(a) Calculate Domestic Income (NDP_FC) from the data given below : | S. No. | Particulars | Amount (in ₹ lakh) | | --- | --- | --- | | (i) | Gross National Product at market price | 2,500 | | (ii) | Consumption of fixed capital | 200 | | (iii) | Goods and Services Tax | 20 | | (iv) | Subsidies | 50 | | (v) | Net Factor Income from Abroad | 50 | | (vi) | Changes in Stocks | 30 | | (vii) | Unexpected loss of a fixed asset | 500 | OR (b) Define Net Factor Income from Abroad (NFIA) and discuss its components.

(a) Calculate Domestic Income (NDPFC) from the dat – Class 12 Economics

Question 61 of 75

(a) Calculate Domestic Income (NDP_FC) from the data given below :

S. No.	Particulars	Amount (in ₹ lakh)
(i)	Gross National Product at market price	2,500
(ii)	Consumption of fixed capital	200
(iii)	Goods and Services Tax	20
(iv)	Subsidies	50
(v)	Net Factor Income from Abroad	50
(vi)	Changes in Stocks	30
(vii)	Unexpected loss of a fixed asset	500

OR (b) Define Net Factor Income from Abroad (NFIA) and discuss its components.

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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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Part (a): Domestic Income $(NDP_{FC})$ = ₹2,280 lakh (changes in stock and the unexpected loss are red herrings).

Part (b): NFIA = factor income earned by residents from abroad minus factor income earned by non-residents at home; components = net compensation of employees, net property & entrepreneurial income, and net retained earnings of firms abroad.

Part (a)

Domestic Income $(NDP_{FC})$ is the income earned by factors of production within the domestic territory. The data begins with Gross National Product at market price, so we strip away three layers.

\text{NDP}_{FC} = \text{GNP}_{MP} - \text{Depreciation} - \text{Net Indirect Taxes} - \text{NFIA}

Step 1 — from gross to net:

\text{NNP}_{MP} = 2500 - 200 = 2300

Step 2 — Net Indirect Taxes (GST is an indirect tax):

\text{NIT} = 20 - 50 = -30 \text{ (subsidies exceed taxes)}

Step 3 — from market price to factor cost:

\text{NNP}_{FC} = 2300 - (-30) = 2330

Step 4 — from national to domestic (subtract NFIA):

$\text{NDP}_{FC} = 2330 - 50 = 2280 \text{ lakh}$ …

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