Chapter 2: National Income and Related Aggregates Class 12 Economics NCERT Solutions

Master national income concepts, aggregates, and methods of calculation with Chapter 2 NCERT Solutions. Download free PDFs to revise GDP, NDP, and GNP topics easily. Scroll down to access complete, step-by-step answers.

What You Will Learn in Chapter 2 – National Income and Related Aggregates

In this chapter, you will learn the different aggregates that contribute to national income. You will explore the methods used to calculate national income, including the Income Method, Expenditure Method, and Output Method. The chapter also introduces important related concepts like GDP, GNP, NNP, and various income aggregates that are essential for understanding economic statistics and policymaking.

Key Topics Covered:

1. National Income: Definition and Importance

  • National Income (NI) refers to the total income earned by a country’s residents within a year. It includes all goods and services produced within a country, valued at market prices.

  • It is a measure of the economic performance of a nation and is vital for comparing the economic health of different countries.

2. Important National Income Aggregates

  • Gross Domestic Product (GDP): The total market value of all final goods and services produced within a country’s borders in a given period.

  • Gross National Product (GNP): The total value of all final goods and services produced by a country’s residents, whether within the country or abroad, during a specific period.

  • Net National Product (NNP): GNP after deducting depreciation (also known as the wear and tear on capital).

  • Personal Income (PI): The total income received by households from all sources before taxes, including transfers and subsidies.

  • Disposable Income (DI): The income available for consumption and saving after paying taxes.

3. Methods of Measuring National Income

  • Income Method: In this method, national income is calculated by adding up all the income earned by individuals in the economy, such as wages, profits, rents, and interest.

  • Expenditure Method: This method calculates national income by adding up all expenditures made on final goods and services produced within the economy.

  • Output Method: The output method calculates national income by adding up the value of all goods and services produced within an economy during a specific period.

4. Real vs Nominal National Income

  • Nominal National Income is the national income measured at current market prices, which includes the effect of price changes (inflation or deflation).

  • Real National Income is adjusted for inflation, providing a more accurate reflection of a country’s actual economic output.

5. Methods to Avoid Double Counting

  • Final Goods: Only the value of final goods should be counted to avoid double counting, as the intermediate goods used in the production process are already included in the final price of the product.

  • Value-Added Method: This method ensures that the value of intermediate goods is excluded by only counting the value added at each stage of production.

6. Problems in Measuring National Income

  • Non-Market Activities: Many goods and services are produced but not sold in the market, such as household labor, which is not captured in national income calculations.

  • Underground Economy: Informal economic activities (e.g., black market) are not included in official national income statistics.

  • Transfer Payments: Government payments like pensions or subsidies are not counted as part of national income, as they are not a result of production.

7. Relation Between Different Income Aggregates

  • GDP and GNP: While GDP measures the value of goods and services within a country, GNP also includes income earned by the country’s residents abroad and excludes income earned by foreigners within the country.

  • NNP and GDP: NNP is derived from GDP by subtracting depreciation. It represents the economy’s sustainable output, considering the capital wear and tear.

Why Use Our NCERT Solutions for Chapter 2?

Our NCERT solutions for Chapter 2: National Income and Related Aggregates are designed to help you master the important concepts related to national income calculation. With easy-to-understand explanations and examples, our solutions make it simple to understand the different income aggregates and the methods used for calculating them.

Highlights of Our Solutions:

  • Clear and concise explanations of key concepts like GDP, GNP, NNP, and Personal Income.

  • Detailed steps for calculating national income using different methods.

  • Diagrams and charts to help visualize income aggregates and national income calculations.

  • In-depth discussion on the challenges faced while measuring national income.

  • Real-life examples for better understanding of how national income is relevant to the economy.

NCERT Solutions for Chapter 2 – National Income and Related Aggregates

Intext Questions:

  • Explanation of the three methods of calculating national income with examples.

  • Detailed steps to avoid double counting in national income calculations.

Exercise Questions (Q.1 to Q.10):

  • Solutions to questions on measuring GDP, GNP, and NNP.

  • Practice problems on calculating national income using the Income Method, Expenditure Method, and Output Method.

  • In-depth answers to questions on real vs nominal national income and their importance.

Download Chapter 2 Solutions PDF – National Income and Related Aggregates

Access the free, downloadable PDF containing detailed solutions for all exercises and in-text questions. This PDF is an excellent resource for quick revision and exam preparation.

What’s Included:

  • Step-by-step solutions for all textbook questions.

  • Key formulas and definitions for easy reference.

  • Diagrams and charts to understand income aggregates.

Recommended Preparation Tips:

  • Understand the different aggregates like GDP, GNP, and NNP, and their importance.

  • Practice calculations using the three methods for measuring national income.

  • Learn to avoid double counting and understand how the value-added method works.

  • Revise the concept of real vs nominal national income, and practice calculating real national income.

  • Be aware of the problems in measuring national income, such as non-market activities and underground economy.

Additional Study Resources:

  • Chapter 2 Economics Notes – National Income and Related Aggregates.

  • NCERT Exemplar Problems and Solutions for extra practice.

  • Previous years’ questions and MCQs on national income for board exams and competitive exams.

  • Flashcards for quick revision of national income concepts and methods.

Mastering National Income and Related Aggregates

Chapter 2 of Class 12 Economics is essential for understanding how a country’s economic performance is measured. By grasping the concepts of national income and the various methods used to calculate it, students will be equipped with the knowledge to analyze the economy at a national level and understand the implications of economic policies.

NCERT Solutions for Class 12 Economics Chapter 2 – National Income and Related Aggregates

NCERT Textbook Questions Solved

Question 1. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Answer: The sum of final expenditures in an economy must equal the income received by factors of production. Revenues earned by firms are distributed as wages, rents, interests, and profits. Since final expenditure includes only final goods and services, it directly corresponds to total factor incomes.

Question 2. What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.

Answer: – Planned Inventory: Deliberate accumulation of stock by firms. – Unplanned Inventory: Unexpected changes due to fluctuating sales. Relation: Gross Value Added (GVA) = Value of Sales + Change in Inventories – Value of Intermediate Goods.

Question 3. Write down the three identities of calculating the GDP of a country by the three methods. Also, briefly explain why each of these should give us the same value of GDP.

Answer:

  • Product Method: National Income = National Product
  • Income Method: National Income = Sum of all factor incomes
  • Expenditure Method: National Income = Total expenditure on final goods
Each measures the same economic activity from different perspectives: creation, distribution, and disposal of income.

Question 4. Define budget deficit and trade deficit. Calculate the trade deficit given private investment and budget deficit.

Answer: – Budget Deficit: Excess of government expenditure over tax revenue. (G – T) – Trade Deficit: Excess of imports over exports (M – X). Given: Investment – Saving = Rs 2,000 crores, G – T = (-) Rs 1,500 crores, Thus, Trade Deficit = 2,000 + (-1,500) = Rs 500 crores.

Question 5. Given GDP at MP, NFIA, and Indirect Taxes – Subsidies, find depreciation.

Answer: Given: GDP (MP) = 1100 crores, NFIA = 100 crores, (Indirect Taxes – Subsidies) = 150 crores, National Income = 850 crores. Using formula: NNP (FC) = GDP (MP) – Depreciation + NFIA – (Indirect Taxes – Subsidies). 850 = 1100 – Depreciation + 100 – 150. Thus, Depreciation = Rs 200 crores.

Question 6. Find value of transfer payments given NNPFC, Personal Income, and Personal Disposable Income.

Answer: Personal Income = Personal Disposable Income + Personal Tax = 1200 + 600 = 1800 crores. Private Income = Personal Income + Retained Earnings = 1800 + 200 = 2000 crores. Private Income = NNPFC + Transfer Payments. 2000 = 1900 + Transfer Payments. Thus, Transfer Payments = Rs 100 crores.

Question 7. Calculate Personal Income and Personal Disposable Income from given data.

Answer: Private Income = 8,800 crores. Personal Income = Private Income – (Undistributed Profits + Corporation Tax) = 8,800 – 1,000 – 500 = 7,300 crores. Personal Disposable Income = Personal Income – Personal Tax = 7,300 – 500 = 6,800 crores.

Question 8. Complete Raju’s contribution to national income measures.

Answer:

  • GDP: Rs 500
  • NNP at MP: Rs 500 – 50 = Rs 450
  • NNP at FC: Rs 450 – 30 = Rs 420
  • Personal Income: Rs 420 – 220 = Rs 200
  • Personal Disposable Income: Rs 200 – 20 = Rs 180

Question 9. Calculate GNP deflator and comment on price level change.

Answer: GNP Deflator = (Nominal GNP / Real GNP) × 100 = (2500 / 3000) × 100 = 83.3%. Since the GNP Deflator is less than 100%, the price level fell compared to the base year.

Question 10. List some limitations of GDP as an index of welfare.

Answer:

  • Non-monetary transactions are excluded.
  • Ignores externalities like pollution or infrastructure benefits.
  • Does not show income inequality.
  • Does not differentiate types of goods (e.g., harmful goods counted equally).

I. VERY SHORT ANSWER TYPE QUESTIONS

  • Depreciation: Decrease in value of fixed assets over time.
  • When is NDP at MP less than NDP at FC? When net indirect taxes are negative.
  • Why is GDP at FC more than NDP at FC? GDP includes depreciation; NDP excludes it.
  • When will GDP equal GNP? When NFIA = 0.
  • When will domestic income exceed national income? When NFIA is negative.
  • National Income if NDPFC = Rs 10,000 crores and NFIA = (-) Rs 500 crores: Rs 9,500 crores.
  • NFIA if Domestic Factor Income = Rs 50,000 crores and National Income = Rs 45,000 crores: (-) Rs 5,000 crores.
  • Three Methods of Measuring National Income: Value added method, Income method, Expenditure method.
  • Disposable income if Personal Income = Rs 30,000, tax rate 10%: Rs 27,000.
  • When is Domestic Income equal to National Income? In a closed economy.
  • Value Added Method: Sum of value additions by producing units.
  • When is Value of Output equal to Value Added? When intermediate goods are zero.
  • Gross value added of all sectors gives: GDP at MP.
  • Why not account for intermediate goods? To avoid double counting.
  • Proportion of Operating Surplus if 65% compensation: 35%.
  • Nominal GDP: GDP at current year prices.
  • Primary Sector: Exploits natural resources.
  • Secondary Sector: Manufacturing goods.
  • Tertiary Sector: Provides services.

II. MULTIPLE CHOICE QUESTIONS

  • Incorrect Statement: (a)
  • National income differs from NNP at MP by: (b) Net indirect taxes
  • NNP at FC equals: (a) National Income
  • Net value added method is also known as: (d) All of the above
  • Which is not a factor payment: (d) Scholarships to SC students
  • Mixed income of self-employed means: (c) Combined factor payments
  • Demand for final consumption arises in: (c) Both household and government sectors
  • Demand for intermediate consumption arises in: (d) All producing sectors
  • Economic activity among options: (c) Medical facilities by charitable dispensary
  • Net value added is: (a) Payments accruing to factors of production
  • Per capita national income: (a) NNP / Population

III. Short Answer Type Questions (3-4 Marks)

Question 1. Distinguish between domestic product and national product. When can domestic product be more than national product?

Answer: Domestic product refers to the total value of goods and services produced within the domestic territory of a country. National product refers to the total value of goods and services produced by the nationals (residents) of a country, irrespective of their location. Domestic product will be greater than national product when the net factor income from abroad is negative.

Question 2. Differentiate between Domestic Income (NDPFC) and National Income (NNPFC).

Answer: Domestic Income (NDPFC) is the total income generated within a country’s domestic territory, excluding depreciation. National Income (NNPFC) includes Domestic Income plus net factor income from abroad. Thus, National Income = Domestic Income + Net Factor Income from Abroad.

Question 3. Differentiate between Gross Domestic Product at Market Price and National Income.

Answer: GDP at Market Price includes the total value of goods and services produced domestically, including indirect taxes and excluding subsidies. National Income is GDP at Market Price minus depreciation, minus net indirect taxes, and plus net factor income from abroad.

Question 4. Differentiate between National Income at constant price and National Income at current price.

Answer: National Income at constant prices measures the value of goods and services at base year prices, eliminating the effect of inflation. National Income at current prices measures the value of goods and services at current year prices, including the effect of inflation.

Question 5. Distinguish between Real and Nominal Gross Domestic Product.

Answer: Real GDP is adjusted for inflation and shows the true volume of goods and services produced. Nominal GDP is measured at current year prices and includes inflation.

  • Real GDP is used for comparing economic performance over time.
  • Nominal GDP reflects the current market value of output.

Question 6. Explain how ‘externalities’ are a limitation of taking GDP as an index of welfare.

Answer: GDP does not account for positive or negative externalities. Positive externalities (like public infrastructure benefits) and negative externalities (like pollution) impact welfare but are not included in GDP calculations.

Question 7. Explain how ‘Non-Monetary Exchanges’ are a limitation in taking GDP as an index of welfare.

Answer: Non-monetary exchanges, such as domestic services performed by housewives, are not included in GDP. This leads to an underestimation of actual welfare as economically valuable activities are ignored.

Question 8. Explain how distribution of ‘Gross Domestic Product’ is a limitation in taking GDP as an index of welfare.

Answer: GDP measures the total value of output but not how evenly income is distributed. Increased GDP may accompany growing income inequality, which may not improve the welfare of the majority.

Question 9. State the various components of the income method used to calculate national income.

Answer:

ComponentDescription
Compensation of EmployeesIncome earned from employment, including wages, salaries, and benefits.
Operating SurplusIncome from property (rent, interest) and entrepreneurship (profit).
Mixed IncomeIncome from self-employed individuals and unincorporated businesses.

National Income = Domestic Income + Net Factor Income from Abroad.

Question 10. Define double counting. How can the problem of double counting be avoided?

Answer: Double counting occurs when the value of the same product is counted multiple times in GDP calculations. It can be avoided using the Value Added Method, where only value added at each stage of production is included.

IV. True or False

  • In a closed economy, GNP is always equal to GDP. — True
  • Gross investment can be equal to net investment. — True
  • Domestic Income can be more than National Income. — True
  • Market price is always more than factor cost. — False
  • National income at current prices provides reliable comparison. — False
  • Nominal GDP can never be less than Real GDP. — False
  • Net capital gains are part of domestic factor income. — False
  • Change in stock is not part of capital formation. — False
  • Brokerage paid on sale of shares is not part of national income. — False
  • Salary of Pakistan worker in Indian Embassy is part of India’s domestic income. — True

National Income – Short and Long Answer Questions

Short Answer Type Questions

  • Change in stock is part of domestic capital formation. — True
  • Brokerage paid on sale of shares is included in national income. — True
  • Salary of a Pakistan worker working in Indian Embassy is part of India’s domestic income. — True
  • Income tax is part of national income. — False
  • Imputed rent of self-occupied houses is part of national income. — True
  • Net profit of Bank of India branch in USA is part of India’s national income. — True
  • Exports are part of domestic income. — True

Long Answer Type Questions

Question: Calculate GNP at FC from the following data by income and expenditure method.

Income Method:
NDPFC = Compensation of employees + Operating surplus + Mixed income = (800 + 100) + 600 + 160 = 1660 crores.
GNPFC = NDPFC + Depreciation + Net Factor Income from Abroad = 1660 + (330 – 300) + (-20) = 1670 crores.

Expenditure Method:
GDPMP = Government final consumption + Private final consumption + Gross domestic capital formation + Net exports = 450 + 1000 + 330 + (30 – 60) = 1750 crores.
GNPFC = GDPMP + Net Factor Income from Abroad – Net Indirect Tax = 1750 – 60 + (-20) = 1670 crores.