National Income Accounting

National income accounting measures the total value of goods and services produced in an economy during a year, and it is the basis for judging economic growth and planning policy. In this chapter you will learn basic concepts: final and intermediate goods, consumption and capital goods, stocks and flows, gross and net investment, and depreciation. You will study the circular flow of income in a simple two-sector economy, where households supply factor services to firms and firms pay them factor incomes that come back as spending. So national income can be measured in three ways. You will use the product or value added method, the expenditure method and the income method, and see why counting the value of final goods only avoids the problem of double counting. The chapter explains the macroeconomic identities linking GDP, NDP, GNP and NNP at market price and factor cost, using depreciation, net factor income from abroad and net indirect taxes. You will distinguish nominal and real GDP, calculate the GDP deflator, and learn why GDP is not a perfect index of welfare.

Detailed Worksheet: National Income Accounting Section A - Definitions (10 marks) 1. Distinguish between final goods and intermediate goods with one example of each. (2 marks) 2. What is depreciation? Why is it deducted from gross investment to obtain net investment? (2 marks) 3. Distinguish between stock and flow variables with one example of each. (2 marks) 4. Define net factor income from abroad. Can it be negative? (2 marks) 5. What is the GDP deflator? How is it calculated? (2 marks) Section B - Calculations and Applications (15 marks) 6. A farmer grows wheat worth Rs 1,000 using no purchased inputs and sells it to a miller. The miller makes flour worth Rs 1,500 and sells it to a baker, who makes bread worth Rs 2,200 and sells it to consumers. Calculate the value added at each stage and show that total value added equals the value of the final good. (3 marks) 7. From the following data (Rs crore), calculate GDP at market price, NNP at market price and NNP at factor cost (national income): private final consumption expenditure 800, government final consumption expenditure 200, gross domestic capital formation 300, net exports -50, depreciation 100, net factor income from abroad -20, net indirect taxes 130. (3 marks) 8. Calculate NDP at factor cost and national income by the income method (Rs crore): compensation of employees 600, rent 100, interest 80, profit 220, mixed income of self-employed 100, net factor income from abroad 30. (3 marks) 9. The nominal GDP of a country was Rs 600 crore in 2024 (base year) and Rs 792 crore in 2025. The GDP deflator for 2025 is 110. Calculate the real GDP in 2025 and the growth rate of real GDP. Explain why real GDP is a better measure of growth. (3 marks) 10. A firm reports (Rs lakh): sales 5,000, change in stock 200, purchase of intermediate goods 3,000, depreciation 300, net indirect taxes 400. Calculate gross value added at market price and net value added at factor cost. (3 marks) Section C - Diagrams (10 marks) 11. Draw the circular flow of income in a two-sector economy, showing the real flow of factor services and goods and the money flow of factor payments and consumption expenditure. (4 marks) 12. Draw a chart showing how GDP at market price is converted to NNP at factor cost, with the items added or subtracted at each step. (3 marks) 13. Draw a chart showing the three methods of measuring national income and the main components of each. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Explain the problem of double counting with an example. How do the value added method and the final product method avoid it? Explain why sale of second-hand goods and purchase of shares are not counted in GDP, but brokerage on them is counted. (5 marks) 15. Explain whether each of the following is included in India's national income, with reasons: (i) salary of an Indian working in the US embassy in Delhi, (ii) old age pension, (iii) imputed rent of owner-occupied houses, (iv) services of a housewife, (v) profits earned by an Indian bank's branch in London. (5 marks) 16. GDP is not a good index of welfare. Analyse this statement with reference to distribution of GDP, non-monetary exchanges and externalities, giving one example of each. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Write the formula before each calculation and show working (Rs crore). Draw neat charts.