(a) (i) Suppose, there are only three firms in a hypothetical economy, viz. A, B and C. During a given period of time, the following transactions were undertaken by them : (I) Firm A sold goods worth ₹ 2,000 to Firm B and ₹ 1,200 to Firm C. (II) Firm B sold goods worth ₹ 1,100 to Firm A and ₹ 3,500 to Firm C. (III) Firm C sold to households for final consumption, goods worth ₹ 5,700. Estimate the value of Net Domestic Product at Market Price (NDP_MP), assuming depreciation to be ₹ 120. (3) (ii) Explain the likely impact of construction of 2000 new schools providing high-quality education in a nation on Gross Domestic Product and Welfare in an economy. (3) OR (b) (i) "All consumption goods are durable in nature." Defend or refute the given statement with a valid argument. (3) (ii) On the basis of the given data, estimate the value of National Income (NNP_FC) : (3) | S.No. | Items | Amount (in ₹ Crore) | | --- | --- | --- | | (i) | Household Consumption Expenditure | 1,800 | | (ii) | Gross Business Fixed Capital Formation | 1,150 | | (iii) | Gross Residential Construction Expenditure | 1,020 | | (iv) | Government Final Consumption Expenditure | 2,170 | | (v) | Excess of Imports over Exports | 720 | | (vi) | Inventory Investments | 540 | | (vii) | Gross Public Investments | 1,300 | | (viii) | Net Indirect Taxes | 240 | | (ix) | Net Factor Income from Abroad | (–) 250 | | (x) | Consumption of Fixed Capital | 440 |

(a) (i) Suppose, there are only three firms in a hypothetical economy, viz. A, B and C. During a given period

Question 59 of 75

(i) Suppose, there are only three firms in a hypothetical economy, viz. A, B and C. During a given period of time, the following transactions were undertaken by them : (I) Firm A sold goods worth ₹ 2,000 to Firm B and ₹ 1,200 to Firm C. (II) Firm B sold goods worth ₹ 1,100 to Firm A and ₹ 3,500 to Firm C. (III) Firm C sold to households for final consumption, goods worth ₹ 5,700. Estimate the value of Net Domestic Product at Market Price (NDP_MP), assuming depreciation to be ₹ 120. (3) (ii) Explain the likely impact of construction of 2000 new schools providing high-quality education in a nation on Gross Domestic Product and Welfare in an economy. (3) OR
(i) "All consumption goods are durable in nature." Defend or refute the given statement with a valid argument. (3) (ii) On the basis of the given data, estimate the value of National Income (NNP_FC) : (3)

S.No.	Items	Amount (in ₹ Crore)
(i)	Household Consumption Expenditure	1,800
(ii)	Gross Business Fixed Capital Formation	1,150
(iii)	Gross Residential Construction Expenditure	1,020
(iv)	Government Final Consumption Expenditure	2,170
(v)	Excess of Imports over Exports	720
(vi)	Inventory Investments	540
(vii)	Gross Public Investments	1,300
(viii)	Net Indirect Taxes	240
(ix)	Net Factor Income from Abroad	(–) 250
(x)	Consumption of Fixed Capital	440

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Part (a)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) …

Part (b)Concept understanding — National Income Identity

The National Income Identity: Where Does a Country's Money Come From?

The Everyday Intuition

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.

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) …

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(a)(i) NDPₘₚ = ₹5,580 by the value-added method. (a)(ii) New schools raise GDP (investment + multiplier) and welfare (human capital, health, equity). (b)(i) Refuted — consumption goods may be durable, semi-durable, non-durable or services. (b)(ii) NNPₔₑ = ₹6,330 crore.

Part (a)

(i) Net Domestic Product at Market Price. In a multi-firm setup use the value-added method: value added = sales − intermediate purchases.

Firm A: sales $=2{,}000+1{,}200=3{,}200$ ; purchases from B $=1{,}100$ ; VA $=2{,}100$ .
Firm B: sales $=1{,}100+3{,}500=4{,}600$ ; purchases from A $=2{,}000$ ; VA $=2{,}600$ .
Firm C: sales $=5{,}700$ ; purchases from A and B $=1{,}200+3{,}500=4{,}700$ ; VA $=1{,}000$ .

\text{GDP}_{MP}=\sum VA = 2{,}100+2{,}600+1{,}000 = ₹5{,}700

(Cross-check: final sales to households = ₹5,700 = GDPₘₚ.) …

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