CUET UG Economics Booster Test 3 - Methods of Calculating National Income -

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CUET UG Economics Booster Test 3 - Methods of Calculating National Income

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Methods of Calculating National Income

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QUESTION 1 OF 20

Read the following and select the correct option.
Assertion (A): The sum of value added by all firms in the economy equals the value of the final goods produced.
Reason (R): Subtracting intermediate consumption from total production at each stage ensures only the net value added is counted, actively preventing double counting.

Answer Review

1 Read the following and select the correct option.
Assertion (A): The sum of value added by all firms in the economy equals the value of the final goods produced.
Reason (R): Subtracting intermediate consumption from total production at each stage ensures only the net value added is counted, actively preventing double counting.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

�� Value added measures each firm's net contribution. �� Intermediate goods are excluded through subtraction. �� The sum of value added equals the value of final output.

✅ Correct Answer Explanation

The Assertion is true because the total value added by all firms equals the market value of all final goods and services produced in the economy. This is the foundation of the Product (Value Added) Method of measuring GDP. The Reason is also true because subtracting intermediate consumption at every production stage ensures that only the additional value created by each firm is counted. This prevents double counting, ensuring that the sum of value added equals the value of final output. Since the Reason correctly explains the Assertion, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect because both the Assertion and the Reason are true.
Option B → Incorrect because the Reason is also true.
Option D → Incorrect because the Assertion is true and correctly explained by the Reason.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Evaluate both the Assertion and the Reason, then determine whether the Reason logically explains the Assertion.

Final Logic:

Subtracting intermediate goods ensures that the total value added equals the value of final goods.

🧠 Memory Trick

"Add Value Added = Final Output."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Product Method and Double Counting

2 Firm A produces Rs 50 of cotton without inputs. Firm B buys this and produces cloth worth Rs 200. If an economist does not avoid double counting, what would be the mistakenly calculated total value of production?

A Rs 150

B Rs 50

C Rs 200

D Rs 250

💡 Short Explanation

�� Cotton is an intermediate good. �� Cloth is the final product. �� Counting both separately leads to double counting.

✅ Correct Answer Explanation

The correct GDP should include only the value of the final product (Rs 200) or the sum of value added. However, if intermediate goods are counted again: Cotton = Rs 50 Cloth = Rs 200 Mistaken GDP = 50 + 200 = Rs 250 Therefore, Option D is correct. This illustrates why intermediate goods must be excluded from GDP estimation.

❓ Why Other Options Are Incorrect

Option A → This represents the value added by Firm B, not the incorrectly calculated GDP.
Option B → This is only the value of cotton produced.
Option C → This is the correct GDP after avoiding double counting, not the mistaken calculation.

🎯 Strategy

Used

Substitution

Application:

Add both production values without eliminating the intermediate good.

Final Logic:

50 + 200 = Rs 250.

🧠 Memory Trick

"Count Twice → GDP Rises Wrongly."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Avoiding Double Counting

3 In the context of macroeconomic identities, why must the value added of a firm exactly equal the sum of wages, interest, profits, and rents paid out?

A Because the government heavily taxes all value added.

B Because all net contribution (value added) must be distributed among the firm's four factors of production.

C Because inventories are treated as immediate factor payments.

D Because intermediate goods are transformed into raw profits.

💡 Short Explanation

�� Value added becomes factor income. �� Labour, land, capital and entrepreneurship receive payments. �� Total factor income equals value added.

✅ Correct Answer Explanation

The value added created by a firm represents its net contribution to production. This value is distributed among the four factors of production as: Wages → Labour Rent → Land Interest → Capital Profit → Entrepreneurship Thus, Value Added = Wages + Rent + Interest + Profit Therefore, Option B is correct. Taxes are not the reason for this identity. Inventories are not factor payments. Intermediate goods do not become profits.

❓ Why Other Options Are Incorrect

Option A → Taxes do not explain why value added equals factor incomes.
Option C → Inventories are treated as investment, not factor payments.
Option D → Intermediate goods are production inputs and do not become profits.

🎯 Strategy

Used

Elimination

Application:

Recall the distribution of value added among the four factors of production.

Final Logic:

Value added ultimately becomes factor income.

🧠 Memory Trick

(Wages + Rent + Interest + Profit)

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Distribution of Value Added

4 Match the following macroeconomic variables (List I) with their correct formulas (List II):

List I	List II
1. GVA at Basic Prices	a. GVA at factor cost + Net production taxes
2. GDP at Market Prices	b. GVA at basic prices + Net product taxes
3. Net production taxes	c. Production taxes minus production subsidies
4. Net product taxes	d. Product taxes minus product subsidies

A 1-d, 2-c, 3-b, 4-a

B 1-b, 2-a, 3-d, 4-c

C 1-c, 2-d, 3-a, 4-b

D 1-a, 2-b, 3-c, 4-d

💡 Short Explanation

�� Basic prices adjust factor cost using production taxes. �� Market prices adjust basic prices using product taxes. �� Net taxes equal taxes minus subsidies.

✅ Correct Answer Explanation

The correct relationships are: GVA at Basic Prices = GVA at Factor Cost + Net Production Taxes GDP at Market Prices = GVA at Basic Prices + Net Product Taxes Net Production Taxes = Production Taxes − Production Subsidies Net Product Taxes = Product Taxes − Product Subsidies Hence, the correct matching is: 1-a, 2-b, 3-c, 4-d Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrectly pairs all four concepts.
Option B → Incorrectly exchanges the formulas for GVA and GDP.
Option C → Incorrectly matches production taxes and product taxes.

🎯 Strategy

Used

Option Grouping

Application:

Recall the official national income accounting identities used in NCERT.

Final Logic:

Only Option D matches every variable correctly.

🧠 Memory Trick

"Factor → Basic → Market."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: GVA at Basic Prices and GDP at Market Prices

5 The Central Statistics Office (CSO) replaced GDP at factor cost with the ________ at basic prices to reflect the production-side contribution more precisely.

A Gross National Product

B Net Domestic Product

C Gross Value Added

D Personal Income

💡 Short Explanation

�� GVA measures producers' contribution. �� India now reports production performance using GVA at basic prices. �� It better reflects sector-wise output.

✅ Correct Answer Explanation

The Central Statistics Office (CSO) adopted Gross Value Added (GVA) at Basic Prices as the primary measure of production-side performance because it better reflects the contribution of individual sectors to the economy. GVA measures the value created by producers before adding product taxes and subtracting product subsidies. Therefore, Option C is correct. Gross National Product includes production by nationals. Net Domestic Product deducts depreciation. Personal Income measures household income.

❓ Why Other Options Are Incorrect

Option A → GNP measures output based on nationality rather than domestic production.
Option B → NDP is obtained after deducting depreciation.
Option D → Personal Income is unrelated to production-side measurement.

🎯 Strategy

Used

Odd One Out

Application:

Identify the production-side aggregate adopted by the CSO.

Final Logic:

GVA at Basic Prices replaced GDP at factor cost for production analysis.

🧠 Memory Trick

"CSO → GVA."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: GVA at Basic Prices

6 Read the following and select the correct option.
Assertion (A): Net Value Added provides a more accurate measure of the new value created than Gross Value Added because it subtracts the wear and tear of capital.
Reason (R): Net Value Added is derived by simply adding government subsidies directly to the Gross Value Added.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

�� Net Value Added excludes depreciation. �� Depreciation represents the wear and tear of fixed capital. �� Government subsidies are not added to derive Net Value Added.

✅ Correct Answer Explanation

The Assertion is true because Net Value Added (NVA) provides a better measure of the actual new value created during production by deducting depreciation (consumption of fixed capital) from Gross Value Added (GVA). Formula: Net Value Added = Gross Value Added − Depreciation The Reason is false because NVA is not obtained by adding government subsidies to GVA. Subsidies are considered while moving between factor cost, basic prices, and market prices—not while converting Gross Value Added into Net Value Added. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect because the Assertion is true.
Option C → Incorrect because the Reason is false.
Option D → Incorrect because the Assertion is true.

🎯 Strategy

Used

Elimination

Application:

Evaluate the Assertion and Reason separately before checking whether the Reason explains the Assertion.

Final Logic:

NVA = GVA − Depreciation; subsidies are unrelated to this conversion.

🧠 Memory Trick

"Net Means Minus Depreciation."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Gross Value Added and Net Value Added

📄 Passage

"Change in inventories of a firm during a year ≡ production of the firm during the year – sale of the firm during the year. Inventories are treated as capital. Addition to the stock of capital of a firm is known as investment. Therefore, change in the inventory of a firm is treated as investment."

According to the passage, how is the change in a firm's inventory broadly classified in macroeconomic terms?

A As final consumption

B As depreciation

C As intermediate expenditure

D As investment

💡 Short Explanation

�� Inventories are treated as capital. �� An increase in capital is investment. �� Inventory changes are therefore classified as investment.

✅ Correct Answer Explanation

The passage clearly states that inventories are treated as capital. Any addition to capital stock is classified as investment. Therefore, a change in inventories—whether planned or unplanned—is treated as inventory investment in national income accounting. Hence, Option D is correct. Final consumption satisfies current wants and is unrelated to inventories. Depreciation refers to wear and tear of fixed assets. Intermediate expenditure refers to purchases of inputs, not inventory changes.

❓ Why Other Options Are Incorrect

Option A → Inventory is a capital asset, not final consumption.
Option B → Depreciation reduces capital value, whereas inventory change represents investment.
Option C → Intermediate expenditure concerns inputs used in production, not inventory accumulation.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Locate the sentence in the passage that explicitly defines the treatment of inventory changes.

Final Logic:

The passage directly states that inventory change is treated as investment.

🧠 Memory Trick

"Inventory = Investment."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Inventory Investment

📄 Passage

Based on the passage equation, if a firm produces Rs 1,000 worth of goods and manages to sell Rs 800 worth, what is the identity of the remaining Rs 200?

A It is the change in inventories, treated as an addition to capital stock.

B It is considered an absolute loss and subtracted from GDP.

C It is considered intermediate consumption for the next year.

D It is an unplanned decumulation of inventories.

💡 Short Explanation

�� Production exceeds sales. �� Unsold goods become inventories. �� Inventory addition is treated as investment.

✅ Correct Answer Explanation

According to the passage, Change in Inventories = Production − Sales = Rs 1,000 − Rs 800 = Rs 200 This Rs 200 represents unsold goods, which become inventory. Since inventories are treated as capital, this increase is classified as investment and contributes to GDP. Therefore, Option A is correct. Unsold goods are not a production loss. They are not intermediate consumption. Production exceeding sales causes accumulation, not decumulation.

❓ Why Other Options Are Incorrect

Option B → Unsold goods remain part of current production and are included in GDP.
Option C → Inventory is not classified as intermediate consumption.
Option D → Decumulation occurs when sales exceed production.

🎯 Strategy

Used

Substitution

Application:

Apply the identity:
Inventory Change = Production − Sales

Final Logic:

1000 − 800 = Rs 200, which becomes inventory investment.

🧠 Memory Trick

"Unsold Goods = Inventory = Investment."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Change in Inventories

9 A firm expects to sell 1,000 shirts during the year and plans to intentionally reduce its inventory from 100 to 25. How many shirts must it produce, assuming sales exactly meet expectations?

A 1,000

B 1,025

C 925

D 900

💡 Short Explanation

�� Planned inventory falls by 75 shirts. �� Sales exceed production by 75 shirts. �� Production equals planned sales minus inventory reduction.

✅ Correct Answer Explanation

The firm plans to: Sell 1,000 shirts Reduce inventory from 100 shirts to 25 shirts Therefore, Inventory reduction = 100 − 25 = 75 shirts Since these 75 shirts come from existing inventory, Production required = Expected Sales − Planned Inventory Reduction = 1,000 − 75 = 925 shirts Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Ignores the planned reduction in inventory.
Option B → Assumes inventory is increasing rather than decreasing.
Option D → Reduces production by an incorrect amount.

🎯 Strategy

Used

Substitution

Application:

Subtract the planned inventory reduction from expected sales.

Final Logic:

1000 − 75 = 925 shirts.

🧠 Memory Trick

"Reduce Stock → Produce Less."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Planned Inventory Changes

10 A firm produces 1,000 shirts expecting to sell them all. It only manages to sell 600 shirts. The resulting 400 unsold shirts represent an event known as:

A Unplanned accumulation of inventories

B Planned accumulation of inventories

C Unplanned decumulation of inventories

D Fixed business investment

💡 Short Explanation

�� Sales are lower than expected. �� Unsold stock increases unexpectedly. �� Inventory accumulates without prior planning.

✅ Correct Answer Explanation

The firm expected to sell all 1,000 shirts, but actual sales were only 600 shirts. Therefore, Unsold inventory = 1,000 − 600 = 400 shirts Since the increase in inventory occurred because of unexpectedly low sales, it is classified as unplanned accumulation of inventories. Thus, Option A is correct. Planned accumulation is intentional. Decumulation occurs when sales exceed production. Fixed business investment refers to machinery and equipment, not inventories.

❓ Why Other Options Are Incorrect

Option B → The inventory increase was unexpected, not planned.
Option C → Decumulation means inventories decrease rather than increase.
Option D → Unsold shirts are inventory investment, not fixed capital investment.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Focus on the phrase "expecting to sell them all" to identify that the inventory increase was unplanned.

Final Logic:

Unexpectedly low sales lead to unplanned accumulation.

🧠 Memory Trick

"Low Sales = High Stock."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Unplanned Accumulation of Inventories

11 Arrange the following conceptual steps from firm-level calculation to national aggregate using the product method:
1. Sum the GVA of all 'N' firms to find the GDP.
2. Calculate the value of sales and change in inventories for firm 'i'.
3. Deduct the value of intermediate goods used by firm 'i'.
4. Determine the Gross Value Added (GVA) for firm 'i'.

A 1, 2, 3, 4

B 3, 2, 4, 1

C 4, 3, 2, 1

D 2, 3, 4, 1

💡 Short Explanation

�� Begin with firm-level production data. �� Deduct intermediate goods to calculate GVA. �� Sum all firms' GVA to obtain GDP.

✅ Correct Answer Explanation

The logical sequence in the Product Method is: Step 1: Calculate the firm's value of sales and change in inventories. Step 2: Deduct the value of intermediate goods used. Step 3: Obtain the firm's Gross Value Added (GVA). Step 4: Add the GVA of all firms to calculate GDP. Thus, the correct order is: 2 → 3 → 4 → 1 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Starts with GDP before calculating firm-level GVA.
Option B → Deducts intermediate goods before calculating production value.
Option C → Calculates GVA before determining the firm's output.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the production process chronologically from firm-level calculation to national aggregation.

Final Logic:

Firm calculation always precedes national GDP estimation.

🧠 Memory Trick

"Output → Inputs → GVA → GDP."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Product Method (Calculation of GVA)

12 In the identity GVAi ≡ Vi + Ai − Zi, what does the term (Vi + Ai) collectively represent for a single firm?

A Net factor income from abroad

B Gross value of the output produced by the firm

C Final consumption expenditure

D Aggregate imports of intermediate goods

💡 Short Explanation

�� Vi represents value of sales. �� Ai represents change in inventories. �� Together they measure total output.

✅ Correct Answer Explanation

According to the NCERT identity: GVAi = Vi + Ai − Zi where: Vi = Value of Sales Ai = Value of Change in Inventories Zi = Value of Intermediate Goods Used Therefore, Vi + Ai represents the Gross Value of Output produced by the firm before deducting intermediate goods. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Net factor income from abroad is unrelated to firm-level GVA.
Option C → Final consumption expenditure belongs to the Expenditure Method.
Option D → Imports are not represented by Vi + Ai.

🎯 Strategy

Used

Substitution

Application:

Use the GVA identity and isolate the expression Vi + Ai.

Final Logic:

Sales plus inventory change equals total output.

🧠 Memory Trick

"Sales + Stock = Output."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Firm-Level Gross Value Added Identity

13 The expenditure method essentially estimates GDP by examining the ________ side of the products, adding up all the final spending.

A Supply

B Factor

C Demand

D Production

💡 Short Explanation

�� GDP can be measured through expenditure. �� Expenditure represents demand for final goods. �� Final spending determines aggregate demand.

✅ Correct Answer Explanation

The Expenditure Method estimates GDP by adding all final expenditures made on domestically produced goods and services. Since expenditure reflects the demand for final goods and services, the method examines the demand side of the economy. Thus, GDP = C + I + G + (X − M) Therefore, Option C is correct. Supply and production are analysed under the Product Method. Factor refers to the Income Method.

❓ Why Other Options Are Incorrect

Option A → Supply is measured through production, not expenditure.
Option B → Factor incomes are used in the Income Method.
Option D → Production is measured under the Product Method.

🎯 Strategy

Used

Odd One Out

Application:

Identify which side of the economy is measured through expenditure.

Final Logic:

Expenditure reflects aggregate demand.

🧠 Memory Trick

"Spend = Demand."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Expenditure Method

14 An economy shows the following metrics:
C = Rs 5,000,
I = Rs 2,000,
G = Rs 1,500,
X = Rs 800,
and
M = Rs 1,000.
What is the GDP calculated via the expenditure method?

A Rs 9,300

B Rs 10,300

C Rs 7,500

D Rs 8,300

💡 Short Explanation

�� Use the expenditure identity. �� Net exports equal exports minus imports. �� Add all expenditure components.

✅ Correct Answer Explanation

The Expenditure Method formula is: GDP = C + I + G + (X − M) Substituting the given values: = 5,000 + 2,000 + 1,500 + (800 − 1,000) = 5,000 + 2,000 + 1,500 − 200 = Rs 8,300 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect calculation of net exports.
Option B → Imports have not been deducted.
Option C → Government expenditure has been omitted.

🎯 Strategy

Used

Substitution

Application:

Apply the GDP expenditure formula directly.

Final Logic:

5000 + 2000 + 1500 + (800 − 1000) = Rs 8,300.

🧠 Memory Trick

"C + I + G + (X − M)."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: GDP by Expenditure Method

15 Read the following and select the correct option.
Assertion (A): Household consumption solely consists of non-durable goods like food and explicitly excludes durable items like televisions.
Reason (R): Durable items purchased by households are classified entirely under fixed business investment instead of consumption.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

�� Household consumption includes durable and non-durable goods. �� Televisions purchased by households are consumption expenditure. �� Fixed business investment refers to firms' capital goods.

✅ Correct Answer Explanation

The Assertion is false because household final consumption expenditure includes purchases of both durable goods (such as televisions, refrigerators, and furniture) and non-durable goods (such as food and clothing). The Reason is also false because durable goods purchased by households are not classified as fixed business investment. Fixed business investment includes capital goods such as machinery, factory buildings, and equipment purchased by firms. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect because the Assertion itself is false.
Option C → Incorrect because both statements are not true.
Option D → Incorrect because the Reason is also false.

🎯 Strategy

Used

Extreme Word Filter

Application:

Notice the absolute terms "solely" and "entirely", which often indicate incorrect statements in economics.

Final Logic:

Household consumption includes both durable and non-durable goods; business investment relates to firms, not households.

🧠 Memory Trick

"TV at Home = Consumption; TV in Factory = Investment."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Household Consumption and Business Investment

16 Match the concepts of Investment (List I) with their specific explanations (List II):

List I	List II
1. Gross Investment	a. Total addition of capital goods in a year before wear and tear
2. Net Investment	b. Gross investment minus depreciation
3. Depreciation	c. Annual allowance reflecting wear and tear of capital
4. Capital Stock	d. The total accumulated capital present at a specific point in time

A 1-b, 2-a, 3-d, 4-c

B 1-a, 2-b, 3-c, 4-d

C 1-c, 2-d, 3-b, 4-a

D 1-d, 2-c, 3-a, 4-b

💡 Short Explanation

�� Gross investment is measured before depreciation. �� Net investment is obtained after deducting depreciation. �� Capital stock refers to the existing stock of capital assets.

✅ Correct Answer Explanation

The correct matching is: Gross Investment → Total addition of capital goods in a year before wear and tear (a). Net Investment → Gross investment minus depreciation (b). Depreciation → Annual allowance reflecting wear and tear of capital (c). Capital Stock → Total accumulated capital available at a point in time (d). Thus, the correct sequence is: 1-a, 2-b, 3-c, 4-d Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Gross investment and net investment are incorrectly interchanged.
Option C → Depreciation and capital stock are matched incorrectly.
Option D → All four concepts are incorrectly paired.

🎯 Strategy

Used

Option Grouping

Application:

Recall the standard NCERT definitions of investment-related concepts.

Final Logic:

Only Option B correctly matches all four concepts.

🧠 Memory Trick

"Gross Before, Net After, Depreciation Wears, Capital Stays."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Gross Investment, Net Investment and Capital Stock

17 The term ________ in the basic expenditure equation is comprehensive, incorporating both the final consumption and final investment expenditures incurred by the public sector.

A Government final expenditure

B Private final consumption

C Net factor income

D Transfer payments

💡 Short Explanation

�� Government expenditure has two components. �� It includes consumption expenditure. �� It also includes investment expenditure.

✅ Correct Answer Explanation

In the Expenditure Method, Government Final Expenditure (G) includes: Government Final Consumption Expenditure Government Investment Expenditure Both types of expenditure contribute to the purchase of domestically produced final goods and services and are included in GDP. Therefore, Option A is correct. Private final consumption refers to household expenditure. Net factor income belongs to national income accounting, not expenditure components. Transfer payments are excluded because they do not involve current production.

❓ Why Other Options Are Incorrect

Option B → Household consumption is represented by C, not G.
Option C → Net factor income from abroad is unrelated to government expenditure.
Option D → Transfer payments do not represent purchases of goods or services and are excluded from GDP.

🎯 Strategy

Used

Elimination

Application:

Identify which expenditure component includes both government consumption and government investment.

Final Logic:

Only Government Final Expenditure satisfies both conditions.

🧠 Memory Trick

"G = Government Consumption + Government Investment."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Government Final Expenditure

18 Why are imports (M) subtracted in the expenditure method equation (C + I + G + X - M)?

A Because imports generate indirect tax revenue for the government.

B Because imported goods are heavily depreciated compared to domestic goods.

C Because C, I, and G already include spending on imported goods, which must be removed to measure strictly domestic production.

D Because exports are always larger than imports in macro models.

💡 Short Explanation

�� Consumption, investment, and government expenditure may include imports. �� GDP measures only domestic production. �� Imports are deducted to avoid including foreign production.

✅ Correct Answer Explanation

The GDP expenditure identity is: GDP = C + I + G + (X − M) The components C, I, and G include expenditure on both domestically produced and imported goods. Since GDP measures only domestic production, imports must be subtracted to remove the value of foreign-produced goods already included in these expenditure categories. Therefore, Option C is correct. Imports are not deducted because of tax revenue. Depreciation has no role in the treatment of imports. Exports are not always larger than imports.

❓ Why Other Options Are Incorrect

Option A → Import duties are unrelated to the reason imports are deducted from GDP.
Option B → Depreciation does not explain the treatment of imports.
Option D → A country may have either a trade surplus or a trade deficit.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the purpose of subtracting imports in the expenditure identity.

Final Logic:

GDP measures domestic production only; therefore, imports must be excluded.

🧠 Memory Trick

"Imports = Foreign Output → Subtract."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Net Exports (X − M)

19 Which of the following equations accurately reflects the core of the Income Method for calculating GDP?

A GDP ≡ C + I + G

B GDP ≡ Vi + Ai - Zi

C GDP ≡ Net National Product + Depreciation

D GDP ≡ W + P + In + R

💡 Short Explanation

�� Income Method sums all factor incomes. �� The four factor incomes are wages, rent, interest, and profit. �� Their sum equals GDP under the Income Method.

✅ Correct Answer Explanation

The Income Method estimates GDP by summing the incomes earned by all factors of production: W = Wages R = Rent In = Interest P = Profit Thus, GDP ≡ W + R + In + P Option D expresses the same identity (although the order differs), making it correct. Option A is an incomplete expenditure identity because it omits net exports. Option B is the Product Method formula. Option C does not represent the basic Income Method identity. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Represents the Expenditure Method and omits net exports.
Option B → Represents Gross Value Added under the Product Method.
Option C → This is not the fundamental equation used in the Income Method.

🎯 Strategy

Used

Odd One Out

Application:

Identify the equation containing only factor incomes.

Final Logic:

Only wages, rent, interest, and profit constitute the Income Method.

🧠 Memory Trick

"WRIP = Income Method."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Income Method

20 In a simplified economy,
Total Wages = Rs 80
Total Profits = Rs 120
Total Interest = Rs 0
Total Rent = Rs 0
Using the Income Method, what is the GDP?

A Rs 40

B Rs 200

C Rs 120

D Rs 80

💡 Short Explanation

�� Income Method adds all factor incomes. �� Wages, rent, interest, and profit are included. �� Their sum gives GDP.

✅ Correct Answer Explanation

The Income Method formula is: GDP = Wages + Rent + Interest + Profit Substituting the given values: = Rs 80 + Rs 0 + Rs 0 + Rs 120 = Rs 200 Therefore, Option B is correct. Option A ignores major income components. Option C includes only profit. Option D includes only wages.

❓ Why Other Options Are Incorrect

Option A → Does not equal the sum of all factor incomes.
Option C → Includes only profit and ignores wages.
Option D → Includes only wages and ignores profits.

🎯 Strategy

Used

Substitution

Application:

Apply the Income Method formula directly by adding all factor incomes.

Final Logic:

80 + 120 + 0 + 0 = Rs 200.

🧠 Memory Trick

"Add WRIP = GDP."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Income Method – Factor Incomes

CUET UG Economics Booster Test 3 - Methods of Calculating National Income

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