Exam-useful questions from this chapter, grouped by marks, each with a full model answer. Try writing the answer yourself first, then check it against this one.
In CBSE 2026-27 the unit ‘National Income and Related Aggregates’ carries 10 marks. Personal income, personal disposable income, CPI and WPI are not in the CBSE syllabus, but the UP, Bihar, Rajasthan and MP boards teach from the same NCERT book. The (½) and (1) marks in numerical answers show step marks as in the CBSE marking scheme.
1 1-Mark Questions
Q. Define depreciation.
Answer: Depreciation is the annual allowance for the regular wear and tear of capital goods (annual depreciation = cost ÷ years of useful life).
Q. Give one example of a stock and one of a flow.
Answer: Stock: a country’s capital stock (on 31 March). Flow: national income over a year.
Q. What is net factor income from abroad?
Answer: Factor income earned by the country’s factors employed abroad minus factor income earned by foreign factors employed in the domestic economy.
Q. If net factor income from abroad is zero, how are GDP and GNP related?
Answer: They are equal, since GNP = GDP + NFIA = GDP + 0.
Q. Write the formula of the GDP deflator.
Answer: GDP deflator = Nominal GDP ÷ Real GDP (× 100 in percentage terms).
Q. In the circular flow of income, measuring the value of final goods and services produced by firms (point B) is called which method?
Answer: The product (value added) method.
2 2-Mark Questions
Q. Give two differences between final goods and intermediate goods.
Answer: (1) Final goods are for final consumption or investment; intermediate goods are used as inputs in producing other goods in the same year.
(2) The value of final goods is counted in national income; that of intermediate goods is not counted separately, or there would be double counting.
Q. Distinguish between gross investment and net investment.
Answer: Gross investment is all capital goods produced in a year, including replacement of worn-out capital. Net investment is the real new addition to the capital stock.
Relation: Net investment = Gross investment − Depreciation.
Q. Give reason: the sale of second-hand goods is not included in national income, but the broker’s commission on the deal is.
Answer: The value of a second-hand good was counted in the year it was produced; its sale is only a transfer of ownership, not fresh production. The broker renders a fresh service this year in arranging the deal, so the commission is part of current production and is included.
3 3-Mark Questions
Q. From the following data of a hypothetical economy, show that GDPMP by the value added method and the expenditure method is the same.
(₹ crore) Value of output 4,200; intermediate consumption 1,800; private final consumption expenditure 1,300; government final consumption expenditure 450; gross domestic capital formation 700; net exports (−) 50
Answer: Value added method:
GDPMP = Value of output − Intermediate consumption (½)
= 4,200 − 1,800 (½)
= ₹2,400 crore (½)
Expenditure method:
GDPMP = PFCE + GFCE + GDCF + Net exports (½)
= 1,300 + 450 + 700 + (−50) (½)
= ₹2,400 crore (½)
Both methods give GDPMP of ₹2,400 crore.
Q. A country produces one good. In 2023 (base year) its price was ₹10 per unit. In 2024, 150 units were produced at ₹12 per unit. Find 2024’s nominal GDP, real GDP and the GDP deflator.
Answer: Nominal GDP (2024) = 2024 quantity × 2024 price = 150 × 12 = ₹1,800 (1)
Real GDP (2024) = 2024 quantity × base-year price = 150 × 10 = ₹1,500 (1)
GDP deflator = Nominal ÷ Real × 100 = 1,800 ÷ 1,500 × 100 = 120 (1)
Meaning: the price level is 20% higher than in the base year.
Q. Why is aggregate final expenditure equal to aggregate factor payments in a two-sector economy?
Answer: • The entire revenue firms get from selling final goods is distributed among the factors as wages, rent, interest and profit; profit is the residual, so nothing is left undistributed.
• Households spend their entire factor income on the firms’ goods (no saving, taxes or imports).
• So the same amount moves round the circle with no leakage, and expenditure measured at A equals factor payments measured at C.
Q. Giving reasons, state whether the following are included in India’s national income:
(a) Imputed rent of an owner-occupied house
(b) Salary of an Indian resident working in the American embassy in India
(c) Scholarships given by the government to students
Answer: (a) Included: the house renders a housing service; the owner in effect pays rent to himself, so its imputed value is production.
(b) Included: the embassy is part of the domestic territory of the USA, so this salary is factor income from abroad for India; it is not in India’s GDP but enters national income through NFIA.
(c) Not included: a scholarship is a transfer payment; no productive service is rendered for it.
Q. NNP at factor cost is ₹1,800 crore, depreciation ₹120 crore and net factor income from abroad (−) ₹30 crore. Find GDP at factor cost.
Answer: GDPFC = NNPFC + Depreciation − NFIA (1)
= 1,800 + 120 − (−30) (1)
= ₹1,950 crore (1)
NFIA is negative, so domestic income exceeds national income.
Q. Explain the difference between planned and unplanned inventory accumulation with an example.
Answer: • Planned accumulation: the firm deliberately raises its stock. Example: expecting to sell 1,000 shirts, a firm that wants its stock to rise from 100 to 200 produces 1,100; 1,000 are sold.
• Unplanned accumulation: stock rises because sales unexpectedly fall. Example: the firm produced 1,000 shirts but sold only 600, so 400 shirts accumulated unplanned.
• Both are counted in investment (in the book’s identity 2.6, I is planned plus unplanned).
Q. Why is real GDP better than nominal GDP for comparing economic growth between two years?
Answer: • Nominal GDP is at current prices, so it rises merely because prices rise, even if output does not.
• Real GDP is at constant base-year prices, so it changes only when the quantity of goods and services changes.
• So real GDP shows the true growth of output (and material welfare). The book’s example: nominal GDP of bread rose from ₹1,000 to ₹1,650, but real GDP only to ₹1,100, i.e. output grew just 10%.
Q. How are externalities a limitation of GDP as an index of welfare? Give an example.
Answer: • Externalities are benefits or harms a firm or individual causes to others without being paid or penalised; there is no market for them.
• Example: an oil refinery’s value added is counted in GDP, but its pollution of the river, which lowers people’s well-being and costs fishermen their livelihood, is not subtracted.
• So with negative externalities GDP overestimates welfare; with positive externalities it underestimates it.
4 4-Mark Questions
Q. From the following data, find (a) domestic income (NDPFC) and (b) national income by the income method.
(₹ crore) Compensation of employees 1,200; rent 200; interest 150; profit 400 (including dividends 150); mixed income 250; old-age pension 60; net factor income from abroad (−) 40
Answer: (a) NDPFC = Compensation of employees + Rent + Interest + Profit + Mixed income (1)
= 1,200 + 200 + 150 + 400 + 250 (1)
= ₹2,200 crore (½)
Dividends are already in profit, so they are not added again; old-age pension is a transfer, so it is left out.
(b) National income = NDPFC + NFIA = 2,200 + (−40) (1)
= ₹2,160 crore (½)
Q. Find GDPMP and national income by the expenditure method.
(₹ crore) Private final consumption expenditure 2,000; government final consumption expenditure 500; gross fixed capital formation 550; change in stock 70; net exports (−) 120; depreciation 100; net indirect taxes 250; net factor income from abroad 30
Answer: GDPMP = PFCE + GFCE + (Gross fixed capital formation + Change in stock) + Net exports (1)
= 2,000 + 500 + (550 + 70) + (−120) = ₹3,000 crore (1)
National income = GDPMP − Depreciation − Net indirect taxes + NFIA (1)
= 3,000 − 100 − 250 + 30 = ₹2,680 crore (1)
Q. A country’s national income is ₹2,650 crore and domestic income (NDPFC) ₹2,700 crore. Depreciation is ₹150 crore and net indirect taxes ₹200 crore. (a) Find net factor income from abroad and state its meaning. (b) Find GDPMP.
Answer: (a) NFIA = National income − Domestic income = 2,650 − 2,700 = (−) ₹50 crore (1½)
Meaning: income paid to foreign factors working in the country exceeds the income of the country’s factors working abroad by ₹50 crore. (½)
(b) GDPMP = NDPFC + Depreciation + Net indirect taxes (1)
= 2,700 + 150 + 200 = ₹3,050 crore (1)
Q. Explain the circular flow of income in a two-sector economy with the help of real and money flows.
Answer: Assumptions: only households and firms; households spend their entire income; no government and no external trade.
Real flows: households provide factor services (labour, land, capital, enterprise) to firms; firms provide goods and services to households.
Money flows: firms make factor payments (wages, rent, interest, profit) to households; households return this income to firms as consumption expenditure.
Conclusion: there is no leakage, so production = income = expenditure, which is the basis of the three methods. (Diagram: two boxes for households and firms, spending and goods arrows on top, factor payment and factor service arrows below.)
Q. Distinguish between domestic income and national income. Can national income be less than domestic income? Explain.
Answer: • Domestic income (NDPFC): factor income earned within the domestic territory, whether by residents or non-residents.
• National income (NNPFC): factor income earned by the country’s normal residents, at home or abroad.
• Relation: National income = Domestic income + NFIA.
• Yes: when income paid to foreign factors working in the country (such as the profits of the Korean-owned Hyundai factory in India) exceeds the income of residents working abroad, NFIA is negative and national income is less than domestic income.
Q. Explain three limitations of GDP as an index of a country’s welfare.
Answer: 1. Distribution of GDP: a rise in GDP may go to a few people. The book’s example: GDP rose from ₹1,000 to ₹1,010, but 90% of people saw their income fall from ₹10 to ₹9.
2. Non-monetary exchanges: domestic services of homemakers and barter are not measured in money, so GDP is underestimated.
3. Externalities: harm such as pollution is not subtracted from GDP (overestimation); the benefit of positive externalities is not added (underestimation).
Q. Distinguish between stock and flow. Classify the following into stocks and flows: capital, national income, investment, wealth, depreciation, bank deposits.
Answer: • A stock is measured at a point of time and has no time dimension; a flow is measured over a period of time.
• Tank example: water flowing in from the tap per minute is a flow (net investment); the water in the tank at a moment is a stock (capital).
• Stocks: capital, wealth, bank deposits.
• Flows: national income, investment, depreciation.
Q. Distinguish between market price and factor cost. How is national income obtained from NNP at market prices? Explain with the book’s example.
Answer: • Market price is what the consumer pays; it includes indirect taxes and has subsidies netted out.
• Factor cost is what the producer receives and distributes among the factors; it includes no tax.
• Indirect taxes go to the government, so they are deducted; subsidies reach producers, so they are added (in India petrol is heavily taxed, cooking gas subsidised).
• National income = NNPMP − (Indirect taxes − Subsidies) = NNPMP − Net indirect taxes.
Q. From the following data, find personal income and personal disposable income.
(₹ crore) Net domestic product at factor cost 6,000; net factor income from abroad (−) 100; undistributed profits 500; corporate tax 400; net interest paid by households 200; transfers from government and firms to households 350; personal tax 600; non-tax payments 50
Answer: National income = NDPFC + NFIA = 6,000 + (−100) = ₹5,900 crore (1)
PI = NI − Undistributed profits − Corporate tax − Net interest paid by households + Transfers (1)
= 5,900 − 500 − 400 − 200 + 350 = ₹5,150 crore (1)
PDI = PI − Personal tax − Non-tax payments = 5,150 − 600 − 50 = ₹4,500 crore (1)
5 6-Mark Questions
Q. An economy has three firms. Firm A produces raw material worth ₹300 crore without any input and sells it to firm B. B makes goods worth ₹800 crore and sells them to firm C. C makes final goods worth ₹1,200 crore and sells them to consumers. Depreciation in the economy is ₹60 crore, net indirect taxes ₹90 crore and NFIA ₹15 crore.
(a) Find GDPMP by the value added method. (b) Verify it by the expenditure method. (c) Find national income.
Answer: (a) VA = Output − Intermediate consumption (½)
A: 300 − 0 = 300; B: 800 − 300 = 500; C: 1,200 − 800 = 400 (1½)
GDPMP = 300 + 500 + 400 = ₹1,200 crore (1)
(b) The only final expenditure is consumers’ spending on C’s goods = ₹1,200 crore; the two agree. Adding all three outputs (300 + 800 + 1,200 = 2,300) would be double counting. (1)
(c) NI = GDPMP − Depreciation − Net indirect taxes + NFIA (1)
= 1,200 − 60 − 90 + 15 = ₹1,065 crore (1)
Q. Firm X produces raw material worth ₹600 without any input and sells it to firm Y. Y makes goods worth ₹1,500 and sells them to consumers. X pays ₹250 as wages and keeps ₹350 as profit; Y pays ₹500 as wages and keeps ₹400 as profit. Find GDP by all three methods and show that they agree.
Answer: Product (value added) method: VAX = 600 − 0 = 600; VAY = 1,500 − 600 = 900; GDP = 1,500 (2)
Expenditure method: the only final expenditure is consumers’ spending on Y’s goods = ₹1,500 (X’s output is intermediate) (2)
Income method: wages 250 + 500 = 750; profits 350 + 400 = 750; GDP = 1,500 (2)
Check: each firm’s value added equals its factor incomes (X: 250 + 350 = 600; Y: 500 + 400 = 900). All three give ₹1,500 because they measure one flow at the phases of production, disposition and distribution.
Q. Write the identities of the three methods of calculating national income and explain why all three give the same value.
Answer: 1. Product (value added) method: GDP ≡ GVA1 + GVA2 + … + GVAN, where GVAi ≡ sales + change in inventories − intermediate goods.
2. Expenditure method: GDP ≡ C + I + G + X − M (only final expenditure; I includes planned and unplanned investment).
3. Income method: GDP ≡ W + P + In + R (wages, profits, interest, rent).
Why equal:
• A firm’s value added is distributed among its four factors, so product = income.
• The value of final goods equals the final expenditure on them; unsold output is counted as inventory investment, so product = expenditure.
• In the circular flow the same amount passes A (expenditure), B (product) and C (income).
Q. Write, with examples, the precautions to be taken while estimating national income by the value added method and the income method.
Answer: Value added method:
• Avoid double counting: count only value added (or only the value of final goods), as in the farmer-baker example (₹250, not ₹300).
• Do not count the sale of second-hand goods; count the brokerage on them.
• Count output retained for self-consumption (a farmer’s own produce, imputed rent of an owner-occupied house).
Income method:
• Do not count transfer payments (old-age pension, scholarship, gifts, donations).
• Do not count capital gains (on selling an old house or shares).
• Count the imputed value of free services of owners and the rent of owner-occupied houses.
• Do not add both profit and dividends; dividends are part of profit.
Q. Distinguish between nominal and real GDP. A country produces 200 units at ₹20 each in year 1 (base year) and 220 units at ₹25 each in year 2. Find year 2’s nominal GDP, real GDP, GDP deflator and real growth rate.
Answer: Difference: nominal GDP is at current prices, real GDP at constant base-year prices; nominal GDP changes with price and quantity, real GDP only with quantity. (2)
Year 1 GDP (nominal = real) = 200 × 20 = ₹4,000
Year 2 nominal GDP = 220 × 25 = ₹5,500 (1)
Year 2 real GDP = 220 × 20 = ₹4,400 (1)
GDP deflator = 5,500 ÷ 4,400 × 100 = 125 (1)
Real growth rate = (4,400 − 4,000) ÷ 4,000 × 100 = 10% (1)
Meaning: nominal GDP rose 37.5%, but output rose only 10%; the rest is the rise in prices (25%).
6 10-Mark Questions
Q. Define national income. Describe the value added, income and expenditure methods of calculating it, and write two precautions for each method. (UP Board 10 marks)
Answer: Definition: National income (NNPFC) is the sum of factor incomes (wages, rent, interest and profit) earned by a country’s normal residents in a year, whether production took place at home or abroad. NI = NNPMP − Net indirect taxes = NDPFC + NFIA.
1. Value added method:
• Find each firm’s/sector’s value of output (sales + change in stock).
• Deduct intermediate consumption to get GVAMP; the sum is GDPMP.
• GDPMP − Depreciation − Net indirect taxes + NFIA = National income.
• Precautions: avoid double counting; do not count sales of second-hand goods, but count production for self-consumption.
2. Income method:
• Compensation of employees + Rent + Interest + Profit + Mixed income = NDPFC.
• NDPFC + NFIA = National income.
• Precautions: do not count transfer payments (pension, scholarship) or capital gains; count imputed rent.
3. Expenditure method:
• PFCE + GFCE + Gross domestic capital formation + Net exports = GDPMP.
• Then deduct depreciation and net indirect taxes and add NFIA to get national income.
• Precautions: do not count intermediate expenditure; do not count spending on second-hand goods, shares and bonds, or transfer expenditure.
Example (₹ crore): PFCE 1,000 + GFCE 300 + GDCF 400 + net exports (−40) = GDPMP 1,660; − depreciation 60 − net indirect taxes 90 + NFIA 20 = national income 1,530.
Conclusion: in the circular flow, production, income and expenditure are three forms of one flow, so all three methods give the same national income. (Diagram: circular flow with points A, B, C.)
7 Source-Based Questions
(A) 1 mark Define Gross Domestic Product.
Answer: Gross Domestic Product is the market value of all final goods and services produced within the domestic territory of a country in a year.
(B) 2 marks “GDP adjusted for inflation grew by 7 per cent”: is this nominal GDP or real GDP? State one benefit of this measure.
Answer: It is real GDP, because adjusting for inflation means measuring at constant (base-year) prices. (1)
Benefit: it removes the effect of price changes, so it shows the true growth in the volume of output and allows a correct comparison between years. (1)
(C) 3 marks On the basis of the passage, explain why the welfare of Amarpur’s people may not have risen as much as its GDP.
Answer: • Distribution: incomes rose very slowly in some regions; the rise in GDP may be confined to a few, so most people may not be better off. (1)
• Externalities: river pollution is a negative externality; its harm is not subtracted from GDP, so GDP overestimates welfare. (1)
• Non-monetary activities: women’s unpaid work at home is not counted in GDP, so GDP does not give a true picture of productive activity. (1)
8 Data / Graph-Based Questions
(A) 2 marks Find GDPMP by the expenditure method.
Answer: GDPMP = PFCE + GFCE + GDCF + Net exports (½)
= 800 + 200 + 300 + 20 (½)
= ₹1,320 crore (1)
The change in stock is already inside GDCF, so it is not added again.
(B) 2 marks Find national income.
Answer: NI = GDPMP − Consumption of fixed capital − Net indirect taxes + NFIA (½)
= 1,320 − 50 − 60 + (−10) (½)
= ₹1,200 crore (1)