(a) Calculate the value of 'Change in Stock' from the following data : | S. No. | Items | Amount (in ₹ Crores) | | --- | --- | --- | | (i) | Sales | 400 | | (ii) | Net Value Added at Factor Cost (NVAFC) | 200 | | (iii) | Subsidies | 10 | | (iv) | Change in Stock | ? | | (v) | Depreciation | 40 | | (vi) | Intermediate Consumption | 100. | (b) Define Real Gross Domestic Product. OR (a) Discuss briefly the three components of 'Income from Property and Entrepreneurship'. (b) What are 'externalities' ? State its types with suitable examples.

(a) Calculate the value of 'Change in Stock' from – Class 12 Economics

Question 22 of 75

(a) Calculate the value of 'Change in Stock' from the following data :

S. No.	Items	Amount (in ₹ Crores)
(i)	Sales	400
(ii)	Net Value Added at Factor Cost (NVAFC)	200
(iii)	Subsidies	10
(iv)	Change in Stock	?
(v)	Depreciation	40
(vi)	Intermediate Consumption	100.

(b) Define Real Gross Domestic Product.

(a) Discuss briefly the three components of 'Income from Property and Entrepreneurship'. (b) What are 'externalities' ? State its types with suitable examples.

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Part (a)Concept understanding — Depreciation Calculation

Depreciation Calculation – A First Look

You own a smartphone you bought for ₹30,000. After a year, if you tried to sell it, you’d get maybe ₹20,000. That ₹10,000 drop isn’t a loss of cash from your pocket — it’s the wear and tear of the phone’s value. In economics, when a factory buys a machine for ₹10 lakh, that machine doesn’t stay worth ₹10 lakh forever. It rusts, breaks down, becomes outdated. The gradual loss in value is depreciation.

The Precise Meaning

In your NCERT Class 12 Macroeconomics textbook (Chapter 2, National Income Accounting), depreciation is defined as:

Depreciation is the fall in the value of a fixed asset due to normal wear and tear, passage of time, or expected obsolescence.

It is not a cash expense — no money leaves the firm when depreciation happens. But it is a cost that must be accounted for, because using a machine today reduces its future usefulness. Without depreciation, a firm would overstate its profit and a country would overstate its national income.

Why It Matters

For a firm: Depreciation is subtracted from revenue to find true profit. If you ignore it, you think you earned more than you really did.
For the economy: Gross Domestic Product (GDP) counts all final goods produced. But some of that production is just replacing worn-out machines. Net Domestic Product (NDP) = GDP – Depreciation. NDP tells us how much new value was actually added.

The Formula (NCERT Standard)

The NCERT textbook gives one standard method for calculating depreciation — the Straight Line Method. It is simple and exam-relevant.

\text{Depreciation} = \frac{\text{Cost of Asset} - \text{Scrap Value}}{\text{Estimated Life of Asset}}

Where:

Cost of Asset = purchase price + installation/transport costs (the total initial investment)
Scrap Value = the estimated resale value at the end of its life (could be zero)
Estimated Life = number of years the asset is expected to be used

Example: A machine costs ₹1,00,000, has a scrap value of ₹10,000, and a life of 10 years.

\text{Depreciation per year} = \frac{1,00,000 - 10,000}{10} = \frac{90,000}{10} = ₹9,000

Each year, the firm records ₹9,000 as depreciation. After 10 years, the machine’s book value becomes ₹10,000 (the scrap value).

A Word on Other Methods …

Part (b)Concept understanding — Factors of Production

You have probably heard someone say, "We need more workers" or "We don't have enough raw materials." That is the real-world root of this idea. Every single thing you consume — a phone, a plate of rice, a bus ride — was produced. And to produce anything, you need four basic ingredients. Economists call these ingredients the factors of production.

Think of it like baking a cake. You need the flour and sugar (raw materials), an oven (machinery), a baker (labour), and someone to decide what cake to bake and how to sell it (entrepreneurship). Without any one of these, no cake. The same logic applies to an entire economy.

The Four Factors (as per NCERT Class 11/12)

The NCERT textbook divides these into four clear categories. Memorise them by name and by what they earn, because that link — factor → reward — is a recurring exam question.

Land \to Rent Labour \to Wages Capital \to Interest Entrepreneurship \to Profit

Let’s unpack each one.

1. Land (and all natural resources)

Land does not mean just the plot of soil. In economics, it means every gift of nature used in production: the soil, minerals, forests, water, even sunlight. It is a passive factor — it does nothing by itself. Its reward is rent.

Note

NCERT emphasises that land is fixed in supply (you cannot create more land). This is why rent exists — because land is scarce.

2. Labour (human effort)

Labour is any physical or mental work done for a reward. The person who digs a ditch, the software engineer writing code, the teacher in a classroom — all are labour. The key point: labour is perishable (a lost hour of work cannot be stored) and inseparable from the worker. Its reward is wages.

Watch out

Do not confuse labour with the labourer. The service is labour; the person is the labourer. NCERT makes this distinction clearly.

3. Capital (man-made aids)

Capital is everything produced earlier that helps produce more now. Machines, tools, factories, roads, computers — even money used to buy these things (though money itself is not capital; it is just a medium). Capital is a produced factor of production. Its reward is interest.

Tip

A simple test: if nature gave it, it is land. If humans made it to make other things, it is capital. A river is land; a dam built on it is capital.

4. Entrepreneurship (the organiser)

This is the factor that combines land, labour, and capital. The entrepreneur decides what to produce, how to produce, and who to sell to. They bear the risk of loss. Without an entrepreneur, the other three factors just sit idle. Its reward is profit (which can be positive or negative — that is the risk).

Important

NCERT calls entrepreneurship the most active factor. It is the spark that lights the fire.

Why This Matters (The Big Picture)

These four factors are the building blocks of National Income. When you add up all the rent, wages, interest, and profit earned in a country in one year, you get the National Income (by the income method). That is why the NCERT chapter on National Income Accounting starts with factors of production — because every rupee earned in the economy is a reward to one of these four factors.

National Income (by income method) = Rent + Wages + Interest + Profit \dots

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First (a): Change in Stock $= -₹70$ crore (inventories fell); Real GDP = final output valued at constant base-year prices.

Second (a): Income from Property and Entrepreneurship = rent + interest + profit; externalities are uncompensated third-party effects — positive (pollination) or negative (pollution).

Part (a)

Change in Stock

\text{NVA}_{FC} = (\text{Sales} + \Delta\text{Stock}) - \text{Intermediate Consumption} - \text{Depreciation} - \text{Net Indirect Taxes}

Only Subsidies (₹10 crore) are given and no Indirect Taxes, so Net Indirect Taxes $= \text{Indirect Taxes} - \text{Subsidies} = 0 - 10 = -10$ crore.

Substituting Sales $=400$ , NVA $_{FC}=200$ , Intermediate Consumption $=100$ , Depreciation $=40$ :

200 = (400 + \Delta\text{Stock}) - 100 - 40 - (-10)

200 = 270 + \Delta\text{Stock}

\Delta\text{Stock} = 200 - 270 = -₹70\text{ crore}

A negative change in stock is legitimate: it means the firm ran down inventories, selling more during the year than it produced.

Real Gross Domestic Product

Real GDP is the market value of all final goods and services produced within the domestic territory of a country in a year, measured at constant base-year prices. Because prices are held fixed, movements in Real GDP capture changes only in the quantity of output, removing the effect of inflation. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 39 on this concept.

CBSE 2026Set ANNUAL1 markMCQ
$Q. Write True or False: The remuneration for entrepreneurship is interest.$
(a) True
(b) False
›Reveal solutionSolution

False — the entrepreneur's reward is profit, not interest.

Each factor of production earns a specific reward: land earns rent, labour earns wages, capital earns interest, and the entrepreneur earns profit. Therefore the remuneration for entrepreneurship is profit, not interes …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Which of the following item is not included while estimating national income by Income Method? (A) Rent (B) Mixed income of the self-employed (C) Fixed Investment (D) Undistributed profits$
›Reveal solutionSolution

Fixed Investment is an expenditure-method item, not a factor income, so it is excluded from the Income Method.

Under the Income Method, national income is estimated by adding up all factor incomes paid out by production units to the owners of the four factors of production for their contribution to current production: Rent (land), Wages/Compensation of employees (labour), Interest (capital), and Profit (entrepreneurship). Profit itself is broken down into dividends, corporate tax, and undistributed profits/retained earnings. Mixed income of self-employed persons (who combine more than one factor, e.g. a farmer who supplies land, labour and capital) is also a factor income and is included. …

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CBSE 2025Set 58/5/11 markMCQ
$Q. To arrive at the value of Net Value Added at Market Price (NVA_MP), ________ must be ________ to/from Gross Value Added at Market Price (GVA_MP). (Choose the correct option to fill in the blanks) (A) depreciation, added (B) depreciation, subtracted (C) net indirect taxes, subtracted (D) net indirect taxes, added$
›Reveal solutionSolution

Net Value Added at Market Price (NVA_MP) is simply Gross Value Added at Market Price (GVA_MP) minus the consumption of fixed capital (depreciation). The correct fill is "depreciation, subtracted."

The relationship between gross and net value added is one of the most fundamental accounting identities in national income. Think of it this way: when a firm produces output, its machinery, buildings, and equipment wear out over time. That wear and tear — depreciation — is a real cost of production, even though no cash leaves the firm in that period. Gross Value Added counts the total value of output before accounting for this capital consumption. Net Value Added, on the other hand, gives us the fresh value created in the period — the output that remains after setting aside enough to replace the worn-out capital.

So the bridge between the two is straightforward:
$\text{NVA}_{\text{MP}} = \text{GVA}_{\text{MP}} - \text{Depreciation}$
Depreciation is subtracted from the gross figure to arrive at the net figure. This is true whether we are talking about market price or factor cost — the subtraction of depreciation is always the step that converts gross to net. …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which one of the following is a component of profit? (A) Dividend (B) Undistributed profit (C) Corporate profit tax (D) All of these$
›Reveal solutionSolution

Profit splits into corporate tax, dividends and retained earnings, so the answer is (D) All of these.

In national income accounting, the profit earned by a corporate enterprise is divided into three components: (i) corporate profit tax paid to the government, (ii) dividends distributed to shareholders, and (iii) undistributed or retained profits kept within the firm (reserves). Thus dividend (A), undistributed profit (B) and corporate prof …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which one is true? (A) GNP = GDP + Depreciation (B) NNP = GNP + Depreciation (C) NNP = GNP - Depreciation (D) GNP = NNP - Depreciation$
›Reveal solutionSolution

NNP = GNP - Depreciation, so the answer is (C).

Depreciation (consumption of fixed capital) is the wear and tear of capital during production. The net value of output is obtained by deducting depreciation from the gross value, so NNP = GNP - Depreciation (and equivalently GNP = NNP + Depreciation). Option (A), (B) and (D) state the relationship wrongly. Hence the correct identity is (C). Converting gross to net …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. What is consumption of fixed capital called? (A) Capital formation (B) Depreciation (C) Investment (D) All of these$
›Reveal solutionSolution

Consumption of fixed capital is called depreciation, so the answer is (B).

Depreciation, also termed consumption of fixed capital, is the fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence during production. It is deducted from gross measures to get net measures (e.g. NNP = GNP - depreciation). Capital formation (A) and investment (C) refer to addi …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. What is/are the factor(s) of production? (A) Land (B) Labour (C) Capital (D) All of these$
›Reveal solutionSolution

Land, labour and capital are all factors of production, so the answer is (D).

Factors of production are the resources used to produce goods and services. The four traditional factors are land (natural resources), labour (human effort), capital (man-made means of production) and enterprise (the entrepreneur who organises the others and bears risk). The options here list land, labour and capital — each of which is a genuine factor of produ …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which one of the following is true? Net investment is equal to$
(a) Gross Investment - Cost
(b) Gross Investment - Depreciation
(c) Gross Investment - Marginal Investment
(d) Gross investment - Net Profit
›Reveal solutionSolution

Net Investment = Gross Investment − Depreciation, so the answer is (b).

Gross investment is the total addition to the capital stock during a year, including the part that merely replaces worn-out capital. Depreciation (consumption of fixed capital) is the value of capital used up in production. Net investment is the actual net addition to the capi …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which of the following is factor income?$
(a) Interest
(b) Grants
(c) Scholarship
(d) Gifts from abroad
›Reveal solutionSolution

Interest is the factor income — option (a).

Factor income is income received in return for rendering a factor service in production — rent (land), wages (labour), interest (capital) and profit (enterprise). Interest is the reward for capital, so it is a factor income. In contrast, grants, scholarships and gifts from abroad are transfer payments — received witho …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. A tailor is engaged in his tailoring activity at his residence only, so his income earned will be termed as ______ .$
(a) Mixed income
(b) Compensation of employees
(c) Operating surplus
(d) Dividends
›Reveal solutionSolution

A self-employed person's earnings — combining labour, capital, and entrepreneurship in one individual — are classified as "mixed income," not as a pure factor payment.

National income accounting classifies factor incomes (by the factor-income method) into: Compensation of Employees (wages/salaries to hired labour), Operating Surplus (rent + interest + profit earned by enterprises, usually corporate), and Mixed Income of Self-Employed.

Mixed income of self-employed applies to people such as farmers working their own land, doctors or lawyers in independent practice, and small shopkeepers/artisans (like a tailor working from home) who perform MULTIPLE economic roles themselves: they supply their own labour (as a worker), their own capital/tools (as capital owner), and bear business risk (as an entrepreneur) — sometimes even using their own premises (as a landowner). Their total earnings from the activity therefore contain an insepar …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Choose the correct statement.$
(a) NDPmp is estimated as the difference between GDPmp and depreciation.
(b) NDPmp is estimated as the difference between GDPmp and Net Indirect taxes.
(c) NDPmp is estimated as the difference between Depreciation and Mixed income.
(d) NDPmp is estimated as the difference between Depreciation and Net Indirect taxes.
›Reveal solutionSolution
NDPmp = GDPmp − Depreciation; none of the other listed pairs give this identity.

GDPmp (Gross Domestic Product at market price) includes the full value of goods and services produced in a year, but part of the capital stock (machinery, buildings) is used up in the process of production. This wear-and-tear is called Depreciation or Consumption of Fixed Capital.

NDPmp = GDPmp − Depreciation. This is the standard identity every MZ Class-12 Economics / Macroeconomics syllabus (closely following the NCERT/CBSE curriculum) tests directly. …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. Which of the following is an active factor of production?$
(a) land
(b) capital
(c) entrepreneur
(d) labour
›Reveal solutionSolution
The entrepreneur is the active factor of production because it is the one factor that takes initiative, organises the other three factors, and bears business risk — land, labour and capital only contribute once someone decides how to deploy them.

Economics classifies the factors of production into four categories: land, labour, capital, and entrepreneur (or enterprise), each earning a corresponding reward (rent, wages, interest, profit).

Of these, land, labour and capital are often described as passive factors — they are the physical/human inputs that exist and are available for use, but by themselves they do not decide how, where, or in what combination to be employed. A plot of land, a pool of labour, or a stock of machinery sitting idle produces nothing on its own.

The entrepreneur is the active factor because it is the entrepreneur who:

takes the initiative to start and organise a business,

decides how much land, labour and capital to combine, and in what proportion,

innovates and makes strategic decisions under uncertainty, and …
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Part (a)

Change in Stock

Real Gross Domestic Product

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