Concepts of National Income: Explained with Examples ans MCQs

Concepts of National Income: Explained with Examples ans MCQs

National income is a crucial concept in economics, reflecting the overall economic activity and prosperity of a nation. Here's an explanation of key concepts with examples:

1. What is National Income?

National income refers to the total monetary value of all final goods and services produced within a country's borders in a given year. It's essentially a measure of the nation's economic output.

2. Different Measures of National Income:

Gross Domestic Product (GDP): Measures the total value of final goods and services produced within a country's borders, regardless of ownership.

Example: If a foreign company operates a factory in the country, its production contributes to the GDP.

Gross National Product (GNP): Measures the total income earned by the citizens and businesses of a country, regardless of their location.

Example: Income earned by a domestic company operating abroad is included in GNP.

Net National Product (NNP): GNP minus depreciation (wear and tear of capital).

Disposable Income: Income remaining after deducting taxes and other mandatory payments.

3. Importance of National Income:

Economic Progress: Rising national income indicates economic growth and development.

Policymaking: Governments use national income data to formulate economic policies like taxation, investment, and social welfare programs.

Comparison: National income allows comparison of economic performance between different countries.

4. Examples of National Income Components:

l Wages and salaries earned by employees

l Profits earned by businesses

l Rental income from property

l Interest income earned on investments

l Value of goods and services produced by the government

SAMPLE Multiple Choice Questions and Answers (MCQs)

1. Which of the following is NOT included in GDP?

(a) Value of a car produced in the country (b) Income earned by a national working abroad (c) Value of imported goods sold domestically (d) Value of a house sold within the country

Answer: (c)

2. Gross National Product considers income earned by:

(a) Only domestic citizens and businesses (b) Both domestic and foreign citizens and businesses (c) Only foreign citizens and businesses (d) Only government entities

Answer: (b)

3. Which measure of national income considers depreciation?

(a) GDP (b) GNP (c) NNP (d) Disposable income

Answer: (c)

4. An increase in national income indicates:

(a) Increased poverty (b) Lower economic activity (c) Improved standard of living (d) Decreased government revenue

Answer: (c)

5. Which of the following is NOT a reason for discrepancies between GDP and GNP?

(a) Foreign investments (b) International trade (c) Government transfers (d) Inflation

Answer: (c)

National Income MCQs:

1. Which of the following is NOT included in Gross Domestic Product (GDP)? (a) Value of a house sold within the country (b) Income earned by a national working abroad (c) Value of exported goods (d) Value of a car manufactured in the country

 Answer: (b)

2. Net National Product (NNP) is calculated by: (a) Adding depreciation to GDP (b) Subtracting depreciation from GDP (c) Dividing GDP by the population (d) Adding net factor income from abroad to GDP

 Answer: (b)

3. Disposable income is the income remaining after: (a) Adding government transfers (b) Subtracting taxes and other mandatory payments (c) Adding net factor income from abroad (d) Subtracting depreciation

 Answer: (b)

4. An increase in government spending on goods and services directly impacts: (a) Disposable income (b) Net factor income from abroad (c) Gross Domestic Product (GDP) (d) Net National Product (NNP)

 Answer: (c)

5. Which of the following is NOT a component of Gross National Product (GNP)? (a) Wages and salaries earned by employees (b) Income earned by foreign companies operating in the country (c) Rental income from property (d) Profits earned by domestic businesses operating abroad

 Answer: (d)

6. The main difference between GDP and GNP is: (a) Inclusion of net factor income from abroad (b) Use of market prices versus factor prices (c) Consideration of depreciation (d) Measurement of final goods and services

 Answer: (a)

7. A decrease in net exports (exports minus imports) leads to a: (a) Higher GDP and GNP (b) Lower GDP and GNP (c) Higher GDP and lower GNP (d) Lower GDP and higher GNP

 Answer: (b)

8. Which of the following is NOT a limitation of using national income as a measure of economic well-being? (a) Ignores income distribution inequalities (b) Does not consider non-market activities (c) Fails to account for environmental sustainability (d) Accurately reflects overall economic growth

 Answer: (d)

9. The concept of disposable income is most relevant for: (a) Businesses (b) Governments (c) Individuals and households (d) International organizations

 Answer: (c)

10. A significant increase in the stock market does NOT directly affect: (a) Disposable income (b) Gross Domestic Product (GDP) (c) Gross National Product (GNP) (d) Net National Product (NNP)

 Answer: (b)

11. Which of the following is NOT a method for calculating national income? (a) Expenditure approach (b) Income approach (c) Production approach (d) Market capitalization approach

Answer: (d)

12. A country with a high GDP per capita is likely to have: (a) A low standard of living for all citizens (b) A large informal economy (c) Significant income inequality (d) A higher average quality of life

 Answer: (d)

13. Which of the following factors can contribute to an increase in national income without necessarily increasing economic well-being? (a) Increased government spending on infrastructure (b) Expansion of the service sector (c) Improved resource utilization and efficiency (d) Growth in the informal economy

 Answer: (d)

14. The concept of depreciation is relevant for understanding: (a) Inflationary trends (b) Capital formation and investment (c) Income distribution patterns (d) International trade balance

 Answer: (b)

15. A decrease in government transfer payments (e.g., unemployment benefits) will directly affect: (a) Disposable income (b) Gross Domestic Product (GDP) (c) National savings (d) All of the above

 Answer: (d)