Economics Test - 4

The correct answer is Net foreign income from abroad.

Key Points

• Gross Domestic Product (GDP) is the aggregate value of goods and services produced within the domestic territory of a country.
• GDP includes the replacement investment of the depreciation of capital stock.
• The total amount of goods and services generated in a country throughout a financial year is referred to as GDP.
• The GDP accounts for the purchases of newly generated goods and services during a given time period.
• When measuring GDP, the total value of products and services produced within the country's boundaries is taken into account, regardless of whether the value addition is due to citizens or non-residents.
• It highlights the strength of the country’s economy.
• Gross National Product (GNP) is the sum of GDP and Net Factor Income from Abroad.
• GNP includes the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners within the domestic economy and excludes incomes earned by the citizens in a foreign economy.
• Net foreign income from abroad is the main difference between GDP and GNP.
• It considers the income earned by citizens of the country, whether they live within or outside the country.
• It does not include money made by foreign nationals living in the country.
• It highlights the contribution of the residents to the development of the economy.

The correct answer is an Individual's purchasing decision.

Key Points

• Macroeconomics is the study of the entire industries, structure, performance, behavior, and economy. (Not only a few companies or individuals)
• The Goal of Macroeconomics
  • To achieve sustainable economic growth
  • Increasing Productivity
  • Full employment
  • Living standard growth
  • Stability and security 
  • Financial, Social, and Ecological Sustainability

Additional Information

• Microeconomics is a study of individual, household, and business decisions regarding the allocation of resources and the price of goods and services. 
  • These economics characterized the consumer equilibrium, individual income, and saving.

Confusion Points

• Macro - Big (Like - All companies in a whole sector)
• Micro - Small (Like - Individual company)

The correct answer is Remains constant

Key Points

• Depreciation: The fall in the monetary value of an asset due to its constant use, wear, and tear, obsolescence is termed as Depreciation. It is considered a yearly non-cash expense of a company.

Important Points

• Under the Straight-line method of depreciation, the depreciation on any asset is charged on the original cost of the assets, which was paid at the time of purchasing of the asset. The value of depreciation is fixed for all years.
• It is calculated by deducting the salvage value of the asset from the cost and then dividing it by the total estimated life of the asset.
• The formula for calculating depreciation charged using the Straight-line method-
  • (Original Cost - Salvage Value) / (Useful life of the asset)

Additional Information

• Salvage Value: The salvage value of an asset is the amount of money a company anticipates getting for selling or splitting out the asset at the end of its useful life.

The correct answer is Taxes.

Explanation:

• The value of total produced goods and services i.e. national income of any economy is calculated on either of the two parameters - ‘factor cost’ or the ‘market cost’.
• Factor cost is basically the input costs (like raw material, interest on loans if taken, labourer wages, etc)  the producer or the manufacturer has to bear during the process of producing goods. Factor cost is also termed as ‘factory price’. So in a way, it can also be termed as the ‘price’ of the commodity from the producer’s side. 
• Now when we add the taxes (indirect) to the factory cost we get ‘market cost’.
• So it means the cost at which the goods reach the market, i.e., showrooms (the tax paid by the producers to the union government in India). After adding the state government taxes (SGST)  to it we get 'market price’ or factor price. 
• Before 2015 officially India calculated the national income at factor cost ( however the data regarding market cost was also released) but after 2015, CSO has switched over to calculating it at market price (i.e., market cost). 
• The market price is calculated by adding the product taxes (both the state and central taxes) to the factor cost. 

The correct answer is Income earned from investment and capital.

• One of the methods to calculate the GDP of a country is the Income method.
• Income method: The income approach starts with the income earned from the production of goods and services. Under the income approach, we calculate the income earned by all the factors of production in an economy like Land, Labour, Interest, and Management.
• Interest includes the following: 
  • The amount received for lending funds to a production unit. It includes the interest of funds provided by the entrepreneur. Interest income includes interest on loans taken for productive services only.
• Interest income does not include any interest which does not contribute to production like:
  • Interest paid by the government on public debt and interest paid by consumers as such interest is paid on loans taken for consumption purposes.
  • Interest paid by one firm to another firm as it is already included in the profits of the firm which pays it.
• Formula to calculate GDP from Income method: Net National Income = Wages + Rent + Interest + Profits
  To make it gross, we need to do two adjustments – Add depreciation of capital & Add Net Foreign Factor Income. NFFI is (income earned by the rest of the world in the country – income earned by the country from the rest of the world)
  GDP (Factor Cost) = Wages + Rent + Interest + Profits+ Depreciation + Net Foreign Factor Income
• This basically is the sum of the final income of all factors of production contributing to a business in a country before tax.
  Now if we add taxes and deduct subsidies, then it becomes GDP at Market cost.
  GDP (Market Cost) = GDP (Factor Cost)+ (Indirect Taxes – Subsidies).
• Other methods to calculate the GDP of a country are:
  • Value-added method: In this method, we calculate the monetary value added to the economy by all the final goods and services produced within a country. It includes value-addition from all sectors i.e. agriculture, manufacturing, and service sectors.
  • To get the exact GDP value from the Value-added method we must exclude the values added at intermediate stages. So, the final value of GDP as per the market value would be- GDP (as per the Value-added method) = Gross value of output – value of intermediate consumption. 
  • Expenditure method: This approach is a converse of Income approach as rather than Income, it begins with money spent on goods & services. This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.

    Mathematically, GDP (as per expenditure method) = C + I + G + (EX-IM)
    Where, C= Consumption Expenditure, I= Investment Expenditure (businesses spend money as they invest in their business activities. for example, buying land, machinery, etc), G =Government Expenditure on various activities, and (EX-IM) =Exports minus Imports, that is, Net Exports.

National income

• National income is the total value of a country's final output of all new goods and services produced in one year. Understanding how national income is created is the starting point for macroeconomics.
• It is the total amount of goods and services produced within the nation during the given period say, 1 year. It is the total factor income i.e. wages, interest, rent, profit, received by factors of production i.e. labor, capital, land, and entrepreneurship of a nation.

1. As the level of households and firms increases, the output is also likely to increase. However, under certain circumstances, the price level may also be driven up.
2. The nominal value of national income, or any other aggregate, is the value of national output at the prices existing in the year that national income is measured – that is, at current prices. In simple terms, the ‘nominal' value of national income can be found by multiplying the quantity of output by the retail (market) price of this output.
3. If demand increases at an unsustainable rate, resources become increasingly scarce, and firms will raise prices. Similarly, wages are likely to rise as the labour market clears and unemployment falls. The more that workers are needed the higher the wage rate. This will act as an incentive for workers to enter this industry. The combined effect of higher wages and prices is that the nominal value of national output may be driven up, rather than its real value.
4. To find the real value of changes in output under inflationary conditions, the effects of any general price increase (price inflation) must be taken into account. This is done by holding prices constant from a starting measure, called the base year.

Therefore, an increase in national income because of an increase in prices only is called an increase in nominal national income.

The correct answer is option 3, i.e. NNP at Factor cost.

Key Points

National income is a total value of a country’s final output of all goods and services produced in a year.

Concept of National Income:

• GDP (Gross Domestic Product) is the total value of goods and services which are produced only within the territory of a country. It does not include any depreciation of capital goods. It is calculated by Income method, product or value-added method and expenditure method. It is given as,

GDP = C + I + G + X – M

• Where C = consumption expenditure
• I = investment expenditure
• G = government expenditure
• M = import expanditure
• X = income from export
• GNP (Gross National Product) is the value of goods and service produced by the citizens within the domestic territory as well as abroad in a year. It is given as,

GNP = GDP + Factor income Indian Nationals working abroad – factor income of foreign residents working in India

GNP = GDP + Net factor income from abroad

• NNP (Net National Product) is the value of goods and services produced in an economy during a year after subtracting the depreciation value lost by capital goods each year. It is NNP at market price because the value of goods and services are taken at its actual market rate.

NNP = GNP – Depreciation of capital goods

• National income is also known as NNP at factor cost. It is sum total of incomes of residents of a country in a given period of time including capital consumption or depreciation. All payments that are made to factors of production like land, labour, capital and entrepreneurship are at factor cost at which goods and services are produced.

National income = NNP at factor cost

Option 1 is Correct. i.e. ​Difference in the costs of input and output.

• The value-added method of calculating national income focuses on the value added to a product at each stage of production.
• Value added is the difference between gross output and intermediate inputs and represents the value of labor and capital used in producing gross output. 
• To calculate the national income using this method, we will have first to calculate the net value added at factor cost (NVAfc).
• And to calculate the (NVAfc), we will have to deduct the net indirect taxes.
• Usually, this method involves dividing the economy into various industries such as agriculture,fishing, transport, communication, and so on.
• This method concentrates on the net value added by each component; we would need to exclude or subtract the following elements from the output of each enterprise:
  • Consumption of raw materials
  • Consumption of capital
  • Net indirect taxes

The correct answer is John Maynard Keynes.

• The General Theory of Employment, Interest and Money(1936) is the seminal work of John Maynard Keynes.
• John Manard Kaynes is considered as the father of macroeconomics.
• The General Theory of Employment, Interest and Money published during the Great Depression of the 1930s suggested a new set of policy approach to help economic recovery.

Key Points

• John Maynard Keynes is the British Economist worked especially in the area of Macroeconomics.
• After his contributions, the domain of economics is divided into microeconomics and macroeconomics.
  • Microeconomics-It studies the economics of the firm, individual, consumers, inflation etc.
  • Macroeconomics-It studies the economics of a nation or a country.

The correct answer is Option 4.

Key PointsProduct Method:

• It calculates the aggregate value of final goods & services produced in a year. 
• It emphasises a calculation of the net contribution at every stage of production.
• This method focuses on the net value added by each of the components in production.
• While calculating National income, the following elements should be excluded:
  • Consumption of raw materials,
  • Capital consumption,
  • Net Indirect Taxes,
  • Self-consumption services like services of house-wife etc.

Additional Information

The National Income Accounting of a country is calculated by three methods:

• Product Method
• Income Method
• Consumption Method