Goods and Services. Consumption Expenditure On Goods and Services. Factor Payments Rent, Wages, Interest and Profits

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Primrose Gardner
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1 Q.1 Define the following. (i) Stock Stock variable refers to that variable, which is measured at a particular point of time. Examples: stock of goods on 31st March 2017, National wealth, National Capital, Money supply etc. (ii) Flow Flow variable refers to that variable, which is measured over a period of time. The period of time could be a day, a week, a year etc. It means flow variables are time dimensional as they are measured for a period of time. (iii) Real Flow Real flow refers to the flow of factor services from households to firms and the corresponding flow of goods and services from firm to households. Factor Services Households Firms Goods and Services (iv) Money flow Money flow refers to flow of factor payments from firms to households for their factor services and corresponding flow of consumption expenditure from households to firms for purchase of goods and services produced by the firms. Consumption Expenditure On Goods and Services Households Firms (v) Closed Economy It is an economy which has no economic relations with rest of the world. (vi) Open Economy It is an economy which has economic relations with rest of the world. (vii) Factor Income Factor Payments Rent, Wages, Interest and Profits

2 Factor income refers to income received by factors of production for rendering factor services in the production process. It is received for providing factor services of land, labour, capital and enterprise. Factor income of normal residents of a country is included in the National Income. Examples: Rent, wages, interest and profit. Factors of Production are the primary inputs, which are needed to produce goods and services. They are broadly categorised under four heads (1) Land, (2) Labour (3) Capital (IV) Entrepreneur. (viii) Transfer Income Transfer income refers to income received without rendering any productive service in return. It is a unilateral (One-sided) concept. It is not included in National Income as it does not reflect any production of goods and services. It can be received either within the domestic territory of a country or from abroad. Examples: Old age pension, scholarship, unemployment allowance, pocket money, etc. (ix) Final goods Final goods refer to those goods which are used either for consumption or for investment Final Goods include: (a) Goods purchased by consumer households as they are meant for final consumption (like milk purchased by households). (b) Goods purchased by firms for capital formation or investment (like machinery purchased by a firm). Final goods are neither resold nor used for anyfurther transformation in the process of production. (x) Intermediate Goods Intermediate goods refer to those goods which are used either for resale or for further production in the same year. Intermediate Goods include: (i) Goods purchased for resale (like milk purchased by a Dairy Shop). (ii) Goods used for further production (like milk used for making sweets). Points about Intermediate Goods 1. They are generally purchased by one production unit from another production unit, i.e. intermediate goods remain within the production boundary. 2.They have 'Derived Demand' as their demand depends on demand for final goods. 3. Durable goods (like trucks, 'aircrafts, vehicles, etc.) purchased by Government for military purposes are included under the category of intermediate goods as they are used for production of defence services and not for market sale. 4.Value of intermediate goods is merged with the value final goods. (xi) Capital Goods Capital Goods are those final goods which help in production of other goods and services. For example, plant and machinery, equipments, etc. Some Points about Capital Goods (i) They are used in future for productive purposes and have expected life time of several years. VIVEK JAISWAL : ,

3 (ii) They do not lose their identity in the production process, i.e. they do not get merged in the process of production. (iii) They need repairs or replacement over time as they depreciate over a period of time. (iv) They have derived demand as their demand is derived from the demand for other goods, which they help to produce. (xi) Gross Investment The total addition made to the capital stock of economy in a given period is termed as Gross Investment. Capital stock consists of fixed assets and unsold stock. So gross investment is the expenditure on purchase of fixed assets and unsold stock during the accounting year. (x) Depreciation (Consumption of Fixed Capital) Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time or expected obsolescence. It is also known as (1) Current Replacement cost (2) Replacement cost of Fixed capital and (3) Capital consumption allowance. (xi) Indirect Taxes Indirect taxes refers to those taxes which are imposed by the government on production and sale of goods and services. GST, custom duty, etc. are some of the indirect taxes. Its burden can be shifted to others. Indirect tax increases the price of the product in the market. (xii) Subsidies Subsidies refer to the financial assistance given by the government to an enterprise on the production of a certain commodity. In India, LPG cylinder is sold at subsidized rates. They are often granted to promote exports or to encourage firms for setting up the industriesin the backward areas. Subsidies are opposite to indirect taxes as they reduce the market price of the commodity. I Subsidies may also be referred as Economic Assistance. (xiii) Factor Cost (FC) It refers to amount paid to factors of production for their contribution in the production process. (xiv) Market Price (MP) It refers to the price at which product is actually sold in the market. Q.2 Define externalities. Give an example of negative externality. What is its impact on welfare? [CBSE Delhi 2014] Ans. Externalities are the good and bad impact of an activity without paying the price or penalty for that. Externalities can be positive or negative. An example of negative externality would be the smoke emitted by factories that causes air pollution, or the industrial waste is driven into rivers causing water pollution. Environmental pollution causes a loss of social welfare. But nobody is penalised for it and there is no valuation of it in the estimation of GDP.

4 Impact of externalities is not accounted in the index of social welfare in termsof GDP which makes GDP an inappropriate index of welfare. It either underestimates or, overestimates the level of welfare. Q.3 Giving reasons categorise the following into stock and flow: (i) Capital (ii) Saving. (iii) Gross domestic product (iv) Wealth. [CBSE Delhi 2013] Ans. (i) Capital is a stock variable because it is measured at a point of time. (ii) Saving is a flow variable as it is measured per unit of time period. (iii) Gross domestic product is a flow variable as it is measured per unit of time period. (iv) Wealth is a stock variable because it is measured at a point of time. Q.4 Explain the circular flow of income. [BSE 'Delhi 2013 (F) 2013] Ans. The flow of production, income and expenditure is a circular flow. Production gives rise to income, income gives rise to demand for goods and services, 'and demand in turn gives rise to expenditure. Expenditure leads to further production. Thus, the flow of production, income and expenditure becomes circular with no beginning or no end. Q.5 Distinguish between stocks and flows. Give two examples of each.[cbse (Al) 2013] Ans. Stock Flow 1. Stock is the quantity of an economic variable 1.Flow is that quantity of an economic Which is measured at a particular point of time variable which is measured during the which is measured during the period of time. 2. Stock has no time dimension 2.Flow has time dimension as per hour per day,per month etc. 3. Stock is a static concept. 3. Flow is a dynamic concept 4. Examples: Quantity of money wealth 4. Examples: Consumption investment Q.6 Giving reason, explain how should the following be treated in estimating gross domestic product at market price. (i) Fees to a mechanic paid by a firm (ii) Interest paid by an individual on a car loan taken from a bank (in) Expenditure on purchasing a car for use by a firm [CBSE Delhi 2014] Ans. (i) Fees to a mechanic paid by a firm will not be included in the estimation of gross domestic product at market price because this fees is an intermediate expenditure for the firm and not a final expenditure. (ii) Interest paid by an individual on a car loan taken from a bank will not be included in estimation of gross domestic product at market price because such loans, are not used for production purpose, rather are made for consumption purposes. (iii) Expenditure on purchasing a car for use by a firm will be included in the estimation of gross domestic product at market price because it is an investment expenditure.the car purchased will be used by the firm for many years and the firm 'will be a final u'ser of the car, provided it is neither a second hand car nor purchased for further sale. VIVEK JAISWAL : ,

5 Q.7 What are externalities? Give an example of a positive externality and its impact on welfare of the people. [CBSE (Al) 2014] Ans. Externalities are the good and bad impact of an activity without paying the price or penalty for that. Externalities can be positive or negative. Example of a positive externality is when a beautiful garden maintained by Mr. X raises welfare of Mr. Y even when Mr. Y is not paying for it. There is no valuation of it in the estimation of GDP. Impact of externalities (positive or negative) is not accounted in the index of social welfare in terms of GDP. To that extent, GDP as an index of welfare is an inappropriate index. It either underestimates or overestimates the level of welfare. Q.8 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) Payment of corporate tax. (iii) Expenditure on providing police services by the government [CBSE (Al) 2014] Ans. (i) Taking care of aged parents should be included in the estimation of national income as it involves generation of services that are rendered for the parents. (ii) Payment of corporate tax should not be included in the estimation of national income because it is a transfer payment by the firm. It is paid out of income and therefore, it is not to be separately added in the national income. (iii) Expenditure on providing police services by the government should be included in the estimation of national income because expenditure incurred by the government is a part of government's final consumption expenditure. Q.9 What are non-monetary exchanges? Give an example. Explain their impact on use of gross domestic product as an index of welfare of the people. [CBSE (F) 2014] Ans. Non-monetary exchanges refer to such exchanges which do not involve the use of money, as a medium of exchange. In such exchanges, goods are exchanged for goods.. In economies like of India, barter system of exchange is not totally non-existent. Non-monetary transactions are quite evident in rural areas where payments for farm-labour are often made in kind rather than cash. But such transactions are not recorded because they are outside the monetary system of exchange. To this extent GDP remains underestimated. Thus, non-monetary exchanges make gross domestic product an inappropriate index of welfare. Q.10 How should the following be treated while estimating national income? You must give reason support of your answer. (i) Bonus paid to employees. (ii) Addition to stocks during a year. (iii) Purchase of taxi by a taxi driver. [CBSE (F) 2014] Ans. (i) Bonus paid to employees will be included in the estimation of national income since it is a component of compensation of employees. (ii) Addition to stocks during a year will be included in the estimation of national income because change in stock is a part of investment expenditure.

6 (iii) Purchase of taxi by a taxi driver will be included in the estimation of national income because it is an investment expenditure. A taxi will be used by the taxi driver for several years to earn his living. Q.11 Giving reasons 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. [CBSE Delhi 2015] Ans. (i) Expenditure by a firm on payment of fees to a chartered accountant is not included in the estimation of national income because fees to a chartered accountant is an intermediate expenditure for the firm and not a final expenditure. (ii) Payment of corporate tax by a firm should not be included in the estimation of national income because it is a transfer payment by the firm. It is paid out of income and therefore, it is not to be separately added in the national income. (iii) Purchase of refrigerator by a firm is included in the estimation of national income because it is investment expenditure or capital formation. A refrigerator is used by the firm for several years and the firm is a final user of it. Q.12 Giving reasons explain how the following should be treated in estimation ofnational income: (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. [CBSE (Al) 2015] Ans. (i) Payment of interest by a firm to a bank is included in national income because firm borrows money for production purpose and thus, it is a factor payment. (ii) Payment of interest by a bank to an individual is included in national income because the bank is expected to have used individual's saving for productive purpose and thus, this is a factor payment. (iii) Payment of interest by an individual to a bank is not included in national income because the individual uses the loan amount for consumption purpose and not foi investment or productive purpose. Q Giving reasons explain how should the following be treated in estimation of national income (i) Payment of corporate tax by a firm. (ii) Purchase of machinery by.a factory for own use. (in) Purchase of uniforms for nurses by a hospital [CBSE (F) 2015] Ans. (ii) Purchase of machinery by a factory is included in the estimation of national income because it is investment expenditure.or capital formation. VIVEK JAISWAL : ,

7 (iii) Purchase of uniforms for nurses by a hospital is not included in the estimation of national income, because uniform is provided by the hospital at the time of work. It is to be treated as an intermediate consumption. Q.14 Government incurs expenditure to popularize yoga among the masses. Analyse its impact on gross domestic product and welfare of the people. [CBSE Delhi 2016] Ans. (a) Impact on Gross Domestic Product (GDP): Government expenditure adds to aggregate demand in the economy. It has a multiplier effect. on GDP. (b) Impact on Welfare: Expenditure on yoga is expected to improve physical and mental health of the people. Accordingly, skill formation as well as efficiency are expected to rise. This would improve welfare of the people. Q.15 Sale of petrol and diesel cars is rising particularly in big cities. Analyse its impact on gross domestic product and welfare. [CBSE (Al) 2016] Ans. (a) Impact on Gross Domestic Product (GDP): GDP = Sales, in case there is no change in stocks during the year. Accordingly, increase in sale of cars during the year indicates increase in GDP. (b) Impact on Welfare: Rise in sale of cars leads to a rise in the consumption of petrol and diesel. Both these fuels (particularly diesel) cause emission of carbon dioxide. It increases environmental pollution. It adversely impacts welfare of the people. Because increase in environmental pollution causes increase in expenditure on the maintenance of health. It also reduces the level of sustainable development. Implying loss of welfare of future generations.

UNIT 6 NATIONAL INCOME POINTS TO REMEMBER

1 COMPREHENSIVE COMMERCE UNIT 6 NATIONAL INCOME POINTS TO REMEMBER Good : In economics a good is defined as any physical object, natural or man-made, that could command a price in the market. Consumption