A car purchased by a household is a _____ . (Choose the correct alternative) (A) single use capital good (B) s

Question 23 of 75

Q. A car purchased by a household is a _________ . (Choose the correct alternative) (A) single use capital good (B) single use consumer good (C) durable consumer good (D) semi-durable consumer good

(OR)

GNP deflator is represented by which of the following formulae ? (Choose the correct alternative) (A) (Nominal GNP / Real GNP) \times 100 (B) (Real GNP / Nominal GNP) \times 100 (C) (Real GNP / Change in Rate of Inflation) \times 100 (D) (Change in Rate of Inflation / Real GNP) \times 100

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Part (a)Concept understanding — Demand Composition Distinction

Demand Composition Distinction

The Everyday Intuition

Think about your own spending. When you buy a notebook for school, that's one kind of demand. When your father buys a new laptop for his office, that's another. And when the government builds a road near your colony, that's yet another. Each of these purchases serves a different purpose — personal use, business investment, or public infrastructure.

Now imagine the economy as a giant household. Just like your family spends money on different things (food, rent, school fees, savings), the entire country's spending is also divided into categories. The Demand Composition Distinction is simply the way economists split total demand in the economy into its main components.

The Precise Meaning

In macroeconomics, the total demand for goods and services produced in a country is called Aggregate Demand (AD) . The NCERT textbook (Class 12, Macroeconomics, Chapter 4) gives us a clear identity to break it down:

AD = C + I + G + (X - M)

Where:

$C$ = Private Final Consumption Expenditure — spending by households on goods and services (food, clothes, education, entertainment)
$I$ = Gross Fixed Capital Formation (Investment) — spending by firms on capital goods (machinery, factories, buildings) plus changes in inventory
$G$ = Government Final Consumption Expenditure — spending by the government on goods and services (salaries of teachers, buying office supplies, building roads)
$X$ = Exports — goods and services sold to foreigners
$M$ = Imports — goods and services bought from foreigners
$(X - M)$ = Net Exports — the difference between what we sell abroad and what we buy from abroad

This is not a theory — it's an accounting identity. Every rupee spent in the economy falls into exactly one of these four buckets.

Why the Distinction Matters

You might wonder: why not just call it all "spending"? Because each component behaves differently and responds to different forces.

Consumption ( $C$ ) is the largest and most stable component. It depends mainly on your income — when people earn more, they spend more, but not by the same amount (that's the marginal propensity to consume, or MPC). The NCERT says consumption is a function of disposable income: $C = \bar{C} + cY$ , where $\bar{C}$ is autonomous consumption (spending even at zero income) and $c$ is the MPC.

Investment ( $I$ ) is the most volatile. It depends on interest rates, business confidence, and future expectations. A small change in interest rates can swing investment by crores. This is why the government watches investment closely — it's the engine of growth but also the source of instability.

Government spending ( $G$ ) is a policy tool. The government can increase $G$ during a recession to boost demand (expansionary fiscal policy) or reduce it during inflation to cool the economy.

Net exports ( $X-M$ ) depend on exchange rates, global demand, and trade policies. A weak rupee makes exports cheaper and imports costlier, improving net exports.

A Simple Diagram (in Words)

Imagine a pie chart of India's GDP. The largest slice (about 55-60%) is Private Consumption ( $C$ ) — all the chai, mobile recharges, and movie tickets. The next slice (about 30-35%) is Investment ( $I$ ) — new factories, machinery, and construction. Government spending ( $G$ ) takes about 10-12%, and Net Exports ( $X-M$ ) is usually a small slice (often negative for India, meaning we import more than we export). …

Part (b)Concept understanding — GNP Deflator Calculation

The GNP Deflator: From Everyday Intuition to Exam-Ready Concept

Imagine you earn ₹50,000 a month. Next year, your salary goes up to ₹55,000 — a 10% raise. Are you actually better off? Not if the price of everything you buy has also risen by 10%. Your nominal income went up, but your real purchasing power stayed the same.

This is exactly the problem the GNP Deflator solves — but for an entire country's output instead of your salary.

What the GNP Deflator Actually Measures

The GNP Deflator is a price index that measures the average change in prices of all final goods and services included in the Gross National Product (GNP). Unlike the Consumer Price Index (CPI) which tracks only a fixed basket of consumer goods, the GNP Deflator covers everything a country's residents produce — including machinery, government services, exports, and capital goods.

Note

The GNP Deflator is not based on a fixed basket. It uses the current year's composition of output. This means it automatically accounts for new goods and changing consumption patterns — something the CPI cannot do.

The Formula (NCERT Standard)

The NCERT textbook defines the GNP Deflator as:

\text{GNP Deflator} = \frac{\text{Nominal GNP}}{\text{Real GNP}} \times 100

Where:

Nominal GNP = GNP measured at current year prices (includes inflation)
Real GNP = GNP measured at base year prices (removes inflation)
The multiplication by 100 converts it into an index number

How It Works: A Step-by-Step Example

Suppose India produces only two things in a year: wheat and steel.

Step 1: Calculate Nominal GNP

Use current year prices × current year quantities for everything.

Step 2: Calculate Real GNP

Use base year prices × current year quantities for everything. This shows what the same output would have cost if prices hadn't changed.

Step 3: Apply the formula

If Nominal GNP = ₹120 lakh crore and Real GNP = ₹100 lakh crore, then:

\text{GNP Deflator} = \frac{120}{100} \times 100 = 120

This means the general price level has risen by 20% since the base year.

Why It Matters (and Where It Differs from CPI)

The GNP Deflator serves three critical purposes in macroeconomics:

Converting nominal to real values — If you know the deflator, you can "deflate" any nominal GNP figure to find real GNP:

\text{Real GNP} = \frac{\text{Nominal GNP}}{\text{GNP Deflator}} \times 100

Measuring economy-wide inflation — The percentage change in the GNP Deflator from one year to the next gives the inflation rate for all domestically produced goods and services.
Comparing across time — Without the deflator, comparing India's GNP in 1990 to 2024 would be meaningless because prices have changed so much.

Watch out

A common exam mistake: The GNP Deflator includes exports (since GNP includes what residents produce abroad) but excludes imports (since imports are not part of domestic production). CPI, by contrast, includes imported consumer goods. This is why the two indices can give different inflation rates.

The Key Insight NCERT Expects You to Know …

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Part (a): a household car lasts for years and is for personal use → durable consumer good (C). Part (b): GNP deflator = (Nominal GNP / Real GNP) × 100 → (A).

Part (a)

Classify a good by who uses it and why and how long it lasts.

A car bought by a household is used for personal transport, directly satisfying wants → a consumer good (a car bought by a firm for a taxi service would be a capital good).
A car serves repeatedly over many years → durable, unlike single-use goods (food) or semi-durable goods (clothing). …

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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 15 on this concept.

CBSE 2026Set MARCH1 mark
$Q. Give the meaning of Exports.$
›Reveal solutionSolution

Exports are domestically produced goods and services sold to other countries.

In an open economy, exports (X) are those goods and services that are produced within the country but purchased by residents of other countries. They represent a demand for domestic output coming from abroad, form part of aggregate demand, and bring foreign exchange into the country. Examples include India selling t …

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CBSE 2026Set ANNUAL1 mark
$Q. Write the answer in one sentence: What is inflation?$
›Reveal solutionSolution

Inflation = a sustained rise in the general price level, reducing money's purchasing power.

Inflation is a situation in which there is a sustained and continuous rise in the general price level of goods and services in an economy over a period of time. As prices rise, the purchasing power of money falls. It is measured by price indices such as the Wholesale Pri …

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CBSE 2025Set MARCH1 markMCQ
$Q. The consumers and producers can choose between domestic and foreign goods, this market linkage is called,$
(a) a) Financial market linkage
(b) b) Output market linkage
(c) c) Labour market linkage
(d) d) Exchange market linkage
›Reveal solutionSolution
Choice between domestic and foreign goods is the output market linkage — option (b).

An open economy interacts with the rest of the world in three ways, one of which is the output market: consumers and producers can choose between domestic goods and foreign goods (imports and exports). The other links are the financial market (choice between domestic and foreign financial assets) and the labour market (movement of workers across countries).

(a) Financial market linkage → about assets, not goods. …
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CBSE 2025Set MARCH1 mark
$Q. CPI - Expand.$
›Reveal solutionSolution

CPI stands for Consumer Price Index.

The Consumer Price Index (CPI) measures the average change over time in the prices of a fixed basket of goods and services commonly consumed by households. It is a key indicator of the cost of living an …

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CBSE 2024Set MARCH1 mark
$Q. Fill in the blank by choosing the correct answer from the brackets (Perfect competition, Export, Choice, Government, RBI, 1st April to 31st March): The domestic country may sell goods to the rest of the world are called ————.$
›Reveal solutionSolution

Goods the domestic country sells to the rest of the world are called Exports.

In an open economy, transactions with the rest of the world take two forms. Imports are goods and services that the domestic country buys from abroad. Exports are goods and services that the domestic country produces and sells to the rest of the world; they bring foreign exchange into the country and form part of aggregate demand (X in the demand identity …

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CBSE 2024Set ANNUAL1 markMCQ
$Q. In an open economy which are the components of Aggregate demand? (A) Consumption (B) Investment (C) Consumption + Government expenditure (D) Consumption + Investment + Government expenditure + Net export$
›Reveal solutionSolution
The correct option is (D). Aggregate demand in an open economy = Consumption (C) + Investment (I) + Government expenditure (G) + Net exports (X − M).

In the open-economy macroeconomics chapter of the BSEB Class-12 Commerce Economics course, aggregate demand (AD) is the total planned expenditure on final goods and services. An open economy trades with the rest of the world, so its demand includes a foreign-trade component.

The four components are:

C — household consumption expenditure.

I — investment (capital formation by firms).

G — government expenditure.

X − M (Net exports) — exports minus imports, capturing net foreign demand. …
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CBSE 2023Set MARCH1 markMCQ
$Q. The ratio of Nominal GDP to real GDP is$
(a) Consumer Price Index
(b) Wholesale Price Index
(c) Producer Price Index
(d) GDP Deflator
›Reveal solutionSolution
Nominal GDP ÷ Real GDP is the GDP deflator, a broad measure of the price level.

Why:

Nominal GDP is valued at current prices; real GDP is valued at base-year (constant) prices. …
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CBSE 2023Set ANNUAL1 mark
$Q. Answer in one sentence: What is inflation?$
›Reveal solutionSolution

Inflation = a sustained rise in the general price level, reducing money's purchasing power.

Inflation is a situation in which there is a sustained and continuous rise in the general price level of goods and services in an economy over a period of time. As prices rise, the purchasing power of money falls — the same amount of money buys fewer goods than before. Mild inflation may accompany growth, but high inflation hurts fixed-income groups and distorts the economy. It is me …

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CBSE 2023Set ANNUAL1 markMCQ
$Q. Meaning of deterioration in the purchasing power of money is :$
(a) Decrease in prices of goods
(b) No change in the prices of goods
(c) Rise in prices of goods
(d) None of these
(a) Decrease in prices of goods
(b) No change in the prices of goods
(c) Rise in prices of goods
(d) None of these
›Reveal solutionSolution

Falling purchasing power of money = rising prices (inflation); the two move in opposite directions.

Purchasing power of money is inversely related to the general price level: if the price level rises (inflation), a fixed amount of money (say ₹100) can buy fewer goods and services than before — its purchasing power has fallen, or 'deteriorated'. Conversely, a fall in the general price level (deflation) would IMPROVE the purchasing power of money, as the same ₹100 could buy more goods. 'No change in prices' would leave p …

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CBSE 2022Set MARCH1 markMCQ
$Q. The ratio of nominal GDP to real GDP is$
(a) Consumer Price Index
(b) Wholesale Price Index
(c) GDP Deflator
(d) Producer Price Index
›Reveal solutionSolution

Nominal GDP divided by Real GDP gives the GDP Deflator (option c).

…

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CBSE 2022Set MARCH1 mark
$Q. The domestic country may sell goods to the rest of the world are called ____________.$
›Reveal solutionSolution

Goods a country sells to the rest of the world are exports.

In an open economy, the goods a domestic country produces and sells to residents of other countries are called exports (X). Conversely, goods bought from abroad are imports (M). Exports bring foreign exchange into the country and ad …

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CBSE 2020Set 58/2/11 mark
$Q. A car purchased by a household is a _________ . (Choose the correct alternative) (A) single use capital good (B) single use consumer good (C) durable consumer good (D) semi-durable consumer good$
(OR)
$GNP deflator is represented by which of the following formulae ? (Choose the correct alternative) (A) (Nominal GNP / Real GNP) \times 100 (B) (Real GNP / Nominal GNP) \times 100 (C) (Real GNP / Change in Rate of Inflation) \times 100 (D) (Change in Rate of Inflation / Real GNP) \times 100$
›Reveal solutionSolution
Part (a): a household car lasts for years and is for personal use → durable consumer good (C). Part (b): GNP deflator = (Nominal GNP / Real GNP) × 100 → (A).

Part (a)

Classify a good by who uses it and why and how long it lasts.

A car bought by a household is used for personal transport, directly satisfying wants → a consumer good (a car bought by a firm for a taxi service would be a capital good).

A car serves repeatedly over many years → durable, unlike single-use goods (food) or semi-durable goods (clothing). …
Start your 14-day free trial to see the full solution →

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Q.A car purchased by a household is a _________ . (Choose the correct alternative) (A) single use capital good (B) single use consumer good (C) durable consumer good (D) semi-durable consumer good

Part (a)

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