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National Income Accounting – Class 12 Economics notes, important questions and MCQs

NCERT Class 12 Economics, chapter 6. Notes, key terms, important questions with answers and MCQs.

Chapter overview

National income accounting measures the total value of final goods and services produced in an economy. Income flows in a circle between households and firms. GDP can be measured by the product (value added), expenditure and income methods, which give the same result. Related aggregates such as GNP, NDP and national income are derived by adjusting for net factor income from abroad, depreciation and net indirect taxes.

Basic concepts

Final goods are bought for final use (consumption or investment); intermediate goods are used up in production and are not counted separately, to avoid double counting.
Stock is measured at a point of time (such as capital); flow is measured over a period (such as income or investment).
Gross investment includes depreciation; net investment = gross investment − depreciation.
In the circular flow of income, households supply factor services to firms and receive factor payments, which they spend on goods produced by firms.

Methods of measuring GDP

Product (value added) method: GDP = sum of gross value added of all firms; value added = value of output − intermediate consumption.
Expenditure method: GDP = C + I + G + (X − M), that is consumption, investment, government purchases and net exports.
Income method: GDP = wages + rent + interest + profit (plus mixed income), the factor payments.

Aggregates and real GDP

GNP = GDP + net factor income from abroad (NFIA); NDP = GDP − depreciation; NNP at market prices = GNP − depreciation.
National income = NNP at factor cost = NNP at market prices − (indirect taxes − subsidies).
Nominal GDP is at current prices; real GDP is at constant (base year) prices; GDP deflator = (nominal GDP ÷ real GDP) × 100.
GDP is not a perfect measure of welfare because it ignores income distribution, non-monetary exchanges and externalities such as pollution.

Key terms

Gross domestic product: the market value of all final goods and services produced within a country's domestic territory in a year
Value added: the value of output minus the value of intermediate goods used
Net factor income from abroad: factor income earned by residents abroad minus factor income paid to non-residents
Depreciation: the fall in value of fixed capital due to normal wear and tear
GDP deflator: the ratio of nominal GDP to real GDP multiplied by 100

Important questions with answers

Distinguish between final goods and intermediate goods.2 marks

Final goods are goods bought for final consumption or investment and are not resold or used up in further production in the same year, such as a car bought by a household. Intermediate goods are goods used as inputs in producing other goods within the year, such as steel used by a car maker. Only final goods are included in GDP, to avoid double counting.

Why is GDP not a perfect index of welfare?3 marks

GDP may rise while most people are no better off if income is unequally distributed. It ignores non-monetary exchanges, such as household work, which add to welfare. It ignores externalities, such as pollution, that reduce welfare, and it does not reflect leisure, quality of life or the composition of output.

Explain the three methods of measuring GDP and show how national income is derived from GDP.5 marks

GDP can be measured in three ways, which give the same result because one person's expenditure is another's income. In the product or value added method, GDP is the sum of gross value added by all producing units in the domestic territory, where value added is the value of output minus intermediate consumption; this avoids double counting. In the expenditure method, GDP is the sum of final expenditure: private final consumption expenditure, investment expenditure, government final consumption expenditure and net exports, that is GDP = C + I + G + (X − M). In the income method, GDP is the sum of factor incomes generated in production: compensation of employees (wages), rent, interest and profit, along with mixed income of the self-employed. From GDP at market prices, adding net factor income from abroad gives GNP at market prices. Subtracting depreciation gives NNP at market prices. Subtracting net indirect taxes, that is indirect taxes minus subsidies, gives NNP at factor cost, which is called national income. Real GDP, measured at base year prices, is used to compare output over time, and the GDP deflator, nominal GDP ÷ real GDP × 100, measures the change in prices.

Quick revision

Final vs intermediate goods; stock vs flow.
Three methods: value added, expenditure, income.
GNP = GDP + NFIA; NDP = GDP − depreciation; NI = NNP at FC.
Real vs nominal GDP; GDP deflator; GDP and welfare.

Exam tips

Write the chain of aggregates: GDP → GNP (+NFIA) → NNP (−depreciation) → NNP at factor cost (−net indirect taxes).
Practise one example each for value added and the expenditure method.

Practice MCQs

Goods used up in the production of other goods are
1. final goods
2. intermediate goods
3. capital goods only
4. consumer goods
Show answer
Answer: (b) intermediate goods. They are not counted separately.
Income is a
1. stock variable
2. flow variable
3. constant
4. neither
Show answer
Answer: (b) flow variable. It is measured over a period.
GDP at current prices is called
1. nominal GDP
2. real GDP
3. NDP
4. GNP
Show answer
Answer: (a) nominal GDP. It includes price changes.
GNP equals
1. GDP − depreciation
2. GDP − indirect taxes
3. GDP + net factor income from abroad
4. NDP + subsidies
Show answer
Answer: (c) GDP + net factor income from abroad. It includes residents' income from abroad.
Under the expenditure method, GDP equals
1. C + I + G + (X − M)
2. wages + rent
3. output − input
4. C − I
Show answer
Answer: (a) C + I + G + (X − M). Net exports are added.
National income equals
1. GDP at market prices
2. GNP at market prices
3. NNP at factor cost
4. NDP at market prices
Show answer
Answer: (c) NNP at factor cost. It is the sum of factor incomes earned by residents.
If nominal GDP is ₹600 crore and real GDP is ₹500 crore, the GDP deflator is
1. 83
2. 100
3. 120
4. 1,100
Show answer
Answer: (c) 120. 600 ÷ 500 × 100.
A firm's output is worth ₹1,000 and it uses intermediate goods worth ₹600. Its value added is
1. ₹1,600
2. ₹400
3. ₹600
4. ₹1,000
Show answer
Answer: (b) ₹400. Value added = output − intermediate consumption.

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Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.