Methods of measuring National Income MCQ Quiz - Objective Question with Answer for Methods of measuring National Income - Download Free PDF

The correct answer is Depreciation.

Key Points

• Depreciation​
  • “Depreciation” means a decline in the value of fixed assets due to use, the passage of time or obsolescence. 
  • Depreciation is an accounting term used to determine the value of fixed assets.
  • If a business enterprise procures a machine and uses it in a production process then the value of the machine declines with its usage.
  •  Even if the machine is not used in the production process, we can not expect it to realise the same sales price due to the passage of time or the arrival of a new model.
  • Fixed assets are subject to depreciation.
  • Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise.
  • Hence, Depreciation is NOT included in the circular flow of Income in a simple economy.

Important Points

•  The Net National Product of an economy is the GNP after deducting the loss due to depreciation.
  • NNP = GNP – Depreciation
  • NNP = GDP + income from abroad - Depreciation
• Net Domestic Product (NDP) is GDP estimated after deducting the loss due to depreciation
• This is essentially the net version of GDP, i.e, GDP minus the total value of the wear and tear (depreciation) that occurred in the assets while the products and services were created.
  • NDP = GDP - Depreciation.

The correct answer is primary deficit.

Key Points

• Primary deficit refers to the difference between the current year's fiscal deficit and the interest payment on previous borrowings.
• It indicates the borrowing requirements of the government, excluding interest.
• As per the Union Budget 2022-23, the target for the primary deficit in 2021-22 is 2.8% of GDP.

Additional Information

• A fiscal deficit is a shortfall in a government's income compared with its spending.
• A revenue deficit occurs when the actual amount of revenue and/or the actual amount of expenditures do not correspond with budgeted revenue and expenditures.
• A fiscal imbalance is the result of a gap between expenditures and income in the public sector - central government, local governments and social insurance.

The correct answer is ​A organization that deals with transferring products to the respective shops 

Key Points

• The service sector holds the activities which help the primary and secondary sector.
• It is also known as the service sector where services like transport, insurance, banking, communication, retail, information technology and hospitality are organised.
• The service sector links the other sector of the economy by proving various types of services.

Additional Information An economy consists of various sectors in the economy, these sectors are divided into different parts on a different basis.

• On the basis of economic activities there are three sectors in an economy.
  • Primary sector holds activities that are undertaken directly using natural resources. like agriculture, horticulture, animal husbandry, fishing, forestry and dairying. It is also called agriculture and related sector.
  • Secondary sector holds activities in which natural products are changed into other forms through ways of manufacturing that we associate with industrial activity. It is also called the manufacturing sector.​​
  • Tertiary sector holds activities that help in the development of the primary and secondary sectors. These activities, by themselves, do not produce a good but they are an aid or support for the production process.
• On the basis of income expenditure there are four sectors in an economy.
  • Household sector is the owner of the factors of production and it is also involved in production activities as human resource.
  • Production sector is involved in producing goods with the help of production factors that are hired from the household sector.
  • Government is a welfare agency which works to maximise public welfare. It also controls economic activities in the economy with its fiscal policy.
  • External sector is engaged in export and import activities. It is understood rest of the world with a country keeps economic relations.
• On the basis of employment there are two sectors in an economy.
  •  Organized sector covers those enterprises of work where the terms of employment are regular and therefore, people have assured work. It covers all the registered enterprises in the economy.
  • Unorganized sector covers those working people who do work on daily wages. they do not have regular work and they do not have assured to get work daily.
• On the basis of ownership there are two sectors in an economy.
  • In the public sector, the government owns most of the assets and provides all the services.
  • In the private sector, ownership of assets and delivery of services is in the hands of private individuals or companies.

The correct answer is Central Statistical Organization.

• In India, the estimate of National Income is prepared by Central Statistical Organization (CSO).
• Every year it issues a white paper on national income estimates.

Key Points

•  Central Statistical Organization:
  • The Central Statistical Organisation (CSO) is responsible for the coordination of statistical activities in the country, and evolving and maintaining statistical standards.
  • Its activities include National Income accounting, the conduct of annual survey of Industries, Economic Census and its follow up surveys.
  • The Central Statistical Organisation also publishes Consumer Price Indices for urban non-manual employees, Human Development Statistics, etc.
  • The Central Statistical Organisation is located in Delhi. Some portion of industrial statistics work pertaining to an annual survey of industries is carried out in Calcutta.
  • It was set up in May 1951 in the Cabinet Secretariat with the primary objective of providing technical leadership in building up the statistical system in the country.
• National Income:
  • In a layman's language, national income means the total value of goods and services produced annually in a Country.
  • According to National Income Committee, "A national income estimate measures the volume of commodities and services turned out during a given period, counting it without duplication".

Additional Information

• Planning Commission:
  • The Planning Commission of India was constituted by the Government of India on the resolution of the Cabinet on 15th March 1950. It is neither mentioned in the Constitution nor it has been established by an act passed by the parliament.
  • On 1^st January 2015, a Cabinet resolution was passed to replace the Planning Commission with the newly formed NITI Aayog (National Institution for Transforming India).
• Reserve Bank of India:
  • The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934.
  • The central office of the Reserve Bank of India was initially established in Kolkata but was permanently moved to Mumbai in 1937.
  • Reserve Bank of India (RBI) is the Central Bank and supreme monetary authority of India.

The Correct Answer is V Five-Year Plan.

Key Points

• India recorded the highest growth rate of National Income during V Five Year Plan. (111.2% growth)
• The Fifth(5th) Five-Year Plan focused on poverty eradication (Garibi Hatao), employment, and justice.
• Fifth Five Year Plan duration was 1974 to 1979.
• In this plan, the priority was given to the agriculture sector, and then to the industry and mines.
• Overall this plan was a success which gained a growth of 4.8% against the target of 4.4%.
• The draft of this plan was created and released by the D.P. Dhar. This plan was put to an end in 1978.
• Rolling Plan: This plan was introduced with an annual plan for 1978-79 and as an extension of the terminated fifth-five year plan.

Important Points

•  Five Year Plan in India
  • Five-year plans were started in India during the time of Jawaharlal Nehru.
  • India's first five-year plan was started in 1951.
  • The 12th Five Year Plan i.e. from 2012-2017 was the last Five Year Plan of India.

The correct answer is Corporate tax.

Key Points

• Direct taxes are paid in entirety by a taxpayer directly to the government.
• The tax where the liability, as well as the burden to pay it, resides on the same individual.
• Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift tax, expenditure tax etc.​
• Types of direct tax include :
  • Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax department.
  • Corporate Tax: Paid by companies and corporations on their profits.
  • Wealth Tax: Levied on the value of the property that a person holds.
  • Estate Duty: Paid by an individual in case of inheritance.
  • Gift Tax: An individual receiving the taxable gift pays tax to the government.
  • Fringe Benefits Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state government.

Additional Information

• Indirect tax
  • Taxes, where the liability to pay the tax, lies on a person who then shifts the tax burden to another individual.

The correct answer is Banking method.

Key Points

• National income is the total value of a country’s final output of all new goods and services produced in one year.
• Methods of measuring national income are:

1. Expenditure Method - Under this method, we estimate the disposal of income on the purchase of final goods and services.
2. Income Method - The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest, and profit for their productive services in an accounting year. 
3. Production method - In this method, national income is measured as a flow of goods and services. This method is also called an output method.

Additional Information

• Measurement of National Income
  • There are three methods to measure national income:
    1. Income Method
    2. Production (Value-Added) Method
    3. Expenditure Method
  • Measurement of National Income – Income Method
    • Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed-income of self-employed.
    • In India, one-third of people are self-employed
    • This is the ‘domestic’ income, related to the production within the borders of the country
  • Measurement of National Income – Production Method
    • Estimated by adding the value added by all the firms.
    • Value-added = Value of Output – Value of (non-factor) inputs
    1. This gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’) and taxes (thus ‘market price’)
    2. To reach National Income (that is, NNP at FC)
    • Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
    • Subtract Depreciation: NNP at MP = GNP at MP – Dep
    • Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT
  • Measurement of National Income – Expenditure Method
    • The expenditure method to measure national income can be understood by the equation given below: 
      • Y = C + I + G + (X-M),
      • where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X = Exports, X- M = Net Exports (difference between exports (X) and imports (M))

Important Points

• GDP: Gross Domestic Product is the sum of the money of all the final goods and services produced solely within the boundaries of a country, at a specific time.
  • GDP includes the income of foreigners staying in the country.
  • It excludes the income of nationals of the country staying abroad and also excludes the remittances sent from abroad.
• GNP: Gross National Product is the sum of the money of all the final goods and services produced both within and outside of a country by nationals during a specific period of time.
  • GNP includes remittances.
  • It excludes income generated locally by non-nationals.

The correct answer is National Statistical Office (NSO).

Key Points

• The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation is the nodal agency for Estimates of National Income.
   
• CSO was merged with National Sample Survey Office (NSSO) to form the National Statistical Office (NSO) in 2019.
   

Method of Calculating National Income:

• Product Method
• Income Method
• Consumption Method

Additional Information

History of National Income Estimation In India:

• The first attempt to calculate the National Income of India was made by Dadabhai Naoroji in 1867- 68.
• The first official attempt was made by the National Income Committee headed by Professor P.C. Mahalanobis in 1949.

RBI: The Reserve Bank of India is India's Central bank which controls the issue and supply of Indian rupees.

Ministry of Finance: It is the ministry within the government of India, concerned with the economy of India.

The short-term rate at which the Reserve Bank of India lends to the bank. Key Points

1. Repo rate is the rate at which the central bank of a country (Reserve Bank of I India) lends money to commercial banks in the event of any shortfall of funds.
2.  Repo rate is used by monetary authorities to control inflation.
3. The RBI has kept the repo rate, the rate at which the RBI lends funds to banks that is unchanged at four percent, and the reverse repo rate - the rate at which RBI borrows from banks – at 3.35 percent.
4. Repo rate is the rate at which the central bank gives loans to commercial banks against government securities. 

Important Points

1. Reverse repo rate is the interest that RBI pays to banks for the funds that the bank's deposits with it
2. Statutory liquidity ratio (SLR) refers to the minimum reserve requirement that needs to be maintained by commercial banks in the nation. 
3. CRR or cash reserve ratio is the minimum proportion/percentage of a bank's deposits to be held in the form of cash

Additional Information

• Reserve Bank of India (RBI):
  • RBI was set up on the basis of the Hilton Young Commission recommendation in April 1935, with the enactment of the >RBI Act, 1934.
  • It was nationalized on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • The Custodian of India’s foreign exchange reserves is the Reserve Bank of India.
  • Its first Governor was C.D. Deshmukh.
  • The headquarters of RBI is in Mumbai.
  • Current governor of RBI is Shaktikanta Das.

Key Points

• Bank Rate:
  • It is also called the rediscount rate. It is the rate, at which the RBI gives finance to commercial banks.
• Cash Reserve Ratio (CRR):
  • The RBI (Amendment) Bill, 2006, empowers RBI to prescribe CRR–Cash that banks deposit with the RBI without any floor rate or ceiling rate.
• Statutory Liquidity Ratio (SLR):
  • It is the ratio of a liquid asset, which all commercial banks have to keep in the form of cash, gold, and unencumbered approved securities equal to not more than 40% of their total demand and time deposit liabilities (ranges is 25‑40%).
• Repo Rate:
  • It is the rate, at which RBI lends short-term money to the bank against securities.
• Reverse Repo Rate:
  • It is the rate, at which banks park short-term excess liquidity with the RBI.
• Open Market Operations (OMOs):
  • Under OMOs, the RBI sells G-securities in the market.
• Quantitative credit controls are used to control the volume of credit and indirectly to control the inflationary and deflationary pressures caused by the expansion and contraction of credit.

Key Points

• The net market worth of all the final goods and services generated over a year by the normal citizen of a nation is referred to as the net national product at market prices.
• The gross market value of all finished products and services generated by the normal residents of a nation over a year is referred to as the gross national product at factor cost.
• GNP at factor cost = NNP at market prices + Depreciation-Net Indirect Taxes.

Hence, the correct answer is NNP at market prices + depreciation – net indirect taxes equals GNP at factor cost.

The correct answer is Capital Goods.

• Capital goods:- Goods that are bought not for meeting the immediate need of the consumer but for producing other goods

Key Points

• Capital goods:- Goods that are bought not for meeting the immediate need of the consumer but for producing other goods
• Final goods:- These are those which are used for:
  • Personal consumption (like bread purchased by consumer household), or
  •  Investment or capital formation (like building, machinery purchased by a firm)
• Intermediate goods:- These are those, which are used for:
  •   Further processing (like sugar used for making sweets), or
  •   Resale in the same year (If car purchased by a car dealer for resale).
• Consumption goods:- Those goods which satisfy the wants of consumers directly.

The correct answer is Sum total of factor incomes.

• National income means the value of goods and services produced by a country during a financial year. 
• National Income is earned by resources for their contribution of land, labour, capital, and organizational ability.
• The sum of the income received by factors of production in the form of rent, wages, interest, and profit is called National Income.
• The progress of a country can be determined by the growth of the national income of the country.

Additional Information

• There are 3 methods to calculate National Income.
  • Income Method
  • Expenditure Method
  • Product Method
• According to the production method,
  • National income or NNPFC = GDPMP - Consumption of fixed capital + NFIA - Net Indirect Taxes
  • NNPFC = Net National Product - Indirect Taxes + Subsidy

The correct answer is Both I and II.

Key PointsNational Income Calculation

• Intermediate goods are not included in the calculation of national income.
  • Intermediate goods are products used in the production of final goods and services. Including them would result in double counting, as their value is already embedded in the value of final goods.
  Hence, statement I is correct.
• Final goods are included in the calculation of national income.
  • Final goods are products that have completed the production process and are available for consumption or investment. These goods are counted in national income because they reflect the actual value of production in the economy.
  Hence, statement II is correct.

Additional Information

• National Income Overview
  • National income is a measure of the total value of goods and services produced by a country within a specific period, typically one year.
  • It is calculated using various methods, including the income method, production method, and expenditure method.
• Exclusion of Intermediate Goods
  • Excluding intermediate goods prevents double counting and ensures that only the value of final products is considered, providing a more accurate measure of economic output.
• Inclusion of Final Goods
  • Final goods are included in national income calculations because they represent the end product of economic activity, reflecting the actual value created in the economy.

Key facts about National income in India-

• The first attempt to calculate the national income of India was made by Dadabhai Naoroji.
• The first scientific method for calculating national income was made by Prof. V.K.R.V. Rao in 1931 but was not satisfactory.
• The first official attempt was made by National Income Committee headed by Prof. P.C. Mahalanobis in 1949.
• Central Statistical Organization (CSO) is responsible for calculating National income in India.

The correct answer is Central Statistical Organisation.

Key Points

• National income is the total market value of production in a country’s economy during a year. The national income of a country can be measured by three alternative methods: (i) Product Method (ii) Income Method, and (iii) Expenditure Method.
• In India, Central Statistical Organisation (1949) now renamed as Central Statistical Office (CSO) has been formulating National Income.
• Central Statistical Office was set up in 1949. It is one of the two wings of the National Statistical Organisation (NSO), along with the National Sample Survey Office (NSSO), responsible for the coordination of statistical activities in the country and for evolving and maintaining statistical standards. 
• Its activities include a compilation of national accounts, the conduct of an annual survey of industries and economic census, a compilation of an index of industrial production, as well as consumer price indices.
• It also deals with various social statistics, training, international cooperation, industrial classification etc.

Additional Information 

• The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, of 1934.
• The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
• Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
• Main functions of the RBI- Monopoly of Note Issue, Banker’s Bank, Banker to the Government, Controller of Credit and Exchange Management and Control.
• Planning Commission was established by an executive decision of the Government of India in 1950. The Planning Commission is a non-constitutional and non-statutory body and is responsible to formulate five years plans for social and economic development in India.

Hence, the agency estimating the National Income of India is Central Statistical Organisation.

The correct answer is option 4 i.e. NNP_FC.  

• NNPFC = NNP at factor cost.
• National Income is the total amount of money earned within a country. Some important parameters of National Income are:-
• GDP:
  • Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country in one financial year.
• NDP:
  • Net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation and is calculated by subtracting depreciation from the gross domestic product (GDP).
• GNP:
  • The gross national product (GNP), is the value of all finished goods and services owned by a country's residents over a period of time.
• NNP:
  • Net national product (NNP) is calculated by taking GNP and then subtracting depreciation.
• An NNP at market price (net indirect taxes) = NNP at factor cost. It is also called a National income