginal Propensity to Consume is 0.6 and initial income in the economy is ₹ 100 crore. Prepare a schedule showing Income, Consumption and Saving. Also show the equilibrium level of income by assuming Autonomous Investment of ₹ 80 crore. (March 2018)
Answer:
Marginal Propensity to Consume (MPC) = 0.6,
Initial Income (Y) = ₹ 100 crore,
Assuming autonomous Consumption (C̅) = ₹ 200 crore
Schedule showing Income, Consumption and Saving

Income (y)	Consumption (c)	Saving (s)	Change in Income (DX)	Change in Consumption (DC)	MPC (\(\frac { DY }{ DC }\))
100	260	-160	–	–	–
200	320	-120	100	60	0.6
300	380	-40	100	60	0.6
400	440	-40	100	60	0.6
500	550	0	100	60	0.6
600	560	40	100	60	0.6

At equilibrium levels, Y = C + I
Or Y = C̅ + bY + I
On substituting, Y = 200 + 0.6 Y + 80
Y – 0.6 Y = 280
0.4Y = 280
Y = \(\frac { 280 }{ 0.4 }\) = ₹ 700 crore

Question 34.
An economy is in equilibrium. From the following data, calculate the Marginal Propensity to Save. (All India 2017)
(a) Income = ₹ 10,000
(b) Autonomous Consumption = ₹ 500
(c) Consumption Expenditure = ₹ 8,000
Answer:
We know that,
Consumption Expenditure = C̅ + bY,
Where, C̅ = Autonomous Consumption,
b = Marginal Propensity to Consume and Y = Income
So, on substituting the given variables, we get,
8,0 = 500 + b x 10,000
Or 8,000 – 500 = b x 10000
Or b = \(\frac { 7500 }{ 10000 }\)
Marginal Propensity to Consume = 0.75.
We also know that,
MPC + MPS = 1
Where, MPC = Marginal Propensity to Consume and MPS = Marginal Propensity to Save
On substituting MPC = 0.75, we get,
0.75 + MPS = 1
Or MPS = 1 – 0.75 = 0.25, i.e.
Marginal Propensity to Save = 0.25

Question 35.
Complete the following table.

Income	Marginal Propensity to Save	Average Propensity to Save	Consumption Expenditure
200	–	0.4	120
400	–	–	220
–	–	0.48	260

Answer:

Income(Y)	Consumption Expenditure(C)	Savings (S)	Average Propensity to Save	MPS
200	120	80	0.4	–
400	220	180	0.45	0.5
500	260	240	0.48	0.6

Formulae used:
S = Y – C
MPS = \(\frac { ΔS }{ ΔY }\); APS = \(\frac { S }{ Y }\)

Question 36.
If National Income is ₹ 50 crore and saving ?5 crore, find out Average Propensity to Consume. When income rises to ₹ 60 crore and saving to ₹ 9 crore, what will be the Average Propensity to Consume and the Marginal Propensity to Save? (Delhi 2011)
Answer:
National Income (Y) = ₹ 50 crore
Saving (S) = ₹ 5 crore
∴ Consumption (C) = Y – S
= 50 – 5 = ₹ 45 crore
∴ APC = \(\frac { C }{ Y }\) = \(\frac { 45 }{ 50 }\) = 0.90
After change,
Income (Y₁) = ₹ 60 crore
Change in Income (ΔY) = 60 – 50 = 10
Consumption (C₁) = 60 – 9 = 51
Change in Saving (ΔS) = 9 – 5 = 4
∴ APC = \(\frac { C_1 }{ Y_1 }\) = \(\frac { 51 }{ 60 }\) = 0.85
And MPS = \(\frac { ΔS }{ ΔY }\) ⇒ \(\frac { 4 }{ 10 }\) = 0.40

Question 37.
Given a consumption curve, outline the steps required to be taken in deriving a saving curve from it. Use diagram. (All India 2017)
Or
Given consumption curve, derive saving curve and state the steps taken in the process of derivation. Use diagram. (Delhi 2016)
Or
Outline the steps required to be taken in deriving saving curve from the given consumption curve. Use diagram. (Delhi 2014)
Answer:
Steps taken for derivation of saving curve are
(i) At zero level of Income (Y), the Autonomous Consumption is OC̅. If we take the vertical distance between the Consumption Curve, CC̅ and income line at zero level of income, then \(\overline{\mathbf{S}}\) = -OC̅. Hence, the saving curve starts from the point \(\overline{\mathbf{S}}\) on the negative Y-axis.

(ii) The consumption curve intersects income line at point B. It is the break-even point where Consumption (C) is equal to income (C = Y). At this point. Saving (S) will be zero as all the income is consumed. Hence, the saving curve will intersect the A-axis (at point E) at this income level.

(iii) The consumption is less than income beyond point E. It means the excess income after consumption is saved and hence, the saving curve moves towards positive direction above A-axis with the increase in the level of income.

Question 38.
Explain the consumption function and saving function. (Foreign 2014)
Answer:
Consumption function The functional relationship between the consumption expenditure and the income is known as consumption function. Mathematically it is expressed as,
C = f (Y), which is read as ‘consumption is a function of income’.

Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption Expenditure
C̅ = Autonomous consumption, when income is zero
b = Marginal Propensity to Consume
Y = Income
Saving function The functional relationship between the savings and income is known as saving function. Mathematically, it is expressed as S = f (Y), which is read as ‘Saving is a function of income’. Saving function, as an algebraic expression, can be written as S = –\(\overline{\mathbf{S}}\) + SY Where,
S = Savings
–\(\overline{\mathbf{S}}\) = Savings at zero level of income (Dis-savings or borrowings)
s = Marginal Propensity to save
Y = Income

Question 39.
Complete the following table. (Delhi 2013)

Income (Y)	Saving (S)	Average Propensity to Consume (APC)	Marginal Propensity to Consume (MPC)
0	-40	–	–
50	-20	–	–
100	0	–	0.6
150	30	0.8	–
200	50	–	–

Answer:

Income (Y)	Saving (S)	Consumption (C)	Average Propensity to Consume (APC)	Marginal Propensity to Consume (MPC)
0	-40	40	∞	–
50	-20	70	1.4	0.6
100	0	100	1	0.6
150	30	120	0.8	0.4
200	50	150	0.75	0.6

Formulae used:
C = Y – S; APC= C/Y, MPC = \(\frac { ΔC }{ ΔY }\)

Question 40.
Complete the following table. (Delhi 2013)

Income (Y)	Consumption Expenditure (C)	Marginal Propensity to Save (MPS)	Average Propensity to save (APS)
0	80	–	–
100	140	0.4	–
200	–	–	0
–	240	–	0.20
–	260	0.8	0.35

Answer:

Income (Y) (C + S)	Consumption Expenditure (C) (Y – S)	Saving (S) (Y – C)	Change in Saving (ΔS)	Change in Income (ΔY)	Marginal Propensity to Save (MPS)	Average Propensity to save (APS)
0	80	-80	–	–	–	–
100	140	-40	40	100	0.4	0.4
200	200	0	46	100	0.4	0
300	240	60	60	100	0.6	0.20
400	260	140	80	100	0.8	0.35

Formulae used
C = Y – S, S = Y – C, MPS = \(\frac { ΔS }{ ΔY }\), APS = \(\frac { S }{ Y }\).

Question 41.
Complete the following table. (Delhi 2013)

Consumption expenditure (₹)	Savings (₹)	Income (₹)	Marginal Propensity to Consume
100	50	150	–
175	75	–	–
250	100	–	–
325	125	–	–

Answer:

Consumption expenditure (₹)	Savings (₹)	Income (₹)	Marginal Propensity to Consume
100	50	150	–
175	75	250	0.75
250	100	350	0.75
325	125	450	0.75

Formulae used:
Y = C + S, MPC = \(\frac { ΔC }{ ΔY }\)

Question 41.
Explain consumption function, with the help of a schedule and diagram. (All India 2011)
Answer:
The functional relationship between the consumption expenditure and the income is known as consumption function. Symbolically,
C = f(Y), Which is read as, ‘Consumption is a function of income’.
Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption expenditure
C̅ = Autonomous consumption at zero level of income
b = Marginal Propensity to Consume
Y = Income
Let us understand it with the help of a schedule and diagram

Consumption (C)	Income (Y)	Marginal Propensity to Consume (MPC) = \(\frac { ΔC }{ ΔY }\)	Change in Consumption (ΔC)	Change in Income (ΔY)
100	0	–	–	–
170	100	0.7	70	100
240	200	0.7	70	100
310	300	0.7	70	100
380	400	0.7	70	100
450	500	0.7	70	100

The point B represents the break-even point, where the consumption expenditure equals the income. To the left of point B, consumption is greater than income and to the right of point B, consumption is less than income.

Question 42.
If the value of Marginal Propensity to Save is 0.4, what will be the value of investment multiplier? (All India 2012)
Answer:
Investment Multiplier (K) = \(\frac { 1 }{ MPS }\)
= \(\frac { 1 }{ 0.4 }\) = \(\frac { 10 }{ 4 }\) = 2.5

Question 43.
What can be the minimum value of investment multiplier? (Delhi (C) 2012)
Answer:
The minimum value of investment multiplier is 1.

Question 44.
Give the meaning of ex-ante savings. (Delhi 2010)
Answer:
The planned or desired savings by the people during an accounting year is termed as ex-ante saving.

Question 45.
What is Ex-ante Aggregate Demand? (All India 2010)
Answer:
The planned expenditure on the purchase of goods and services in an economy during a period of an accounting year, is termed as Ex-ante Aggregate Demand.

Question 46.
When will there be equilibrium level of National Income? (All India 2010)
Answer:
When Aggregate Demand (AD) is equal to Aggregate Supply (AS) in an economy, at full employment level, then it is termed as the equilibrium level of National Income.

Question 47.
Calculate change in final income, if Marginal Propensity to Consume (MPC) is 0.8 and change in initial investment is ₹ 1,000 crore. (All India 2019)
Answer:
MPC (b) = 0.8
Change in Investment (ΔI) = ₹ 1,000 crore
Investment Multiplier
(K) = \(\frac{Income}{Investment}=\frac{1}{1-0.8}=\frac{1}{0.2}\) = 5
⇒ 5 = \(\frac { ΔY }{ 1000 }\)
ΔY = ₹ 5,000 crore

Question 48.
State the meaning of the following. (All India 2019)
(a) Ex-ante savings
(b) Full employment
(c) Autonomous consumption
Answer:
(a) The planned expenditure on the purchase of goods and services in an economy during a period of an accounting year, is termed as Ex-ante Aggregate Demand.
(b) Full employment It refers to the state where all those who are willing and able to work at a particular wage rate are employed.
(c) Autonomous consumption It refers to the consumption at zero level of income, i.e. it is independent of level of income. This is the basic amount required for consumption at all levels of income.

Question 49.
Estimate the change in final income if Marginal Propensity to Consume (MPC) is 0.75 and change in initial investment is ₹ 2,000 crore. (All India 2019)
Answer:
Change in Final Income (ΔY) = ?
MPC = 0.75
Change in Initial Investment (ΔI) = ₹ 2,000 crore
Investment Multiplier (K) = \(\frac { 1 }{ 1-MPC }\)
= \(\frac{1}{1-0.75}=\frac{1}{0.25}\) = 4
Also,

4 = \(\frac { ΔY }{ 2000 }\)
AY = ₹ 8,000 crore

Question 50.
If in an economy
Change in initial investment (ΔI) = ₹ 500 crore
Marginal Propensity to Save (MPS) = 0.2 Find the values of the following
(a) Investment Multiplier (K)
(b) Change in final income (ΔY) (Delhi 2019)
Answer:
Investment Multiplier (K) = 1/ MPS = 1/0.2 = 5

5 = ΔY/500
ΔY = ₹ 2,500 crore

Question 51.
Define Multiplier. What is the relation between Marginal Propensity to Consume and Multiplier? Calculate the Marginal Propensity to Consume if the value of Multiplier is 4. (March 2018)
Answer:
Investment multiplier is the ratio between change in income and the corresponding change in investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier

There is direct or positive relationship between Marginal Propensity to Consume (MPC) and Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) = \(\frac{1}{1-\mathrm{MPC}}\)
e.g. If MPC = 0.5, then K = \(\frac{1}{1-0.5}=\frac{1}{0.5}\) = 2
When MPC increase to 0.75, then
K = \(\frac{1}{1-0.75}=\frac{1}{0.25}\) = 4
So, we observe that as MPC rises, K also rises.
We know that, K = \(\frac{1}{1-\mathrm{MPC}}\)
4 = \(\frac{1}{1-\mathrm{MPC}}\)
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC = \(\frac{3}{4}\) = 0.75

Question 52.
Define Investment Multiplier. How is it related to Marginal Propensity to Consume? (April Re-Exam 2018)
Answer:
Investment multiplier is the ratio between change in income and the corresponding change in investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier

There is direct or positive relationship between Marginal Propensity to Consume (MPC) and Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) = \(\frac{1}{1-\mathrm{MPC}}\)
e.g. If MPC = 0.5, then K = \(\frac{1}{1-0.5}=\frac{1}{0.5}\) = 2
When MPC increase to 0.75, then
K = \(\frac{1}{1-0.75}=\frac{1}{0.25}\) = 4
So, we observe that as MPC rises, K also rises.
We know that, K = \(\frac{1}{1-\mathrm{MPC}}\)
4 = \(\frac{1}{1-\mathrm{MPC}}\)
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC = \(\frac{3}{4}\) = 0.75

Question 53.
In an economy investment is increased by ₹ 300 crore. If Marginal Propensity to Consume is 2/3, calculate increase in National Income. (Delhi 2016)
Answer:
Given,
Marginal Propensity to Consume (MPC)
= \(\frac{2}{3}\) or 0.678
Change in Investment Expenditure (ΔI)
= ₹ 300 crore
We know that,
Investment Multiplier (K) = \(\frac{1}{1-\mathrm{MPC}}=\frac{1}{1-0.67}\)
= \(\frac{1}{0.33}\) = 3.03 ~ 3
Also,
Investment Multiplier (K)

So 3 = \(\frac{ΔY}{300}\)
ΔY = 900
National Income increases by ₹ 900 crore.

Question 54.
Suppose Marginal Propensity to Consume is 0.8. How much increase in investment is required to increase National Income by ₹ 2,000 crore? Calculate. (Delhi 2016)
Answer:
Given, Marginal Propensity to Consume (MPC)
= 0.8
Change in National Income (AY) = ₹ 2,000 crore
We know that,
Investment Multiplier (K) = \(\frac{1}{1-MPC}=\frac{1}{1-0.8}\) = 5
Also, Investment Multiplier (K)

So 5 = \(\frac{2000}{ΔI}\) Or ΔI = 400
i.e. investment should be increased by ₹ 400 crore, in order to increase income by ₹ 2,000 crore.

Question 55.
In an economy an increase in investment by ₹ 100 crore led to increase in National Income by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi 2016)
Answer:
Given,
Increase in Investment (ΔI) = ₹ 100 crore
Increase in Income (ΔY) = ₹ 1,000 crore
We know that,
Investment Multiplier (K) = \(\frac{\Delta \mathrm{Y}}{\Delta \mathrm{I}}=\frac{1,000}{100}\) = 10
Also, K = \(\frac{1}{1-MPC}\)
So, 10 = \(\frac{1}{1-MPC}\) Or 10 (1 – MPC) = 1,
Or 10 – 10 MPC = 1,
Or – 10MPC = 1 – 10 Or MPC = \(\frac{-9}{-10}\) = 0.9
i.e. Marginal Propensity to Consume = 0.9

Question 56.
An economy is in equilibrium. Calculate Marginal Propensity to Consume National Income = ₹ 1,000,
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2016)
Answer:
Given, National Income (Y) = ₹ 1,000,
Autonomous Consumption Expenditure (C̅) = ₹ 200,
and Investment Expenditure (I)= ₹ 100,
Marginal Propensity to Consume (MPC/b) = ₹ We know that at the equilibrium level,
Savings = Investment,
So, Income (Y) = Consumption Expenditure (C) + Investment (I)
Also, Consumption Expenditure (C) = C̅ + bY So, it follows that,
Y = C̅ + bY + I
On substituting the given variables, we get
1000 = 200 + b × 1,000 + 100
Or 1,000 = 300 +1000 b.
Or 700 = 1,000 b,
Or b = \(\frac{700}{1000}\)
Or Marginal Propensity to Consume (MPC) = 0.7

Question 57.
From the following data calculate investment expenditure. (All India 2016)
Marginal Propensity to Save = 0.2
Equilibrium level of Income = ₹ 22,500
Autoriomous Consumption = ₹ 500
Answer:
Given, MPS = 0.2,
Y = ₹ 22,500, C̅ = ₹ 500, I = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y = C + I
and C = C̅ + (MPC)Y
∴ Y = C̅ + (MPC)Y + I
22,500 = 500 + (0.8)22,500 + I
I = 22,500 – 500 – 18000 = ₹ 4,000

Question 58.
What is Investment Multiplier? How is its value determined? What can be its minimum and maximum values? (Delhi (C) 2016)
Or
Explain the meaning of investment multiplier. What can be its minimum and maximum value? (Delhi (C) 2014)
Answer:
It is also equal to \(\frac{1}{1-M P C}\) where
MPC is Marginal Propensity to Consume So, the value of Multiplier depends on the value of MPC.
Since, 0 < MPC < 1, therefore, if
MPC = 0, then K = 1, and if MPC = 1, then K = ∞
So, it follows that the minimum value of investment multiplier can be 1 and maximum value can be infinity.

Question 59.
An economy is in equilibrium. Find investment expenditure.
National Income = ₹ 1,200
Autonomous Consumption Expenditure = ₹ 150
Marginal Propensity to Consume = 0.8 (All India 2016)
Answer:
Given, National Income (Y) = ₹ 1200
Autonomous Consumption Expenditure (C̅) = ₹ 150,
Marginal Propensity to Consume (MPC/b) = 0.8 We know that, Y = C̅ + bY + I, Where I is the Total Investments in the economy.
On substituting the given variables, we get,
1200 = 150 + 0.8 × 1200 + 1, Or 1200 = 1210 + I Or
I = 1200 – 1210 = 90
Investment Expenditure = ₹ 90

Question 60.
In an economy investment expenditure is ₹ 1,000, autonomous consumption is ₹ 500 and Marginal Propensity to Save is 0.2. Calculate its equilibrium level of income. (All India 2016)
Answer:
Given, Investment (l)= ₹ 1,000,
Autonomous Consumption (C̅) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.2,
Income (Y) = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y = C + I and C = C̅ + (MPC)Y
∴ Y = C̅ +(MPC)Y + I
⇒ Y = 500 + (0.8)Y + 1,000
0.2 Y = 1,500 ⇒ Y = ₹ 7,500

Question 61.
From the following data calculate the equilibrium level of National Income Autonomous Consumption = ₹ 500 Marginal Propensity to Save = 0.2 Investment = ₹ 2.000 (Delhi (C) 2016)
Answer:
Given, Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS) = 0.2,
Investment (I) = ₹ 2,000,
We know that, MPC = 1 – MPS
= 1 – 0.2
∴ MPC = 0.8
Also, Consumption Expenditure (C) = C̅ + (MPC)Y
and at equilibrium level, Y = C + I
.’. Y = C̅ + (MPC)Y + I
Y = 500 + 0.8Y + 2,000
Y = 2,500 + 0.8Y
0.2 Y = 2,500
Y = ₹ 12,500
∴ Equilibrium level of National Income = ₹ 12,500

Question 62.
Calculate investment expenditure in the economy from the following data. Equilibrium Level of Income = ₹ 10,000 Autonomous Consumption = ₹ 500 Marginal Propensity to Consume 0.75 (Delhi (C) 2016)
Answer:
Given Y = ₹ 10,000; C̅ = ₹ 500; MPC = 0.75,
We know that, C = C̅ + (MPC )Y and Y = C + I
∴ Y = C̅ + (MPC)Y + I
10,000 = 500+ (0.75) × 10,000 + I
I = 10,000 – 500 – 7,500
∴ I = ₹ 2,000

Question 63.
In an economy 20 % of increased income is saved. How much will be the increase in income if investment increase by ₹ 10,060? Calculate. (All India (C) 2015)
Answer:
Marginal Propensity to Save (MPS)
= 20% = \(\frac{20}{100}\) = 0.2
Investment Multiplier (K) = \(\frac{1}{\text { MPS }}\)
⇒ K = \(\frac{1}{0.2}=\frac{10}{2}\) = 5
K = \(\frac{\Delta \mathrm{Y}}{\Delta \mathrm{I}}\) ⇒ 5 = \(\frac{\Delta \mathrm{Y}}{10,000}\)
∴ ΔY = 50,000
Therefore, increase in investment by ₹ 10,000, increases the income by ₹ 50,000.

Question 64.
In an economy autonomous consumption is ₹ 500, Marginal Propensity to Save is 0.2 and investment expenditure is ₹ 2,000. Calculate its equilibrium level of income. (All India (C) 2015)
Answer:
C = ₹ 500, MPS = 0.2, I = ₹ 2,000
MPC = 1 – MPS = 1 – 0.2
∴ MPC = 0.8
Consumption function, C = C̅ + bY
[where, b = MPC]
= 500 + 0.8Y
At equilibrium level,
National Income (Y) = C + I
⇒ Y = 500 + 0.8Y + 2,000
⇒ Y – 0.8Y = 500 + 2,000
⇒ 0.2Y = 2,500
Y = \(\frac{2.500}{0.2}=\frac{25.000}{2}\)
∴ Y = ₹ 12,500

Question 65.
What is the relationship between Marginal Propensity to Save and Investment Multiplier. (Delhi (C) 2015)
Answer:
There is an indirect or negative relationship between Marginal propensity to save (MPS) and multiplier (K). Higher the MPS, lower will be the value of Multiplier and vice-versa.
Multiplier (K) = \(\frac{1}{\text { MPS }}\)
e.g. If MPS = 0.5, then K = \(\frac{1}{0.5}\) = 2
if MPS =0.75, then K =\(\frac{1}{0.75}\) = 1.33
So, we observe that when MPS rises to 0.75 from 0.5, the value of Multiplier falls from 2 to 1.33.

Question 66.
In an economy investment increases from 300 to 500. As a result of this, equilibrium level of income increases by ₹ 2,000, calculate the Marginal Propensity to Consume. (All India to 2015)
Answer:
Given,
Change in Income (ΔY) = ₹ 2,000
And, Change in Investment (ΔI) = 200(500 – 300)
∴ Investment Multiplier (K) = \(\frac{\Delta \mathrm{Y}}{\Delta \mathrm{I}}=\frac{2,000}{200}\) = 10
Also, K = \(\frac{1}{\text { 1-MPC }}\), Where
MPC = Marginal Propensity to Consume
So, 10 = \(\frac{1}{\text { 1-MPC }}\)
Or 10 (1 – MPC) = 1
Or 10 – 10MPC = 1
Or 9 = 10 MPC
⇒ MPC = 9/10 = 0.9

Question 67.
S = -100 + 0.2 Y is the saving function in an economy. Investment expenditure is ₹ 5,000. Calculate the equilibrium level of income. (Delhi (C) 2015)
Answer:
At the equilibrium level of income,
Saving (S) = Investment (I)
∴ -100 + 0.2 Y = 5,000
0.2 Y = 5,000 + 100 = 5,100
Y = \(\frac{5,100}{0.2}\) = 25,500
∴ Income = ₹ 25,500

Question 68.
Calculate the equilibrium level of income in the economy. (Delhi (C) 2015)
C = 500 + (0.9) Y;
Investment expenditure = 3,000
Answer:
Given, C = 500 + (0.9 )Y.
Investment Expenditure (I) = ₹ 3,000
At equilibrium level, Y = C + I
⇒ Y = 500 + (0.9 )Y + 3,000
⇒ Y – (0.9 )Y = 3500 ⇒ (0.1)Y = 3,500
∴ Y = \(\frac{3,500}{0.1}\) = ₹ 35,000

Question 69.
Calculate equilibrium level of income (Delhi (C) 2015)
Autonomous Consumption = ₹ 200
Marginal Propensity to Consume = 0.9
Investment Expenditure = ₹ 1,000
Answer:
Autonomous Consumption (C) = ₹ 200 [Given]
MPC = 0.9, I = ₹ 1,000
At equilibrium level, Y = C + I …….. (i)
And C = C̅ + bY [Where, b = MPC]
C = 200 + (0.9 )Y
Substituting the value of C in equation (i), we get,
Y = 200 + (0.9 )Y + 1,000
Y – (0.9 )Y = 1200 ⇒ (0.1)Y = 1200
∴ Y = \(\frac{1200}{0.1}\) = ₹ 12,000

Question 70.
Give the meaning of Investment Multiplier and Aggregate Supply. (Delhi (C) 2015)
Answer:
Aggregate supply Aggregate supply is the money value of the final goods and services produced in an economy during an accounting year. It is equal to income generated, symbolically,
Aggregate Supply (AS) = Consumption (C) + Savings (S)

Question 71.
The value of Marginal Propensity to Consume is double the value of Marginal Propensity to Save. Find the value of Multiplier. (All India 2014)
Answer:
We know that, MPC + MPS = 1 ……. (i)
Given MFC is double the value of MPS
⇒ MPC = 2 MPS
Substituting this in equation (i), we get,
2 MPS + MPS = 1
⇒ 3 MPS = 1
∴ MPS = \(\frac{1}{3}\)
Now multiplier, K = \(\frac{1}{MPS}\) = \(\frac{1}{\frac{1}{3}}\) = 3
∴ Value of multiplier is 3.

Question 72.
Calculate ‘Investment’ from the following. Equilibrium Income = ₹ 500
Consumption Expenditure at zero income = ₹ 50
Marginal Propensity to Consume = 0.7 (Delhi (G) 2013)
Answer:
Here, Y = ₹ 500; MPC = 0.7; C̅ = ₹ 50
∴ C = C̅ + MPC × Y
Now, Y = C̅ + MPC × Y + I
⇒ 500 = 50 + 350 + I
⇒ 500 – 400 = I
Investment (I) = ₹ 100

Question 73.
Calculate Marginal Propensity to Consume from the following.
Equilibrium Income = ₹ 350
Consumption Expenditure at zero income = ₹ 20
Investment = ₹ 50 (Delhi (c) 2013)
Answer:
Given, Y = ₹ 350, Investment, I = 50, C = ₹ 20
Now, Y = C̅ + bY + I
350 = 20 + b(350) + 50
⇒ 350 = 70 + b(350)
350 – 70 = b(350)
⇒ 280 = b (350), b = \(\frac{280}{350}\) = 0.8
∴ MPC = b = 0.8

Question 74.
Find ‘Investment’ from the following National Income = ₹ 500 Autonomous Consumption = ₹ 100 Marginal Propensity to Consume = 0.75 (Delhi 2012)
Answer:
National Income (Y) = ₹ 500;
Autonomous Consumption (C̅) = ₹ 100
MPC(b) = 0.75
Y = C̅ + bY + I (Investment)
Or Y – C̅ – bY = I
Or 500 – 100 – 0.75(500) = I
Or 400 – 375 = I
Or I = ₹ 25

Question 75.
In an economy 20 % fall in investment results in 40 % fall in income. Calculate the value of Marginal Propensity to Consume. (All India (C) 2012)
Answer:
Investment Multiplier (K) = \(\frac{\Delta \mathrm{Y}}{\Delta \mathrm{I}}=\frac{0.4}{0.2}\) = 2
Since, K = \(\frac{1}{MPS}\)
∴ MPS = \(\frac{1}{K}\) = \(\frac{1}{2}\)
∴ MPC = 1 – MPS = 1 – \(\frac{1}{2}=\frac{1}{2}\) = \(\frac{1}{2}\) Or 0.5

Question 76.
Find National Income from the following. Autonomous consumption = ₹ 100 Marginal Propensity to Consume = 0.60 Investment = ₹ 200 (All India 2012)
Answer:
Here, C̅ = ₹ 100, MPC or b = 0.60, I = ₹ 200
At equilibrium level, I = S = ₹ 200
Now, we know that, Y = C + S
Or Y – S = C
Or Y – S = C̅ + bY because C = C̅ + bY
Or Y- 200 = 100 + 0.6 Y
Or Y – 0.6 Y = 100 + 200
Or 0.4 Y = 300
Hence, Y = \(\frac{300}{0.4}\) = ₹ 750
Hence, National Income (Y) = ₹ 750

Question 77.
Find investment from the following. (All India 2012)
National Income = ₹ 600 Autonomous Consumption = ₹ 150
Marginal Propensity to Consume = 0.70
Answer:
Here, Y = ₹ 600, C = ₹ 150, MPC Or b = 0.70
We know that, Y = C + S
Or S = Y – C
Or S = 600 – [C̅ + bY]
Or S = 600 – [150+ (0.7 × 600)]
Or S = 600 – [150 + 420]
Or S = 600 – 570 Or S = ₹ 30
As, I = S = ₹ 30
Hence, Investment = ₹ 30

Question 78.
In an economy a 40 % increase in investment results in a 40 % increase in income. Calculate the Marginal Propensity to Consume. (Delhi (C) 2012)
Answer:

MPC = 1 – 1 = 0
∴ MPC = 1 – MPS = 1 – 1 = 0

Question 79.
As a result of increase in investment by ₹ 60 crore, National Income rises to ₹ 240 crore. Calculate Marginal Propensity to Consume. (All India 2011)
Answer:
Here, Change in Investment (ΔI) = ₹ 60 crore,
Change in Income (ΔY) = ₹ 240 crore
Hence, Multiplier (K) = \(\frac{\Delta Y}{\Delta I}=\frac{240}{60}\) = 4
Now K = \(\frac{1}{1-\mathrm{MPC}}\), Where MPC is the marginal prosensity to consume
Or 4 = \(\frac{1}{1-\mathrm{MPC}}\)
Or 4 – 4 MPC = 1
Or 4 MPC = 4 – 1
Or MPC = \(\frac{3}{4}\)
MPC = 0.75

Question 80.
In an economy, investment is increased by ₹ 2,000 crore. Calculate the change in total income, if Marginal Propensity to Save is 0.25. (All India 2010)
Answer:
Here, Change in Investment (ΔI)= ₹ 2,000 crore,
Marginal Propensity to Save (MPS) = 0.25
Now, Multiplier (K) = \(\frac{1}{\text { MPS }}=\frac{1}{0.25}\) = 4
Again, we know that,

Or 4 = \(\frac{ΔY}{2000}\)
Or ΔY = 2,000 × 4
Change in Total Income (ΔY) = ₹ 8,000 crore

Question 81.
Find the value of multiplier given Marginal Propensity to Consume = 1 and Marginal Propensity to Save = 1. (All India 2010)
Answer:
(i) Here, Marginal Propensity to Consume (MPC) = 1
Hence, Multiplier (K) = \(\frac{1}{1-MPC}=\frac{1}{1-1}\) = ∞
So, Multiplier (K) = ∞ (Infinity)

(ii) Here, Marginal Propensity to Save (MPS) = 1
Now, K = \(\frac{1}{MPS}=\frac{1}{1}\)
Hence, Multiplier (K) = 1

Question 82.
In an economy, as a result of increase in investment by ₹ 100 crore, National Income rises by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi (C) 2010)
Answer:
Here, Change in Investment (ΔI) = ₹ 100 crore,
Change in Income (ΔY)= ₹ 1,000 crore
Now, Multiplier (K) = \(\frac{ΔY}{ΔI}\) = \(\frac{1000}{100}\) = 10
Now, we know that, K = \(\frac{1}{1-MPC}\), Where MPC is the Marginal Propensity to Consume
Or 10 = \(\frac{1}{1-MPC}\)
Or 10 – 10 MPC = 1
Or 10 MPC = 10 – 1
Or MPC = \(\frac{9}{10}\)
Or MPC = 0.9

Question 83.
If Marginal Propensity to Save is one, what is the value of multiplier? What can you say about the change in National Income, given Change in Investment. (Delhi (C) 2010)
Answer:
Here, Marginal Propensity to Save (MPS) = 1
So, Multiplier (K) = \(\frac{1}{MPS}\) = \(\frac{1}{1}\) = 1
Now, suppose Change in Investment is given ₹ 100 crore
S0, K = \(\frac{Income(ΔY)}{Investment(ΔI)}\)
Or 1 = \(\frac{ΔY}{100}\)
Or Change in National Income (AY) = ₹ 100 crore,
So, it follows that the National Income will change in that quantum only with which investment changes.

Question 84.
An economy is in equilibrium. From the following data about an economy calculate autonomous consumption. (Delhi 2017)
Income = ₹ 5,000
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 800
Answer:
Given,
Income (Y) = ₹ 5,000,
Marginal Propensity to Save (MPS) = 0.2, and Investment Expenditure = 800 We know that,
MPS + MPC = 1,
On substituting MPS = 0.2, we get,
MPC (b) = 1-0.2 = 0.8
We also know that, at the point of equilibrium, Savings = Investment
∴ Savings = ₹ 800
Now, Income = Consumption + Savings
5000 = C̅ + b. 5,000 + 800,
Where, C̅ = Autonomous Consumption and b = MPC
∴ 5,000 – 800 = C̅ + 0.8 x 5,000
4200 = C̅ + 4,000
∴ C̅ = 4,200 – 4,000 = 200
∴ Autonomous consumption in the economy = ₹ 200

Question 85.
An economy is in equilibrium. Calculate the investment expenditure from the following: (All India 2015)
National Income = ₹ 800
Marginal Propensity to Save = 0.3
Autonomous Consumption = ₹ 100
Answer:
Given, National Income (Y) = ₹ 800
Marginal Propensity to Save (MPS) = 0.3
Marginal Propensity to Consume
(MPC or b ) = 1 – MPS = 1 – 0.3 = 0.7
Autonomous Consumption (C̅) = 100
As the economy is in equilibrium, therefore,
Saving = Investment
So, Income
(Y) = Consumption (C) + Investment (I)
Also, we know that, C = C̅ + bY
∴ Y = C̅ + bY + I …(i)
On substituting the variables in equation (i), we get,
800 = 100 + 0.7(800) + 1,700 = 560 + I
I = 140, i.e. Investment = ₹ 140

Question 86.
An economy is in equilibrium. Calculate the Marginal Propensity to Save from the following: (All India 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment = 120
Answer:
According to the question.
National Income (Y) = 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment (I) = ₹ 120
An economy is in equilibrium, therefore,
Saving = Investment
∴ Y = C̅ + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the variables in eq (i), we get,
1,000 = 100 + b (1,000) + 120
Or 1,000 – 220 = b (1,000)
Or b = \(\frac{780}{1,000}\) b = 0.78 (b = MPC)
MPS = 1 – MPC
∴ MPS = 1 – 0.78 = 0.22

Question 87.
An economy is in equilibrium. Calculate the National Income from the following: (All India 2015)
Autonomous Consumption = 120
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 150
Answer:
Autonomous Consumption (C̅) = ₹ 120
Marginal Propensity to Save (MPS) = 0.2
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
MPC = 0.8
Investment expenditure (I) = ₹ 150
As the economy is in Equilibrium, therefore,
Saving = Investment
Y = C + I
Or Y = C̅ + bY + I, …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 120 + 0.8 Y + 150
Y – 0.8 Y = 270
0.2Y = 270
Y = \(\frac{270}{0.2}\) = ₹ 1,350

Question 88.
An economy is in equilibrium. Calculate National Income from the following: (Delhi 2015)
Autonomous Consumption = ₹ 100
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 200
Answer:
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Save (MPS) = 0.2
Investment Expenditure (I) = ₹ 200
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
∴ MPC (b) = 0. 8
As the economy is in equilibrium, therefore, Saving = Investment
Y= C + I
Y = C̅ + bY + I ,..(i)
C = C̅ + bY
On substituting the variables in eq (i), we get
Y = 100 + 0.8Y + 200
Y – 0.8Y = 300
Y = \(\frac{300}{0.2}\)
Y= 1,500, i.e. National Income = ₹ 1,500

Question 89.
An economy is in equilibrium. Find ‘Autonomous Consumption’ from the following: (Delhi 2015)
National Income = ₹ 1,000
Marginal Propensity to Consume = 0.8
Investment Expenditure = ₹ 100
Answer:
Now, National Income (Y) = ₹ 1,000
Marginal Propensity to Consume (MPC/b) = 0.8
Investment Expenditure (I) = ₹ 100,
At equilibrium. Saving = Investment
∴ Y = C + I
Or Y = C̅ + bY + I ………(i)
C = C̅ + bY
On substituting the given variables in equation (i),
we get,
1,000 = C̅ + 0.8 (1000) + 100
1000 = C̅ + 800 + 100
C̅ = ₹ 100
i.,e. Autonomous Consumption = ₹ 100

Question 90.
An economy is in equilibrium. Find Marginal Propensity to Consume from the following: (Delhi 2015)
National Income = ₹ 2,000
Autonomous Consumption = ₹ 400
Investment Expenditure = ₹ 200
Answer:
Given, National Income (Y) = ₹ 2,000
Autonomous Consumption (C̅) = ₹ 400
Investment Expenditure (I) = ₹ 200
It is given in the question that the economy is in equilibrium,
hence Saving = Investment
∴ Y = C + I
Or Y = C̅ + bY + I ………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
2,000 = 400 + b (2,000) + 200
2,000 b = 1,400
b = \(\frac{1,400}{2,000}\)
b = 0.7, i.e. Marginal Propensity to Consume (MPC) = 0.7

Question 91.
An economy is in equilibrium. Calculate Marginal Propensity to Save from the following: (Foreign 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment Expenditure = ₹ 200
Answer:
It is given that.
National Income (Y) = ₹ 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment expenditure (I) = ₹ 200
At the equilibrium level, Saving = Investment
∴ Y = C + I (as S = I)
Or Y = C̅ + by + I ……… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
⇒ 1,000 = 100 + b (1000) + 200
or 1000 = 300 + 1,000 b
1,000 – 300 = 1000 b
Or 700/1000 = b = 0.7
Or Marginal Propensity to Consume (MPC) = 0.7
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.7
∴ MPS = 0.3

Question 92.
Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium.
National Income = ₹ 2,000
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2014)
Answer:
Given, Income (Y) = ₹ 2,000
Autonomus Consumption (C̅) = ₹ 200,
Inve-tment (I) = ₹ 100 We know, Y = C + I
Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given varibales in equation(i), we get,
2,000 = 200 + 2000 b + 100
b = \(\frac{2000-300}{2,000}\)
= \(\frac{1,700}{2,000}\) = 0.85
Thus, Marginal Propensity to Consume (MPC) = 0.85

Question 93.
Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium.
National Income = ₹ 500
Marginal Propensity to Save = 0.30
Investment Expenditure = ₹ 100 (All India 2014)
Answer:
Given, National Income (Y) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.30, Investment (I) = ₹ 100
Marginal Propensity to Consume (b/MPC)
= 1 – MPS, 1 – 0.30 = 0.70
Also, Y = C + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
500 = C̅ + 0.70 × 500 + 100
500 = C̅ + 350 + 100
C̅ = 500 – 450 = 50
∴ Autonomous Consumption (C) = ₹ 50

Question 94.
Calculate investment expenditure from the following data about an economy which is in equilibrium. (Delhi 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.25
Autonomous Consumption Expenditure = ₹ 200
Answer: National Income (Y) = ₹ 1000
Marginal Propensity to Save (MPS) = 0.25, Autonomous
Consumption Expenditure (C) = ₹ 1000
Marginal Propensity to Consume (MPC/b) = I – MPS = 1 – 0.25 = 0.75
We know, Y = C + I, or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 200 + 0.75 × 1000 + I
1000 = 200 + 750 + I
1,000 = 950 + I
⇒ I = 1000 – 950 = 50
i. e. Investment = ₹ 50

Question 95.
Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium.
National Income = ₹ 1200 (Delhi 2014)
Marginal Propensity to Save = 0.20
Investment Expenditure = ₹ 100
Answer:
Given, Investment Expenditure (I) = ₹ 100, National Income (Y) = ₹ 1200,
Marginal Propensity to Save (MPS) = 0.20 Marginal Propensity to Consume (MPC/b)
= 1 – Marginal Propensity to Save (MPC) = 1 – 0.20 = 0.80
Also, Y = C + I, or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,200 = C̅ + 0.80 × 1200 + 100
1200 = C̅ + 960 + 100
= C̅ + 1,060
⇒ C̅ = 1200 – 1,060 = ₹ 140
Autonomous Consumption Expenditure (C̅) = ₹ 140

Question 96.
Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium. (Delhi 2014)
National Income = ₹ 1,500
Autonoumous Consumption Expenditure = ₹ 300
Investment Expenditure = ₹ 300
Answer:
National Income (Y) = ₹ 1,500,
Autonomous Consumption Expenditure (C̅) = ₹ 300,
Investment (I) = ₹ 300
Also, Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,500 = 300 + b (1,500) + 300
1,500 = 600 + 1,500 b
900 = 1,500 b or b = 900/1,500
b = 0.6
Therefore, Marginal Propensity to Consumer (MPC/b) = 0.6

Question 97.
Calculate ‘autonomous consumption expenditure’ from the following data about an economy which is in equilibrium.
National Income = ₹ 900
Marginal Propensity to Save = 0.10 Investment Expenditure = ₹ 80 (Foreign 2014)
Answer:
It is given that,
National Income (Y) = ₹ 900,
Marginal Propensity to Save (MPS) = 0.10, and Investment (I) = ₹ 80
Marginal Propensity to Consume (MPC/b)
= 1 – MPS = 1 – 0.10 = 0.90
At the equilibrium level. Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i).
we get,
900 = C̅ + 0.90 x 900 + 80
900 = C̅ + 810 + 80
900 = C̅ + 890
⇒ C̅ = 900 – 890 = 10
i.e. Autonomous Consumption (C̅) = ₹ 10

Question 98.
Calculate ‘investment expenditure’ from the following data about an economy which is in equilibrium.
National Income = ₹ 700 Marginal Propensity to Consume = 0.8 Autonomous Consumption Expenditure = ₹ 70 (Foreign 2014)
Answer:
It is given that,
National Income (Y) = ₹ 700,
Marginal Propensity to Consume (MPC/b) = 0.8 and
Autonomous Consumtion Expenditure (C̅) = ₹ 70
At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C= C̅ + bY
On substituting the given variables in equation (i), we get,
700 = 70 + 0.8 × 700 + I
700 = 70 + 560 + I
700 = 630 + I
⇒ I = 700 – 630 = 70
i.e. Investment Expenditure = ₹ 70

Question 99.
Calculate ‘Marginal Propensity to Consume’ from the following data about an economy which is in equilibrium. (Foreign 2014)
National Income = ₹ 800 Autonomous Consumption Expenditure = ₹ 100
Investment Expenditure = ₹ 100
Answer:
It is given that,
National Income (Y) = ₹ 800,
Autonomous Consumption Expenditure (C̅) = ₹ 100 and Investment Expenditure (I) = ₹ 100
As we know that at equilibrium level,
Saving = Investment,
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in eq (i), we get,
800 = 100 +b (800) + 100
800 = 200 + 800 b
600 = 800 b
Or b = 600/800 = 0.75
i.e. Marginal Propensity to Consume (MPC/b) = 0.75

Question 100.
In an economy the Marginal Propensity to Save is 0.4. National Income in the economy increase by ₹ 200 crore as a result of change in investment. Calculate the change in investment. (All India 2011)
Answer:

∴ ΔI = \(\frac{200}{2.5}\) = 200 × \(\frac{10}{25}\) = ₹ 80 crore

Question 101.
State whether the following statements are true or false. Give reasons for your answer.
(i) When Marginal Propensity to Consume is greater than Marginal Propensity to Save, the value of investment multiplier will be greater than 5.
(ii) The value of Marginal Propensity to Save can never be negative. (Delhi 2010)
Answer:
(i) No, the statement is false. This can be understood by an example. Suppose, the value of Marginal Propensity to Consume (MPC) = 0.6, hence. Marginal Propensity to Save (MPS) = 0.4 (as MPS = 1 -MPC) Here, MPC > MPS Now, Investment Multiplier
(K) = \(\frac{1}{1-\mathrm{MPC}}\)
= \(\frac{1}{1-0.6}=\frac{1}{0.4}\) = 2.5
So, K < 5 even if MPC > MPS.

(ii) Yes, the statement is true.

Question 102.
Giving reasons, state whether the following statements are true or false.
(i) Average Propensity to Save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity. Delhi 2010
Answer:
(i) No, the statement is false.

(ii) No, the statement is false.
We know that,
K = \(\frac{1}{1-\mathrm{MPC}}\) so even if the Marginal Propensity to Consume (MPC) will have its minimum value, i.e. 0, the investment multiplier will be I.
Similarly, when MPC = 1, the value of investment multiplier is infinity. Hence, value of investment multiplier varies between one and infinity.

Question 103.
Giving reasons, state whether the following statements are true or false.
(i) When Marginal Propensity to Consume is zero, the value of investment multiplier will also be zero.
(ii) Value of Average Propensity to Save can never be less than zero. (All India 2010)
Answer:
(i) No, the statement is false.
When Marginal Propensity to Consume (MPC) is zero, the value of investment multiplier will be 1 (not zero).
K = \(\frac{1}{1-\mathrm{MPC}}\) or K = \(\frac{1}{1-0}=\frac{1}{1}\) = 1

(ii) The statement is false.

Question 104.
Giving reasons state whether the following statements are true or false.
(i) If the ratio of Marginal Propensity to Consume and Marginal Propensity to Save is 4 : 1, the value of investment multiplier will be 4.
(ii) Sum of Average Propensity to Consume and Marginal Propensity to Consume is always equal to 1. (All India 2010)
Answer:
(i) No, the statement is false.
If the ratio of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is 4 : 1, then the value of investment multiplier is 5 and not 4.
MPC = \(\frac{4}{4+1}=\frac{4}{5}\) = 0.8
K = \(\frac{1}{1-0.8}=\frac{1}{0.2}\) = 5

(ii) No, the statement is false.
The sum of average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) is not necessarily 1.
Consider the following schedule

Income (Y)	Consumption (C)	Change in Income (ΔY)	Change in Consumption (ΔC)	Average Propersity to Consume C/Y	Marginal Propersity Consume (ΔC/ΔY)
1000	800	–	–	0.8	–
1500	1200	500	400	0.8	0.8

In the given schedule, APC = 0.8 and MPC = 0.8
And 0.8 + 0.8 ≠ 1
Therefore, the sum of APC and MPC is not 1,
i.e. APC + MPC ≠ 1

Question 105.
What is meant by the “Effective Demand Principle” in Keynesian theory of employment? Discuss using a schedule or a diagram. (All India 2019)
Answer:
According to the Keynesian theory, “Effective Demand Principle”, equilibrium happens to a point where Aggregate Demand is equal to Aggregate Supply at an under employment situation, which creates deficit demand or deflationary gap.

Deflationary gap refers to a situation, where AD = AS at less than full employment hereby creating unemployment due to under utilised capacity as shown in the diagram below

As shown in the diagram, AD (ex-ante) and AS (ex-ante) intersects at point E, which is the level of effective demand at full employment level. Now, if AD1 (ex-post) intersects AS(ex-ante) at E’ then it gives under full employment equilibrium due to shortage of effective demand. ‘Ea’ area in the above diagram shows the deficit demand which creates deflationary gap.

Question 106.
Assuming that increase in investment is ₹ 1,000 crore and Marginal Propensity to Consume is 0.9, explain the working of Multiplier. (Delhi 2017)
Answer:
Investment Multiplier or simply the multiplier is measured as a ratio between change in output or income and change in investment.
Symbolically, Investment multiplier (K)

Also, there is a direct relationship between Investment Multiplier and Marginal Propensity to Consume (MPC). Multiplier can also be estimated by using the following formula
K = \(\frac{1}{1-\mathrm{MPC}}\)
So, if MPC = 0.9, then K = \(\frac{1}{1-0.9}=\frac{1}{0.1}\) = 10
Now, if the investment increases by ₹ 1,000 crore, then increase in income can be computed by substituting the values in the following formula
K = \(\frac{\Delta Y}{\Delta I}\) ⇒ 10 = \(\frac{\Delta \mathrm{Y}}{1,000}\)
⇒ Change in Income (A Y) = ₹ 10,000 crore
So, if investment increases by ₹ 1,000 crore and MPC = 0.9, then in such an instance, income will increase by ₹ 10,000 crore.

Question 107.
Assuming that increase in investment is ₹ 800 crore and Marginal Propensity to Consume is 0.8, explain the working of Multiplier. (All India 2017)
Answer:
Change in Income = ₹ 4,000 crore
Solve as Q. No. 2 on page 108 and 109.

Question 108.
Assuming that’s increase in investment is ₹ 900 crore and Marginal Propensity to Consume is 0.6, explain the working of Multiplier. (All India 2017)
Answer:
Increase in income = ₹ 2,250 crore
Solve as Q. No. 2 on page 108 and 109.

Question 109.
Calculate investment expenditure from the following data about an economy which is in equilibrium. (All India 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.20
Autonomous Consumption Expenditure = ₹ 100
Answer:
Given, National Income (Y) = ₹ 1,000,
Marginal Propensity to Save (MPS) = 0.20,
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Consume
(b/MPC) = I – MPS, I – 0.20 = 0.80
Y = C + I Or Y = C̅ + bY + I …………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 100 + 0.80 × 1000 + I
I = 1000 – 900 = 100
i.e. Investment = ₹ 100

Question 110.
On the basis of the following information about an economy calculate its equilibrium level of income. (Delhi (C) 2014)
Autonomous Consumption = ₹ 100
Marginal Propensity to Consume = 0.75
Investment = ₹ 5,000
Answer:
Income (Y) = Consumption (C) + Investment (I), since at the equilibrium level, Saving = Investment
Also, Consumption Expenditure (C) = C̅ + bY
Where, C̅ = Autonomous Consumption
b = Marginal Propensity to Consume
Y = Income
So, from the above two relations, we get,
Y = C̅ + bY + I
Y = 100 + 0.75Y + 5100
Y – 0.75Y = 5,100
0.25Y = 5100
Y = \(\frac{5,100}{0.25}\) = 20,400
Therefore, equilibrium level of income = ₹ 20,400

Question 111.
From the following data about an economy, calculate its equilibrium level of income:
Marginal Propensity to Consume = 0.5
Autonomous Consumption = ₹ 300
Investment = ₹ 6,000 (Delhi (C) 2014)
Answer:
Autonomous Consumption (C̅) = ₹ 300; Investment (I) = ₹ 6,000 We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = 300 + 0.5Y + 6,000
⇒ Y – 0.5Y = 6300
0.5Y = 6,300
⇒ Y = \(\frac{6,300}{0.5}\) = 12,600

Question 112.
(i) Explain the distinction between ex-ante measures and ex-post measures.
(ii) From the following data about an economy, calculate its equilibrium level of income
Autonomous consumption = ₹ 200 Marginal Propensity to Consume = 0.9 Investment = ₹ 1,000 (All India (C) 2014)
Answer:
(i)(a) Ex-ante measures These measures are planned or desired measures. Ex-ante measures are generally classified as:

• Ex-ante savings These are desired savings. These represent the amount that households firms want to save during the period of an accounting year.
• Ex-ante investments These are desired investments. These represent the amount that households/firms want to invest during the period of an accounting year.

(b) Ex-post measures These measures are actual or realised measures. Ex-post measures are generally classified as

• Ex-post savings These represent the actual savings of firms or households during the period of an accounting year.
• Ex-post investments These represent the actual investments of firms or households during the period of an accounting year.

(ii) Autonomous Consumption (C̅) = 1200
Marginal Propensity to Consume (MPC/b) = 0.9
Investment (I) = ₹ 1,000
We know that.
Income (Y) = C + I
And C = C̅ + b(Y)
⇒ Y = 200 + 0.9Y + 1,000
⇒ Y – 0.9 Y = 1,200 ⇒ 0.1 Y = 1,200
⇒ Y = \(\frac{1,200}{0.1}\) = 1,200 × \(\frac{10}{1}\) = ₹ 12,000
∴ Equilibrium level of income will be ₹ 12,000.

Question 113.
From the following data about an economy, calculate its equilibrium level of income :
Marginal Propensity to Consume = 0.75
Autonomous consumption = ₹ 200 Investment = ₹ 6,000 (All India (C) 2014)
Answer:
Autonomous Consumption (C̅) = ₹ 200
Marginal Propensity to Consume (MPC/b) = 0.75
Investment (I) = ₹ 6,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ +b(Y) + I
⇒ Y = 200 + 0.75Y + 6,000
⇒ Y – 0.75Y = 6200
⇒ 0.25Y = 6200
⇒ Y = \(\frac{6,200}{0.25}\) = 6,200 × \(\frac{100}{25}\)
= ₹ 24,800
∴ Equilibrium level of income will be ₹ 24,800.

Question 114.
From the following data about an economy, calculate its equilibrium level of income :
Autonomous consumption = ₹ 400
Marginal Propensity to Consume = 0.5
Investment = ₹ 4,000 (All India (C) 2014)
Answer:
Given,
Autonomous Consumption (C̅) = ₹ 400
Marginal Propensity to Consume (MPC/ b) = 0.5
Investment (I) = ₹ 4,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ + b(Y) + I
⇒ Y = 400 + 0.5 (Y) + 4,000
⇒ Y – 0.5Y = 4,400
⇒ 0.5Y = 4,400
⇒ Y = \(\frac{4400}{0.5}\) = 4,400 × \(\frac{10}{5}\) = ₹ 8,800
∴ Equilibrium level of income will be ₹ 8,800.

Question 115.
(i) Distinguish between Aggregate Demand and Aggregate Supply.
(ii) From the following data about an economy, calculate its equilibrium level of income.
Marginal Propensity to Consume = 0.8
Investment = ₹ 5,000
Autonomous consumption = ₹ 500 (All India (C) 2014)
Answer:
(i) Differences between Aggregate Demand and Aggregate Supply are

Basis	Aggregate Demand	Aggregate Supply
Meaning	Aggregate Demand (AD) refers to the total value of final goods and services that all sectors of the economy taken together are planning to ‘buy’ at a given level of income during a period of time.	Aggregate Supply (AS) means the value of final goods and services planned to be ‘produced’ by all the production units in the economy taken together during a period of time.
Components	Components of AD are private consumption expenditure, private investment expenditure, government expenditure and net exports.	Components of AS are consumption expenditure and savings.
Origin of the curve	AD curve originates from Y-axis.	AS curve originates from origin.

(ii) It is given that,
Marginal Propensity to Consume (MPC/b) = 0.8
Investment (I) = ₹ 5,000, and
Autonomous Consumption (C̅) = ₹ 500
At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I …… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 500 + 0.8Y + 5,000
Y – 0.8Y = 5,500
0.2Y = 5,500
Or Y = 5,500/0.2 = 27,500
i.e. Equilibrium level of Income (Y) = ₹ 27,500

Question 116.
In an economy C = 200 + 0.75Y is the consumption function where C is consumption expenditure and Y is National Income. Investment expenditure is ₹ 4,000. Calculate equilibrium level of income and consumption expenditure. (All India 2013)
Answer:
Consumption function (C) = 200 + 0.75Y,
Investment (I) = ₹ 4,000
Now, Y = C + I Or Y = 200 + 0.75Y + 4,000
Y – 0.75Y = 4,200 Or 0.25Y = 4,200
⇒ Y = 4200 × \(\frac{100}{25}\)
⇒ Y = 16,800
∴ Equilibrium income will be ₹ 16,800.
∴ Consumption Expenditure
(C) = 200 + 0.75Y = 200 + 0.75 (16,800)
= 200 + 12,600 = ₹ 12,800

Question 117.
From the following data about an economy, calculate (i) Equilibrium level of National Income and (ii) Total consumption expenditure at equilibrium level of national income.
(a) C = 200 + 05Y is the consumption function, where C is Consumption Expenditure and Y is National Income.
(b) Investment expenditure is ₹ 1,500. (All India 2013)
Answer:
(i) Consumption function (C) = 200 + 0.5Y Investment (I) = ₹ 15,000 We know that, Y = C + I
∴ Y = 200 + 0.5Y + 1,500
⇒ Y = 1,700 + 0.5Y
Or 0.5Y = 1,700
⇒ Y = 1,700 × \(\frac{10}{5}\) = 3,400
Equilibrium level of National Income (Y) = ₹ 3,400

(ii) Total Consumption Expenditure (C)
= 200 + 0.5Y = 200 + 0.5 (3,400)
= 200 + 1,700 = ₹ 1,900

Question 118.
From the data given below about an economy, calculate (i) Investment expenditure (ii) Consumption expenditure.
Equilibrium level of Income = ₹ 5,000
Autonomous Consumption = ₹ 500
Marginal Propensity to Consume = 0.4 (All India 2013)
Answer:
Given, Equilibrium Level of Income (Y) = ₹ 5,000,
Autonomous Consumption (C̅) = ₹ 500,
and Marginal Propensity to Consume (MPC/b) = 0.4
We know that,
Consumption (C) = C̅ + bY = 500 + 0.4 × 5,000 = 500 + 2,000
∴ Consumption (C) = ₹ 2,500
We also know that,
Income (Y) = Consumption (C) + Investment (I)
At the equilbrium level, Saving = Investment
∴ 5,000 = 2,500 + I Or I = 5,000 – 2,500 = 2,500
So, Investment Expenditure (I) = ₹ 2,500
Consumption Expenditure (C) = ₹ 2,500

Question 119.
In an economy, S = -100 + 0.6 Y is the saving function, where S is saving and Y is National Income. If investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, S = -100 + 0.6Y, and Investment Expenditure (I) = ₹ 1100
At equilibrium level of National Income, Saving = Investment
∴ -100 + 0.6Y = 1100
0.6Y = 1100 + 100
Y = \(\frac{1200}{0.6}\) = ₹ 2000
∴ Y = ₹ 2,000, i.e.
Equilibrium level of National Income = ₹ 2,000

(ii) Consumption expenditure at equilibrium level of National Income Income (Y) = Consumption (C) + Investment (I)
Or C = Y – I
C = 2,000 – 1,100 = ₹ 900
∴ Consumption (C) = ₹ 900

Question 120.
C = 100 + 0. 4Y is the consumption function of an economy, where C is Consumption Expenditure and Y is National Income. Investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, C = 100 + 0.4 Y, and
Investment (I) = ₹ 1,100
Equilibrium level of National Income (Y) = Consumption (C) +Investment (I)
Y= 100 + 0.4Y + 1100
Y – 0.4Y = 100 + 1,100
0.6Y = 1,200
Y = \(\frac{1200}{0.6}\) = 2000
i.e. Equilibrium level of income (Y) = 2000

(ii) Consumption expenditure at equilibrium
level of income
C = 100 + 0.4 Y
C = 100 + 0.4 × 2,000
C = 100 + 800 = 900
i.e. Consumption Expenditure (C) = ₹ 900

Question 121.
C = 50 + 0. 5Y is the consumption function of an economy, where C is Consumption Expenditure and Y is National Income and Investment Expenditure is ₹ 2,000 in an economy.
Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, C = 50 + 0.5Y, and Investment (I) = ₹ 2000
Equilibrium level of National Income (Y) = Consumption (C) + Investment (I)
Y = 50 + 0.5y + 2000
Y – 0.5 Y = 50 + 2000 = 2050
Y = 2050/0.5 = 4100
i.e. Equilibrium level of Income (Y) = ₹ 4100

(ii) Consumption expenditure at equilibrium level of National Income
C = 50 + 0.5Y
C = 50 + 0.5 × 4100
C = 50 + 2,050
i.e. Consumption Expenditure (C) = ₹ 2,100

Question 122.
In an economy 75% of the increase in income is spent on consumption. Investment is increased by ₹ 1,000 crore. Calculate (Delhi 2010)
(i) Total increase in income.
(ii) Total increase in consumption expenditure.
Answer:
(i) Here, Marginal Propensity to Consume (MPC) = 0.75
and change in investment (ΔI) = ₹ 1000 crore
Now Multiplier (K) = \(\frac{1}{1-\mathrm{MPC}}=\frac{1}{1-0.75}\) = 4
Again we know that

Or 4 = \(\frac{ΔY}{1000}\)
Or AY = ₹ 4,000
Or Increase in Income = ₹ 4,000 crore

Or ΔC = MPC × ΔY
Or ΔC = 0.75 × 4,000
Or Increase in consumption expenditure (ΔC) = ₹ 3000 crore

Question 123.
In an economy, the equilibrium level of income is ₹ 12,000 crore. The ratio of Marginal Propensity to Consume and Marginal Propensity to Save is 3 : 1. Calculate the additional investment needed to reach new equilibrium level of income of ₹ 20,000 crore. (All India 2010)
Answer:
Here, Change in Income (ΔY) = ₹ 8,000 crore (₹ 20,000 – ₹ 12,000)
Marginal Propensity to Consume (MPC)
= \(\frac{3}{4}\) as (\(\frac{MPC}{MPS}\) = \(\frac{3}{1}\)) = 0.75
Where, MPS is the Marginal Propensity to Save
Hence, Multiplier (K)

Or Additional Investment Required = ₹ 2,000 crore

Question 124.
How is saving and investment approach derived from the Aggregate Demand and supply approach of income determination? Explain and use diagrAnswer: (Delhi (C) 2010)
Answer:
The equilibrium level of income or output is that level at which the planned savings and planned investments are equal. It is derived from Aggregate Demand and Supply approach in the following way.

Aggregate Demand (AD) in a two sector economy is defined as the sum of Consumption Expenditure(C) and Investment Expenditure (I) i.e. AD = C + I, whereas Aggregate Supply (AS) is defined as the sum of Consumption (C) and Saving (S) i.e. AS = C + S.

Mathematically, AD = AS
Or C + I = C + S
Hence, I = S
Or S = I

In the graph given, OP or OP is the equilibrium level of income. E is the equilibrium point where Aggregate Demand equals Aggregate Supply. Equality between AS and AD implies the equality between S and I. When we extend the line EP vertically downward, it meets at point E’ with S and I. It is the equilibrium point of saving and investment approach. OP or OP represents the level of income at which the economy is in equilibrium.

Question 125.
Give the meaning of involuntary unemployment. (Delhi 2017)
Or
What is involuntary unemployment? (Delhi 2014)
Answer:
Involuntary unemployment is a situation in the economy when even, if people are willing to work at existing wage rates, they are not getting work.

Question 126.
Give the meaning of deflationary gap. (All India 2014; Delhi 2010)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap.

Question 127.
What is meant by excess demand in macroeconomics? (Foreign 2014)
Or
What is excess demand in macroeconomics? (All India 2014)
Answer:
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.

Question 128.
Define inflationary gap. (All India 2014)
Or
Give the meaning of inflationary gap. (All India (C) 2012, 2010)
Answer:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

Question 129.
What is full employment? (All India 2014)
Answer:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 130.
Give the meaning of deficient demand. (Foreign 2014)
Answer:
A situation when the Aggregate Demand is less than the Aggregate Supply in an economy, corresponding to full employment, is termed as deficient demand.

Question 131.
State the impact of ‘Excess Demand’ under the Keynesian theory on employment in an economy. (All India 2019)
Or
Describe the adjustments that may take place in an economy when Ex-ante Aggregate Demand is greater than Ex-ante Aggregate Supply. (All India 2019)
Or
In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy. (All India 2014)
Or
In an economy, Aggregate Demand is greater than Aggregate Supply. Explain the changes that will take place in this economy. (Delhi (C) 2011)
Answer:
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

Question 132.
Describe the adjustments that may take place in an economy when Ex-ante savings are less than Ex-ante Investments. (All India 2019)
Answer:
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment curve, i.e households are saving less, which means that they are speeding more. This will lead to an unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock, producers will increase employment so as to increase their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 133.
Describe the adjustments that may take place in an economy when Ex-ante Savings are greater than Ex-ante Investments. (All India 2019)
Answer:
If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve, i.e. households are saving more, which means that they are spending less. This will lead to an unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers will cut back employment so as to reduce their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 134.
What is meant by inflationary gap? State three measures to reduce this gap. (March 2018)
Answer:
Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

The following are the three measures to reduce this gap

• Reduction in government expenditure on public works, public welfare, defence etc.
• Reduction in public expenditure on transfer payments and subsidies.
• Increase in taxes to lower the disposable income with the people.

Question 135.
Explain the role of taxation in reducing excess demand. (Delhi (C) 2016)
Answer:
Excess demand refers to the situation when Aggregate Demand (AD) is in excess of Aggregate Supply (AS) corresponding to full employment in the economy.

In a situation of excess demand, government raises the rates of all taxes. This reduces the purchasing power of the people and reduces both consumption and investment expenditures. A fall in consumption and investment expenditures reduces the level of Aggregate Demand and helps to check the problem of excess demand.

Question 136.
Explain how controlling money supply is helpful in reducing excess demand. (All India 2016)
Answer:
The Reserve Bank of India controls money supply in the country with the help of its monetary policy.
The various tools of the monetary policy which are helpful in reducing excess demand are

• Bank rate is increased.
• Government securities are sold in the open market.
• Cash reserve ratio and statutory liquidity ratio are increased.
• Margin requirements are increased.
• The RBI will persuade the commercial banks to make the credit costlier or decrease the availability of credit.
• Credit rationing will be encouraged.

The above quantitative (i-iii) and qualitative (iv-vi) measures will decreases the money supply in the economy. As money supply decreases, it leads to decrease in liquidity in the economy. Decreased liquidity causes a fall in the level of Aggregate Demand, and hence the problem of excess demand is checked.

Question 137.
Explain the changes that take place when Aggregate Demand is less than Aggregate Supply. (All India (C) 2016)
Or
Explain the meaning of deflationary gap with the help of diagram. (All India (C) 2015)
Or
What is the meaning and implications of deflationary gap? (All India 2011)
Or
In an economy, Aggregate Demand is less than Aggregate Supply. Explain the changes that will take place in this economy. (All India 2011)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium.
This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = AD_FE – AD_IU = EF
Where, AD_FE = AD in full employment
AD_IU =AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to Aggregate Demand.

Question 138.
Give the meaning of
(i) involuntary unemployment
(ii) inflationary gap (Delhi (C) 2015)
Answer:
(i) Involuntary unemployment:
It is a situation in the economy when even, if people are willing to work at existing wage rates, they are not getting work.

(ii) Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

Question 139.
Give the meaning of
(i) Autonomous consumption, and
(ii) Full employment (Delhi (C) 2015)
Answer:
(i) Autonomous consumption:
The initiator minimum level of consumption required for sustenance at zero level of income is termed as autonomous consumption.

(ii) Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 140.
Give the meaning of aggregate demand and full employment. (Delhi (C) 2015)
Answer:
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.

Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 141.
Explain the distinction between voluntary and involuntary unemployment. (All India 2011)
Or
Distinguish between voluntary unemployment and involuntary unemployment. (Delhi (C) 2011)
Answer:
Voluntary unemployment is a kind of unemployment, when people are able to work but not willing to work at all or are not willing to work at the existing wage rate. It is self induced.

Involuntary unemployment is a situation in the economy when even if people are able and willing to work at existing wage rates, they are not getting work. Hence, they are unemployed against their wishes.

Question 142.
In the given figure, what does the gap ‘KT’ represent? State any two fiscal measures to correct the situation. (Delhi 2019)

Answer:
In the given figure, the gap KT represents inflationary gap. AD and AS represents Aggregate Demand and Aggregate Supply respectively at full employment level and ‘E’ is the point of equilibrium. AD represents actual aggregate demand which exceed aggregate demand at the point of equilibrium. This will create inflationary pressures in the economy.

Two fiscal measures to correct the situation are as follows

• Increase tax
• Reduce government expenditure

Question 143.
Discuss the working of the adjustment mechanism in the following situations.
(a) Aggregate demand is greater than Aggregate supply.
(b) Ex-ante investments are less than Ex-ante savings. (All India 2019)
Answer:
(a) When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

(b) If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve, i.e. households are saving more, which means that they are spending less. This will lead to an unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers will cut back employment so as to reduce their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 144.
What is monetary policy? State any three instruments of monetary policy. (April re-exam 2018)
Answer:
Monetary Policy: It is the policy of correcting excess or deficient demand in the economy by controlling the supply of credit. It regulates the cost of credit (i.e. rate of interest) and availability of credit (i.e. money supply).

The three instruments of monetary policy include

• Open market operations
• Cash reserve ratio
• Margin requirements

Question 145.
Define full employment in an economy. Discuss the situation when Aggregate Demand is more than Aggregate Supply at full employment income level. (April re-exam 2018)
Answer:
Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

When AD is more than AS:
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

Question 146.
Distinguish between Inflationary gap and Deflationary gap. (All India 2012)
Answer:
Differences between inflationary gap and deflationary gap are

Basis	Inflationary Gap	Deflationary Gap
Meaning	The excess of aggregate demand above the level that is required to maintain full employment level of equilibrium is termed as inflation any gap.	The short fall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as deflationary gap.
Effect	Inflationary gap causes inflation and increases wages and price level in the economy.	Deflationary gap causes deflation and decreases wages and price level in the economy.

Question 147.
Discuss the adjustment mechanism in the following situations. (All India 2019)
(a) Aggregate Demand is less than Aggregate Supply.
(b) Ex-ante Investments are greater then Ex-ante Savings.
Answer:
(a) Adjustment mechanism when aggregate demand is less than aggregate supply:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium.
This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = AD_FE – AD_IU = EF
Where, AD_FE = AD in full employment
AD_IU = AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to Aggregate Demand.

(b) Adjustment mechanism when ex-ante investments are greater than ex-ante savings:
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment curve, i.e households are saving less, which means that they are speeding more. This will lead to an unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock, producers will increase employment so as to increase their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 148.
What are two alternative ways of determining equilibrium level of income? How are these related? (April re-exam 2018)
Answer:
The equilibrium level of income/output can be studied with the help of following two approach
1. AS = AD approach Equilibrium level of output in an economy is determined at a point where planned spending (i.e. AD = C + I) equals to planned output (i.e.Y/AS = C + S).
2. S = I approach Equilibrium output /GDP is achieved, when S = I.
Both Approach are Interrelated We know that,
= + = + =
In simple words, we can say that equality between AS and AD implies the equality between S and I. We can explain it with the help of following diagram

There is one and only one equilibrium of GDP, when AS = AD (i.e Y = AD) or when S = I. In either case, the equilibrium of GDP= OQ.

Question 149.
Explain the situation of deficient demand in an economy. Also explain the role of repo rate in correcting his. (All India (C) 2016)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, AD_FE = AD at full employment level
AD_IU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of AD_IU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= AD_FE – AD_IU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Question 150.
State whether the following statements are true or false. Give reasons for your answer.
(i) Inventories accumulate when planned investment is less than planned saving.
(ii) Inflationary gap exists when Aggregate Demand is greater than Aggregate Supply.
(iii) Average Propensity to Save can be negative. (Delhi (C) 2016)
Answer:
(i) The given statement is True. When planned investment is less than planned savings, then in such a situation, Aggregate Demand is less than Aggregate Supply which leads to accumulation of inventories.
(ii) The given statement is False. Inflationary gap exists when at full employment level aggregate demand is greater than aggregate supply.
(iii) The given statement is True. APS can be negative when consumption expenditure exceeds income.

Question 151.
What is ‘Inflationary Gap’? Explain the role of Cash Reserve Ratio in removing this gap. (Foreign 2015)
Or
Explain the concept of inflationary gap. Also, explain the role of legal reserves in reducing it. (All India 2011,2010)
Or
Define and represent inflationary gap on a diagram. Explain the role of the varying reserves requirement in removing the gap. (Delhi (C) 2010)
Answer:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

In the above figure,
AD_FE = AD at full employment level
AD_AE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= AD_AE – AD_FE = EF

Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

Question 152.
What is ‘deficient demand’? Explain the role of ‘Margin Requirements’ in removing this gap. (Foreign 2015)
Or
Explain the concept of deflationary gap. Also, explain the role of margin requirement in reducing it. (All India 2012,2011, 2010)
Answer:
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, AD_FE = AD at full employment level
AD_IU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of AD_IU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= AD_FE – AD_IU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Role of margin requirements to reduce deflationary gap Margin requirement refers to the difference between the amount of loan granted and the current value of security offered for loAnswer: In case of deflationary gap, the margin requirements are lowered to increase the flow of credit by encouraging people to borrow. As a result of that, the Aggregate Demand increases and ultimately the economy attains equilibrium.

Question 153.
Explain the concept of inflationary gap. Explain the role of ‘repo rate’ in reducing this gap. (Delhi 2015)
Answer:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

In the above figure,
AD_FE = AD at full employment level
AD_AE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= AD_AE – AD_FE = EF

Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

Role of repo rate in reducing inflationary gap:
Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of inflation Central Bank increases repo rate which makes credit dearer (cost of borrowings increases), hence liquidity falls, which helps in bringing down the inflation rate through fall in Aggregate Demand.

Question 154.
Explain the concept of deflationary gap and the role of ‘open market operations’ in reducing this gap. (Delhi 2015)
Answer:
Deflationary gap or deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, AD_FE = AD at full employment level
AD_IU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of AD_IU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= AD_FE – AD_IU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Role of open market operations in reducing deflationary gap Open market operations refers to the buying and selling of securities in the open market to the general public and commercial banks by the Central Bank.

In the situation of deflationary gap. Central Bank opts for open market purchases. This process leads to increase in the money supply in the economy and hence increase in Aggregate Demand to check the deflationary gap.

Question 155.
What is ‘Deficient Demand’? Explain the role of ‘bank rate’ in removing it. (All India 2015)
Or
Explain the concept of deficient demand in macroeconomics. Also, explain the role of bank rate in correcting it. (Delhi 2012: All India 2011)
Answer:
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, AD_FE = AD at full employment level
AD_IU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of AD_IU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= AD_FE – AD_IU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Role of bank rate in correcting the problem of deficient demand The rate at which the Central Bank lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central Bank reduces the bank rate to increase the money supply in the economy.

Reduction in bank rate increases the credit/money creation capacity of commercial banks and also reduces the market rate of interest which encourages people to borrow more. In this way, the Aggregate Demand increases to the level of Aggregate Supply and the economy attains equilibrium.

Question 156.
What is ‘excess demand’? Explain the role of ‘reverse repo rate’ in removing it. (All India 2015)
Answer:
Excess demand or inflationary gap:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

In the above figure,
AD_FE = AD at full employment level
AD_AE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= AD_AE – AD_FE = EF

Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

Role of ‘reverse repo rate’ in correcting the problem of excess demand Reverse repo rate is the rate at which commercial banks keep their excess funds with the Central Bank, or in other words, the rate at which Central Bank borrows from commercial banks. In the situation of excess demand. Central Bank raises the ‘reverse repo rate’ which locks the excess liquidity of commercial banks with Central Bank, hence it causes a fall in Aggregate Demand to attain the full employment equilibrium.

Question 157.
Explain the changes that take place when aggregate demand and aggregate supply are not equal. (Delhi 2015)
Or
Explain National Income equilibrium through Aggreate Demand and Aggregate Supply. Use diagram. Also explain the changes that take place in an economy when the economy is not in equilibrium. (Delhi 2014)
Answer:
In an economy, equilibrium level of income and employment is determined when Aggregate Demand (AD) is equal to Aggregate Supply (AS). According to Keynes, Aggregate Supply may be assumed to be perfectly elastic in an economy where full employment of resources is yet to be achieved. Accordingly, Aggregate Demand becomes the principal determinant of equilibrium level of income. In the following figure, AD represents Aggregate Demand curve and 45° line is the line of reference, representing Aggregate Supply (AS). Equilibrium level of income Yis determined at point E, where AD = AS.

Prior to point E, Aggregate Demand exceeds Aggregate Supply, it means demand for goods and services in economy is more than their flow. To increase inventory upto desirable level, firms would plan to increase output which increases output and income level in economy. This process will continue till AD and AS become equal to each other.
Beyond that point, Aggregate Supply exceeds Aggregate Demand, it means demand for goods and services in the economy is less than their flow. To clear excess inventory, firm would plan to reduce output which decreases output and income level. This process will continue till AD and AS become equal to each other.

When AS = AD the equilibrium is struck. Because the equality between AS and AD implies that the desired level of output in the economy (as indicated by AS) is exactly equal to the desired level of expenditure (indicated by AD) In the economy.

Question 158.
In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy. (All India (C) 2015)
Answer:
If in an economy, planned spending, i.e. aggregate demand is greater than the planned output i.e. aggregate supply then the following changes will take place in the economy.

(i) Since the aggregate demand exceeds aggregate supply, therefore the existing stocks of the producers will be sold out.
(ii) To rebuild the desired stocks, so as to be able to meet the demand, the producers would plan greater production.
(iii) This decision of producers will increase the level of aggregate supply, till the point it converges with aggregate demand, as is shown in the diagram given above.

Question 159.
When is an economy in equilibrium? Explain with the help of saving and investment function. Also, explain the changes that take place in an economy when the economy is not in equilibrium. Use diagram. (All India 2014)
Answer:
Equilibrium level of income is determined at a point, where ex-ante or planned saving is equal to planned investment. This is because, in equilibrium
Aggreate Supply (AS) = Aggreate Demand (AD),
Or Consumption (C) + Saving (S)
= Consumption (C) + Investment (I),
Or Saving (S) = Investment (I).
In the diagram given below,
E is the point where S = 1,
Hence, the point at which the economy is in equilibrium. OY is the equilibrium level of National Incomes.

When savings are greater than investment in an economy, it refers to AD < AS. There will be a rise in inventory stock and prices will start to fall. To clear their stocks, the producers would now plan lesser output. This would mean lesser income in the economy. Lesser income implies lesser saving. The process would continue till S = I.

But if investments are more than savings, it means that AS < AD. Stocks would reduce and prices will start to rise. To stand benefited from such a condition, the producers will increase their production, leading to an increase in investments. The process would continue till S = I. Question 160. Explain all the changes that will take place in an economy when Aggregate Demand is not equal to Aggregate Supply. (All India 2013) Answer: There may be two possible conditions (i) Aggregate Demand is greater than Aggregate Supply (AD > AS) When AD is greater than AS, flow of goods and services in the economy tends to be less than their demand. The existing stocks of the producers would be sold out. To rebuild the desired stocks the producer would plan greater production. AS would increase to become equal to AD.

(ii) Aggregate Demand is less than Aggregate Supply (AD < AS) When AD is less than AS, flow of goods and services in the economy tends to exceed their demand. As a result, some of the goods would remain unsold. To clear unwanted stocks, the producers would plan a cut in production. Consequently, AS would reduce to become equal to AD. This is how AS adapts itself to AD.

Question 161
Distinguish between Inflationary Gap and Deflationary Gap. State two measures by which these can be corrected. (All India 2013)
Answer:
Differences between inflationary gap and deflationary gap:

Basis	Inflationary Gap	Deflationary Gap
Meaning	The excess of aggregate demand above the level that is required to maintain full employment level of equilibrium is termed as inflation any gap.	The short fall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as deflationary gap.
Effect	Inflationary gap causes inflation and increases wages and price level in the economy.	Deflationary gap causes deflation and decreases wages and price level in the economy.

Two measures by which inflationary gap can be corrected
(i) Increase in bank rate
(ii) Increase in repo rate

Two measures by which deflationary gap can be corrected
(i) Decrease in bank rate
(ii) Decrease in repo rate

Question 162.
Explain the meaning of under employment equilibrium. Explain two measures by which full employment equilibrium can be reached. (All India 2013)
Answer:
In an economy, when AS = AD or S = I but without the fuller utilisation of labour force, the economy is said to be in under employment equilibrium. Under employment, equilibrium occurs when AS = AD but without the fuller utilisation of labour force.

Measures to correct under employment equilibrium:
(i) Bank rate Central Bank should decrease the bank rate. A decrease in bank rate lowers the rate of interest and credit becomes cheap. Accordingly, the demand for credit expands and Aggregate Demand increases.
(ii) Open market operations By buying the government securities, the Central Bank injects additional purchasing power into the system which results in the expansion of credit. As a result. Aggregate Demand increases.

Question 163.
Explain the concept of excess demand in macroeconomics. Also, explain the role of open market operation in correcting it. (Delhi 2012)
Answer:
Excess demand:
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.

Role of open market operations to correct the problem of excess demand Open market operations refer to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of citizens of the country.

In case of excess demand, the Central Bank sells its securities to common public and financial institutions. It reduces the supply of money in the economy and reduces the money/credit creation power of commercial banks. Thus, the Aggregate Demand comes down and the economy attains equilibrium.

Question 164.
Explain the role of the following in correcting deficient demand in an economy.
(i) Open market operations
(ii) Bank rate (Delhi 2012, 2011, 2010)
Answer:
(i) Role of open market operations in correcting deficient demand Open market operations refers to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of commercial banks and citizens of the country. In case of deficient demand, the Central Bank purchase securities from public and financial institutions. It increases the supply of money in the economy as well as credit/money creation power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy attains equilibrium.

(ii) Role of bank rate in correcting Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, AD_FE = AD at full employment level
AD_IU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of AD_IU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= AD_FE – AD_IU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Role of bank rate in correcting the problem of deficient demand The rate at which the Central Bank lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central Bank reduces the bank rate to increase the money supply in the economy.

Reduction in bank rate increases the credit/money creation capacity of commercial banks and also reduces the market rate of interest which encourages people to borrow more. In this way, the Aggregate Demand increases to the level of Aggregate Supply and the economy attains equilibrium.

Question 165.
Explain the role of the following in correcting the inflationary gap in an economy:
(i) Legal reserves
(ii) Bank rate (All India 2011)
Answer:
(i) Legal Reserves:
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

Role of ‘reverse repo rate’ in correcting the problem of excess demand Reverse repo rate is the rate at which commercial banks keep their excess funds with the Central Bank, or in other words, the rate at which Central Bank borrows from commercial banks. In the situation of excess demand. Central Bank raises the ‘reverse repo rate’ which locks the excess liquidity of commercial banks with Central Bank, hence it causes a fall in Aggregate Demand to attain the full employment equilibrium.

(ii) Bank Rate – The rate at which Central Bank lends money to Commercial Banks is termed as bank rate. In case of inflationary gap in the economy, the Central Bank increases the bank rate to reduce the money supply in the economy. Increase in bank rate reduces the money/credit creation power of commercial banks and also increases the market rate of interest which discourages people to borrow more. In this way, the Aggregate Demand falls in the economy and equilibrium is restored.

Question 166.
Explain the role of the following in correcting the deflationary gap in an economy (All India 2011)
(i) Open market operations.
(ii) Margin requirements.
Answer:
(i) Open market operations:
Role of open market operations in correcting deficient demand Open market operations refers to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of commercial banks and citizens of the country. In case of deficient demand, the Central Bank purchase securities from public and financial institutions. It increases the supply of money in the economy as well as credit/money creation power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy attains equilibrium.

(ii) Margin requirements:
Role of margin requirements to reduce deflationary gap Margin requirement refers to the difference between the amount of loan granted and the current value of security offered for loans. In case of deflationary gap, the margin requirements are lowered to increase the flow of credit by encouraging people to borrow. As a result of that, the Aggregate Demand increases and ultimately the economy attains equilibrium.

Multiple Choice Questions

Question 1.
Suppose in a hypothetical economy, the income rises from ₹ 5,000 crore to ₹ 6,000 crore. As a result, the consumption expenditure rises from ₹ 4,000 crore to ₹ 4,600 crore. Marginal propensity to consume in such a case would be (Choose the correct alternative) (Delhi 2019)
(a) 0.8
(b) 0.4
(c) 0.2
(d) 0.6
Answer:
(d) 0.6

Question 2.
If the Marginal Propensity to Consume is greater than Marginal Propensity to Save, the value of the multiplier will be (All India 2017)
(a) greater than 2
(b) less than 2
(c) equal to 2
(d) equal to 5
Answer:
(a) greater than 2

Question 3.
If MPC = 1, the value of multiplier is …………. (All India 2015)
(a) 0
(b) 1
(c) between 0 and 1
(d) infinity
Answer:
(d) infinity

Question 4.
The value of multiplier is ………… . (Delhi 2015)
(a) \(\frac { 1 }{ MPC }\)
(b) \(\frac { 1 }{ MPS }\)
(c) \(\frac { 1 }{ 1-MPS }\)
(d) \(\frac { 1 }{ MPC-1 }\)
Answer:
(b) \(\frac { 1 }{ MPS }\)

Question 5.
If MPC = 0, the value of multiplier is (Choose the correct alternative) Foreign 2015
(a) 0
(b) 1
(c) between 0 and 1
(d) infinity
Answer:
(b) 1

Question 6.
Aggregate Demand can be increased by (Choose the correct alternative) (Delhi 2017)
(a) increasing bank rate
(b) selling government securities by Reserve Bank of India
(c) increasing cash reserve ratio
(d) None of the above
Answer:
(d) None of the above

Question 7.
Which of the following are sectors of two sector economy?
(a) Government and households
(b) Households and private firms
(c) Private firms and government
(d) External and households
Answer:
(b) Households and private firms

Question 8.
Consumption function (C) = C̅ + bY, what does C̅ indicates?
(a) Consumption at zero level of income
(b) Autonomous consumption
(c) Dis-savings
(d) All of the above
Answer:
(d) All of the above

Question 9.
Under autonomous investment function, the investment curve is
(a) parallel to 7-axis
(b) parallel toA-axis
(c) downward sloping
(d) upward sloping
Answer:
(b) parallel toA-axis

Question 10.
Aggregate supply is always equals to National Income (AS = Y) if C = ₹ 800 crore and Y = ₹ 1,700 crore, then find savings (S).
(a) ₹ 800 crore
(b) ₹ 900 crore
(c) ₹ 2,500 crore
(d) ₹ 1,700 crore
Answer:
(b) ₹ 900 crore

Question 11.
…………. refers to the situation where some people are not getting work, even when they are willing to work at the existing wage rate.
(a) Voluntary unemployment
(b) Disguised unemployment
(c) Involuntary unemployment
(d) Under unemployment
Answer:
(c) Involuntary unemployment

Question 12.
In macroeconomics, under short-run economic equilibrium analysis, ………. factor remains constant.
(a) raw material
(b) employment (labour)
(c) technology
(d) All of the above
Answer:
(c) technology

Question 13.
When …………. flow of goods and services in the economy tends to exceed their demand. As a result, some of the goods would remain unsold.
(a) AS < AD
(b) S < I
(c) AS > AD
(d) AS = AD
(Where, AS = Aggregate Supply, AD = Aggregate Demand, = Investment, = Savings)
Answer:
(c) AS > AD

Question 14.
If MPS = 0, then what would be the value to Investment Multiplier (K)?
(a) 0
(b) 1
(c) ∞
(d) 2
Answer:
(c) ∞

Question 15.
What will happen, when AS < AD?
(a) To clear unwanted stocks, the producers would plan a cut down in production
(b) To rebuild the desire stocks, the producers would plan greater production
(c) The producers would plan same level of production
(d) Both (a) and (c)
Answer:
(b) To rebuild the desire stocks, the producers would plan greater production

Question 16.
…………. is a quantitative instrument of Central Bank monetary policy.
(a) Margin requirements
(b) Bank rate policy
(c) Moral suasion
(d) Selective credit control
Answer:
(b) Bank rate policy

Question 17.
Deflationary gap exists in the economy when
(a) AD = AS
(b) AD < AS
(c) deficit demand
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

Question 18.
During deficit demand, RBI decreases ……….. which is the fraction of total deposits that each commercial bank must keep with RBI.
(a) CRR
(b) Repo
(c) Reverse repo
(d) SLR
Answer:
(a) CRR

Question 19.
If MPS = 0.2, Find the value of MPC?
(a) 0.2
(b) 1
(c) 0.8
(d) 8
Answer:
(c) 0.8

Question 20.
………….. refers to a situation in which actual aggregate demand tends to be higher than what is required to maintain full employment.
(a) Under employment equilibrium
(b) Over employment equilibrium
(c) Full employment equilibrium
(d) Zero employment equilibrium
Answer:
(b) Over employment equilibrium

Question 21.
Find the value of consumption, if autonomous consumption = ₹ 100 crore, Income = ₹ 500 crore and MPC = 0.8.
(a) ₹ 600 crore
(b) ₹ 400 crore
(c) ₹ 500 crore
(d) ₹ 480 crore
Answer:
(c) ₹ 500 crore