Economics Test - 5

Option 1 is correct, Food and Clothing.

Food and Clothing is part of Non-durables consumer goods.

• Capital Good-
  • Capital goods are tangible assets that one business produces which in turn gets used by the second business to produce consumer goods. Examples include vehicles, machinery, equipment, buildings, vehicles, tools.
• Consumer durables-
  • Our daily use items and household items are called consumer durables. From fridge, TV, AC to packaged food, clothes all come in consumer durables. Consumer durables can be divided into two categories based on their usage.
• Durable consumer goods-
  • There are such items in this category which are used for a long time. Electronic appliances, fridges, ACs, washing machines, fans, cars, mobiles, etc. used in kitchens come in durables consumer goods.
• Non-durables consumer goods-
  • Items that are finished immediately after use are called non-durables consumer goods.
  • Their age may also be a few years. For example, clothes, food items, cosmetics, medicines, etc. fall into this category.

The correct answer is Option 3, i.e Wealth.

• Stocks are defined at a particular point of time. So, Wealth is a stock variable as it can be measured at a particular time. Hence, option 3 is correct.
• A flow shows change during a period of time whereas a stock indicates the quantity of a variable at a point of time.
• Wealth is a stock since it can be measured at a point of time.
• Income is a flow because it can be measured over a period of time.
• Salary and change in wealth is a flow because it can be measured over a period of time.

The correct answer is GDP - Depreciation.

Key Points

• Net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted as per the depreciation effect.
• The NDP is calculated by subtracting depreciation from the gross domestic product (GDP).
• An increased NDP indicates growth in economic health, while a decrease would indicate a slowdown of the economy of the country.
• Depreciation is the measure of the decreased monetary value of an asset over time due to use, wear and tear, or obsolescence.

Additional Information Gross National Income (GNI)

• Gross National Income (GNI) is the total amount of money earned by a nation's people and businesses.
• It is used to measure and track a nation's wealth from year to year.
• The number is calculated using the nation's gross domestic product (GDP) plus the income it receives from abroad.
• India GNI per capita for 2020 was $1,900.

Net National Product (NNP)

• Net national product (NNP) is the monetary value of finished goods and services produced by a country's citizens, overseas and domestically, in a given period.
• It is the equivalent of the Gross National Product (GNP), the total value of a nation's annual output, minus the depreciation.
• NNP is often examined on an annual basis as a way to measure a nation's success.

The correct answer is NNP at factor cost.

Key Points

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

Important Points

• According to Simon Kuznets, National Income can be calculated by three methods.
  • Product Method- 
  • In this method, the net value of final goods and services produced in a country during a year is obtained, which is called the final product.
  • Income Method-
  • In this method, a total of net income earned by working people in different sectors and commercial enterprises is obtained. By this method, NI is obtained by adding receipts as total rent, total wages, total interest, and total profit.
  • Consumption Method-
  • It is also called the expenditure method.
  • Income is either spent on consumption or saving. Hence, National Income is the addition of total consumption and total saving.
• The national income in India is calculated by the Central Statistical Organisation.
• The Central Statistics Office (CSO), an attached office of the ministry, coordinates the statistical activities in the country and evolves statistical standards.

Additional Information

•  GNP(Gross National Product): GNP includes only those goods and services that are produced by the residents of India whether working in India or Abroad.
  • GNP = Consumption + Gross Private Investment + Government Expenditure + Net Exports + 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​

• Gross National Product is defined as total value of goods and services produced by the citizens of a country. As it specifically mentions about the citizens of a country, the income of foreigners are exempted from this. 
• Net Factor income is defined as the difference between the factor income earned by the normal residents of a country and income earned by the foreigners in the geographical territory of that particular country. 
• Gross Domestic Product + Net factor income from abroad = Gross National Product.

• Personal income (PI) is equal to NI (net interest) – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
• Personal Disposable Income (PDI) =Personal income (PI) – Personal tax payments – Non-tax payments.

The correct answer is option 3.

Key Points

• GDP Deflator:
  • GDP Deflator is the ratio between GDP at current prices and GDP at constant prices.
  • GDP deflator consists of two important components which are nominal GDP and real GDP.
  • Nominal GDP differs from real GDP as the former doesn’t include inflation, while the latter does. As a result, nominal GDP will most often be higher than real GDP in an expanding economy.
  • GDP price deflator = (nominal GDP ÷ real GDP) x 100
  • The GDP deflator is 1 when GDP at current prices is equal to the GDP at constant prices.
  • The value 1 implies that there is no change in the price level.
  • If the GDP deflator is found to be 2, it implies a rise in price level by a factor of 2, and if the GDP deflator is found to be 4, it implies a rise in price level by a factor of 4.
  • The GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country (because the weight of services has not been equitably accounted in the Indian 'headline inflation', i.e. inflation at the WP.
  • Current Prices measures GDP/ inflation/asset prices using the actual prices we notice in the economy. National income at constant prices is called real national income.
  • Constant prices adjust to the effects of inflation. National income at current prices is called nominal national income.

Key Points

• Externalities occur when producing or consuming goods cause an impact on third parties not directly related to the transaction.
• Externalities can either be positive or negative.

Additional Information

• Positive Externality
  • A farmer grows apple trees. An external benefit is that he provides nectar for a nearby beekeeper who gains increased honey as a result of the farmers’ orchard. The beekeeper provides an external benefit to the apple grower because his bees help to fertilise the apple tree
• Negative Externality
  • Making furniture by cutting down rainforests in the Amazon leads to negative externalities to other people. Firstly it harms the indigenous people of the Amazon rainforest. It also leads to higher global warming as there are fewer trees to absorb carbon dioxide.

the correct answer is Option 1.

Key Points

• It measures price changes from the perspective of a retail buyer. Hence, it is an index measuring retail inflation in the economy. It is released by the National Statistical Office (NSO) under Ministry of Statistics and Programme Implementation.
• Hence, both statement 3 and 4 are correct.
• In April 2014, the RBI had adopted the CPI as its key measure of inflation.
• Hence, statement 2 is correct.
• The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
• Weightage of items in CPI is as follows-
  • Food and Beverages – 45.86
  • Housing – 10.07
  • Fuel and Light – 6.84
  • Clothing and Footwear – 6.53
  • Pan, tobacco and intoxicants – 2.38
  • Miscellaneous – 28.32
• Hence, statement 1 is incorrect.
• Four types of CPI are as follows:
  • CPI for Industrial Workers (IW).
  • CPI for Agricultural Labourer (AL).
  • CPI for Rural Labourer (RL).
  • CPI (Rural/Urban/Combined).
• Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. 
• Fourth is compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.
• Base Year for CPI is 2012.
• The Monetary Policy Committee (MPC) uses CPI data to control inflation.

Explanation:

WPI basket includes 697 commodities.

WPI represents the Wholesale Price Index of goods only.

There are three components of WPI viz.

●       Manufactured Products – 64.20%

●       Primary Articles – 22.60%

●       Fuel & Power – 13.10%

Hence, option A, B and C are correct.

The weightage of three components are:

Manufactured Products (64.20%), Primary Articles (22.60%) and Fuel & Power (13.10%).

Services is not included in WPI.

Hence, option D is incorrect.