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Section A

Q1) Give two examples of non-factor inputs.
Ans1) Two examples of non-factor inputs are raw materials and power.

Q2) Define gross domestic capital formation.
Ans2) It is defined as the addition to the existing stock of capital (including depreciation) within the domestic territory during an accounting year. It is equal to gross domestic fixed capital formation and change in stocks in an accounting year.

Q3) Define subsistence production units.
Ans3) The production units which produce for self consumption are called subsistence production units since their production is just enough to meet the consumption needs.

Q4) If domestic factor income is Rs. 1000 crores and net factor income from abroad is Rs. (-) 5 crores, how much will be national income.
Ans4) National Income = DI + net factor income from abroad
= 1000 - 5 = Rs. 995 crores

Q5) Find GDP_fe from the following data :
                                                                 (Rs. Crores)
(i) Value of output                                          500
(ii) Consumption of fixed capital                      20
(iii) Value of intermediate consumption        200
(iv) Net indirect taxes                                      20
Ans5) GDP_fe = Value of output - Value of intermediate consumption - Consumption of fixed capital - Net Indirect taxes
= 500 - 200 - 20 - 20
= Rs. 280 crores

Q6) Are exports of goods and services a part of domestic product? Give reasons in support of your answer.
Ans6) Yes, exports of goods and services are a part of domestic product as these goods and services are provided by the producers of the domestic territory of the country.

Q7) How is final consumption expenditure of the government estimated?
Ans7) Since government itself is a consumer as well as a producer as it satisfies collective consumption, therefore government's final consumption expenditure is estimated at the cost of providing the various services. The cost includes
a) Intermediate consumption - Purchase of non durable, durable for military purposes, gifts needed from abroad which requires further processing. 
(b) Compensation to employees.
(c) Direct purchase made by the government on current account - Purchase made by one embassy located in foreign countries.

Q8) Why are the following not included in the estimation of national income :
Ans8) (i) Purchase of second hand machine form a domestic firm - It is not included in national income because it is not related with current flow of goods and services.
(ii) Purchase of new shares of a domestic firm - This should be excluded from national income because they are not payment for goods or service as it is only a financial transaction.
(iii) Scholarship to students by the government - It is not included in national income because it is a transferee payment.

Q9) How is income generated in the production process?
Ans9) Goods are produced with the help of factors of production, i.e. land, labour, capital and entrepreneurship. Production actually means addition made to the value of inputs by the collective efforts of the factors of production. In return for their contribution they get paid in the from of rent, interest, wages and profits which is the income generated. Therefore value added would always be equal to income generated. If one rupee worth of value is added, one rupee worth of income would be generated. Whatever value is added by a firm by utilising the services of factors, income of the same value is said to have been generated.

Q10) What is private income? How does it differ from personal income?
Ans10)  Private income consist of factor income earned within the domestic territory and abroad by private enterprises and workers and current transferees from the government and the rest of the world.

Private Income = Factor income from net domestic product accruing to the private sector + national debt interest + net factor income form abroad + current transfers from the rest of the world (net).

Personal income consist of income which individual actually received from all sources. Undistributed profits and corporate tax are a part of private income but they are not received by he individual. So, if from private income, the income not received by the person is subtracted. We get personal income.

Personal income = Private income - Undistributed profit - Corporate tax

Q11) Find operating surplus from the following data.
                                                      (Rs. in crores)
(i) Gross value added at factor cost                100
(ii) Wage and salaries                                     30
(iii) Consumption of fixed capital                       10
(iv) Employers' contribution to social security      3
scheme
(v) Employees subscription to provident fund
Ans11) Operating surplus = NVA_fe - Compensation of employees
= CVA_fe - Depreciation - (wages + salaries + employees' contribution in social security scheme)
= (100 - 10) - (30 + 3)
= 100 - 10 - 33 = 100 - 43
= 57 crores 

Q12) Explain the concept of 'mixed income of self employed'. Give suitable example.
Ans12) Accordingly in CSO, it refers to income of own account workers as well profits of un-incorporated enterprises. In the developing countries like India, family members work in the small household enterprises, which do not maintain proper accounts and do not take any wages. No distinction is made between rents, wage, interests and profits. These people do not separate the labour income from property income because of this the concept of mixed income of the self employed was introduced. In un-incorporated enterprises wherever it is possible to separate the income into rent for land, wages and salaries for workers and interest for the funds borrowed only profits are included in the mixed income of self employed.

Q13) Define capital goods. Give an example each of durable capital good and non durable capital good.
Ans13) Capital goods are defined as all goods produced for use in future productive processes. Example of durable capital good are machinery, equipment, road, bridges.

Non durable capital good is - stock of sugar at the end of an accounting year, stock of raw materials lying with the producers at the end of accounting year.

Q14) Distinguish between product based and process based division of labour.
Ans14)

Product based 1. When a labourer performs all the processes of production of a single commodity himself it is called product based division of labour. 2. It is generally found in household enterprises. 3. For example - a farmer in India cultivates, sows, waters the field, applies manure's and pesticide, harvest and finally bring the crop home.

Process based 1. When production process of a commodity is split up into different operation and each worker does one or two operations it is called process based division of labour.  2. It is generally found in corporate, quasi corporate enterprises and general government. 3. For example in a modern shoe factory, processes like cutting, dyeing of leather, preparing of sole, stitching and polishing, packing are done by specialised people.

Q15) Which three types of enterprises are included in producer household sector?
Ans15) Producer households are unincorporated enterprises which produce for sale in the market but do not maintain separate profits and loss account. Household enterprises produce at a very small scale, do not maintain profit and loss account and balanced sheets are owned a managed by family members. The three type of enterprises included are
(1) Unincorporated enterprises which comprise of independent producers like manufacturers of baskets, footwear, toys and own account producers like doctors, washermen, barbers, farmers and more.
(2) Households rendering domestic services like maid servants, washerwomen, tutors and more.
(3) Non profit institutions serving households like charitable school, trade unions, sewa smriti and the likes which provide social services free or at nominal rate.

Q16) Calculate national income by income and expenditure methods from the following data.

Ans16) National income by income method -
NDP_fe = Compensation of employees + mixed income of self employed + operating surplus = 250 +  50 +  350
= 650
National income = NDP_fe + Net factor income from abroad
= 650 + 20 = 670
National income by expenditure method :-
GDP_mp = Private final consumption expenditure + Government final consumption expenditure + Gross fixed capital formation + Change in stocks + (Exports - Imports)
= 550 + 60 + 120 + 20 + (10 - 20)
= 610 + 120 + 20 - 10
= 730 + 20 - 10
= 740
NNP_fe = GDP_mp - depreciation - net Indirect taxes + net factor income from abroad = 740 - 10 - (100 - 20) + 20
= 740 - 10 - 80 + 20
= 760 - 90
= 670 crores 

Q17) Explain the value-added method of estimating national income.
Ans17) In calculating Ni by the value added method the following steps should be taken :
Step 1: To identify the producing enterprises and classify them into industrial sectors according to their activities. This means classifying the producing enterprises into 3 sectors, i.e. primary, secondary and tertiary and then their subsection.

Step 2: Find the NVA of each enterprise with the help of (i) value of output, (ii) value of intermediate inputs and (iii) consumption of fixed capital.
NVA = Value of output - Intermediate consumption - Consumption of fixed capital.
For estimating NVA_fc, NVA_fnp - net indirect taxes = NVA_fe. Adding the NVA_fc of all producing enterprises, we get domestic income.

Step 3: To obtain national income :
DI + net factor income from abroad = national income

Q18) Explain the methodology followed in India for estimating national income originating in the agricultural sector.
Ans18) The output method is used for estimating the national income in this sector. Sixty-eight agricultural crops are considered. Random sampling technique is used for collecting data on output and prices. For example, in the wheat growing states of the country, some field are selected at random in every district where the wheat crop is ready for cutting. The crop is cut over one hectare of land. The output is multiplied by the average wholesale price prevailing in the district market centre in that season. This will give the value of output of one-hectare wheat crop. This is multiplied by the number of hectare put to wheat in one district. Similarly we will get data for each district and then for the state. This random sampling method is used for collecting data for 36 main crops. For the others, data is collected form various sources.

From obtaining value added from the value of output we subtract intermediate consumption and then we subtract consumption of fixed capital for the fixed assets used in agricultural production like agricultural implements, machinery and transport equipment, cattle sheds and the likes.
Net value added = value of output - intermediate consumption - consumption of fixed capital.

Section B

Q19) Define windfall profits.
Ans19) Windfall profit are profits that arise on account of unforeseen change in demand and supply conditions. There are profits which cannot be anticipated and are a result of luck or chance.

Q20) Define marginal revenue product?
Ans20) Marginal revenue product is the net addition to the total revenue by sale of marginal physical product. MRP = MPP x MR.

Q21) What will be the value of the multiplies if marginal propensity to save is 0.4
Ans21) R = 1/(1 - mpc) = 1/mps
= 1/0.4 = 2.5 

Q22) What is bank rate?
Ans22) Bank rate is the rate at which central bank lends to commercial banks.

Q23) What is the income effect of a fall in the price of a commodity on its demand.
Ans23) Income effect is a part of the price effect when the price of a commodity falls, real income of the individual increase and as a result more of the will be bought and his demand increase. This part of the increase in demand due to increase in real income is called the income effect of the price change.

Q24) Distinguish between nominal wages and real wages.
Ans24) Money wages refer to wages in terms of money if a person is getting Rs.2000 in cash as his salary then his money wages are Rs.2000. Real wages, on the other hand refer to the net real advantage that go with a job. They depend upon money.

Q25) Define price elasticity of demand. State any one method of measuring it.
Ans25) Elasticity of demand shows the responsiveness of demand to change in price. One of the methods of measuring it is :
Expenditure method :

If the expenditure after the price change becomes more than the expenditure before the price change then the elasticity is greater than one.

If the expenditure after the price change is same as the expenditure before the price change then the elasticity is equal to one.

If the expenditure after the price change is less than the expenditure before the price change then the elasticity is less then one.

The limitation of this method is that we can only say whether the elasticity is less than, equal to, or greater than one but we cannot tell its exact magnitude.

Q26) State any two factors that affect a firm's supply of a commodity. How do they affect it?
Ans26) The two factors that affect the supply of a commodity are :
(a) Goals of the firm - A change in the goal of the firm from output maximisation to employment maximisation may lead to reduction in the supply and a change form employment maximisation to output maximisation may lead to increase on supply.
(b) Prices of factors of production - A rise in the price of one factor of production increases the cost of production of a commodity which uses the factor in large quantities. The costs of producing commodities which use the factor in small quantities will rise less. This will make their production more profitable. The supply of this commodity will therefore increase.

Q27) Complete the following table?
Ans27)

Output (units) 0 1 2

TC (rs.) 12 18 21

TVC (Rs.) - 6 9

MC (Rs.) - 6 3

Q28) Explain the affect of an increase in both demand and supply of a commodity on its equilibrium price.
Ans28) There can be three possibilities of increase in demand and supply on equilibrium price -
a) When increase in supply is equal to increase in demand - in this case price will remain unaffected as show in the (a) diagram.
b) When increase in supply is less than increase in demand, new equilibrium price will rise from OP to OP₁ as shown in the (b) diagram. Here equilibrium quantity will increase from PE to P₁E₁.
c) When increase in supply is more than increase in demand, new equilibrium price will fall from OP to OP₁ as shown in Figure(c). Here also equilibrium quantity will increase from PE to P₁E_1.
  

Q29) Briefly explain the modern theory of rent.
Ans29) Accordingly to the modern theory any factor that is not perfectly elastic in supply can earn rent. Rent according to the modern theory is the excess earnings which any factor of production earns over and above its transfer earning. The more elastic the supply curve the higher are the transfer earnings and lesser is the economic rent.
(i) When the supply cure is upward sloping or is relatively less elastic as shown in (i) we find that the price paid to the units employed i.e. OM is OP. But all units except the last one were prepared to remain in the industry even for a price less than OP. The area below the supply curve shows the transfer earnings and the area above shows the surplus that is actually paid over and above this maximum payment. Hence this is scarcity rent.
(ii) If the supply is perfectly elastic (ii) the entire earnings will be in the form of transfer earnings.
.^.. Eco Rent = 0
(iii) If the supply is perfectly inelastic, (iii) there is no maximum that must be paid, i.e. TE = 0,
.^.. Actual Earning = Eco Rent

Q30) Define monopolistic competition. State its basic features.
Ans30) Monopolistic competition is a market situation in which both the monopolistic and competitive element are present. There is large number of seller's selling differentiated products. Firms can enter or leave the industry wherever they want to. The features are -

1. Many sellers - There are a large number of firms producing the commodity in the market. The number of sellers is large enough that the activities of each does not have much of an effect on the activities of other firms. Each firm controls a small part of the market.

2. Freedom of entry or exit - New firms can enter the market if found profitable. Similarly inefficient firms already operating in the market are free to leave the market if they incur losses. 

3. Product differentiation - Each firm produces a product that is somewhat different from the products its competitors. Thus, the product of the firm is different from that of the other. But it is not entirely distinct, it is very close to the product of other firms. They are close substitutes. Yet each firm is known for its product and here it is like a monopolist.

Q31) Distinguish between gross interest and net interest. 
Ans31) Gross interest means the whole amount that a borrower pays to a lender whereas net interest is that part of the gross interest which is paid for the use of capital alone. Gross interest besides net interest, includes the following :

1. Payment for risk - The lender always undertakes the risk of non-payment. If the lender takes some sort of security before giving a loan then the risk is reduced and so the payment for risk would be less. A part of the gross interest paid thus is in the nature of profit against risk bearing.

2. Payment for inconvenience - The lender goes through some inconvenience when he lends money - the instalment's may not be paid at the due date, his money may get locked up for a period of time, he may himself be confronted with the need for capital in that period. Therefore the lender includes some amount in the interest for this inconvenience.

3. Payment for Management - The lender has to incur expenditure on maintaining account book, payment of instalment's, making arrangement for the collection of interest and the likes therefore he includes the wages of management in the collection of interest and the likes.

Q32) Explain the relationship between marginal products and average product.
Ans32) Average product - it is per unit product of a variable factor and is calculated by dividing total product by the total number of units of variable factor.
MP = TP/Units of variable factor.

Marginal product - it is an addition to the total product when an additional unit of a valuable factor is employed.
Relationship - 1. AP increases so long as MP is greater that AP.
2. AP is maximum and constant when MP = AP.
3. AP falls when MP is less than AP.
Average is calculated on the basis of all the units whereas marginal is based on the incremental unit only. Thus it is the marginal value which pulls the average value up or down. This is shown in the diagram.

Q33) Explain any two measure by which a central bank can contract bank credit.
Ans33) The two measures are -
(a) Cash Reserve Ratio (b) Bank Rate 

(a) Cash Reserve Ratio - Reserve ratio is the percentage of the demand deposits which the commercial banks have to keep in the from of cash. To reduce or contract the credit, the central bank varies or increases the reserve ratio. For example if the deposits are Rs.10,000 then increasing cash reserve ratio from 10% to 20% means that the bank would now have to keep 2000 Rs. than 1000 Rs. as cash and can lend only Rs. 8000. As a result the credit creating capacity of the banks is reduced.

(b) Bank Rate - Bank rate is the rate at which the central bank lends to the commercial banks. To reduce the credit the central bank raises the bank rate. When the commercial bank pay higher discount rate, the central bank affects the costs of borrowing. To make up for this increase in cost of borrowing, they charge a still high rate of interest from the public. The credit therefore becomes costly and this reduces the demand for it.

Q34) Explain with the help of an illustration, the law of diminishing returns to a factor.
Ans34) The law of diminishing returns to a factor refers to a situation in which marginal product falls when more unit of a valuable factor are applied to a given quantity of fixed factors. According to modern economists, this law indicates one aspect of law of variable proportion. 
The following table and diagram clarify the law.

Fixed factor (Acre of land) 1 1 1 1

Variable factor (Units of labour) 1 2 3 4

TP (Kgs) 20 35 45 50

MP (Kgs) 20 15 10 5

The diagram indicates diminishing returns in the shape of downward sloping MP curve. The law operates if technology does not change. The reasons for diminishing returns are -

(i) Use beyond optimum capacity - After achieving optimum combination of variable and fixed factors, efficiency starts declining when more unit of a variable factor are employed. As a result MP starts falling.

(ii) Lack of perfect substitution between factors - After a certain limit, the factors become imperfect substitutes .^..more labour cannot be employed instead of machinery .^..MP falls.

Q35) Why do central problems arises? Explain the problem of allocation of resources.
Ans35) It is the scarcity of resources which gives use to central problem or the problems of making a choice in the use of resources. 
Since the resources are scarce, an economy has to allocate its scarce resources in such a way that reeves best the needs of the society. The problem of resource allocation is in fact the problem of What, how and for whom to produce.
1. What to produce and in what quantities - since human wants are unlimited and resources are limited, it becomes imperative for the economy to choose what commodities should be produced and in what quantities. The various choices can be :
(a) between consumer goods and capital goods,
(b) necessities and luxuries and the likes. 

2. How to produce - This refers to different combinations of factors of production and the particular technique to be used in producing a good or service. More labour and less capital or vice-versa. Large scale production or small scale production. At macro level, the most efficient technical method is one which uses least amount of scarce resources.

3. For whom to produce - This problem relates to how should goods produced by four factor of production be allocated among them. This is known as theory of functional distribution.

Q36) Explain the determination of equilib