Most Important Question Answer on Concept and Measurement of National Income :-
In WBCS examination Concept and Measurement of National Income in one of the most important topic. Each and every year some questions are asked from this topic, so here we are given most important question answer on Concept and Measurement of National Income.
What is the economic territory of a country?
Answer: Economic territory is the geographical territory administered by a government within which persons, goods, and capital circulate freely, including airspace, territorial waters, and enclaves like embassies abroad, but excluding foreign enclaves and international organizations.
How does economic territory differ from geographical territory?
Answer: Economic territory is derived from geographical territory by adding areas like embassies abroad and subtracting foreign enclaves, based on economic criteria.
Who is considered a resident unit according to the SNA?
Answer: A resident unit is an entity (individual, household, corporation, etc.) whose center of economic interest lies in the economic territory of the country, typically for a year or more.
How is a resident different from a citizen?
Answer: A resident is defined by economic activity in the country’s economic territory, while a citizen is defined by birth or other non-economic criteria.
What is meant by the center of economic interest?
Answer: The center of economic interest refers to a unit’s location within the economic territory where it conducts significant economic activities for a long period (typically one year or more).
What is factor income?
Answer: Factor income is the income received by factor owners (labor, land, capital, entrepreneurship) for rendering services to production units, such as wages, rent, interest, and profits.
Name the four conventional factors of production.
Answer: Labor, land, capital, and entrepreneurship.
What is intermediate consumption?
Answer: Intermediate consumption is the value of goods and services entirely used up in the production process during an accounting period.
What are the two conditions for classifying a good as intermediate consumption?
Answer: It must be purchased from another production unit and acquired for resale or used up entirely in production during the accounting period.
What is a final product?
Answer: A final product is a good or service acquired for consumption or investment, not for resale.
How does a final product differ from an intermediate product?
Answer: Final products are acquired for consumption or investment, not for resale, while intermediate products are used up in production or resold.
What is value added in national income accounting?
Answer: Value added is the excess of the value of gross output over intermediate costs, often measured as gross value added at market prices (GVAmp).
What is the formula for Gross Value Added at Market Prices (GVAmp)?
Answer: GVAmp = Value of gross output – Intermediate cost.
How is Net Value Added at Factor Cost (NVAfc) calculated?
Answer: NVAfc = NVAmp – Indirect taxes + Subsidies.
What is National Income at Constant Prices?
Answer: National Income at Constant Prices is the real income measure, derived by deflating current price estimates using a price index to eliminate price changes.
Why are constant price estimates preferred over current price estimates?
Answer: Constant price estimates reflect real income changes by removing the effect of price changes, providing a better measure of economic performance. Concept and Measurement of National Income
What is the process of deflation in national income estimation?
Answer: Deflation converts current price estimates to constant price estimates by dividing by the current year’s price index and multiplying by the base year’s price index.
What are the three methods of estimating national income?
Answer: Production (value added) method, income distribution method, and expenditure method.
What is the production method of estimating national income?
Answer: The production method estimates national income by measuring the value added (NVAfc) by each industrial sector and summing them to get NDPfc, then adding NFIA for NNPfc.
What is the first step in the production method?
Answer: Classify production units into industrial sectors.
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What is included in the value of gross output in the production method?
Answer: Gross output is the sum of sales and net change in inventories or quantity of output multiplied by price.
What should be excluded when estimating value added in the production method?
Answer: Second-hand goods, financial asset transactions (e.g., shares), and exclude non-productive services, but include goods/services for own use.
What is the income distribution method?
Answer: The income distribution method estimates national income by summing factor payments (COE, rent, interest, profits) made by production units, equaling NDPfc, then adding NFIA for NNPfc.
Name the two variants of the income distribution method.
Answer: Income paid out and income received.
What is Compensation of Employees (COE)?
Answer: COE is the total remuneration (cash or in-kind) paid by an enterprise to employees, including wages, salaries, and social contributions.
What are social contributions in COE?
Answer: Social contributions are employer payments (actual or imputed) to secure social benefits for employees, like social security or pension funds.
How is rent defined as a factor income? | Concept and Measurement of National Income
Answer: Rent is the net amount payable by a tenant to a landlord for land use, excluding taxes and maintenance costs, including royalties for subsoil assets.
What is the difference between rent and rental?
Answer: Rent is payment for land use, while rental is payment for using buildings or structures, which is not a factor income.
What is interest as a factor income?
Answer: Interest is the amount payable on loans used for production, recorded on an accrual basis, excluding consumption loans.
How is profit categorized in national income accounting?
Answer: Profit is divided into profit tax, distributed profits (dividends), and retained profits.
What is operating surplus?
Answer: Operating surplus is the excess of NVAmp over COE, indirect taxes, and subsidies for corporate enterprises, equaling rent, interest, and profits.
What is mixed income?
Answer: Mixed income is the excess of NVAfc over COE for non-corporate enterprises, equaling rent, interest, and profits.
What is the expenditure method of estimating national income?
Answer: The expenditure method estimates national income by summing final expenditures on consumption (PFCE, GFCE), investment (GDCF), and net exports, equaling GDPmp, then adjusting for CFC, taxes, and NFIA to get NNPfc.
Name the two variants of the expenditure method.
Answer: Income disposal and product disposal.
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What is Private Final Consumption Expenditure (PFCE)?
Answer: PFCE is the sum of Household Final Consumption Expenditure (HFCE) and Non-Profit Institutions Serving Households Final Consumption Expenditure (NPISH-FCE).
What does Household Final Consumption Expenditure (HFCE) include?
Answer: HFCE includes actual and imputed expenditures by resident households on consumption goods and services, both domestically and abroad.
What is Government Final Consumption Expenditure (GFCE)?
Answer: GFCE is the imputed expenditure by the government on providing services, less receipts from sales (e.g., fees).
What is Gross Capital Formation (GCF)?
Answer: GCF is the sum of gross fixed capital formation (GFCF) and changes in inventories, including tangible and intangible assets.
What is included in Gross Fixed Capital Formation (GFCF)?
Answer: GFCF includes net acquisition of tangible assets (e.g., buildings, machinery) and intangible assets (e.g., software), plus improvements to fixed assets.
What are net exports in the expenditure method?
Answer: Net exports are exports minus imports of goods and services, representing the value of final products sold to non-residents.
What expenditures should be excluded in the expenditure method?
Answer: Intermediate expenditures, financial asset transactions, transfer payments (e.g., gifts, taxes), and second-hand goods.
What are the two main considerations for choosing a method to estimate national income?
Answer: Purpose of estimation and availability of data.
What is the purpose of the production method?
Answer: To measure the contribution of different industrial sectors to national income.
What does the income method reveal?
Answer: The income method reveals the distribution of national income among factor owners, indicating income inequality.
What is the purpose of the expenditure method?
Answer: To measure the standard of living through consumption and investment expenditures.
Why is data availability a critical factor in choosing a method?
Answer: Lack of relevant data may force estimators to use a method despite a different purpose, as data constraints limit options.
What is Net Domestic Product at Factor Cost (NDPfc)?
Answer: NDPfc is the sum of net value added at factor cost (NVAfc) by all resident production units in the economic territory.
How is Net National Product at Factor Cost (NNPfc) calculated?
Answer: NNPfc = NDPfc + Net Factor Income from Abroad (NFIA).
What is the role of the price index in deflation?
Answer: The price index adjusts current price estimates to constant price estimates by accounting for price changes relative to a base year.
Why is it ideal to estimate national income using all three methods?
Answer: Using all three methods provides comprehensive insights into sectoral contributions, income distribution, and living standards, maximizing data utility.
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