How to get edge in National Income Accounting

This Chapter on National Income Accounting needs memory skills,Understanding and application skills.All the three approaches are required to make NIA a cake walk.
Before starting you must know a bit about Factor Income,Transfer Income,Final Goods,Intermediate Goods etc.
First thing is to learn all the methods.This require cramming of farmules.This can be done by Practice.
Some Golden Rules-:
MP=FC+NIT                                                           :NIT=INDIRECT TAX-SUBSIDIES
FC=MP-NIT

GROSS=NET+DEPRECIATION                           :DEP=CONSUMPTION OF FIXED CAPITAL
NET=GROSS-DEPRECIATION

NATIONAL=DOMESTIC+NFIFA                           :NFIFA=FIFA-FITA
DOMESTIC=NATIONAL-NFIFA

So GNPmp=NDPfc+Dep+NFIFA+NIT
or

NDPfc=GNPmp-Dep-NFIFA-NIT
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After remembering above rules now various methods of estimating National Income.

Income method-:The first step is to determine NDPfc
NDPfc=Compensation of employees + operating surplus + mixed Income

Compensation of employees=Wages and salaries + Employers contribution to social security
Operating surplus=Rent + interest + Profits + Royalty(if given)

After determining NDPfc determine NNPfc

NNPfc=NDPfc+NFIFA

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Expenditure Method
The first step is to determine GDPmp


GDPmp=Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital Formation + Net Exports
Gross Domestic Capital formation may not be given directly then you have to make it.

If NDCF is given use given below method

GDCF=Net domestic capital formation + Depreciation


If ND Fixed CF is given use given below method

GDCF=Net domestic fixed capital formation + Depreciation + Change in stock

 If GD Fixed CF is given use given below method

GDCF=Gross domestic fixed capital formation + Change in stock

or

GDCF=Gross business fixed Investment + Gross residential construction + Gross Public Investment + Change in stock

Net exports=Exports - Imports


So after determining GDPmp


NNPfc=GDPmp - Dep + NFIFA - NIT

Macroeconomics second preboard

Q17. What do you mean by effective Demand?

Effective Demand is that level of aggregate demand which is required to maintain full employment level of output.
Q18. Why is repayment of loan considered as capital expenditure?
Repayment of loan leads to reduction in liabilities so it capital expenditure.

Q19. What can be the minimum value of investment multiplier?

Minimum value of multiplier is 1.

Q20. What does the deficit in Balance of Trade Indicate?

It indicates excess of imports of goods over exports of goods.

Q21. Define cash reserve ratio.

It is that part of deposits held by commercial banks which they have to maintain with RBI in the form of cash reserve.

Q22. Differentiate between autonomous items and accommodating items of Balance of Payment account.

Autonomous items are those items which are included in BOP due to some economic activity like profit making. These may be import or export.

These are also known as above the line items.

Autonomous items are those items which are included in BOP due to some other activity like making adjustments. These may be borrowings, errors and omissions.

These are also known as below the line items.



Q23. What do you mean by Revenue Deficit in Government Budget? How can it be reduced?

Revenue deficit in government budget is the difference between Revenue expenditure and revenue receipt.

RD = RE - RR

This can be reduced by discouraging expenditure on non productive activities and increasing revenue receipts may be through taxes.



Or

Explain the objective of Redistribution of Income of Government Budget.

Governments try to bring equal distribution of income and wealth through budget. This can be done by Taxing the income of rich people and subsidizing the needs of poor people. It will reduce the purchasing power of rich and increase the purchasing power of poor people.. This way the gap between rich and poor can be reduced.





Q24. Determine Gross national disposable income.

(in cr)

NDPfc 550

Net current transfers from rest of the world 50

Current transfers from government administrative deptt. 20

Net Indirect Tax 35

Consumption of fixed capital 10

Net factor Income from abroad (-15)

Exports 25



GNDI =GNPmp+ Net current transfers from rest of the world

GNDI = NDPfc+Depriciation + NFIFA+ NIT+ NCTrow

GNDI = 550+10+(-15) +20+ 50

GNDI = 615 cr

Q25. State any three sources of demand for foreign exchange.

(i) To purchase god and services in foreign countries

(ii) To Invest in foreign countries

(iii) To Import

(iv) To send a Gift abroad

To speculate in the foreign currencies.

Q26. How money has overcome the problem of lack of double coincidence of wants. Explain briefly.

Double coincidences of wants means mutual fulfillment of wants. This was a rare phenomenon in barter system due to lack of double coincidences. There was no common unit for medium of exchange. To carry out trade a lot of time was got wasted in searching. Money has solve this problem as in money we can measure the value of all the goods and services. We can also buy those goods and services. There is no need to search for trading partner. There is well established market system due to money. Anything which is sellable can be exchanged with money.

Q27. In an Economy MPC is 4 times of MPS.Determine the change in Income if Investment in the Economy is increased by Rs 4000 Cr.

MPC=4MPS

MPC+MPS= 1 ; PUTING

4MPS+MPS= 1

5MPS= 1

MPS=1/5

MPS= .2 and MPC=.8

K=1/MPS ; k =1/.2 ; K = 5

Change in income= K x change in investment

Change in income= 5x 4000 = 20000 cr

Q28. Explain how open market operations are used to control money supply in the economy by central bank.

Open market operation means buying and selling of government securities by central bank from commercial banks and public in open market. This is quantitative method adopted by central bank to control money supply.

During inflation central bank sell securities to commercial bank and public, as a result money supply in the economy reduces and inflation can be contained.

During depression central bank buys securities so funds moves from central bank to commercial banks and public. Money supply in the economy increases and lack of demand can be curbed.

Q29. Distinguish between Revenue Expenditure and Capital Expenditure. Give two examples of each.

Revenue expenditure

1.It does not lead to creation of assets and reduction in liabilities.

2. Examples -paying of salaries, payment of interest, Expenditure on maintenance of law and order.

Capital Ependiture

It leads to creation of assets or reduction in liabilities.

Payment of borrowed amount, construction of dam ,buying of machinery

Or

Categorise the following into capital receipt and revenue Receipt giving reasons

(i) Selling of shares of Public sector undertaking by government

(ii) Recovery of old loan by central government from state government

(iii) Income tax collected by government

(iv) Grants by foreign government

Sol.

(i) Capital receipt-It leads to reduction in assets.

(ii) Capital receipt-It leads to reduction in assets.

(iii) Revenue receipt-It neither leads to reduction in assets nor results in creation of liabilities.

(iv) Revenue receipt-It neither leads to reduction in assets nor results in creation of liabilities.


Q30. Determine the equilibrium level of Income, output and employment in the economy with the help of Saving and investment approach with the help of diagram. Explain what happens when Planned saving is not equal to planned investment.

In an economy equilibrium is determined where aggregate demand is equal to aggregate supply.


AS=AD

C+ S= C +I

So S=I

So equilibrium is determined where planned saving is equal to planned investment.

Economy is in equilibrium at on level of out put at this level of out put planned saving is equal to planned investment.

S>I When planned saving is more than planned investment it mean households are refraining from consumption. It will result in unwanted stock of unsold goods with firms. The real investment of the firm will increase. The firms will respond to this situation by reducing output by reducing employment till AS becomes equal to ADat this level planned savings are equal to planned investment.





Q31. Determine Private Income, Personal Income and personal disposable income.

Items in Cr

Net Current transfers from rest of the world 60

Net domestic product at market price 1720

Net indirect tax 20

Savings of non deptt enterprises 100

Factor income received from abroad 20

Factor income paid to abroad 40

Corporation tax 50

Net retained earnings of private corporate sector 120

Miscellaneous receipt of government administrative dements 150

Income of government from property and entrepreneurship 200

Direct taxes paid by households 30

Consumption of fixed capital 15

Current transfers from government administrative departments 50

Sol.

Private Income =Part of NDPfc accruing to private sector+ NFIFA+ Current transfer from government administrative deptt+ Net current transfer from Rest of the world+ Interest on Public Debt



Part of NDPfc to private sector = NDPfc –Part of NDPfc to Government



Part of NDPfc to private sector = (1720 -20)-(100 +200)

= 1400

Private Income= 1400+ (-20)+ 50+ 60+ 80

=1570 Cr

Personal Income= Private income- corporation Tax- Net retained earning of private corporate sector

= 1570- 50-120

=1400

Personal disposable income= Personal income- direct tax paid by households- Misc receipts of government administrative deptt.

PDI= 1400- 30-150

=1220 cr



Q32. Explain the problem of double counting with the help of an example. Suggest two methods of overcoming it.

Problem of double counting may arise when we estimate national income by value added method. It means taking the value of goods and services more than once in the estimation of national income. This problem may arise when we take the output of all the firm as final output without considering the fact that output of one firm may be input for other.

Example-

IT can be overcome by two ways-:

Final output- It can be solved by taking the value of only final goods which are available for direct use.

Value added at each step of production-: If we take value added at each step of production then this problem can be solved.



Or

Explain the expenditure method of estimating national Income. Why exports are added and imports are excluded.

In expenditure method we assume that expenditure on final goods and services is equal to final goods and services produced.

To determine national income firm expenditure method first of all final expenditure and gross domestic capital formation is determined. The various constituents are

Private final consumption expenditure-: It is consumption expenditure of households on the purchase of final goods and services.

Government final consumption expenditure-: It is consumption expenditure of Government on the purchase of final goods and services.

Gross domestic capital formation-: It is the sum of gross business fixed investment, gross residential construction, gross public investment and change in stock.



Net exports -: It is the difference between exports and imports.

After adding all the constituents gross domestic product at market price is determined.

If factor income received from rest of the world is added and factor income paid to rest of the world is excluded gross national income at market price is determined.



Exports are the goods which are produced in the domestic territory so they are included and imports are the goods which are not produced in the domestic territory so these are excluded.

Answer of the Question of second pre-board Exam of Micro Economics

Q1. Define Monopolistic competition.

Monopolistic competition is a market situation when there are many sellers selling similar but differentiated products.

Q2. What do you mean by monotonic preferences?

Out of two given bundle the consumer will prefer the bundle in which more of one good and no less of other good is given.

Q3. What happens to equilibrium price of a good if the demand for this good decrease and supply increases.

The equilibrium price will fall.

Q4. Why is demand curve in monopoly less elastic?

There is no close substitute available so the demand curve is less elastic

Q5. What is the elasticity of a demand of a good if total expenditure on this good increase with rise in price of this good?

Less elastic

Q6. At a given price there is excess supply of a good in the market. Write chain of effect that will take place to attain equilibrium.

At a given price there is excess supply it means Qty supplied is more than qty demanded. It will lead to competition among sellers. Price will fall. At reduced price qty demanded raises leading to equilibrium.

Q7. Calculate total variable cost and marginal cost from the following schedule of a firm whose total fixed cost is Rs 20.

Output TC

1 60

2 70

3 96

4 136



Output TC FC TVC MC

1 60 20 40 40

2 70 20 50 10

3 96 20 76 26

4 136 20 116 40


Q8. Explain the effect of rise in price of related goods on the demand of a good. Use diagram.
Related goods are of two types -: Substitute goods and complementary goods.

If the price of substitute good increases the demand for given good will also increases and demand curve shifts to right.

If the price of complementary good increases the demand for given good will decrease and demand curve shifts to left.



Q9. Explain the law of diminishing marginal utility with the help of a schedule. How does it affect demand curve.

Law of diminishing marginal utility state as a consumer consumes more and more amount of a good the utility diminishes with the consumption of successive units.

Q MU

1 20

2 16

3 10

4 0

5 -4

The demand curve is downward slopping due to law of diminishing MU.



Or

Why does demand curve slope downward.

Demand curve is downward slopping due to law of diminishing marginal utility. As a consumer consumes more and more amount of a good his utility diminishes. so he will pay less for less utility. So he buys more at less price and less at high price.



Q10. What is the likely effect on the supply of a good if there is technological progress in the production of this good takes place.
If there is technological progress in the production of a good takes place, the cost of production of the given good falls and as a result the supply of the given good increases and supply curve shifts to right.

Q11. What do you mean by Marginal Rate of transformation? Show it with the help of a hypothetical schedule. Why does it increase along the Production Possibility Curve?
Marginal rate of transformation is the amount of one good given up in order to produce one more unit of other good.

If there are two goods ,Good x and Good y then marginal rate of transformation can be shown as
MRT= dY/dX
It shows the amount of good y given up in order to produce one more unit of good x.

It always increases along with the PPC because all the resources are not equally efficient in the production of all the goods. The PPC is concave shaped due to this.

Q12. What happens to loss in long run if firms are free to enter and exit in the industry under perfect competition?
Free entry and exit is a feature of perfect competition. If some firms are earning loss in short run,some firms may leave the industry as a result the supply decreases, the supply curve shifts to left. The equilibrium price rises and the existing firms start earning normal profit.
Or
Explain briefly the collusive oligopoly and non collusive oligopoly.

Collusive oligopoly is a situation when oligopolistic firm do not pose completion for each other. These behave like a cartel.

Non collusive oligopoly- When oligopolistic firms compete with each other and there actions are dependent on the rival firms actions.

Q13. If price of a good is increased by 10 % the buyer of that good reduces his demand by 25 %.He buys 60 units of this good at price Rs 6 per unit. How many units of this good will he buy if price is decreased by Rs 2.
Ed = - % change in qty demanded / % change in price

= - 25/10

= - 2.5

Given as

P= 6 Q = 60

P1= 4 Q1 =?

dP= 2 dQ= ?

ed=dQ/dp x p/Q

-2.5 = - dQ/2 x 6/60

2.5x20=dQ

dQ=50 units

New qty demanded at Rs 4= 60+50=110

Q14. Giving reasons state true and false.

(i) When AVC rises MC must rise.

(ii) When MR is Zero AR will be constant

(iii) When MR is constant and not equal to zero TR will increase at increasing rate.

False, When mc rises AVC may be falling as MC intersects AVC at its minimum. So before AVC reaches to its minimum it falls and MC rises.



False, when MR is zero AR is not constant. When MR becomes zero TR becomes constant and average Revenue falls.



False, When MR is constant and not equal to Zero TR will increase at constant rate.



Q15. When does the profit maximizing firm attain equilibrium in competitive market? State the conditions. Determine equilibrium level of output with the help Marginal Revenue and Marginal cost approach using schedules.

A profit maximizing firm is in equilibrium in competitive market when it is maximizing its profit.

The level of output where it maximizes it profit is determined when Marginal cost becomes equal to Marginal Revenue.

(i) MC = MR or MC = Price in perfect competition as MR = AR

(ii) And MC must rise after intersecting MR



Q MC MR

1 20 15

2 15 15

3 10 15

4 15 15

5 22 15

The producer is in equilibrium at 4th unit .At this level of output MC = MR and after this MC is more than MR.



Or

Explain the various stages of Law of variable proportion with the help of Marginal Product and Total Product schedule. Explain the reasons for increasing returns to a factor.

Law of variable proportion is a short run phenomenon in which all the factors are fixed only one factor is variable output increase with the increase in variable input.

When the ratio between fixed factor and variable factor is altered total product first increase at increasing rate then increases at diminishing rate and finally starts falling down.

Q MP TP

1 20 20

2 30 50

3 38 88

4 22 110

5 0 110

6 - 10 100



Up to three unit TP increases at increasing rate and MP increases

From 3 to 5 units TP increases at diminishing rate and MP falls but remains positive

After 5th unit TP starts falling down and MP becomes negative



Increasing returns to factor takes place due ot division of labour and efficient combination between fixed factor and variable factor.



Q16. (i) Why do two indifference curves never intersect each other?

(i) Two indifference can never intersect each other.

Suppose two IC intersect each other at point A. Point A and point B lies on same IC1 so they will yield same level of satisfaction. Point A and point c lie on same IC2 so they will yield same level of satisfaction. It means Bundle at point B and C must also yield same level of satisfaction. But this is false. As bundle c lies on higher IC and bundle B on lower IC.

So our assumption is wrong. Two indifference can never intersect each other.





(ii) A consumer is buying two goods X and Y. The price of Good X is Rs 4 per unit and the price of Good Y is Rs 5 Per unit. Determine all the bundles that will lie on budget line if the income of consumer is Rs 20. (3x2)

(ii) Budget line can be expressed as

Px Qx+PyQy =M

4Qx+5Qy=20 ; 5Qy=20 – 4Qx Now putting values in Qx



Qx Qy

0 4

1 3.2

2 2.4

3 1.6

4 .8