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(ii) Only the value of final goods should be counted while calculating national income. The value of
intermediate goods should be ignored. This is important so as to avoid double counting.
(iv) Imputed value of owner occupied houses should be part of National Income.
(v) National Income should also include own account production of fixed assets by the
households/government.
(vi) Domestic services and voluntary work done are to be excluded. However an exception is made in
case of domestic services produced by paid employees.
Q.2. What precautions should be taken while calculating national income by Expenditure
Method?
Ans. Precautions to be taken while calculating national income by Expenditure Method are:
(i) Only expenditure on final goods and services should be considered to avoid double counting.
(iii) Expenditure on second hand goods should be ignored as they have already been counted for when
they were originally produced/purchased.
(iv) Expenditure on purchase of new/old shares, debentures etc. should not be included as they are
simply paper claims and no production is involved.
Q.3. Explain the problem of double counting in estimating national income, with the help of an
example. Also explain two alternative ways of avoiding the problem.
Ans. i. Counting the value of goods or services more than once when estimating NI is the problem of
double counting.
ii. Example: Suppose a farmer produces wheat worth Rs 1,000. He sells this to the baker who converts
the wheat into bread and sells it to the grocer for Rs 2,000. The value of total output here would be Rs
3,000 and this includes the value of wheat two times.
Q.4. What precautions should be taken while calculating national income by Income Method?
Ans. The precautions to be taken while calculating national income by Income Method are:
(i) Transfer payments such as scholarships, old age pension etc. should not be included as they are not
associated with any movement of goods/services at all. Retirement pension however is an exception
because it is the payment by employers in lieu of employee’s services received earlier.
(ii) Any illegal incomes like those from smuggling, black marketing etc. are obviously excluded.
(iii) Income from sale of second hand goods is not included in national income, because it involves only
change in the ownership now; their original sale value having already been accounted for in the year
when they were first sold. However brokerage/commission etc. on even second hand goods sale is
included since that has been earned in current year only.
(iv) Indirect taxes raise the market price of goods, thus they should be included while calculating
national income at market price.
(v) Money received from sale of shares, bonds etc. should not be included because there is no
corresponding flow of goods/services.
(vi) Windfall gains like winning from lotteries etc. should not be included as these are unearned
incomes.
(ix) Death duties, gift tax, wealth tax etc. being paid out of past savings should not be included
Q.5. Explain briefly the main steps to estimate national income by Income method.
Ans. Calculation of national income by Income method involves the following three steps:
It consists of producing units which make use of natural resources like land, water, forests etc. It
includes agriculture and allied activities like fishing, mining and quarrying etc.
All producing units which are engaged in transforming one commodity into another are included in this
sector and hence it is also called manufacturing sector.
Various factor payment that are earned by factors of production can be classified as follows:
(b) Income from property and entrepreneurship: Basically, income from property and
entrepreneurship is operating surplus.
ii. Interest
iii. Royalty
iv. Profit includes dividends, corporate Profit tax and undistributed profits. This is income from
entrepreneurship.
It is a combination of both income from work and property & Entrepreneurship. Basically, this income is
earned by self employed people and small unincorporated enterprises.
3. Estimation of NDPFC:
The domestic factor income is estimated by adding different factor incomes and can be worked out as
under
Now, we can obtain national income by adding Net factor income from abroad to the domestic income.
Q.6. Write down some of the limitations of using GDP as an index of welfare of a country.
Ans. (i) The national income figures do not reflect the size of population etc. of the country. The national
income of a country may be rising yet the level of welfare may remain low, if population is going up at a
much faster rate.
(ii) The high national income may be due to concentration of some resources in a country. For example,
many Arab countries have high national income due to the oil resources but majority of their population
is extremely backward.
(iii) National income does not account for price level. The people may be earning a lot but if due to high
prices, they are not able to maintain a high standard of life. National Income is obviously an inadequate
index to that extent.
(iv) High national income of a country may be due to only a few very rich business tycoons like Ambanis,
Tata’s etc. In such a situation a few persons say 20% owning a large share of GNP say 80% will lead a
luxurious life while 80% of masses will continue to struggle because they will have to share just 20% of
GNP.
(v) National income does not take into account level of employment also in the country. People will not
be in a position to enjoy a high standard of living if level of unemployment in the economy is very high.
(vi) National income also does not consider the composition of goods produced. If goods produced in a
country include more of defence goods like radars, Turdus etc. even a high national income will not
increase the welfare.
(vii) A rise in national income will give rise to industrialization and urbanization which raise the problem
of air, water and noise pollution. These in turn lead to environmental degradation which harms the
welfare of the society at large. Thus GDP is not directly related to the economic welfare and an increase
in GDP does not necessarily imply corresponding increase in the economic prosperity of the people.