Chapter 2 – National Income Accounting (secount book)
Q1. What is national income accounting?
It is the measurement of a country’s overall economic performance using indicators like GDP, GNP, NNP, and personal income within a specified period, usually a year.
Q2. What is gross domestic product (GDP)?
GDP is the total monetary value of all final goods and services produced within the country’s domestic territory during a year.
Q3. What is gross national product (GNP)?
GNP is GDP plus net factor income from abroad. It shows the income earned by nationals regardless of location.
Q4. What is net national product (NNP)?
NNP is GNP minus depreciation (capital consumption). It reflects the actual value of goods/services after accounting for wear and tear of capital assets.
Q5. What is net factor income from abroad (NFIA)?
The difference between factor income received from abroad and factor income paid abroad.
NFIA = Income Received – Income Paid
Q6. What is depreciation?
It is the fall in value of fixed capital due to wear and tear, obsolescence, or time.
Q7. What is national income at factor cost?
It is the total income earned by factors of production within and outside the country after adjusting for net taxes and depreciation.
Q8. What are the methods of calculating national income?
- Production/Value Added Method
- Income Method
- Expenditure Method
Q9. What is the value-added method?
It calculates national income by summing the value added at each stage of production across all industries in the economy.
Q10. What is the income method?
It estimates national income by adding all factor incomes — wages, rent, interest, and profit earned by residents.
Q11. What is the expenditure method?
It adds all expenditures made on final goods/services: consumption, investment, government spending, and net exports.
Q12. What are final goods?
Goods purchased for final use, not for resale or further processing. Their value is counted in GDP.
Q13. What are intermediate goods?
Goods used for further production or resale. Their value is excluded from GDP to avoid double counting.
Q14. What is double counting?
Counting the same value of goods/services more than once in national income, avoided by including only value added or final goods.
Q15. What is GDP at market price?
It is the total value of final goods and services produced within the country at market prices, including indirect taxes minus subsidies.
Q16. What is GDP at factor cost?
GDP at market price minus net indirect taxes (indirect taxes – subsidies). It represents income earned by factors of production.
Q17. What are indirect taxes?
Taxes imposed on goods/services, like GST, which increase market price but not factor earnings.
Q18. What are subsidies?
Financial support by the government to producers or consumers to lower production costs or prices.
Q19. What is domestic territory?
It includes geographical boundaries plus embassies, ships, aircraft operated by residents abroad, and excludes foreign embassies within the country.
Q20. Who is a normal resident?
A person/institution residing in a country for more than one year and earning income from it.
Q21. What is personal income?
Income actually received by individuals, including transfer payments but excluding undistributed profits, corporate taxes, and contributions to social security.
Q22. What is personal disposable income?
Personal income minus personal taxes. It’s the actual income available to individuals for consumption and saving.
Q23. What is the difference between GDP and GNP?
GDP is income within domestic territory; GNP is income by nationals regardless of location.
GNP = GDP + NFIA
Q24. What is real GDP?
GDP measured at constant prices (base year), used to compare economic performance over time by removing inflation.
Q25. What is nominal GDP?
GDP measured at current prices, which includes the effect of inflation.
Q26. What is GDP deflator?
It is a price index used to convert nominal GDP into real GDP:
GDP Deflator = (Nominal GDP / Real GDP) × 100
Q27. What are transfer payments?
Unilateral payments received without providing any goods/services in return — e.g., pensions, scholarships, donations.
Q28. What is circular flow of income?
It shows how income flows between households and firms in an economy through production, income generation, and expenditure.
Q29. Why is national income accounting important?
It helps assess economic performance, guides policy decisions, compares international economies, and measures welfare.
Q30. What precautions should be taken while calculating national income?
Avoid double counting, include only final goods, exclude transfer payments and illegal income, and consider only economic activities.