CHAPTER - 1 DETERMINATION OF NATIONAL INCOME UNIT-1 ... · Determination of National Income 1 If you try, you risk failure. If you don’t, you ensure it CHAPTER - 1 DETERMINATION

Determination of National Income

1 If you try, you risk failure. If you don’t, you ensure it

CHAPTER - 1

DETERMINATION OF NATIONAL INCOME

UNIT-1: NATIONAL INCOME ACCOUNTING

CONCEPTS

PARTICULARS

NO. OF QUES

CONCEPT-1

DEFINATION OF NATIONAL INCOME

3

CONCEPT-2

THE CIRCULAR FLOW OF INCOME/ METHODS FOR CALCULATION OF NATIONAL INCOME

1

CONCEPT-3

PRACTICAL PROBLEMS

8

CONCEPT-4

THE SYSTEM OF REGIONAL ACCOUNTS IN INDIA

1

CONCEPT-5

LIMITATIONS AND CHALLENGES OF NATIONAL INCOME COMPUTATION

2

TOTAL 16



CHAPTER - 1

DETERMINATION OF NATIONAL INCOME

UNIT-1: NATIONAL INCOME ACCOUNTING

CONCEPT 1 DEFINATION OF NATIONAL INCOME

Q1 Define National Income. (**** STAR Q) Or

Define National Income and explain the usefulness of National Income estimates.

Ans Meaning: National Income is defined as the net value of all economic goods and services produced within the domestic territory of a country in an accounting year plus the net factor income from abroad.

According to the Central Statistical Organisation (CSO) ”National income is the sum total of factor incomes generated by the normal residents of a country in the form of wages, rent, interest and profit in an accounting year’’.

In simple words, National income/product is the value of production by the normal residents of a country (within or outside the domestic territory).

USEFULNESS AND SIGNIFICANCE OF NATIONAL INCOME ESTIMATES

(a) National income accounts provide a broader view of an economy. It indicates the level of economic activity, and aggregate demand for goods and services and overall economic development of a country.

(b) It enables businesses to forecast the future demand for their products.

(c) The estimates of national income show the composition and structure of national income in terms of different sectors of the economy. Using this information, the governments can fix various sector-specific development targets for different sectors of the economy and formulate suitable development plans and policies to increase growth rates.

(d) National income estimates throw light on income distribution and the possible inequality in the distribution among different categories of income earners.



(e) International comparisons in respect of incomes and living standards assist in determining eligibility for loans. The national income data are also useful to determine the share of nation’s contributions to various international bodies.

(f) National income statistics also provide a quantitative basis for macroeconomic modeling and analysis, for assessing and choosing economic policies and for objective statement as well as evaluation of governments’ economic policies.

Q2 What function does the UN System of National Accounts (SNA) serve? (BAGHI TYPE Q)

Ans: System of National Accounts (SNA) The System of National Accounts (SNA) is the internationally agreed standard set of recommendations on how to compile measures of economic activity. The SNA describes a coherent, consistent and integrated set of macroeconomic accounts in the context of a set of internationally agreed concepts, definitions, classifications and accounting rules.

SNA provides an overview of economic processes, recording how production is distributed among consumers, businesses, government and foreign nations. It shows how income originating in production, modified by taxes and transfers, flows to these groups and how they allocate these flows to consumption, saving and investment. Consequently, the national accounts are one of the building blocks of macroeconomic statistics forming a basis for economic analysis and policy formulation.

Q3 Describe the different concepts of National Income. CA STUDY (AOQ)

Ans: National income accounts have three sides -

i) Product side: It measures production based on concept of value added.

ii) Expenditure side: It looks at the final sales of goods and services.

iii) Income side: measures the distribution of the proceeds from sales to different factors of production.

There are many different concepts of national income. Each has a specific meaning, method of measurement and use.



GROSS DOMESTIC PRODUCT (GDPMP)

The term ‘gross’ means that GDPMP is gross of depreciation. ‘Domestic’ means domestic territory or resident production units. ‘Product’ means final products. ‘Market Price’ means that GDPMP is calculated at prices inclusive of taxes and exclusive of subsidies.

Gross domestic product (GDP) is a measure of the market value of all final economic goods and service produced within the domestic territory of a country during a given time period.

Key points about GDPMP

(a) GDPMP is flow of goods and services produced during a year. It doesn’t include goods produced in the previous year.

GDPMP

Nominal GDP &

Real GDP GNPMP

Per Capita Income

CONCEPTS OF

NATIONAL INCOME

NDPMP

NNPMP

GDPFC

NDPFC

GNPFC

NNPFC National Income

Disposable Income

Personal Income



(b) GDPMP is always GDPMP at current prices. (c) GDPMP isn’t value of output because it excludes value of intermediate

consumptions.

(d) GDPMP excludes transfer payments, capital gains, financial transactions and income generated through illegal means.

(e) GDPMP is market value of final goods and services. Market Value = Price * Quantity of final goods and services.

(f) GDPMP is confined to domestic territory of a country and therefore excludes Net Factor Income from Abroad (NFIA)

NOMINAL GDP vs. REAL GDP

Gross Domestic Product or GDP refers to the economic value of goods and services produced within the nation’s boundaries, in a particular financial year plus income earned by foreign residents locally less income earned abroad by country’s residents. When the GDP is estimated at current prices, it exhibits Nominal GDP, whereas Real GDP is when the estimation is made at constant prices.

Both Nominal and real GDP are considered as a financial metric for evaluating country’s economic growth and development. However, the confusion still exists that which one better indicates the country’s progress than the other. Take a read of the following Table to know the differences between nominal and real GDP and it may also help you to overcome your confusion.

BASIS FOR COMPARISON

NOMINAL GDP REAL GDP

Meaning The aggregate market value of the economic output produced in a year within the boundaries of the country is known as Nominal GDP.

Real GDP refers to the value of economic output produced in a given period, adjusted according to the changes in the general price level.

What is it? GDP without the effect of inflation. Inflation adjusted GDP

GDPMP = Value of Output in the Domestic Territory – Value of Intermediate Consumption

GDPMP= ∑ Value Added



Expressed in Current year prices Base year prices or constant prices.

Value Higher Generally, lower. Uses Comparison of various quarters of

the given year can be made. Comparison of two or more financial year can be done easily.

Economic Growth

Cannot be analyzed easily. Good indicator of economic growth.

GROSS NATIONAL PRODUCT

Gross National Product (GNP) is a measure of the market value of all final economic goods and services, gross of depreciation, produced within the domestic territory of a country by normal residents during an accounting year including net factor incomes from abroad. Gross National Product (GNP) is evaluated at market prices and therefore it is in fact Gross National Product at market prices (GNPMP).

NFIA is the difference between the aggregate amount that a country's citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country. If Net Factor Income from Abroad is positive, then GNPMP would be greater than GDPMP.

NET DOMESTIC PRODUCT AT MARKET PRICES (NDPMP )

NDPMP is defined as the market value of all final goods & services produced within the domestic territory of a country by its normal residents and non-residents during an accounting year less of depreciation. NDPMP can be calculated by the formula:

GNPMP = GDPMP + Net Factor Income from Abroad

GDPMP = GNPMP – Net Factor Income from Abroad

National = Domestic + Net Factor Income from Abroad

NDPMP = GDPMP – Depreciation

NDPMP = NNPMP – Net Factor Income from Abroad



NET NATIONAL PRODUCT AT MARKET PRICES (NNPMP)

NNPMP is defined as the market value of output of final goods and services produced by normal residents within the domestic territory during an accounting year excluding depreciation and including of a country including NFIA.

GROSS DOMESTIC PRODUCT AT FACTOR COST (GDPFC)

GDP at factor cost is defined as the sum of net values added by all producers in the domestic territory of a country inclusive of depreciation during an accounting year.

GDPFC is measured by the following formulae:

GDPFC = GDPMP – Indirect Taxes + Subsidies

GDPFC = NDPFC – Depreciation

= Compensation of Employees – Operating Surplus + Mixed Income + Depreciation

NET DOMESTIC PRODUCT AT FACTOR COST (NDPFC)

Net Domestic Product at Factor Cost (NDPFC) is defined as the total factor incomes earned by the factors of production. In other words, it is sum of domestic factor incomes or domestic income net of depreciation. It is alternatively known as Net Domestic Income.

NDPFC = NDPMP – Net Indirect Taxes

= Compensation of employees

+ Operating Surplus (rent + interest + profit)

+ Mixed Income of Self – employed

NDPFC = NDPMP – Net Indirect Taxes (Indirect Tax + Subsidies)

NNPMP = GNPMP – Depreciation

NNPMP = NDPMP + Net Factor Income from Abroad

NNPMP = GDPMP + Net Factor Income from Abroad – Depreciation



NET NATIONAL PRODUCT AT FACTOR COST (NNPFC) OR NATIONAL INCOME

National Income is defined as the factor income accruing to the normal residents of the country during a year. It is the sum of domestic factor income and net factor income from abroad. In other words, national income is the value of factor income generated within the country plus factor income from abroad in an accounting year.

A few key features of National Income-

a) National Income reflects the value of final goods & services only.

b) It is expressed in monetary terms.

c) It is a flow concept.

d) National Income isn’t the sum of individual personal incomes. Personal incomes include transfer incomes.

PER CAPITA INCOME Per capita income (PCI) or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population. It serves as an indicator of the standard of living of a country.

Note: Per Capita Income of India is Rs. 1, 12,835 as per Times of India Report as on 31st May, 2018.

PERSONAL INCOME Personal Income is the sum total of income actually received by persons from all sources in the form of current transfer payments and factor incomes.

NNPFC = National Income = FID (factor income earned in domestic territory) + NFIA.

NNPFC = NDPFC + NFIA

PI = NI + income received but not earned – income earned but not received. = NI – Income from domestic product accruing to public sector – corporate tax

– distributed profit less of retained earnings of foreign companies and transfer incomes



DISPOSABLE PERSONAL INCOME (DI) DI is defined as the income remaining with individuals after deduction of all taxes levied against their income and their property by the government.

CONCEPT 2 THE CIRCULAR FLOW OF INCOME/ METHODS FOR CALCULATION OF NATIONAL INCOME Q4 Illustrate the circular flow of income. (SOORMA TYPE Q)

Or

Illustrate the circular flow of income and describe its relevance for measurement of national income. CA STUDY (AOQ)

Ans: CIRCULAR FLOW OF INCOME

Production generates income; income gives rise to demand for goods & services; and demand in turn gives rise to expenditure. Expenditure leads to further production. The flow of production, income and expenditure represents three related phases, namely-

a.) Phase I: Production of goods & services,

b.) Phase II: Distribution of factor income, and

c.) Phase III: Disposition of income.

The three phases goes on simultaneously. Each phase is the outcome of other. All the three phases are interlinked in a circular manner.

Thus, the circular flow of income refers to the continuous circulation of production, income generation and expenditure involving different sectors of the economy.

DI = PI-Personal Income Taxes



METHODS FOR CALCULATION OF NATIONAL INCOME There are 3 methods of measuring National Income-

Value Added Method Income Method Expenditure Method

1) VALUE ADDED METHOD

Product Method or Value Added Method is also called Industrial Origin Method or Net Output Method.

National income by value added method is the sum total of net value added at factor cost across all producing units of the economy.

This method of measurement shows the unduplicated contribution by each industry to the total output.

Steps involved in Calculating National Income by Value Added Method

STEP 1 Identification & Classification of Producing Enterprises: Enterprises are identified and classified into different sectors according to the nature of their activities. All the producing enterprises are broadly classified into three main sectors namely:

a) Primary sector (Agriculture)

b) Secondary sector (Manufacturing)

c) Tertiary sector or Service sector (Services)



STEP 2 Estimation of Gross Value Added (GAV):

GAV = Value of Input – Intermediate Consumption

= [Sales + Changes in stock] – Intermediate Consumption

STEP 3 Estimation of National Income: According to Value Added Method the composition of National Income is as follows:

National income by Value Added = Sum total of net value added at factor cost across all producing units of the economy.

-Gross value added by Primary sector within the domestic territory of a country

+Gross value added by Secondary sector within the domestic territory of a country

+Gross value added by Tertiary sector within the domestic territory of a country

-Depreciation

-Net Indirect Tax +NFIA

Advantages & Disadvantages of Value Added Method:

Advantages of Product method Disadvantages of Product method

This method reveals the relative importance of the different sectors of the economy by showing their respective contribution to the national income.

In many Countries, figures of Production of only important industries are known. So, this method can be employed only along with other methods to arrive at National Income.

This method recognizes national income at the initial stage i.e. Value addition/production itself.

Due to lack of appropriate data, there is the risk of double counting of intermediate consumption.

Most suited for primary sector (i.e. Agriculture) where factor Incomes/Consumption cannot be properly ascertained.



2) INCOME METHOD

Income Method is also called Factor Payment Method or Distributed Share Method.

National income is calculated by summation of factor incomes paid out by all production units within the domestic territory of a country as wages and salaries, rent, interest, and profit.

It includes factor payments to both residents and non-residents.

According to income method, the components of NI are given by the formula:

NI (or NNPFC) = Compensation of Employees + Operating Surplus + Mixed Income of Self-employed + NFIA

Steps involved in Calculating National Income by Income Method

STEP 1 Identification & classification of producing enterprises which employs

factor inputs: It requires a) Identifying the producing enterprise which employs factor inputs; and b) Classifying producing units under 3 heads:

i) Primary Sector ii) Secondary Sector iii) Tertiary Sector

STEP 2 Classification of factor Income: Factor income are classified into the following groups- a) Compensation of Employees (Wages & Salaries in Cash, Compensation in

kind, and employers contribution) b) Operating Surplus (rent, Interest, Royalty, Profit) c) Mixed Income of Self-employed d) NFIA

STEP 3 Estimation of National Income:

NI (or NNPFC) = Compensation of Employees + Operating Surplus + Mixed Income of Self-employed + NFIA

Advantages & Disadvantages of Income Method:

Advantages of Income method Disadvantages of Income method

This method measures the national income after it has been distributed and appears as Income earned or received by Individuals of

There is a risk of omission Of vital data relating to Incomes of unorganized sector.



the Country. It is more appropriate and easy to measure National Income from this approach. This method indicates the distribution of National Income among different Income Groups. (Distributive Shares Method).

This there is a risk of double counting, in relation to certain Incomes and also in Mixed Income of Self Employed.

Most suitable in economies with a greater degree of compliance as to filing of Income Tax Returns, Information called for by Government etc

3) EXPENDITURE METHOD

The Expenditure method is also called Income Disposal Approach or Consumption/Investment Method.

Expenditure method measures the final expenditure on GDP at market price during an accounting year.

According to Expenditure method, NI is the aggregate of all final expenditure in an economy during a year, i.e.,

National Income = Final Consumption Expenditure + Final Investment Expenditure

Steps involved in Calculating National Income by Expenditure Method

STEP 1 Identification of economic units incurring final expenditure

There are 4 categories of economic units which incur final expenditure within the domestic territory of a country. They are:

a) Household Sector

b) Producing Sector

c) Government Sector

d) Rest of the World Sector

STEP 2 Classification of Final Expenditure: The final expenditure is classified into the following three categories –

1. Final Consumption Expenditure:

a) Private Final Consumption Expenditure: To measure private final consumption expenditure, the volume of final sales of goods & services



to the consumer household and non-profit institutions serving households is multiplied by retail prices.

b) General Government Consumption Expenditure: It is the estimated total expenditure incurred by government for producing various services to satisfy collective needs.

2. Gross Domestic Capital Formation: It includes final expenditure on machinery and equipment and own account production of machinery and equipments, expenditure on construction, expenditure on changes in inventories, and expenditure on the acquisition of valuables such as, jewelry and works of art.

3. Net Exports: It is the difference between exports & imports of a country during one year.

STEP 3 Estimation of Final Expenditure: After classifying final expenditure into 3 components, it is estimated to arrive at National Income.

Advantages & Disadvantages of Expenditure Method:

Advantages of Product method Disadvantages of Product method

Most suited in situations where consumption pattern and expenditure data is easily available.

It is difficult to measure Capital Formation (both Domestic and Foreign) in many situations.

Appropriate in Sectors like Construction, where this method is used.

It may be easy to differentiate between Final Consumption Expenditure and Capital Formation in certain cases, leading to double counting of the same expenditure.

Most suitable in cases where Commodity Flow Data is captured, e.g. with implementation of GST.



CONCEPT 3 PRACTICAL QUESTIONS ON COMPUTATION OF NATIONAL INCOME

Q5 Compute National income. (ALLADIN TYPE Q)

Ans: Computation of National Income (Y)-

Y = C + I + G + (X–M)

= [(650+ 350 + 100) + (200 - 100)]

= 1000

Particulars Amt. (in lakhs)

Imports (M) 200

Consumption (C) 650

Investment (I) 350

Government Purchases (G) 100

Export (X) 100



Q6 Calculate Gross Domestic Product at market Prices (GDPMP) and derive national income from the following data (in Lakhs of Rupees). (FANNAY KHAN TYPE Q)

Particulars Amt. (in lakhs) Inventory Investment 10000 Exports 2000 Indirect taxes 1000 Net factor income from abroad -500 Personal consumption expenditure 35000 Gross residential construction investment 3000 Depreciation 500 Imports 1000 Government purchases of goods and services 10000 Gross public investment 2000 Gross business fixed investment 3000

Ans: Computation of GDPMP and National Income-

GDPMP = Personal consumption expenditure + Gross Investment (Gross business fixed investment + inventory investment) + Gross residential construction investment + Gross public investment + Government purchases of goods and services + Net Exports (Exports - imports)

GNPMP = GDPMP + Net factor income from abroad

GNPMP – Indirect Taxes = GNPFC

GNPFC – Depreciation = NNPFC (National Income)

GDPMp=

Particulars Amt. (in lakhs) Personal consumption expenditure 35000

+ Gross Investment

Which includes gross business fixed investment 3000

Gross residential construction investment 3000

Gross public investment 2000

Inventory investment 1000 9000



+ Government purchases of goods and services 10000

+ Net exports (X-M) 1000

GDPMp 55000

+ Net Factor Income From Abroad -500

GNPMP 54500

-Indirect Taxes 1000

GNPFC 53500

-Depreciation 500

NNPFC (National Income) 53000

Q7 Find GDPMP and GNPMP from the following data (in Crores of Rs) using income method. Show that it is the same as that obtained by expenditure method. CA STUDY (AOQ)

Ans: Income Method

GDPMP = Employee compensation (wages and salaries + employers' contribution towards social security schemes) + profits + rent + interest + mixed income + depreciation + net indirect taxes (Indirect taxes - subsidies)

GDPMP = 65080 + 340 + 10600 + 8060 + 6820 + 10000 + 8000 = 108900

GNPMP = GDPMP + NFIA = 108900 + 400 = 109300

Particulars Amt. (in Crore) Personal Consumption 73140 Depreciation 8000 Wages 65080 Indirect Business Taxes 10000 Domestic Investment 10600 Government Expenditures 14820 Rental Income 21960 Corporate Profits 340 Exports 6820 Net Factor Income from Abroad 13460 Mixed Income 400 interest 8060 Imports 14080



Expenditure Method

Y = C + I + G + (X–M)

Y = 73140 + 1482 + 2196 + (1346 - 1408)

Y = (7314 + 1482 + 2196) – 62

Y = 109300

GNPMP = GDPMP + NFIA

= 108900 + 400= 109300

Q8 From, the following data calculate the Gross National Product at Market Price using Value Added method. CA STUDY (AOQ)

Particulars Amt. (Rs. in Cr.)

Value of output in primary sector 1000

Value of output in tertiary sector 1400 Intermediate consumption in secondary sector

800

Value of output in secondary sector 1800 Intermediate consumption in tertiary sector

600

Intermediate consumption in primary sector

500

Value of output in secondary sector 1800 Intermediate consumption in secondary sector

600

Ans GDPMP = (Value of output in primary sector-intermediate consumption of primary sector) + (value of output in secondary sector-intermediate consumption of secondary sector) + (value of output in tertiary sector – intermediate consumption of tertiary sector)


Value of output in primary sector 1000

-Intermediate consumption of primary sector 500

+ Value of output in secondary sector 1800

- Intermediate consumption in secondary sector 600



+Value of output in tertiary sector 1400

- Intermediate consumption of tertiary sector 600

GDPMP 2500

In the given question NFIA is not given, hence GNPMP = GDPMP.

Q9 From the following data, compute the Gross National Product at Market Price (GNPMP) using value added method: CA INTER (MAY 2018)

Ans Calculation of GNPMP:


Value of output in secondary sector 1000

-Intermediate consumption of secondary sector 400

+ Value of output in tertiary sector 3000

- Intermediate consumption in tertiary sector 900

+Value of output in primary sector 800

- Intermediate consumption of primary sector 300

GDPMP 3200

+NFIA (100)

GNPMP 3100

Particulars Rs (in crores)

Value of output in Secondary Sector 1000

Intermediate consumption in Primary Sector 300

Value of output in Tertiary Sector 3000

Intermediate consumption in Secondary Sector

400

Net Factor income from abroad (-) 100

Value of output in Primary Sector 800

Intermediate consumption in Tertiary Sector

900



Q10 From the following data, calculate Personal Income and Personal Disposable Income.


Net Domestic Product at factor cost 8000 Net Factor Income from abroad 200 Undisbursed Profit 1000 Corporate Tax 500 Interest Received by Households 1500 Interest Paid by Households 1200 Transfer Income 300 Personal Tax 500

Ans CALCULATION OF PERSONAL INCOME & PERSONAL DISPOSABLE INCOME

Personal Income= NDPFC + NFIA + Transfer Income - Undisbursed profit - Corporate Tax - Net Interest paid by households (paid-received)

= 8000+200+300-1000-500-(300)

= 7300 crores

Personal Disposable Income= Personal Income - Personal Payments

= 7300-500 = 6800 crores

Q11 In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju's contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income. (CA STUDY)

Ans Given, Indirect tax = 30; Personal tax = 20; Depreciation = 50 and Retained earnings=220

(a) GDPMP= Rs.500 [Barber collects from haircut] (b) NNPMP= GDPMP – Depreciation = 500-50= 450. (c) NNPFC= NNP – Indirect Tax = 450 – 30=420. (d) Personal income= NNPFC - Retained earnings= 420-220=200. (e) Personal disposable income = PI – Income tax= 200-20=180.



Q12 On the basis of the following data about an economy which consists of only two firms, find out: a) Value Added by Firm A and B. b) Gross Domestic Product at Factor Cost (3 STAR Q)

Items (Rs. In Lakh)

Sales by Firm A 100 Purchases from Firm B by the Firm A 40 Purchases from Firm A by the Firm B 60 Sales by Firm B 200 Closing Stock of Firm A 20 Closing Stock of Firm B 35 Opening Stock of Firm A 25 Opening Stock of Firm B 45 Indirect Taxes paid by both Firms 30

Ans

a) Value Added by Firm A= Sales by Firm A- Purchases from Firm B + Change in Stock (Closing-Opening Stock)

= 100-40+ (20-25) = 55 lakhs Value Added by firm B= Sales by Firm A- Purchases from Firm B + Change in Stock (Closing-Opening Stock) = 200-60+ (35-45) =130 lakhs b) GDPFC= Value Added by Firm A + Value Added by Firm B- Indirect taxes =55+130-30= 155 lakhs.

Q13 Given the following data and using income method calculate: (a) Net Domestic Income,

(b) Gross Domestic Income, (c) Net National Income, (d) Net National Product at Market Price.

Items (Rs. In Lakh)

Indirect taxes 9000 Subsidies 1800 Depreciation 1700 Mixed income of self-employed 28000 Operating surplus 10000 NFIA (300) Compensation to employees 24000



Ans a) Net Domestic Income = Mixed income of self-employed+ Operating surplus+

Compensation to employees = 28000+10000+24000= 62000 lakhs b) Gross Domestic Income = Net Domestic Income + Depreciation = 62000+1700= 63700 lakhs c) Net National Income = Net Domestic Income + NFIA = 62000 + (300) = 61700 lakhs d) NNPMP = Net National Income + Indirect taxes – Subsidies = 61700+9000-1800= 68900 lakhs

CONCEPT 4 THE SYSTEM OF REGIONAL ACCOUNTS IN INDIA

Q14 Write notes on the system of Regional Accounts in India. (CA STUDY)

Ans Regional Accounts provide an integrated data base on the innumerable transactions taking place in the regional economy and help decision making at the regional level.

i. All the states and union territories of India compute state income estimates and district level estimates. State Income or Net State Domestic Product (NSDP) is a measure in monetary terms of the volume of all goods and services produced in the state within a given period of time (generally a year) accounted without duplication.

ii. Per Capita State Income is obtained by dividing the NSDP (State Income) by the mid year projected population of the state.

iii. The state level estimates are prepared by the State Income Units of the respective State Directorates of Economics and Statistics (DESs). The Central Statistical Organization assists the States in the preparation of these estimates by rendering advice on conceptual and methodological problems.

iv. In the preparation of state income estimates, certain activities such as railways, communications, banking and insurance and central government administration, that cut across state boundaries, and thus their economic contribution cannot be assigned to anyone state directly and are known as the ‘Supra-regional sectors’ of the economy.

ेक अ ा काय पहले अस व नजर आता है



CONCEPT 5 LIMITATIONS AND CHALLENGES OF NATIONAL INCOME COMPUTATION

Q15 Explain the limitations & challenges of National Income computation ? CA STUDY (AOQ)

Ans Difficulties related to measurement of National Income:

(a) Lack of an agreed definition of national income (b) Accurate distinction between final goods and intermediate goods (c) Services of durable goods (d) Difficulty of incorporating distribution of income (e) Valuation of a new good at constant prices. (f) Inadequacy of data and lack of reliability of available data, (g) Presence of non-monetized sector (h) Absence of recording of incomes due to illiteracy and ignorance (i) Accurate estimation of consumption of fixed capital

Q16 Write short notes on- (Imp. Q)

a) Net Factor Income from Abroad b) Factor Income c) Final Goods d) Intermediate Goods

Ans Net Factor Income from Abroad: Net factor income from abroad is the difference between the factor income earned from abroad by normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e., India).

Factor Income: Factor income is income received from the factors of production – land, labor, and capital. Factor income on the use of land is called rent, income generated from labor is called wages and income generated from capital is called profit. The factor income of all normal residents of a country is referred to as the national income, and factor income and current transfers together are referred to as private income.

Final Goods: Final good is any commodity that is produced or consumed by the consumer to satisfy current wants or needs. Consumer goods are ultimately consumed, rather than used



in the production of another good. For example, a microwave oven or a bicycle that is sold to a consumer is a final good or consumer good.

Intermediate Goods: Intermediate goods or producer goods or semi-finished products are goods which are under process goods, such as partly finished goods, used as inputs in the production of other goods including final goods. A firm may make and then use intermediate goods, or make and then sell, or buy then use them. In the production process, intermediate goods either become part of the final product, or are changed beyond recognition in the process. This means Intermediate goods are sold among industries for resale.

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CHAPTER - 1 DETERMINATION OF NATIONAL INCOME UNIT-1 ... · Determination of National Income 1 If you try, you risk failure. If you don’t, you ensure it CHAPTER - 1 DETERMINATION