Calculate compensation of employees from the data given below :
| S. No. | Particulars | Amount (in ₹ crore) |
|---|---|---|
| (i) | Interest | 45 |
| (ii) | Profits after tax | 20 |
| (iii) | Consumption of fixed capital | 50 |
| (iv) | Gross Domestic Product at market price (GDP_MP) | 200 |
| (v) | Rent | 25 |
| (vi) | Corporate tax | 5 |
| (vii) | Goods and Services tax | 10 |
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — National Income Identity
The National Income Identity: Where Does a Country's Money Come From?
Imagine you're running a lemonade stand. Every rupee you earn comes from someone buying your lemonade. Now imagine the whole country as one giant lemonade stand — every rupee earned by anyone must come from someone else spending money. That simple idea is the heart of the National Income Identity.
The Everyday Intuition
Think of the economy as a circular flow. Households earn income by working for firms. Firms produce goods and services that households buy. What households spend becomes the income of firms, which then becomes wages, rent, and profit for households again. So:
Total spending in the economy = Total income earned in the economy
This isn't a theory — it's an accounting identity. It must be true because every rupee spent by one person is a rupee earned by someone else.
The Precise Meaning (NCERT Class 12, Macroeconomics, Chapter 2)
The National Income Identity breaks down total spending into four components. NCERT gives it as:
Y=C+I+G+(X−M)
Where:
- Y = National Income (GDP at market prices)
- C = Private Final Consumption Expenditure (what households spend on goods and services)
- I = Gross Investment Expenditure (spending on capital goods like machinery, buildings, and inventory changes)
- G = Government Final Consumption Expenditure (government spending on goods and services, not transfers)
- X = Exports of goods and services
- M = Imports of goods and services
- (X−M) = Net Exports (exports minus imports)
Why This Matters
This identity is the foundation of all macroeconomic analysis. Here's what it tells you:
1. It's a checklist for growth. If you want GDP (Y) to rise, at least one of C, I, G, or (X−M) must increase. No other way exists.
2. It reveals trade-offs. If government spending (G) rises but taxes don't, either consumption (C) or investment (I) must fall — unless net exports improve. This is the "crowding out" debate.
3. It explains recessions. During a downturn, consumption (C) and investment (I) typically fall. The identity shows why governments try to boost G or encourage exports.
A Simple Diagram (Describe in Words) …
We need to find Compensation of Employees from the given data. The most direct route is to use the Income Method identity for GDP at market price.
The income method states:
GDPMP=Compensation of Employees+Operating Surplus+Mixed Income+Consumption of Fixed Capital+Net Indirect Taxes
Here, Operating Surplus = Rent + Interest + Profit (before tax).
Profit before tax = Profits after tax + Corporate tax = 20+5=25 crore.
So, Operating Surplus = Rent (25) + Interest (45) + Profit before tax (25) = 95 crore.
Net Indirect Taxes = Goods and Services Tax (since it's the only indirect tax given; no subsidy is mentioned, so we take it as is) = 10 crore. …
By the income method GDPMP=COE+Rent+Interest+Profit+CFC+Net Indirect Taxes; solving for the wage bill gives Compensation of Employees = Rs 45 crore.
Calculating Compensation of Employees
GDP at market price, built up by the income method, is:
GDPMP=COE+Rent+Interest+Profit+Consumption of Fixed Capital+Net Indirect Taxes
Profit (a factor income) is measured before tax, so:
Profit=Profits after tax+Corporate tax=20+5=25 …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQQ.In which direction the flow of factor services take place in two-sector model of circular flow of income?(a) From firm to firm(b) From household to firm(c) From household to household(d) From firm to household
›Reveal solutionSolution
Factor services flow from households to firms.
In the two-sector model of circular flow, households own the factors of production and the firms produce goods. The factor services (land, labour, capital, enterprise) flow from households to firms, and in return factor payments (rent, wages, interest, profit) flow from firms to households. The goods flow …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQQ.The old aged pension paid by the government is the part of which of the following aggregates?(a) GDP(b) GNP(c) National income(d) Personal income
›Reveal solutionSolution
Old-age pension is a transfer payment, part of personal income.
An old-age pension paid by the government is a transfer payment — it is received without any productive service in return. Therefore it is not included in national income (which counts only factor incomes), but it is included in personal income …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQQ.What is National Income?(a) Gross Domestic Product at Factor Cost(b) Net National Product at Market Price(c) Net National Product at Factor Cost(d) All of these
›Reveal solutionSolution
National income = Net National Product at Factor Cost.
National income is the sum of factor incomes (value of final output) earned by the normal residents of a country in an accounting year, measured at factor cost. By definition it equals Net National Product at Factor Cost (NNP_FC). GDP at factor cost and NNP at marke …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQQ.Which method of calculating GDP includes the monetary value of final goods?(a) Product Method(b) Income Method(c) Expenditure Method(d) All of these
›Reveal solutionSolution
The product method measures GDP from the value of final goods produced.
The product (value-added) method estimates GDP by adding up the money value of all final goods and services produced within the domestic territory in a year (or the value added by all producing units). It directly uses the monetary value of final output. The income method sums factor incomes, and the e …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQQ.To include the value of goods or services more than one time while calculating National Income is called(a) Single counting(b) Multiple counting(c) Double counting(d) None of these
›Reveal solutionSolution
Counting a value more than once is double counting.
While estimating national income by the product method, if the value of a good is counted more than once — for instance counting both the intermediate good and the final good — it is called double counting. It overstates national income and …
- JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQQ.Wheat is an intermediate good in manufacturing of which of the following goods?(a) Bread(b) Biscuit(c) Chapati(d) All of these
›Reveal solutionSolution
Wheat is an intermediate good for all three — bread, biscuit and chapati.
An intermediate good is one used up as a raw material in producing another good within the year. Wheat is processed into bread, biscuits and chapati, so in each case it serves as a raw material and is an in …
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