need

Expenditure r, La
nd, Capital & Entre e.g.,
Income Method Product Method bou ent, Intere
pre
n
Method La Wages, R or paym st, Profit eur
s
Fact ents
Gross Domestic Gross Domestic Gross Domestic Households Business Firms
Income Product Expenditure
+ re

ds
C on
+ + sum enditu
Net Income from Flow ption Exp
of Goods & Services
Net Income from Net Income from

Go o
Overseas and

N
n
Overseas Overseas Exports ds

at
– oo

io
  G

l
Gross National Gross National Imports

ita

na
p

lI
Income Product  Goods

n
Ca
Gross National diate

c
– – Expenditure + t erme
In

Consumptio
Depreciation Depreciation Subsidies – Net

ome
  Indirect Tax Final Goods
Net National Net National 
cep ts
Income Product Gross National con
Expenditure i c Purchased for the purpose of
s
NATIONAL INCOME AND RELATED AGGREGATES

– Ba final consumption, e.g, car,

Calculati
Depreciation washing machine, etc.

ons

Net National
Expenditure
National Income Flows are defined over a
Goods & Services ated to period of time, for example,
produced within e s rel and Related annual profit while stocks
gat
e
domestic territory arket Price ggr Aggregates Net are defined at a particular
At M Inv
Depre
A es point of time.
GNP tm
en
ciati
t

GNPMP=GDPMP+NFIA
on

Gross investment–
P
D depreciation
N
NNPMP=GDPMP

P
–Depreciation GDPFC= GNPFC–NFIA

NN
GDP= GDP is regarded as the Index
GDPFC=NDPFC+Depreciation
NNPMP= GNPMP of Welfare as:-
Depreciation GNP= GNPFC= NNPFC+ Depreciation  Economic welfare increases
with the Expansion in GDP.
When inflation is considered while NNPFC= NDPFC+ NFIA  As the GDP expands, per The reduction in the
NNP=
calculating GDP, is called real GDP capital income of the persons value of capital
and when inflation is not considered NDP= NDPFC= NDPMP– Net Indirect also increases. goods is called
while calculating GDP, is termed as Taxes+Subsidies  Expansion of GDP enhances depreciation.
nominal GDP. the infrastructure of the Country.
[ 1
 1
NATIONAL
PART – A CHAPTER
Introductory
Macroeconomics
UNIT-1 INCOME AND
RELATED
National Income And
Related Aggregates

AGGREGATES
Syllabus
• What is Macroeconomics?
• Basic concepts in macroeconomics: consumption goods, capital goods, final goods,
intermediate goods; stocks and flows; gross investment and depreciation.
• Circular flow of income (two sector model); Methods of calculating National Income -
Value Added or Product method, Expenditure method, Income method.
• Aggregates related to National Income: Gross National Product (GNP); Net National
Product (NNP), Gross and Net Domestic Product (GDP and NDP) - at market price, at
factor cost; Real and Nominal GDP.
• GDP and Welfare

Chapter Analysis
2017 2018 2019

Concept Names Delhi Outside Foreign Delhi & Delhi Outside

Delhi Outside Delhi
Delhi
Macroeconomics and 1Q 2Q 1Q 1Q
1Q (3 Marks)
Its Basic Concepts (3 Marks) (3 Marks) (3 Marks) (1 Mark)
Circular Flow of 1Q ‘OR’ 1Q
Income (3 Marks) (6 Marks)
National Income and
2Q 2Q 2Q ‘OR’ 1Q ‘OR’ 1Q
Related Aggregates:
(6 Marks) (6 Marks) (3 Marks) (1 Marks) (4 Marks)
Introduction
Value Added Method
1Q 1Q
of Calculating
(6 Marks) (6 Marks)
National Income
Expenditure Method
1Q 1Q
of calculating
(6 Marks) (6 Marks)
National Income
Income Method of
1Q
calculating National
(6 Marks)
Income
National Income and
1Q (3 Marks)
Aggregates Related to 3Q 3Q 3Q 1Q
(3 Marks) 1Q
its Computation (6 Marks) (6 Marks) (6 Marks) (6 Marks)
1Q (6 Marks) (6 Marks)

GDP and Welfare ‘OR’ 1Q 1Q

(3 Marks) (4 Marks)
NATIONAL INCOME AND RELATED AGGREGATES [ 3

TOPIC-1 TOPIC-1
Macroeconomics with Basic
Concepts and Circular
Macroeconomics with Basic Flow of Income Pg. 3

Concepts and TOPIC-2

National Income: Concept and Methods
Circular Flow of Income of Calculating National Income &
Related Aggregates Pg. 8

Revision Notes TOPIC-3

GDP & Welfare Pg. 23
¾¾ Macroeconomics refers to that branch of economics that deals with economic problems or economic issues at the
level of an economy as a whole, e.g. it deals with aggregates like national income, general price level, etc.
¾¾ Consumption Goods: Goods which are used by the consumers to satisfy human wants directly.
¾¾ Capital Goods: All goods which are used in the production of other goods either as fixed assets or as inventory/
stock are called Capital Goods.
¾¾ Final Goods: Those goods which are purchased either for final consumption by consumers (consumers goods) or
for investment by producers (capital goods).
¾¾ Intermediate Goods: Those goods and services which are purchased as raw material for further production or for
resale in the same year.
¾¾ Stock: Stock is a quantity measurable at a particular “point of time”, e.g. wealth, assets, money, inventory, etc. A
stock variable is nothing but an accumulated sum of flows.
¾¾ Flow: Flow is a quantity that can be measured over a specific “period of time”, e.g. national income, change in
stock, etc.
¾¾ Gross Investment: Total addition made to physical stock of capital during a period of time. It includes depreciation.
It is also known as Gross Capital Formation.
¾¾ Net Investment: Net addition made to the real stock of capital during a period of time.
¾¾ Depreciation: It means fall in value of fixed capital goods due to normal wear and tear, expected obsolescence and
efflux of time.
¾¾ Circular flow of income: Circular flow of income refers to the flow of activities of production, income generation
and expenditure involving different sectors of the economy.
¾¾ 2-Sector Model of Circular Flow: It is assumed that:
(i) Domestic economy comprises only 2 sectors, the producers and the households.
(ii) The households spend their entire income, so that there is no savings.
(iii) Domestic economy is a closed economy (no exports and imports).
(iv) There is no government in the economy.
¾¾ Production in the producing sector generates income for the households who are owners of the factors of
production. Expenditure by the households generates demand for further production. These movements keep
chasing each other continuously moving in a circle.

Scan to know
more about
this topic

¾¾ Significance of Circular Flow of Income: (i) It reflects structure of an economy, (ii) It shows interdependence
among different sectors, (iii) It shows injections and leakages from flow of money, (iv) It helps in estimation of
national income and related aggregates.
4 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Objective Type Questions (1 mark each)

I. MULTIPLE CHOICE QUESTIONS: 2. are variables whose magnitude is

measured over a period of time. R
1. The study of National Income is related to:
Ans. Flows
(i) Microeconomics.
3. is the flow of factor payments and
(ii) Macroeconomics.
payments of goods and services between
(iii) Both Micro & Macro.
households and firms. R
(iv) None of the above. U Ans. Nominal Flow/Money Flow
Ans. (ii) Macroeconomics. 4. Addition made to the stock of capital during the
2. Goods purchased for the following purpose are year is known as . R
final goods: Ans. Investment
(i) For satisfaction of wants. 5. is an annual allowance for wear and
(ii) For investment in firm. tear of a capital good. R
(iii) Both (i) and (ii). Ans. Depreciation
(iv) None of the above. U III. MATCH THE FOLLOWING:
[OD Comptt., Set-I, II, III 2017]
1. Identify the correctly matched pair of the items in
Ans. (iii) Both (i) and (ii). Column A to those in Column B: U
[CBSE Marking Scheme, 2017] Column A Column B
3. Which of the following is a stock? 1. Money Flow (a) Depreciation
(i) Wealth (ii) Savings 2. Real Flow (b) Factor Services
(iii) Exports (iv) Profits 3. Trade Flow (c) House Work by Housewife
 U [OD Set-I, II, III Comptt. 2015] 4. Capital Flow (d) Inventory
Ans. (i) Wealth Ans. (2) Real Flow – (b) Factor Services
[CBSE Marking Scheme, 2015] 2. Identify the correctly matched pair of items in
4. Which of the following is a stock? Column A to those in Column B: U
(i) Savings
Column A Column B
(ii) Production
1. Money Flow (a) Consumption Expenditure
(iii) Consumption of fixed capital
2. Real Flow (b) Between Households
(iv) Capital U [OD Set-I, II, III Comptt. 2016]
3. Trade Flow (c) Only Domestic Economy
Ans. (iv) Capital 4. Capital Flow (d) Inventory
[CBSE Marking Scheme, 2016]
Ans. (1) Money Flow – (a) Consumption Expenditure
5. Which of the following is a flow?
(i) Deposits in a bank 3. Identify the correctly matched pair of items in
Column A to those in Column B: U
(ii) Capital
(iii) Depreciation Column A Column B
(iv) Wealth  U [Delhi Set-I,II,III Comptt. 2016] 1. M
 arkets in the (a) Producers only
Ans. (iii) Depreciation Economy
[CBSE Marking Scheme, 2016] 2. National Income (b) Macroeconomics
6. Unforeseen obsolescence of fixed capital assets 3. Total Cost (c) Both Micro and
during production is: Macroeconomics
(i) Consumption of fixed capital 4. Net National Product (d) Microeconomics
(ii) Capital loss Ans. (2) National Income – (b) Macroeconomic
(iii) Income loss 4. Identify the correctly matched pair of items in
(iv) None of the above Column A to those in Column B: U
 R [Foreign Set-I, II, III Comptt. 2016]
Column A Column B
Ans. (ii) Capital Loss 1. Personal income (a) Corporate Tax
[CBSE Marking Scheme, 2016] 2. Real GDP (b) Market prices
II. FILL IN THE BLANKS: 3. Depreciation (c) Consumption of Fixed
Capital
1. goods will not pass through any more
4. Interest (d) Payment for Labour
stages of production. R
Ans. Final Ans. (3) Depreciation – (c) Consumption of Fixed Capital
NATIONAL INCOME AND RELATED AGGREGATES [ 5
IV. STATE WHETHER THE GIVEN STATEMENTS ARE that deals with economic problems or economic
TRUE OR FALSE: issues at the level of an economy. 1
1. The sum of final expenditures in the economy
must be equal to the incomes received by all 2. Define intermediate goods. R [CBSE SQP 2020]
the factors of production taken together. U Ans. Intermediate goods refers to that good which
Ans. True is purchased during the year by a firm from
2. An unexpected fall in sales leads to planned another for the purpose of further production/
accumulation of inventories.  U resale.
 [CBSE SQP Marking Scheme, 2020] 1
Ans. False
3. More sophisticated and heavy capital goods 3. What do you mean by stock? R
raise the ability of a labourer to produce goods.  U Ans. Stock is a quantity measurable at a particular
Ans. True “point of time”. 1
4. Production taxes and subsidies are paid or 4. Give any two examples of flow concept. 
received in relation to production and are  A [Delhi Set I,II,III – 2019]
independent of the volume of production such Ans. National income, Investment change in
as land revenues.  U inventories, production process, etc.
Ans. True (any other relevant example)
5. Durable goods get transformed in the [CBSE Marking Scheme, 2019] ½ + ½ = 1
production and consumption process. AE
5. Which good will not pass through any more
Ans. False stages of production. R
V. VERY SHORT ANSWER TYPE QUESTIONS: Ans. Final Good 1
1. Define Macroeconomics. R 6. What is the net addition made to the real stock of
Ans. Macroeconomics refers to that branch of economics capital during a period of time? R
Ans. Net Investment 1

Short Answer Type Questions-I (3 marks each)

Q. 1. What are capital goods? How are they different from consumption goods? U [Delhi & OD Re-Exam 2018]

Ans. Capital goods are those durable goods which are used in production of goods and services. 1½
Whereas, consumption goods are those goods which are used for satisfaction of wants by the consumers.  1½
[CBSE Marking Scheme, 2018]
Q. 2. Explain with the help of an example, the basis of classifying goods into final goods and intermediate goods.
U [OD Set I 2017]
Ans. Goods are classified as final goods and intermediate goods on the basis of the end use. If goods are purchased
for consumption or investment, these would be classified as final goods. For example, machine purchased
for use in a factory is a final good. Milk purchased by households is also final good as it is purchased for
consumption.
When a good is purchased for resale or for using it up completely in production during the year, it is called
intermediate good. For example, raw material purchased for producing goods.
(Any other relevant example)
[CBSE Marking Scheme, 2017] 3
Detailed Answer:

6 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

[Topper's Answer 2017]

Q. 3. Define intermediate consumption and explain it with an example. How is it different from final consumption?
 U [OD Set-I Re-Exam, 2018]

Ans. Intermediate Consumption refers to the expenditure incurred by a production unit on purchasing those goods
and services from other production units which are meant for resale or for using up completely during the same
year.
For example: Milk purchased by a hotel because it is purchased from another production unit for resale
indirectly. (or any other relevant example)
Whereas Final Consumption refers to the expenditure on goods and services meant for final consumption and
investment. [CBSE Marking Scheme, 2018] 3
Detailed Answer:

[Topper’s Answer 2018]

Q. 4. Which among the following are capital goods and

(ii) Refrigerator in a hotel: It is a capital good
which are consumer goods and why?
because, it is used for providing services over
(i) A car used as a taxi a period of time to the production unit.
(ii) Refrigerator in a hotel (iii) Air-conditioner in a house: It is a consumer
(iii) Air-conditioner in a house good because it is used for satisfaction of a
AE [Delhi & OD Re-exam Set – I, 2018] want by a household.
 [CBSE Marking Scheme, 2018] 1 × 3 = 3
Ans. (i) A car used as a taxi: It is a capital good
because it is used for producing services for Q. 5. Which among the following are final goods and
generating income. which are intermediate goods ? Give reasons.
NATIONAL INCOME AND RELATED AGGREGATES [ 7
(i) Milk purchased by a tea stall (ii) Bus purchased by a school is a final good
(ii) Bus purchased by a school because expenditure on school bus is an
investment expenditure.  1
(iii) 
Juice purchased by a student from the school (iii) Juice purchased by a student from the
canteen. AE [Delhi & OD 2018] school canteen is a final good because it is
Ans. (i) Milk purchased by a tea stall is an purchased by consumer for own use and not
for resale. 1
intermediate good because it is purchased
(No marks to be awarded if the reason is not
from another production unit for resale
given or incorrect reason is given)
indirectly. 1 [CBSE Marking Scheme, 2018]
Q. 6. Distinguish between stock and flow variables with suitable examples.
 U [Delhi & OD Re-Exam 2018]
OR
Distinguish between stocks and flows. Give an example of each. U [OD Set III, Comptt. 2014;
 OD Set III 2017, Foreign Set I 2017]
OR

Distinguish between stocks and flows. Give two examples of each. U [OD Set I, II, III 2013]

Ans. Any economic variable which is measured at a point of time is known as stock, e.g. capital, etc. 1½
Whereas, any economic variable measured during a period of time is known as flow, e.g. income, etc. 1½
(Any other relevant example)
[CBSE Marking Scheme, 2018]

Short Answer Type Questions-II (4 marks each)

Q. 1. Distinguish between: Q. 2. Define intermediate goods and final goods. Can

(i) Final good and intermediate good. milk be an intermediate good ? Give reasons for
(ii) Consumption good and capital good.
your answer. AE [OD Set-III Comptt. 2015]
 U [OD Set-I, II, III Comptt. 2016]
Ans. (i) 
Goods purchased for consumption or Ans. Goods purchased by a production unit from
investment are final goods and goods other production units for resale or for using
purchased for completely using up in them completely during the same year are
production during the year or for resale are
intermediate goods. Goods purchased for
intermediate goods. 2
consumption / investment are final goods.
(ii) Goods purchased for satisfaction of wants
Milk purchased by a restaurant is an intermediate
are consumer goods. Final goods that are
used for producing other goods are capital good, because it is purchased for reselling.
good.  [CBSE Marking Scheme, 2016] 2 [CBSE Marking Scheme, 2015] 4

Long Answer Type Questions (6 marks each)

Q. 1. Discuss briefly, the circular flow of income in

Ans. Circular Flow of income in a two sector
a two sector economy with the help of a suitable
economy: Households are owners of factors of
diagram. U [SQP 2018-19]
production, they provide factor services to the
OR
Explain the circular flow of income. firms (producing units). Firms provide factor
U [Delhi Comptt. 2014; Foreign 2013; payments in exchange of their factor services.
OD Set II 2017] So, factor payments flow from firms (producing
[OD Set-I, II, III Comptt. 2016; units) to households.
OD Set-I Comptt. 2015]
8 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Answering Tip
A Spending
 Understand the direction of flow of income and
Goods and Services practice the diagram.
B

Firms Households 2. Define Real Flow. Explain how money flows are
opposite to real flows. U
Ans. Real Flow: Real flow of income implies the flow
C of factor services from the household sector to the
producing sector and the corresponding flow of
Factor Payments D
goods and services from the producing sector to
Factor Services
the household sector. 2
Households purchase goods and services from Money flows are opposite to real flows because
money flows are in response to the real flows.
firms (producing units) for which they make Example, there is a real flow of goods and
payment to them. So consumption expenditure services from the producers to the households.
(spending on goods and services) flows from It is in response to it, that the households makes
payments to the producers. So, that money flows
households to the firms. from the households to producers in terms of
 [CBSE Marking Scheme, 2017] 6 consumption expenditure. Likewise, there is a real
flow of factor services from the households to the
Commonly Made Error producers. It is in response to it, that the producers
 Generally, students get confused and draw make payments to the households so that, money
improper directions of flows. flows from producers to the households in terms
of factor payments. 4

TOPIC-2
National Income: Concept and Methods of Calculating
National Income & Related Aggregates
Revision Notes
¾¾ National Income: National Income is the sum total of factor incomes earned by normal residents Scan to know
more about
of a country. this topic
¾¾ Measurement of National Income: In every economy, the circular flow of production, income
and expenditure remains in operation continuously due to economic activities. Production
generates income which creates demand and hence, expenditure. In this way, the national
income of a country may be measured by three alternative methods. These are: (a) In the form
of flow of goods and services, (b) In the form of income flow, (c) In the form of expenditure flow.
¾¾ Value Added Method or Production Method: Product Method or Valued Added Method is the method which
measures the national income by estimating the contribution of each producing enterprise to produce in the
domestic territory of the country in an accounting year. For measuring national income by this method, we have
to estimate the following components:
¾¾ Net Domestic Product at Market Price (NDPMP): Gross Valued Added by [Primary Sector + Secondary Sector +
Tertiary Sector] - Depreciation.
¾¾ Net National Product at Factor Cost (NNPFC) or NI: NDPMP – Net Indirect Tax + Net Income from Abroad.
¾¾ Value Added Method (Product Method): Gross Value Added at Market Price (GVAMP) = Sales + Change in Stock
– Intermediate Consumption.
GDPMP =GVAMP of all sectors
OR
Value of output – Intermediate consumption
Scan to know
NVAFC = GVAMP – Depreciation – Net Indirect Taxes (NIT) more about
¾¾ Precautions while using Value Added Method: this topic
(i) The value of intermediate goods should not be included.
(ii) Purchase and sale of second hand goods should not be included.
(iii) Imputed or estimated value of self-consumed goods should be included but self-consumed
services should not be included.
NATIONAL INCOME AND RELATED AGGREGATES [ 9
(iv) Own account production should be included.
(v) Commission earned on account of sale and purchase of second hand goods is included.
¾¾ Income Method: It measures national income in term of payments made in the form of wages, rent, interest and
profit to the primary factors of production, i.e., labour, land, capital and enterprise respectively for their productive
services in an accounting year.
¾¾ Net Domestic Income or Net Domestic Product at Factor Cost: Compensation to Employees + Operating Surplus
+ Mixed Income from Self Employment.
National Income = Net Domestic Income + Net Income from Abroad.
¾¾ Precautions while using Income Method:
(i) Income from illegal activities like smuggling, theft, gambling, etc., should not be included.
(ii) Imputed rent of owner occupied structure and value of production for self-consumption is included but value
of self-consumed services like those of housewife is not Included.
(iii) Brokerage on the sale/purchase of shares and bonds is to be included.
(iv) Income in terms of wind fall gains should not be included.
(v) Transfer earning like old age pensions, unemployment allowances, scholarships, pocket expenses, etc., should
not be included.
¾¾ Expenditure Method: By this method, the total sum of expenditures on the purchase of final goods and services
produced during an accounting year within an economy is estimated to obtain the value of GDP.
¾¾ Final Expenditure: It is the expenditure on the purchase of final goods and services, during an accounting year. It
is broadly classified into four categories:
(i) Private final consumption expenditure,
(ii) Government final consumption expenditure,
(iii) Investment expenditure,
(iv) Net exports, i.e., difference between exports and imports during an accounting year.
¾¾ Computation of National Income (by expenditure method) NNPFC = GDPMP – Depreciation + NFIA – Net Indirect
Tax. Where, GDPMP = Private Final Consumption Expenditure + Government Final Consumption Expenditure +
Gross Domestic Capital Formation + Net Exports (Exports – Imports). Where, Gross Domestic Capital Formation
= Gross Domestic Fixed Capital Formation + Change in Stock (Closing Stock – Opening Stock)
¾¾ Precautions while using Expenditure Method:
(i) Only final expenditure is to be taken into account to avoid error of double counting.
(ii) Expenditure on second hand goods is not to be included.
(iii) Expenditure on transfer payments by the government is not to be included.
(iv) Imputed value of expenditure on goods produced for self consumption should be taken into account.
(v) Expenditure on shares and bonds is not to be included in total expenditure.
¾¾ Gross Domestic Product (GDP): It is the total value of all the final goods and services by all the enterprises (both
resident and non-resident) within the domestic territory of a country in a particular year.
¾¾ Gross Domestic Product at Market Price (GDPMP): Private Final Consumption Expenditure (C) + Government
Final Consumption Expenditure (G) + Investment or Gross Capital Formation + Net Exports.
Net Domestic Product at Market Price (NDPMP) = GDPMP – Depreciation
Net Domestic Product at Factor Cost (NDPFC) = GDPMP – Indirect Taxes + Subsidies
National Income = GDPMP – Depreciation – Net Indirect Taxes + Net Income from Abroad
¾¾ Nominal Gross Domestic Product: When the goods and services are produced by all producing units in the
domestic territory of a country during an accounting year and valued at current year’s prices or current prices, it
is called Nominal GDP or GDP at current prices. It is influenced by change in both physical output and price level.
It is not considered a true indicator of economic development.
¾¾ Real Gross Domestic Product: When the goods and services are produced by all producing units in the domestic
territory of a country during an accounting year and valued at base year’s prices or constant price, it is called real
GDP or GDP at constant prices. It changes only by change in physical output not by change in price level. It is
called a true indicator of economic development.
¾¾ Gross National Product: It is defined as the total value of all final goods and services produced in a country in a
particular year, plus the income which is earned by its citizens who are located abroad and minus the income of
non-residents located within the country.
GNPMP = GDPMP + Net Factor Income from Abroad
¾¾ Net National Product at Factor Cost (NNPFC): It is the sum total of factor incomes (rent + interest + profits +
wages) earned by normal residents of a country during the period of an accounting year. It is also known as the
National Income.
10 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

NNPFC = GNPFC – Depreciation

OR
NNPFC = NDPFC + NFIA
¾¾ Net National Product at Market Price (NNPMP): It refers to market value of final goods and services produced
during the year inclusive of Net Factor Income from Abroad but exclusive of depreciation.
NNPMP = GDPMP – Depreciation + NFIA

Objective Type Questions (1 marks each)

I. MULTIPLE CHOICE QUESTIONS: 3. Festival gifts (c) Transfer

1. National Income is the sum of factor incomes payments
accruing to: 4. Final expenditure (d) Consumption
(i) Nationals. incurred by the expenditure
(ii) Economic territory. government
(iii) Residents.
Ans. (3) Festival gifts – (c) Transfer payments
(iv) Both residents and non-residents. U [OD 2016]
2. Identify the correctly matched pair of items in
Ans. (iii) Residents.
Column A to those in Column B: U
 [CBSE Marking Scheme, 2016]
2. Which of the following affects national income? Column A Column B
(i) Goods and Services Tax 1. S
 ales + Intermediate (a) Value Added
(ii) Corporation Tax Consumption
(iii) Subsidies
2. Operating Surplus (b) Interest
(iv) None of the above U [Delhi & OD 2018]
3. Cooking Gas (LPG) (c) Heavily taxed
Ans. (iii) Subsidies
 [CBSE Marking Scheme, 2018] 4. Free medical treatment (d) Wages in kind
3. Foreign embassies in India are a part of India’s: Ans. (4) Free medical Treatment – (d) Wages in kind
(i) Economic territory.
(ii) Geographical territory. 3. Identify the correctly matched pair of items in
Column A to those in Column B: U
(iii) Both (i) and (ii).
(iv) None of the above. Column A Column B
 U [Delhi Comptt., Set-I, II, III 2017]
1. Income Tax (a) Forced Transfer
Ans. (ii) Geographical territory.
[CBSE Marking Scheme, 2017] 2. Services of (b) Market Activities
Housewives
II. FILL IN THE BLANKS:
1.  is the value of final goods and services 3. Retirement Pension (c) Taxable for Firm
produced within the domestic territory of a 4. A
 nnual value of (d) Income method
country. R goods and services
Ans. Domestic Product produced
2. Real gross domestic product is the GDP measured
at . R Ans. (1) Income Tax – (a) Forced Transfer
Ans. Constant prices IV. STATE WHETHER THE GIVEN STATEMENTS ARE
3.  are the ‘economic assistance’ given by TRUE OR FALSE:
the government to the firms and households, with 1. Petrol is heavily subsided in India. C
a motive of general welfare. R
Ans. False
Ans. Subsidies 2. Value added is gross production less value of
III. MATH THE FOLLOWING: intermediate goods used. R
1. Identify the correctly matched pair of items in Ans. True
Column A to those in Column B: U 3. Firm has cut production to reduce inventories.
This is planned decumulation. U
Column A Column B
Ans. True
1. T
 otal of factor (a) Value Added 4. Expenditure on Investments is not taken into
payments Method
account while calculating GDP. R
2. Value Added (b) Stock Variable Ans. False
NATIONAL INCOME AND RELATED AGGREGATES [ 11
V. VERY SHORT ANSWER TYPE QUESTIONS: non-resident) within the domestic territory of a
1. What is National Income? R country in a particular year during a year. 1
Ans. National Income is the sum of factor incomes 3. Define NNP. R
earned by normal residents of a country. 1 Ans. It is the total value of all final goods and services
2. Define GDP. R produced in a country in a particular year plus the
Ans. It is the total value of all the final goods and services income earned by citizens abroad and minus the
produced by all the enterprises (both resident and income of non-residents within the country. 1

Short Answer Type Questions-I (3 marks each)

Q. 1. Distinguish between domestic product and Q. 5. Find Net Value Added at Market Price:
national product.  U [Foreign Set-II 2017] (Items) (` lakh)
Ans.
Sum of the value of final products that take (i) Fixed capital good with a life span
place within the domestic territory of a country
is called domestic product, whereas the sum of 5 years 15
of contribution of residents of a country both (ii) Raw materials 6
within domestic territory or abroad is called
national product. (iii) Sales 25
[CBSE Marking Scheme, 2017] 3 (iv) Net change in stock (–) 2
Q. 2. Define the problem of double counting in the (v) Taxes on production 1
computation of national income. State any two A [Delhi Set-II 2016]
approaches to correct the problem of double
counting. R [Delhi Set-I,II,III, 2019] Ans. NVAFC = Sales + Net Change in Stock – Raw
Ans. Refer Q. 2 of Short Answer Type Questions-II. Material – Depreciation

Q. 3. Find Net Value Added at Factor Cost:  15 

= 25 + ( −2 ) − 6 −  
(Items) (` lakh)  5
(i) Durable use producer goods with a life
= 25 – 2 – 6 – 3
of 10 years  10
(ii) Single use producer goods  5 = ` 14 lakh
(iii) Sales  20 [CBSE Marking Scheme, 2016] 3
(iv) Unsold output produced during the year  2
Q. 6. Explain ‘mixed income of self-employed’ and
(v) Taxes on production  1
give an example. U [Foreign III 2017]
A [Delhi Set-I 2016]
Ans. NVAFC = Sales + Unsold output – Single use Ans. There are some incomes which cannot be
producer goods – Depreciation – Taxes on production conveniently divided into distinctive factor
 10  incomes. Such income arises to the self-employed
= 20 + 2 − 5 −   − 1
 10 
like practicing lawyers, doctors, etc. For example, a
= 20 + 2 – 5 – 1 – 1 practicing lawyer. The fees charged by the lawyer
= ` 15 lakh is not only his wages but also interest of capital
 [CBSE Marking Scheme, 2016] 3
employed by him, rent of his office and profit of
Q. 4. Find Gross Value Added at Market Price:
his entrepreneurship. Since no data is available
(Items) (` lakh)
(i) Depreciation  20 to sub-divide the lawyer’s fees into wages, rent,
(ii) Domestic sales  200 interest and profit, it is called mixed income.
(iii) Net change in stocks (–) 10 [CBSE Marking Scheme, 2017] 3
(iv) Exports  10
(v) Single use producer goods  120 Q. 7. Giving reasons, state how the following are
A [Delhi Set-III 2016] treated in the estimation of national income.
Ans. GVAMP (i) Payment of interest by banks to its depositors.
= [(ii) + (iv)] + (iii) – (v)
(ii) Expenditure on old age pensions by government.
= [200 + 10] + (–10) – 120
(iii) Expenditure on engine oil by car service station.
= ` 80 lakh
 [CBSE Marking Scheme, 2016] 3 AE [OD Comptt., Set-I, II, III 2017]
12 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Ans. (i) Payment of interest by banks to its depositors Nominal Income

is included in national income because it is factor Real Income = ´ 100
Price Index
income paid by a production unit.  1
Price Index plays the role of deflator deflating
(ii) Expenditure on old age pensions by government
current price estimates into constant price
is not included because it is a transfer estimate.
payment. 1 (To be marked as a whole)
(iii) Expenditure on engine oil by car service station [CBSE Marking Scheme, 2018] 3
is not included because it is an intermediate
cost. 1 Q. 10. If the Real GDP is ` 500 and Price Index (base =
[CBSE Marking Scheme, 2017] 100) is 125, calculate the Nominal GDP.
A [OD Set-I, II, III 2015]
Q. 8. Giving reasons, state how the following are
treated in the estimation of national income: Ans. Given, Real GDP = ` 500
(i) Payment of interest by an individual to a bank on Price Index = 125
a loan to buy a car.
Nominal GDP
(ii) Expenditure by government on providing free Real GDP = ´100
educational services. PI
(iii) Expenditure on purchasing a machine installed Nominal GDP
or 500= ´100
in a production unit. 125
AE [Delhi Comptt., Set-I, II, III 2017] 500 × 125
 Nominal GDP= = 625
Ans. (i) Payment of interest by an individual to a 100
bank is not included because the individual is a  Nominal GDP= ` 625
consumer. 1 [CBSE Marking Scheme, 2015] 3
(ii) Expenditure by government on providing free
educational services is included because it is a Q. 11. If the Nominal GDP is ` 1,200 and Price Index
final expenditure. 1 (with base = 100) is 120, calculate Real GDP.
(iii) Expenditure on purchasing a machine installed A [Delhi Set-II 2015]
in a production unit is included because it is an Ans. Given, Nominal GDP= ` 1,200
investment expenditure. 1 P. I. = 120
(No marks if the reason is not given) Real GDP = ?
[CBSE Marking Scheme, 2017] Nominal GDP
Real GDP =
PI
Q. 9 Given nominal income, how can we find real
income ? Explain. U [Delhi & OD 2018]
100
1,200 1, 200 × 100
Ans. Given nominal income other than base year, we = 120 =
120
can find real income by eliminating changes in
100
price index. The effect of change in prices on the
nominal income of current year can be eliminated = ` 1,000 3
in the following way: [CBSE Marking Scheme, 2015]

Short Answer Type Questions-II (4 marks each)

Q. 1. Explain the meaning of Real Gross Domestic

output of goods and services produced in an
Product and Nominal Gross Domestic Product,
economy is increasing. 2
using a numerical example.
For Example: Suppose current year’s production
 [OD Set- I, 2019] [CBSE SQP 2016]
in a hypothetical economy is 1,000 units at a price
Ans. Nominal Gross Domestic Product (GDP) is of `500, the GDP at current year price is 1000 ×
measured as the product of current year output 500 = `5,00,000, so the nominal GDP is `5,00,000.
(Q1) of final goods and services and their current Suppose base year price is `400, the GDP at base
year price (P1). Real Gross Domestic Product year prices is 1000 × 400 = `4,00,000. So the Real
(GDP), on the other hand, is measured as GDP is `4,00,000. 2
product of current year output (Q1) and their (Any other relevant example)
base year price (P0). Real GDP will increase if the [CBSE Marking Scheme, 2019]
NATIONAL INCOME AND RELATED AGGREGATES [ 13
Commonly Made Error Ans. National Income by Expenditure Method =
 Students tend to give the difference between the Private Final Consumption Expenditure +
Nominal GDP and Real GDP. Government Final Consumption Expenditure +
Net Domestic Capital Formation + Net Exports
Answering Tip + NFIA − NIT
 The explanation of the term should have the proper National Income by Expenditure Method = v +
numerical example clearly explaining the two ix + vi + iii + viii − ii
concepts. National Income by Expenditure Method = 900
Q. 2. What is meant by problem of Double Counting ? + 400 + 200 + (−25 ) + (−10) − 100
How this problem can be avoided. National Income by Expenditure Method = `1365
U [SQP 2018-19] crore [CBSE Marking Scheme, 2017] 4

Ans. The problem of double counting arises when the Q. 5. Suppose in an imaginary economy GDP at Market
value of certain goods and services are counted Price in a particular fiscal year was `4,000 crore,
more than once while estimating National National Income was `2,500 crore, Net Factor
Income by Value Added Method. This happens Income paid by the economy to rest of the world
when the value of intermediate goods is counted was ` 400 crore and the value of Net Indirect Taxes
in the estimation of National Income along with is `450 crore. Estimate the value of consumption of
the final value of goods and services. fixed capital for the economy from the given data.
Two methods to avoid the problem of double  A [SQP 2016]
counting: Ans. NNPFC = GDPMP – Consumption of Fixed Capital –
(i) To consider only the final value of output Net Factor Income to Abroad – Net Indirect Taxes
produced.
2,500 = 4,000 – CFC – 450 – 400
(ii) To consider only the value added of the output
produced. [CBSE Marking Scheme, 2018] 4 2,500 = 3,150 – CFC
CFC = 650 (in ` crore)
Q. 3. State the various precautions of Product Method
that should be kept in mind while estimating [CBSE Marking Scheme, 2016] 4
national income. R [SQP 2016-17]
Q. 6. How are the following treated while calculating
OR national income ? Give reasons for your answer.
State any four precautions that should be taken (i) Receipts from sale of land.
while estimating national income by production (ii) Profits earned by the branch of an Indian bank in
method. R [OD Set-III Comptt. 2015]
France. A [OD Set-I Comptt. 2016]
Ans. Refer to Q.2. of Long Answer Type Questions
(Topic-2). Ans. (i) Land is a free gift of nature and cannot be
Q. 4. Find National Income from following using produced. So, sale of it is not included. 2
expenditure method: (` in crores) (ii) It is included as factor income from abroad.2
(i) Current transfers from rest of the world 50 (No marks if reason is not given)
(ii) Net Indirect taxes 100 [CBSE Marking Scheme, 2016]

(iii) Net Exports – 25 Q. 7. How should the following be treated while

(iv) Rent 90 calculating national income ? Give reasons for
(v) Private Final Consumption Expenditure 900 your answer.

(vi) Net Domestic Capital Formation 200 (i) Profits earned by a branch of foreign bank in India.

(vii) Compensation of Employees 500 (ii) Salary received by Indian employees working in
American embassy in India.
(viii) Net Factor Income from Abroad – 10
A [OD Set-II, Comptt., 2016]
(ix) Government Final Consumption
Expenditure400 Ans. (i) It is factor income to abroad, so it is not
(x) Profit 220 included. 2
(xi) Mixed Income of Self Employed  400 (ii) It is included as factor income from abroad. 2
(xii) Interest  230 (No marks if reason is not given)
A [SQP 2017] [CBSE Marking Scheme, 2016]
14 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Q. 8. Use following information of an imaginary (i) Purchases by foreign tourists.

country: (ii) Purchase of shares by a domestic firm.
Year 2014-2015 2015-2016 2016-2017 AE [OD Set-II Comptt. 2016]
Ans. (i) Included because such an expenditure is
Nominal
6.5 8.4 9 treated as exports. 2
GDP
(ii) Not included, because it is merely a financial
GDP transaction not resulting in any production.
100 140 125
deflator 2
(No Marks if the reason is not given)
(i) For which year is real GDP and nominal GDP [CBSE Marking Scheme, 2016]
same and why?
Q. 12. How should the following be treated in the
(ii) Calculate Real GDP for the given years. Is there calculation of national income ? Give reasons for
any year for which Real GDP falls? A [SQP 2017] your answer.
Ans. (i) For the year 2014-15 as it’s the base year. (i) Interest on public debt.
(ii) The Real GDP declined in the year 2015-2016. (ii) Bonus given to railway employees.
It could be due to high rate of inflation or AE [OD Set-III Comptt. 2016]
price levels.
Ans. (i) Not included, because public debt interest is
Year 2014-15 2015-16 2016-17 interest on loan taken by government to meet
Nominal GDP 6.5 8.4 9 its day to day consumption expenditure, and
GDP deflator 100 140 125 not for investment. 2
Real GDP (ii) 
Included, because it is compensation of
Nominal GDP employees.
= 6.5 6 7.2
GDP Deflator (No Marks if the reason is not given) 2
[CBSE Marking Scheme, 2016]
× 100
Q. 13. Describe the expenditure method of calculating
Q. 9. How should the following be treated while Gross Domestic Product at Market Price.
calculating national income ? Give reasons for
U [OD Set-I Comptt. 2015]
your answer.
Ans. To calculate GDPMP by the expenditure method,
(i) Interest received by households from banks.
we add up final expenditures on the goods and
(ii) Dividend received by shareholders.
services produced by all the economic sectors of an
AE [OD Set-III Comptt. 2016] economy. Expenditures incurred on consumption
Ans. (i) Bank is a production unit so this is a factor and investment are final expenditures.
income and hence should be included. 2 These are classified into:
(ii) It is a part of the profits of production units which (i) Private final consumption expenditure.
is distributed to the owners so it is included. 2 (ii) Government final consumption expenditure.
[CBSE Marking Scheme, 2016] (iii) Gross domestic capital formation.
(iv) Net exports = Exports less Imports
Q. 10. How should the following be treated in the
The sum total of these expenditures is GDPMP.
calculation of national income? Give reasons for 2+2=4
your answer. [CBSE Marking Scheme, 2015]
(i) Government expenditure on street lighting.
Q. 14. State the various components of the Expenditure
(ii) Sale of an old house.
Method that are used to calculate National
AE [OD Set-I Comptt. 2016]
Income. R [SQP 2016]
Ans. (i) Included, because it is final expenditure of
the government.2 Ans. Components of Expenditure Method:
(ii) Not included, because it does not result (i) Private Final Consumption Expenditure
in any production. Its value was already (ii) Government Final Consumption Expenditure
included when it was newly constructed. 2
(iii) Investment Expenditure
(No marks if the reason is not given)
(iv) Net Exports (X – M).
[CBSE Marking Scheme, 2016]
(i) Private Final Consumption Expenditure (C): It
Q. 11. How should the following be treated while refers to expenditure on final goods and services
calculating national income? Give reasons for by the individuals, households and Non-profit
your answer. Institution Serving Society.
NATIONAL INCOME AND RELATED AGGREGATES [ 15
(ii) Government Final Consumption Expenditure Ans. NVAFC = (i) + (ii) – (iii) – (iv) – (vi)
(G): It refers to expenditure on final goods and or = Sales + Change in Stock – Intermediate
services by the government, like expenditure on
Consumption – Net direct Taxes –
the purchase of goods for consumption by the
Depreciation 2
defence personnel.
(iii) Investment Expenditure (I): It refers to = 400 + (–20) – 200 – 40 – 30 1½
expenditure on the purchase of final goods by the = 400 – 20 – 270
producers.
= 400 – 290
(iv) Net Exports (X – M): It is the difference between
exports and imports during an accounting year. NVAFC = ` 110 lakh ½
[CBSE Marking Scheme, 2016] 1 × 4 = 4 [CBSE Marking Scheme, 2014]
Q. 15. Calculate Net Value Added at Market Price. Q. 18. Calculate Gross Value Added at Factor Cost.
(Items) (` in crores) (Items) (` in crores)
(i) Intermediate consumption  1,000 (i) Domestic sales 3,000
(ii) Consumption of fixed capital 50 (ii) Change in stock (–) 100
(iii) Net indirect taxes  150 (iii) Depreciation 300
(iv) Sales 2,000 (iv) Intermediate consumption 2,000
(v) Exports 200 (v) Exports 500
(vi) Net factor income to abroad 100 (vi) Indirect taxes 250
(vii) Change in stock (–) 50 (vii) Net factor income from abroad (–) 50
A [OD Set-I, II Comptt. 2015]
A [OD Set-II Comptt. 2015]
Ans. GVAFC = (i) + (v) + (ii) – (iv) – (vi)
Ans. NVAMP = (iv)+(vii) − (i) − (ii) = 3,000 + 500 + (–100) – 2,000 – 250
= 2,000 + (−50) − 1,000−50 = ` 1,150 crores
= ` 900 crore [CBSE Marking Scheme, 2015] 4
[CBSE Marking Scheme, 2015] 4
Q. 19. Calculate “Net Value Added at Factor Cost” from
Q. 16. From the following data, calculate Net Value the following data:
Added at Factor Cost. (Items) (` in lakhs)
(Items) (` in crores) (i) Intermediate consumption 300
(i) Sales 300 (ii) Change in stock 50
(ii) Opening stock 40 (iii) Net indirect taxes 70
(iii) Depreciation 30 (iv) Sales 500
(iv) Intermediate consumption 120 (v) Consumption of fixed capital 20
(v) Exports 50 (vi) Imports 40
(vi) Change in Stock 20
A [Delhi Set-I, II, III Comptt. 2014]
(vii) Net indirect taxes 15
Ans. NVAFC = (iv) + (ii) – (i) – (iii) – (v)
(viii) Factor income to abroad 10
or = Sales + Change in stock – Intermediate
A [Delhi Set-I, II, III Comptt. 2015] Consumption – Net indirect taxes – Consumption
Ans. NVAFC = (i)+(vi) − (iv) − (iii) − (vii) of fixed capital 2
= 500 + 50 – 300 – 70 – 20 1½
= 300 + 20 − 120−30−15
= 550 – 390
=` 155 crore
NVAFC = ` 160 lakh ½
[CBSE Marking Scheme, 2015] 4
[CBSE Marking Scheme, 2014]
Q. 17. From the following calculate “Net Value Added
Q. 20. Calculate Sales from the following data:
at Factor Cost.”
(Items) (` in lakhs)
(Items) (` in lakhs)
(i) Subsidies 200
(i) Sales 400
(ii) Opening Stock 100
(ii) Change in stock (–) 20
(iii) Closing Stock 600
(iii) Intermediate Consumption 200 (iv) Intermediate Consumption 3,000
(iv) Net Indirect taxes 40 (v) Consumption of Fixed Capital 700
(v) Exports 50 (vi) Profit 750
(vi) Depreciation 30 (vii) Net Value Added at Factor Cost 2,000
A [OD Set-I, II, III Comptt. 2014] A [OD 2013]
16 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Ans. Sales = (vii) – [(iii) – (ii)] + (iv) + (v) – (i) 2 Q. 22. Calculate Sales from the following data:
= 2,000 – [600 – 100] + 3,000 + 700 – 200 1½ (Contents) (` in lakhs)
= ` 5,000 lakh [CBSE Marking Scheme, 2013] ½ (i) Net Value Added at Factor Cost 560
Q. 21. Calculates Sales from the following data: (ii) Depreciation 60
(Items) (` in lakhs)
(i) Intermediate Costs 700 (iii) Change in Stock (–) 30
(ii) Consumption of Fixed Capital 80 (iv) Intermediate Cost 1,000
(iii) Change in Stock (–) 50
(v) Exports 200
(iv) Subsidy 60
(v) Net Value Added at Factor Cost 1,300 (vi) Indirect taxes60
(vi) Exports 50
A [Delhi Set-I 2013]
A [Delhi Set-III 2013]
Ans. Sales = (i + ii + vi + iv) – iii 2
Ans. Sales = (v + ii – iv + i) – iii 2

= 560 + 60 + 60 + 1,000 – (–30) 1½
= 1,300 + 80 – 60 + 700 – (–50) 1½

= ` 1,710 lakh ½
= ` 2,070 lakh [CBSE Marking Scheme, 2013] ½
[CBSE Marking Scheme, 2013]

Long Answer Type Questions (6 marks each)

Q. 1. Define the following: OR

(i) Value Addition, What precautions should be taken while
(ii) Gross Domestic Product, estimating national income by value added
(iii) Flow Variables, method ? Explain.  U [Foreign Set-III 2017]
(iv) Income from property and entrepreneurship. Ans. (i) Value of only final goods should be included
[OD Set- I, II, III, 2019] and not the value of intermediate goods as it
Ans. (i) Value Addition: It is the excess of value would result in double counting.
of output over the value of intermediate (ii) Value of production for self consumption should
consumption. be included as it is also a part of production.
(ii) Gross Domestic Product: It is the money value (iii) Sale/Purchase of second hand goods should not
of all final goods and services produced in an be included as their value had been included
economy during an accounting year. when these were produced.
(iii) Flow Variables: Flow Variables are those economic (or any other relevant precaution)
variables which can be measured over a period of [CBSE Marking Scheme, 2017] 2 × 3
time, e.g. national income, money creation etc. Detailed Answer:
(iv) Income from Property and Entrepreneurship: (i) Intermediate Goods are not to be included in the
These are incomes earned by property owners. It national income since such goods are already
includes, rent and royalty, profit, interest. It can included in the value of final goods. If they are
also be termed as Operating Surplus. (any other included again, it will lead to double counting.
valid definition) (ii) Sale and purchase of second-hand goods is not
R [CBSE Marking Scheme, 2019] [1½ × 4 = 6] included as they were included in the year in
which they were produced and do not add to
Commonly Made Error current flow of goods and services. However,
 Students tend to explain the examples of the terms. any commission or brokerage on sale or purchase
of such goods will be included in the national
Answering Tip income as it is a productive service.
 A precise and simple definition is enough. If need (iii) Production of services for self-consumption or
be a student can give short examples domestic services are not included. Domestic
services like services of a housewife, kitchen
Q. 2. Explain the precautions that are to be taken gardening, etc. are not included in the national
while estimating national income by value added income since it is difficult to measure their market
method. U [OD Set-II 2017] value. These services are produced and consumed
NATIONAL INCOME AND RELATED AGGREGATES [ 17
at home and never enter the market place and are (v) Imputed value of services provided by owners
termed as non-market transactions. of production units will be included. Imputed
(iv) Production of goods for self-consumption will value of owner-occupied houses, interest on own
be included in the national income as they capital, production for self-consumption, etc. will
contribute to the current output. Their value is to be included as these are productive activities and
be estimated or imputed as they are not sold in add to the flow of goods and services.
the market. (vi) Payments out of past savings like death duties,
(v) Imputed value of owner-occupied houses should gift tax, wealth tax, etc. are not included in the
be included. People who live in their own houses, national income because they are paid out of
do not pay any rent. But, they enjoy housing wealth or past savings and do not add to current
services similar to those people who stay in flow of goods and services.
rented houses. Therefore, value of such housing Indirect taxes are not included in national income
services is estimated according to market rent of at factor cost. However, they are included in
similar accommodation. Such an estimated rent is national income at market price.
known as imputed rent.
Q. 4. Explain the precautions that should be taken
(vi) Change in stock of goods will be included.
while estimating national income by expenditure
Net increase in the stock of inventories will be
included in the national income as it is a part of method. U [OD Set I, III 2017]
capital formation. OR

Q. 3. What precautions should be taken while What precautions should be taken while
estimating national income by income method ? estimating national income by expenditure
Explain. method? Explain.  U [Foreign Set-I 2017]
R [Foreign Set-II 2017] Ans. Precautions to be taken while estimating N.I. by
Ans. (i) Transfer income should not be included because expenditure method:
no good or service is provided in return. (i) Expenditure on intermediate goods should not
be included otherwise it will result in double
(ii) Gain by selling old goods should not be included
counting.
because it is not a gain from fresh production
(ii) Transfer payments such as gifts, old age pension,
activity.
etc., should not be included. These payments are
(iii) Receipts from sale of financial assets should not be not made for factor services.
included, because it is not from sale of any good or (iii) Expenditure on financial assets like shares, etc.
service.  should not be included. This does not result in
[CBSE Marking Scheme, 2017] 2 × 3 = 6 any production. It is only transfer of money.
Detailed Answer: (or any other)
[CBSE Marking Scheme, 2017] 2 × 3 = 6
(i) Transfer incomes like scholarships, donations,
charity, old age pensions, etc. are not included in Detailed Answer:
the National income because such receipts are not (i) Expenditure on intermediate goods will not be
connected with any productive activity and there included in the national income as it is already
is no value addition. included in the value of final expenditure. If it is
(ii) Income from sale of second-hand goods will not included again, it will lead to double counting of
be included in national income as their original expenditures.
sale has already been counted. If they are (ii) Transfer Payments are not included as such
included again, it would lead to double counting. payments are not connected with any productive
However, any brokerage or commission received activity and there is no value addition.
by brokers or commission agents on sale of such
goods will be included as it is an income received (iii) Purchase of second-hand goods will not be
for rendering productive service. included as such expenditure has already been
included when they were originally purchased.
(iii) Income from sale of shares, bonds and debentures Such goods do not affect the current flow of
will not be included as such transactions do not goods and services. However, any commission
contribute to current flow of goods and services. or brokerage on such goods is included as it is a
These financial assets are mere paper claims and
payment made for productive services.
involve a change of title only. However, any
commission or brokerage on such financial assets (iv) Purchase of financial assets (shares, debentures,
is included as it is a productive service. bonds, etc.,) will not be included as such
transactions do not contribute to current flow of
(iv) Windfall gains like income from lotteries, horse
goods and services. These financial assets are mere
race, etc. are not included as there is no productive
paper claims and involve a change of title only.
activity connected with them.
18 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

However, any commission or brokerage on such S. Particulars Amount

financial assets is included as it is a productive No (in ` crores)
service.
(i) Profit after tax 20
(v) Expenditure on own account production (like
production for self-consumption, imputed (ii) Interest 45
value of owner occupied houses, free services (iii) Gross Domestic Product at 200
from general government and private nonprofit Market Price
making institutions serving households) will be (iv) Good and Services Tax 10
included in the national income since these are
productive services. (Any four) (v) Consumption of Fixed Capital 50
(vi) Rent 25
Q. 5. (i) State any two precautions that must be taken
into consideration while estimating national (vii) Corporate Tax 5
income by value added method. AE A [CBSE SQP 2020]
(ii) In any economy, following transactions took
Ans. (i) Y
 es, the given statement is correct. In a two
place. Calculate total consumption expenditure
sector economy, the firms produce goods
of households and value added by Firm B: and services and make factors payments
(a) Firm A sold to firm B goods of ` 80 crore; to firm to the households. The factor income
C ` 50 crore; to household ` 30 crore and goods earned by the households will be used to
of value ` 10 crore remains unsold. buy the goods and services which would
be equal to income of firms. The aggregate
(b) Firm B sold to firm C goods of ` 70 crore; to
consumption expenditure by the households
firm D ` 40 Crore; goods of value ` 30 crore
in the economy is equal to the aggregate
were exported and goods of value ` 5 crore
expenditure on goods and services produced
was sold to government.
by the firms in the economy (Income of the
R , A [CBSE SQP 2018] producers). 3
Ans. (i)Precautions of value added method are: (ii) Compensation of Employees = (iii) – (v) –
(a) Value of sale and purchase of second (iv) – (vi+ii+i+vii) 1½
hand goods is not considered while   = 200 – 50 –10 – (25 + 45 + 20 + 5) 1
estimating value added as the value of = `45 crores ½
second hand goods is already accounted [CBSE SQP Marking Scheme, 2020]
during the year they were produced. Q. 7. Given the following data, find the missing value
(b) Value of intermediate goods is not of ‘Government Final Consumption Expenditure’
included in the estimation of value and ‘Mixed Income of Self Employed’.
added because value of intermediate
goods is reflected in the value of final  A [Delhi Set-I, 2019]
goods. S. Particulars Amount
(ii) Value of output of firm B = Sales of firm B to No (in ` crores)
firm C + Sales of firm B to firm D + Exports (i) National Income 71,000
+ Sales of firm B to Government
(ii) Gross Domestic Capital 10,000
= 70 + 40 + 30 + 5 Formation
= `145 crore
(iii) Government Final Consumption ?
Value Added by Firm B = Value of output by Expenditure
Firm B − Purchases by Firm B from firm A
(iv) Mixed Income of Self-employed ?
= 145 − 80
= `65 crore (v) Net Factor Income from Abroad 1,000
[CBSE SQP Marking Scheme, 2018] 2 × 3 = 6 (vi) Net Indirect Taxes 2,000

Q. 6. (i) ‘Circular flow of income in a two sector (vii) Profits 1,200

economy is based on the axiom that one’s (viii) Wages and Salaries 15,000
expenditure is other’s income’. Do you agree with (ix) Net Exports 5,000
the given statement? Support your answer with (x) Private Final Consumption 40,000
valid reasons. Expenditure
(ii) Calculate compensation of employees from the (xi) Consumption of Fixed Capital 3,000
following data:
(xii) Operating Surplus 30,000
NATIONAL INCOME AND RELATED AGGREGATES [ 19
Ans. Mixed Income of Self-employed S. Particulars Amount
= (i) – [(viii) +(xii) + (v)] 1½ No (in ` crores)
= 71,000 – (15,000 + 30,000 + 1,000) 1 (i) Mixed Income of Self 3,500
Employed
Mixed income of self-employed= `25,000 crore ½
(ii) Net Indirect Taxes 300
Government Final Consumption Expenditure
= (i) – [(x) + (ii) + (v) + (ix)] + (vi) + (xi)  1½ (iii) Wages & Salaries ?
= 71,000 –(40,000 + 10,000 + 1,000 + 5,000) (iv) Government Final 14,000
Consumption Expenditure
+ 2,000 + 3,000  1
(v) Net Exports 3,000
= `20,000 crore ½
(vi) Consumption of Fixed 300
[CBSE Marking Scheme, 2019]
Capital
Q. 8. Given the following data, find the missing value (vii) Net Factor Income from 700
of ‘Private Final Consumption Expenditure’ and Abroad
‘Operating Surplus’. A [Delhi Set-II, 2019] (viii) Operating Surplus 12,000
S. Particulars Amount (ix) National Income 30,000
No. (in ` crores)
(x) Profit 500
(i) National Income 50,000 (xi) Gross Domestic Capital ?
(ii) Net Indirect Taxes 1,000 Formation
(iii) Private Final ? (xii) Private Final Consumption 11,000
Consumption Expenditure
Expenditure
(iv) Gross Domestic Capital 17,000 Ans. Wages and Salaries = ix – [(i) + (viii) + (vii)]1½
Formation = 30,000 – (3,500+12,000+700) 1
= `13,800 crore ½
(v) Profits 1,000 Gross Domestic Capital Formation
(vi) Government Final 12,500 = (ix) – [(iv) + (v) + (vii) + (xii)] + (ii)+(vi) 1½
Consumption = 30,000 – (14,000 + 3,000 + 700 + 11,000) +
Expenditure 300 + 300 1
(vii) Wages & Salaries 20,000 = `1,900 crore ½
A [CBSE Marking Scheme, 2019]
(viii) Consumption of Fixed 700
Capital Q. 10. Given the following data, find the values
(ix) Mixed Income of Self 13,000 of “Gross Domestic Capital formation” and
Employed “Operation Surplus”. A [OD Set I, 2019]
(x) Operating Surplus ? S. Particulars Amount
(xi) Net Factor Income from 500 No (in ` crores)
Abroad (i) National Income 22,100
(xii) Net Exports 2,000 (ii) Wages and Salaries 12,000
(iii) Private Final 7,200
Ans. Operating Surplus = (i) – [(vii)+(ix)+(xi)] 1½ Consumption Expenditure
= 50,000 – (20,000+13,000+500) 1 (iv) Net Indirect Taxes 700
= `16,500 crore ½ (v) Gross Domestic Capital ?
Private Final Consumption Expenditure Formation
= (i) – [(iv) + (vi) + (xi) + (xii)] + (vii) + (ii) 1½ (vi) Depreciation 500
= 50,000 – (17,000 + 12,500 + 2,000 + 500) + 700 (vii) Government Final 6,100
+ 1,000 1 Consumption Expenditure
= ` 19,700 crore ½ (viii) Mixed Income of Self- 4,800
Employed
[CBSE Marking Scheme, 2019]
(ix) Operating Surplus ?
Q.9. Given the following data, find the missing value
(x) Net Exports 3,400
of ‘Wages and Salaries’ and ‘Gross Domestic
(xi) Rent 1,200
Capital Formation’. A [Delhi Set III, 2019]
(xii) Net Factor Income from (−) 150
Abroad
20 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Ans. Gross Domestic Capital Formation = (iii) Gross Domestic Capital 1,100
(i) – {iii + vii + x} + vi – xii +iv Formation
GDCF = 22,100 – {7,200 + 6,100 + 3,400} (iv) Net Exports 500
+ 500 – ( – 150) + 700 (v) Net Factor Income from 100
GDCF =`6,750 crore 3 Abroad
Operating surplus = National Income – Wages (vi) Net Indirect Taxes 300
and Salaries – Mixed Income of Self Employed (vii) Subsidies 40
–Net Factor Income from Abroad
(viii) Change in Stock 80
= (i) – (ii) – (viii) – (xii)
(ix) Consumption of Fixed 120
= 22,100 – 12,000 – 4,800 – ( – 150) Capital
= `5,450 crore
A [OD Set-I, Re-Exam, 2018]
[CBSE Marking Scheme, 2019] 3
Ans. (i) Gross Domestic Product at Market Price
Q. 11. Calculate (i) Gross domestic product at market = (i) + (ii) + (iii) + (iv) 1½
price, and (ii) National income: GDPMP = 4,000 + 3,500 + 1,100 + 500  1
Sl. Items Amount GDPMP = `9,100 crore ½
No (in ` crores)
(ii) National Income ( NNPFC) = GDPMP
(i) Government final 4,000 – (ix) + (v) – (vi) 1½
consumption expenditure

NNPFC = 9,100 – 120 + 100 – 300 1
(ii) Private final consumption 3,500
expenditure
NNPFC = `8,780 crore

Detailed Answer:

[Topper’s Answer 2018]

NATIONAL INCOME AND RELATED AGGREGATES [ 21
Q. 12. (i) Define Real Gross Domestic Product. OR
(ii) Calculate Gross National Product at market GDPFC = NNPMP + vii − iv + ix 1
prices by (a) expenditure method and (b) income =9,630 + 70 − 100 + 50
method.
=` 9,650 crore [CBSE Marking Scheme, 2018]
(in ` crores)
Q. 14. Calculate (a) Operating Surplus and (b) Domestic
(i) Compensation of employees 100 Income.
(ii) Private final consumption expenditure 200  (` in crores)
(iii) Rent 20 (i) Compensation of Employees 2,000
(iv) Government final consumption expenditure 50 (ii) Rent and Interest 800
(v) Profits 10 (iii) Indirect taxes 120
(vi) Interest 10 (iv) Corporation tax 460
(vii) Gross domestic capital formation 60 (v) Consumption of Fixed Capital 100
(viii) Net imports 10 (vi) Subsidies 20
(ix) Consumption of fixed capital 20 (vii) Dividend 940
(x) Net Indirect Taxes 30 (viii) Undistributed profits 300
(xi) Net factor income from abroad (−)20 (ix) Net Factor Income to Abroad 150
(xii) Change in stocks 10 (x) Mixed Income 200
(xiii) Mixed income 110  A [Delhi & OD Re-exam 2018]
A [Delhi Comptt. Set-I, II, III, 2018]
Ans. (a) Operating Surplus = (ii) + (iv) + (vii) + (viii)
Ans. (i) Real GDP: When Gross Domestic Product is
= 800 + 460 + 940 + 300
evaluated at constant/base year prices 2
Operating Surplus = `2,500 crore
(ii) (a) 
GNPMP (Expenditure Method) = (ii) + (iv) +
(vii) − (viii) + (xi) 1 (b) Domestic Income
= 200 + 50 + 60 − (10) + (−20) ½ = 2,000 + 2,500 + 200
= ` 280 crore ½ NDPFC = 4,700 crore
(b) GNPMP (Income Method) [CBSE Marking Scheme, 2018] 6
= (i) + (iii) + (v) + (vi) +(xiii) + (ix) + (x) + (xi) Commonly Made Error
=100 + 20 + 10 + 10 + 110 + 20 + 30 + (–20)
 Generally, students miss out the components which
=` 280 crore [CBSE Marking Scheme, 2018] 2 are to be added or subtracted to calculate National
Q. 13. Calculate (a) Net National Product at market Income.
price, and (b) Gross Domestic Product at factor
cost: (` in crores) Answering Tip
(i) Rent and interest 6,000  The equations for all three methods must be made
(ii) Wages and salaries  1,800 clear for solving questions of National Income
(iii) Undistributed profit  400 Q. 15. Giving reason, explain how should the following
(iv) Net indirect taxes  100 be treated in estimating gross domestic product at
(v) Subsidies  20 Market Price.
(vi) Corporation tax 120 (i) Fees to a mechanic paid by a firm.
(vii) Net factor income to abroad  70 (ii) Interest paid by an individual on a car loan taken
(viii) Dividends  80 from a bank.
(ix) Consumption of fixed capital 50 (iii) Expenditure on purchasing a car for use by a firm.
(x) Social security contribution by employers  200  AE [Delhi Set-I 2016]
(xi) Mixed income  1,000 Ans. (i) Fees paid to mechanic by a firm: It is not
A [Delhi & OD 2018] included because it is an intermediate cost of the
Ans. (a) NNPMP = [(ii) + (x)] + (i) +[(iii) + (vi) firm. 2
+(viii)]+(xi) + (iv) − (iv) 2 (ii) Interest paid by an individual: It is not included
= (1,800 + 200) + 6,000 + (400 + 120 + 80) + because the loan is taken to meet consumption
1,000 + 100 − 70 1½ expenditure and therefore, interest paid on such
= ` 9,630 crore ½ a loan is not a factor payment. 2
(b) GDPFC = (ii + x) + i + (iii + vi + viii) + xi + ix (iii) Expenditure on purchasing car by a firm: It is
=(1,800 + 200) + 6,000 + (400 + 120 + 80) + 1,000 included because it is an investment expenditure,
+ 50 1 a final expenditure. 2
=` 9,650 crore 1 [CBSE Marking Scheme, 2016]
22 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Q. 16. Will the following be included in the domestic product of India ? Give reasons for your answer.
(i) Profits earned by foreign companies in India.
(ii) Salaries of Indians working in the Russian Embassy in India.
(iii) Profits earned by a branch of State Bank of India in Japan.  AE [OD Set-I, III 2017]
Ans. (i) Yes, as it is a factor income earned within domestic territory of India.
(ii) No, because Russian Embassy is not a part of the domestic territory of India. It is factor income from abroad.
(iii) No, as profits are not earned within the domestic territory of India. [CBSE Marking Scheme, 2017] 2×3
Detailed Answer:

[Topper's Answer 2017]

Q. 17. How will you treat the following while estimating (i) Financial assistance to flood victims
domestic product of a country ? Give reasons for (ii) Profits earned by the branches of a foreign bank
your answer: in India
(i) Profits earned by branches of country’s bank in (iii) Salaries of Indians working in the American
other countries Embassy in India. AE [OD Set II 2017]
(ii) Gifts given by an employer to his employees on
Ans. (i) No. Financial assistance to flood victims are
independence day
not included as it is a transfer payment.
(iii) Purchase of goods by foreign tourists
(ii) No. It is a factor income to abroad.
AE [Delhi Set-I, II, III 2017]
(iii) Yes. Included as it is a factor income from abroad
Ans. (i) Not a part of domestic product as it is not so it is added to NDP to get NI.
generated in the domestic territory of the country. [CBSE Marking Scheme, 2017] 2 × 3
(ii) Not a part of domestic product as it is a transfer
Q. 19. Will the following factor incomes be included in
payment.
domestic factor income of India? Give reasons for
(iii) Part of domestic product as these are exports
your answer:-
produced in the domestic territory.
(i) Compensation of employees to the resident of
[CBSE Marking Scheme, 2017] 2+2+2
Japan working in Indian embassy in Japan.
Q. 18. Will the following be included in the (ii) Payment of fees to a Chartered Accountant by a firm.
national income of India ? Give reasons for your (iii) Rent received by an Indian resident from Russian
answer. embassy in India.
NATIONAL INCOME AND RELATED AGGREGATES [ 23
(iv) Compensation given by insurance company to an Q. 20. How should the following be treated while
injured worker. AE [SQP 2017]
estimating national income ? You must give
reason in support of your answer:
Ans. (i) Yes, it will be included as its part of Factor
(i) Bonus paid to employees.
Income earned in domestic territory of the country.
(ii) Addition to stocks during a year.
(ii) Payment of fees to a Chartered Accountant is an (iii) Purchase of taxi car by a taxi driver.
intermediate expenditure for the firm.
Hence, it is to be deducted from the value of AE [Foreign Set-I 2014]
output of the firm to obtain value added. Hence Ans. (i) Bonus: It should be included because it is
it is not included in domestic factor income of compensation paid to employees. 2
India (ii) Addition to stock: It should also be included
(iii) No, as rent received by Indian resident from
because it is investment, a final expenditure. 2
Russian embassy will be part of Factor Income
(iii) Purchase of a Taxi by Taxi Driver: It should
received from abroad as Russian Embassy is
be included because it is final expenditure on
not part of domestic territory of the country.
(iv) No, as compensation is given by insurance investment. 2
company to employee and not by employer.  [CBSE Marking Scheme, 2014]
[CBSE Marking Scheme, 2017] 6

TOPIC-3
GDP & Welfare
¾¾ GDP and Welfare: In general, Real GDP and Welfare are directly related with each other. A Scan to know
more about
higher GDP implies more production of goods and services. It means more availability of goods this topic
and services. But more goods and services may not necessarily indicate that the people were
better off during the year. In other words, a higher GDP may not necessarily mean higher
welfare of the people.
¾¾ Welfare means material well being of the people. It depends on many economic factors like
national income, consumption level, quantity of goods, etc., and non-economic factors like
environmental pollution, law and order etc. The welfare which depends on economic factors is called economic
welfare and the welfare which depends on non-economic factor is called non-economic welfare. The sum total of
economic and non-economic welfare is called social welfare.
¾¾ GDP is not an appropriate indicator for Welfare: GDP may be a good indicator of economic growth but not of
economic welfare or economic development because of:
(a) Externalities: Externalities refer to benefits or harms of an activity caused by a firm or an individual, for which
they are not paid or penalized. For example, environmental pollution caused by industrial plants is a negative
externality and building a flyover is a positive externality.
(b) Composition of GDP: GDP does not exhibit the structure of the product. If the increase in GDP is mainly due
to increased production of war equipment and ammunitions, then such an increase cannot improve welfare
in economy.
(c) Distribution of GDP: When GDP is unevenly distributed, increase in GDP does not increase welfare.
(d) Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms, they are not
included in GDP, due to non availability of data. However, such activities influence the economic welfare of
people of the economy.

Objective Type Questions (1 mark each)

I. MULTIPLE CHOICE QUESTIONS: 2. GDP is not an appropriate indicator of welfare

because of:
1. Real GDP is considered as an index of:
(i) externalities.
(i) price level in the economy.
(ii) composition of GDP and Distribution of GDP.
(ii) welfare of the people.
(iii) profit maximization. (iii) Non-monetary transactions.
(iv) none of these. R (iv) all of these. U
Ans. (ii) welfare of the people. Ans. (iv) all of these.
24 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

3. Pollution created by factories/vehicles is an Column A Column B

example of:
1. Social Welfare a. T
 otal of economic and
(i) positive externalities.
non-economic welfare
(ii) negative externalities.
2. Comparison of b. GDPs evaluated at
(iii) either (i) or (ii). GDP of different current market prices
(iv) neither (i) of (ii). AE Countries
Ans. (ii) negative externalities. 3. Economic c. Situation of
4. With a rise in real national income, welfare of the welfare unemployment
people: 4. GDP deflator d. includes prices of
(a) Rises. imported goods
(b) Falls. Ans. (1) Social Welfare – (a) Total of economic and non-
(c) Remains unchanged. economic welfare
(d) None of the above.
III. STATE WHETHER THE GIVEN STATEMENTS ARE
U [OD Set-I Re-Exam, 2018] TRUE OR FALSE:
Ans. (a) Rises.
1. The ratio of nominal to real GDP is an index of
II. MATCH THE FOLLOWING: prices. This is called GDP Deflator. R
1. Identify the correctly matched items in Column A Ans. True
to that of Column B: U 2. Nominal GDP is the value of GDP at the current
Column A Column B prevailing prices. R

1. Welfare of the people a. Social Welfare Ans. True

3. Profits of chemical industries increased 150%;
2. T
 otal of economic and b. Economic fishermen income reduced by 70% due to
non-economic welfare Welfare untreated chemical pollutants in water bodies.
3. B
 enefits or harms of an c. Externalities This is a positive externality. A
activity caused by a firm Ans. False
4. M
 aterial well being of d. Real GDP
IV. VERY SHORT ANSWER TYPE QUESTIONS:
the people
Ans. (3) Benefits or harms of an activity caused by a 1. Define Externality.  U [SQP 2017]
firm – (c) Externalities
Ans. Externality occurs when the actions of
2. Identify the correctly matched items in Column A consumers or producers give rise to negative or
to that of Column B: R positive side effects on third party who are not
Column A Column B part of these actions, and whose interests are not
taken into consideration.
1. GDP of a country a. A
 bsolute measure of
welfare E.g., Introduction of metro rail on one hand has
increased the prices of property but has also
2. Underestimation b. non-monetary saved the time and money of general public and
of GDP exchanges excluded
has provided safe means of transport.
3. Base year c. Y
 ear of current  [CBSE Marking Scheme, 2017] 1
market prices
2. Give one example of externality, which reduces
4. Economic d. Mental Satisfaction welfare of the people. A [Delhi Set-I, II, III 2018]
Welfare and Peace
Ans. Any one example like smoke out of chimneys
Ans. (2) Underestimation of GDP – (b) non-monetary
of factories, release of contaminated water into
exchanges excluded
river, traffic, jams or any other.
3. Identify the correctly matched items in Column A [CBSE Marking Scheme, 2018] 1
to that of Column B: U

Short Answer Type Questions-I (3 marks each)

Q. 1. “Gross Domestic Product (GDP) does not give country.” Defend or refute the given statement
us a clear indication of economic welfare of a with valid reason. [Delhi Set – I, II, III – 2019]
NATIONAL INCOME AND RELATED AGGREGATES [ 25
Ans. Yes, given statement is defended. As GDP may (i) unequal distribution and composition of
not take into account: GDP,
(i) Non-monetary exchanges like services of (ii) non-monetary transactions in the economy
housewife1 which are not accounted for in GDP, and
(ii) E
 xternalities i.e. benefits and harms which (iii) occurrence of externalities in the economy
are caused due to economic activities 1 (both positive and negative). 3
(iii) Distribution of income. 1 [CBSE SQP Marking Scheme, 2020]
AE [CBSE Marking Scheme, 2019] Q. 3. What are Non-Monetary Exchanges ? Give an
Q. 2. “India’s GDP is expected to expand 7.5% in 2019- example. Explain their impact on use of Gross
20: World Bank” –THE ECONOMIC TIMES. Domestic Product as an index of welfare of the
people. U [Foreign Set-I, II, III 2014]
Does the given statement mean that welfare
of people of India increase at the same rate? Ans. Non-Monetary Exchanges refer to the goods and
Comment with reason. services produced but not exchanged through
 AE [CBSE SQP 2020] money, like the domestic services rendered
Ans. Generally it is considered that an increase by the members of a family to each other. The
in the Gross Domestic Product (GDP) of any value of these service is many a times difficult
economy (India in this case) ensures increase to estimate and so it escapes national income
in welfare of the people of the country. estimation. These exchanges however have
However, this may not always be correct. positive effect on the welfare of the people.
Some of the prime reasons for the same are: [CBSE Marking Scheme, 2014] 3

Short Answer Type Questions-II (4 marks each)

Q 1. “Higher Gross Domestic Product (GDP) means

Ans. Non Monetary Exchanges: These are those
greater per capita availability of goods in
activities in an economy which cannot be
the economy.” Do you agree with the given
evaluated in terms of money due to non-
statement? Give valid reason in support of your
availability of data, e.g. domestic services provided
answer. AE [OD SET – I,II,III, 2019]
by family members at home, barter exchanges etc.
Ans. “Higher Gross Domestic Product (GDP) means Although these activities contribute to welfare,
greater per capita availability of goods in the they are a major cause of understanding of GDP
economy.” This statement is not true. in the economy. Therefore, GDP may not give the
(i) If the rate of population growth is more than true picture of welfare of a country.
the rate of growth of GDP, the per capita (to be marked as a whole)
availability of goods and services will fall. 2 [CBSE Marking Scheme, 2018] 4
(ii) GDP doesn’t account for changes in
3. Suppose a ban is imposed on consumption of
inequalities in distribution of Income. If
tobacco. Examine its likely effects on:
the rising GDP is concentrated in a few
(i) Gross domestic product; and
hands, per capita availability of goods in the (ii) Welfare. AE [Delhi Comptt., SET-I, II, III 2017]
economy might not increase. 2
Ans. (i) Ban on consumption of tobacco will bring
(Any two other relevant reasons)
down the production of tobacco. Since it is
[CBSE Marking Scheme, 2019] counted in GDP, it will fall.  2
Q. 2. Explain ‘non-monetary exchanges’ as a limitation (ii) The ban will improve the health in general. It
of using gross domestic product as an index of will thus, increase welfare. 2
welfare of a country. [CBSE Marking Scheme, 2017]
U [Delhi Set-I, II, III 2017; Delhi Comptt.
Q 4. How does increase in inequalities in distribution
Set-I, II, III 2018] of income affect welfare of the society? Explain.
 U [Delhi Comptt., Set-I, II, III 2017]
26 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Ans. Increase in inequalities means that rich Ans. GDP doesn’t account for externalities.
becomes richer and poor becomes poorer. Positive Externality: e.g., saving commuting
Since utility of money is higher among poor time due to construction of a fly-over, increases
and lower among the rich, any increase in welfare, GDP as an index understates welfare.
inequalities may not lead to increase in welfare. Negative Externality: e.g., pollution from
 (To be marked as a whole) factories, decreases welfare, GDP overstates
[CBSE Marking Scheme, 2017] 4 welfare. [CBSE Marking Scheme, 2016] 4

Q 5. Suppose a ban is imposed on consumption of Q 9. Government raises its expenditure on producing

liquor. Examine its likely effects on: public goods. Which economic value does it
(i) Gross domestic product; and reflect? Explain. AE [Delhi Set-I 2016]
Ans. If government raises its expenditure on producing
(ii) Welfare  AE [OD Comptt., Set-I, II, III 2017] public goods, it reflects that government is serving
Ans. (i) Ban on consumption of liquor will bring down the objective of social welfare. Public goods are those
the production of liquor. Since production of goods which satisfy collective consumption needs,
liquor is counted in gross domestic product, it i.e., health, education, fresh air, civic amenities, etc.
will fall. 2 When government raises its expenditure on public
(ii) Fall in consumption of liquor will improve health goods, residents of a country are benefited by being
causing rise in welfare. 2 provided with these basic amenities. Healthy and
[CBSE Marking Scheme, 2017] educated people are more efficient which can lead
Q 6. How does negative externalities affect the welfare to increase in GDP in future too.
of the people? Explain by taking an example. Thus, it will improve the overall quality of life of the
people in the country. 4
AE [OD Comptt., Set-I, II, III 2017]
Q 10. Government spends on child immunization
Ans. Pollution by factories, vehicles, etc. is an example programme. Analyse its impact on Gross
of negative externalities, i.e., harm caused by a Domestic Product and Welfare of the people.
firm or a person to others for which they are not  AE [Foreign Set-I 2016]
paid for. Gross domestic product does not take
into account such harms caused.  4 Ans. Government spending on child immunization
[CBSE Marking Scheme, 2017] programme is government consumption final
expenditure. Therefore, its raises GDP. Since
Q 7. What is real GDP ? State three limitations of GDP such a programme improves health, it will raise
as an index of economic welfare. efficiency level of people and increase welfare.
[CBSE Marking Scheme, 2016] 4
R [Delhi Set-I, II, III Comptt. 2016]
Q. 11. Government incurs expenditure to popularize
Ans. When GDP represents quantities of final goods
yoga among the masses. Analyse its impact on
and services produced or when GDP is measured
Gross Domestic Product and welfare of the people.
on the basis of constant prices, it is called real
GDP. 1 AE [Delhi Set-I, II, III 2016]
Limitations: Ans. Government expenditure on popularizing yoga
(i) It does not reflect distribution of income among raises Gross Domestic Product because it is
people. government’s final consumption expenditure. It
also raises welfare of the people because yogic
(ii) It does not take into account non-monetary
exercises may improve health and thus, raises
exchanges. efficiency of the people.
(iii) It does not take into account externalities. [CBSE Marking Scheme, 2016] 4
1×3=3
(Or any other) Q. 12. Sale of petrol and diesel cars is rising particularly
[CBSE Marking Scheme, 2016] in big cities. Analyse its impact on Gross Domestic
Product and Welfare. AE [OD Set-I, III, 2016]
Q 8. ‘GDP as an index of welfare may understate or
Ans. Final sales of cars raises GDP, because final sales
overstate welfare.’ are final products. Cars provide convenience in
Explain the statement using examples of a transportation but at the same time, it causes
traffic jams, air pollution and noise pollution
positive and a negative externally.AE [SQP 2016]
reducing the welfare of the people. Pollution has
bad effects on the health of the people.
[CBSE Marking Scheme, 2016] 4
NATIONAL INCOME AND RELATED AGGREGATES [ 27
Q. 13. Is Gross Domestic Product a true index of Commonly Made Error
economic welfare of the people ? Give two reasons
 Students, instead of giving reasons to justify the
in support of your answer. statement, argue why PCI or real PCI is a better
AE [OD Set-I, II, III Comptt. 2014] indicator of economy.
Ans. When Real GDP rises, flow of goods and services
Answering Tip
tends to rise. Other things remaining constant, this
means greater availability of goods per person,  Learn, how growth of GDP is not a real indicator of
implying higher level of welfare. But there are economic welfare.
strong exceptions to this generalisation. Following
Q. 14. Distinguish between Real Gross Domestic
observations may be noted in this context:
Product and Nominal Gross Domestic Product.
(i) Distribution of GDP: If with every increase in the Which of these is a better index of welfare of the
level of GDP, distribution of GDP is getting more
people and why ? U [OD Set-I, II, III 2013]
unequal, welfare level of the society may not rise.
In this situation, the bulk of the population may Ans. When domestic product is valued at current
have even lesser goods than before (even when
prices, it is called nominal domestic product and
the overall level of GDP has tended to rise)
when it is valued at base year prices, it is called
(ii) Composition of GDP: Composition of GDP may Real Domestic Product.
not be welfare oriented even when the level of
GDP tends to rise. There is no direct increase in Real Domestic Product is a better index of welfare
the welfare of the masses if GDP has risen owing of the people because it indicates the change in
largely to the increase in the production of defence quantity of goods and services available to the
goods. [CBSE Marking Scheme, 2014] 4 people. [CBSE Marking Scheme, 2013] 4

Long Answer Type Questions (6 marks each)

Q. 1. (i) ‘Real Gross Domestic Product is a better indicator of economic growth than Nominal Gross Domestic Product’.
Do you agree with the given statement? Support your answer with a suitable numerical example.
(ii) Calculate ‘Depreciation on Capital Asset’ from the following data:
AE A [CBSE SQP 2020]

S. No Particulars Amount (in ` crores)

(i) Capital Value of the Assets 1,000
(ii) Estimated life of the Assets 20 years
(iii) Scrap Value Nil

Ans. (i) 
The given statement is correct. Real Gross Domestic Product (GDP) is a better indicator of economic growth
than Nominal Gross Domestic Product (GDP) as it is not affected by changes in general price level. 1
Numerical Example: 1

Goods Price of Current Price of Base Quantity of NOminal GDP Real GDP
Year Year Current Year (P1Q1) (P0Q1)
(P1) (in `) (P0) (in `) (Q1) (in units)
A 20 10 100 2,000 1,000
B 10 5 200 2,000 1,000
C 30 20 50 1,500 1,000
ΣP1Q1 = 5,500 ΣP0Q1 = 3,000

  In the above example the difference between Real GDP (ΣP0Q1) and Nominal
  GDP (ΣP1Q1) is 5,500–3,000 = `2,500.
   This is only the monetary difference as the quantity sold in the market remains unchanged and the
variation in the value of GDP is merely due to the change in the prices in the economy. 1
28 ] Oswaal CBSE Question Bank Chapterwise & Topicwise Solved Papers, ECONOMICS, Class-XII

Cost of the capital assets - SccrapValue

(ii) Depreciation on capital asset =
Estimated life of the capital

1000 - 0
Depreciation =
20
  Depreciation = `50 crore [CBSE SQP Marking Scheme, 2020] 3

Q. 2. Differentiate between National Income at National income at constant prices =

Current Prices and National Income at Constant
Prices. Which of the two presents a better view of National income at current prices
´ Price index of base year
the economic growth of economy and Why ? Price index of current yeaar

U [SQP 2018] National income at constant prices reflects the

Ans. National income at Constant Prices: When real growth of an economy because it increases
National product is estimated on the basis of prices only when there is an increase in real national
prevailing in the base year, it is called national output over a period of time.
income at constant prices or real national income. National income at current prices may increase
National Income at Current Prices: When due to increase in prices of goods and services
national product is estimated on the basis of during the current year, thus it does not reflect
prices prevailing in the current year, it is called the true picture of economic growth.
national income at current prices or nominal [CBSE Marking Scheme, 2018] 6
national income.

Know the Terms

¾¾ Real Flow: It shows the flow of goods and services among the various sectors of economy.
¾¾ Money Flow: It shows the flow of money among various sectors of economy.
¾¾ Leakages of Income: It is the amount of money which is withdrawn from circular flow of income.
¾¾ Injections of Income: It is the amount of money which is added to the circular flow of income.
¾¾ Net Factor Income from Abroad (NFIA): This is the difference between the income earned from abroad for
rendering factor services by the normal residents of the country to the rest of the world and the income paid for
the factor services rendered by non-residents in the domestic territory of a country.
¾¾ Factor Income: These are incomes received by the owners of factors of production for rendering their factor services
to the producers.
¾¾ Transfer Payments: These are all those unilateral payments corresponding to which there is no value addition in
the economy, e.g., gifts, donations, etc.
¾¾ Domestic Territory: Domestic or Economic territory is the geographical territory administered by a government
within which persons, goods and capital circulate freely.
¾¾ Normal Residents: A resident (or a normal resident) of a country is a person or institution who ordinarily resides
in a country and whose centre of interest also lies in that particular country.
¾¾ Market Price: It is the price at which a commodity is sold and purchased in the market.
¾¾ Factor Cost: It refers to all factor payments made by the producing units (firms) to the factors of production involved
in the production of goods and services.
¾¾ Externalities: Externalities refer to benefits or harms of an activity caused by a firm or an individual, for which
they are not paid or penalized. For example, environmental pollution caused by industrial plants is a negative
externality and building a flyover is a positive externality.
¾¾ Value Added: Means additions in value by each firm in the process of production at each stage.
¾¾ Double Counting: Counting the value of the same product more than once in calculation of National Income.
¾¾ Mixed Income of the Self-Employed: It includes both the profits earned on business in which you are employed
as well as the stipulated wage for the labour put in by you to yourself.
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