CUET UG Economics Booster Test 2 - Methods of Calculating National Income -

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CUET UG Economics Booster Test 2 - 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 2 - Methods of Calculating National Income

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QUESTION 1 OF 20

A farmer produces wheat worth Rs 100 with no input cost. A baker buys Rs 50 of this wheat and produces bread worth Rs 200. What is the net contribution (value added) of the baker?

Answer Review

1 A farmer produces wheat worth Rs 100 with no input cost. A baker buys Rs 50 of this wheat and produces bread worth Rs 200. What is the net contribution (value added) of the baker?

A Rs 200

B Rs 150

C Rs 100

D Rs 250

💡 Short Explanation

�� Value added measures a firm's own contribution to production. �� It is calculated by deducting intermediate goods from the value of output. �� This method prevents double counting in GDP estimation.

✅ Correct Answer Explanation

The Value Added of a firm is calculated as: Value Added = Value of Output − Value of Intermediate Goods Used Here, Value of bread produced = Rs 200 Value of wheat purchased (intermediate input) = Rs 50 Therefore, Value Added = 200 − 50 = Rs 150 Thus, the baker's own contribution to production is Rs 150. Hence, Option B is correct. Option A incorrectly treats the entire output as value added. Option C subtracts the wrong amount. Option D exceeds the value of total output.

❓ Why Other Options Are Incorrect

Option A → Ignores the cost of intermediate goods used in production.
Option C → Underestimates the value added by deducting an incorrect amount.
Option D → Value added cannot exceed the total value of output.

🎯 Strategy

Used

Substitution

Application:

Apply the formula:
Value Added = Output − Intermediate Goods

Final Logic:

200 − 50 = Rs 150.

🧠 Memory Trick

"VA = Output − Inputs."

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

2 Which of the following statements explains why intermediate goods are NOT counted in the final GDP?

A They have no monetary value in the open market.

B They are strictly produced by the government for internal use.

C Their value is already included in the value of the final goods, so counting them leads to double counting.

D They are considered long-term capital investments.

💡 Short Explanation

�� Intermediate goods are used to produce final goods. �� Their value is already embedded in final products. �� Counting them again inflates GDP.

✅ Correct Answer Explanation

Intermediate goods are excluded from GDP because their value is already included in the value of the final goods produced. If intermediate goods were counted separately, the same value would be counted multiple times, resulting in double counting. Therefore, Option C is correct. Intermediate goods do have market value. They are not produced only by the government. They are not long-term capital investments.

❓ Why Other Options Are Incorrect

Option A → Intermediate goods have market prices and monetary value.
Option B → Intermediate goods are produced by both private and public producers.
Option D → Intermediate goods are consumed during production, unlike capital goods.

🎯 Strategy

Used

Elimination

Application:

Choose the option explaining the purpose of excluding intermediate goods from GDP.

Final Logic:

They are excluded to avoid double counting.

🧠 Memory Trick

"Intermediate Goods = Count Once."

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

3 In the value-added method, why is it necessary to subtract intermediate consumption from the value of production?

A To arrive at the firm's true net contribution to total output.

B To intentionally increase the total amount of GDP.

C Because intermediate goods cannot be assigned a monetary price.

D To ensure imports are completely excluded from the calculation.

💡 Short Explanation

�� Intermediate goods are purchased from other firms. �� Only the firm's own contribution should be counted. �� This ensures accurate GDP measurement.

✅ Correct Answer Explanation

The purpose of subtracting intermediate consumption is to measure only the value created by the firm itself. Formula: Value Added = Value of Production − Intermediate Consumption This prevents the value created by previous firms from being counted repeatedly. Therefore, Option A is correct. GDP is not intentionally increased. Intermediate goods do have market values. Imports are handled separately under the expenditure method.

❓ Why Other Options Are Incorrect

Option B → The value-added method prevents overestimation rather than increasing GDP.
Option C → Intermediate goods have measurable market prices.
Option D → Import adjustments are unrelated to the value-added calculation.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Identify the objective of subtracting intermediate consumption.

Final Logic:

Only the firm's own contribution should enter GDP.

🧠 Memory Trick

"Subtract Inputs, Keep Contribution."

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

4 Because it occurs over a defined period of time, the value added of a firm is categorised as a ________ variable.

A Stock

B Static

C Fixed

D Flow

💡 Short Explanation

�� Value added is measured during an accounting year. �� Variables measured over time are flow variables. �� Inventory is an example of a stock variable.

✅ Correct Answer Explanation

A flow variable is measured over a period of time, such as one month or one financial year. Since value added is generated continuously during the production process over an accounting period, it is classified as a flow variable. Therefore, Option D is correct. Stock variables are measured at a specific point in time. Static and fixed are not classifications used in national income accounting.

❓ Why Other Options Are Incorrect

Option A → Stock variables are measured at a particular date, not over a period.
Option B → Static is not an economic classification of variables.
Option C → Fixed refers to capital assets, not the measurement of variables.

🎯 Strategy

Used

Odd One Out

Application:

Differentiate between stock and flow variables.

Final Logic:

Value added is generated over time, making it a flow variable.

🧠 Memory Trick

"Flow = Over Time."

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

5 Match the concepts (List I) with their characteristics (List II):

List I	List II
1. Gross Value Added	a. GVA minus capital consumption
2. Depreciation	b. Includes the wear and tear of capital
3. Net Value Added	c. Consumed fully in the production process
4. Intermediate Goods	d. Also known as consumption of fixed capital

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

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

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

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

💡 Short Explanation

�� Gross Value Added includes depreciation. �� Depreciation is also called consumption of fixed capital. �� Intermediate goods are fully consumed in production.

✅ Correct Answer Explanation

The correct matching is: Gross Value Added → Includes the wear and tear of capital (b) because GVA is measured before deducting depreciation. Depreciation → Also known as consumption of fixed capital (d). Net Value Added → GVA minus capital consumption (a). Intermediate Goods → Consumed fully in the production process (c). Thus, the correct sequence is: 1-b, 2-d, 3-a, 4-c Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrectly matches Gross Value Added with Net Value Added.
Option B → Incorrectly associates intermediate goods with Gross Value Added.
Option D → Incorrectly matches depreciation with Net Value Added.

🎯 Strategy

Used

Option Grouping

Application:

Recall the definitions of Gross Value Added, Net Value Added, depreciation, and intermediate goods.

Final Logic:

Only Option C correctly matches all four concepts.

🧠 Memory Trick

"Gross Includes, Net Minus, Depreciation = Capital Consumption."

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

6 A firm produces Rs 100 worth of goods, uses Rs 20 of intermediate goods, and experiences Rs 10 in capital consumption (depreciation). What is its Net Value Added?

A Rs 70

B Rs 80

C Rs 90

D Rs 110

💡 Short Explanation

�� Gross Value Added is calculated first. �� Depreciation is deducted from Gross Value Added. �� The result is Net Value Added.

✅ Correct Answer Explanation

The calculation proceeds in two steps: Step 1: Calculate Gross Value Added (GVA) GVA = Value of Output − Intermediate Goods = Rs 100 − Rs 20 = Rs 80 Step 2: Calculate Net Value Added (NVA) NVA = Gross Value Added − Depreciation = Rs 80 − Rs 10 = Rs 70 Therefore, Option A is correct. Option B represents Gross Value Added before deducting depreciation. Option C deducts an incorrect amount. Option D exceeds the total value of output and is impossible.

❓ Why Other Options Are Incorrect

Option B → This is Gross Value Added, not Net Value Added.
Option C → Depreciation has not been deducted correctly.
Option D → Net Value Added cannot exceed the total value of production.

🎯 Strategy

Used

Substitution

Application:

Apply the formulas step by step:
GVA = Output − Intermediate Goods
NVA = GVA − Depreciation

Final Logic:

100 − 20 − 10 = Rs 70.

🧠 Memory Trick

"Output → GVA → NVA."

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

7 Because inventory is measured at a specific point in time rather than over a period, it is classified as a:

A Flow variable

B Depreciation variable

C Stock variable

D Continuous variable

💡 Short Explanation

�� Inventory is measured on a specific date. �� Variables measured at a point in time are stock variables. �� National income is a flow variable.

✅ Correct Answer Explanation

A stock variable is measured at a particular point in time, such as the inventory held on 31 March. Inventory consists of unsold finished goods, semi-finished goods, and raw materials available at a specific date. Therefore, it is classified as a stock variable. Hence, Option C is correct. Flow variables are measured over a period. Depreciation variable is not an economic classification. Continuous variable is a statistical term, not an NCERT classification.

❓ Why Other Options Are Incorrect

Option A → Flow variables are measured during an accounting period.
Option B → Depreciation is a concept, not a category of variables.
Option D → Continuous variable is unrelated to stock-flow classification.

🎯 Strategy

Used

Odd One Out

Application:

Differentiate between stock and flow variables.

Final Logic:

Inventory exists at a particular date, making it a stock variable.

🧠 Memory Trick

"Inventory = Stock on a Date."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Inventory as a Stock Variable

8 How is the change in inventories calculated for a firm during a specific year?

A Production of the firm + Sale of the firm

B Sale of the firm - Depreciation

C Production of the firm during the year - Sale of the firm during the year

D Final stock + Intermediate goods used

💡 Short Explanation

�� Inventory changes occur when production differs from sales. �� Unsold production increases inventories. �� Sales exceeding production reduce inventories.

✅ Correct Answer Explanation

The change in inventories measures how much production remains unsold during the accounting year. The formula is: Change in Inventories = Production during the Year − Sales during the Year If production exceeds sales, inventories accumulate. If sales exceed production, inventories decumulate. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Production and sales are not added together.
Option B → Depreciation has no role in inventory calculation.
Option D → Intermediate goods are unrelated to the formula for inventory change.

🎯 Strategy

Used

Substitution

Application:

Recall the NCERT formula for inventory change.

Final Logic:

Inventory change depends only on production and sales.

🧠 Memory Trick

"Inventory = Production − Sales."

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

📄 Passage

"Change in inventories may be planned or unplanned. In case of an unexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories."

Based on the passage, if a firm deliberately chooses to increase its stock from 100 units to 200 units by producing exactly 100 more units than its anticipated sales, this represents:

A Unexpected accumulation

B Unplanned decumulation

C A gross error

D Planned accumulation

💡 Short Explanation

�� The increase in inventory is intentional. �� Production exceeds anticipated sales by design. �� Planned inventory increase is called planned accumulation.

✅ Correct Answer Explanation

The question states that the firm deliberately decides to increase its inventory and successfully achieves its planned target. Since the increase is intentional and expected, it is classified as planned accumulation of inventories. Therefore, Option D is correct. Unexpected accumulation occurs due to lower-than-expected sales. Unplanned decumulation occurs due to higher-than-expected sales. This situation is not an error but a planned business decision.

❓ Why Other Options Are Incorrect

Option A → The accumulation is intentional, not unexpected.
Option B → Decumulation means inventory decreases rather than increases.
Option C → The firm's decision is deliberate and economically rational.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Focus on the keyword "deliberately", which indicates a planned decision.

Final Logic:

Intentional increase in stock = Planned accumulation.

🧠 Memory Trick

"Planned Increase = Planned Accumulation."

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

📄 Passage

According to the passage, an unexpected rise in sales leads directly to:

A Unplanned accumulation of inventories

B Unplanned decumulation of inventories

C Planned decumulation of inventories

D No change in inventory levels

💡 Short Explanation

�� Sales become higher than expected. �� More inventory is sold than anticipated. �� Inventory decreases unexpectedly.

✅ Correct Answer Explanation

The passage clearly states that an unexpected rise in sales causes inventories to fall below the planned level because more goods are sold than anticipated. This unexpected decrease in inventory is called unplanned decumulation of inventories. Therefore, Option B is correct. Unplanned accumulation occurs when sales unexpectedly fall. Planned decumulation results from an intentional decision. Inventory levels do change because additional goods are sold.

❓ Why Other Options Are Incorrect

Option A → Accumulation occurs when sales unexpectedly decrease.
Option C → Planned decumulation is intentional, whereas the passage describes an unexpected event.
Option D → The passage explicitly states that inventory decreases.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Read the concluding sentence of the passage carefully.

Final Logic:

Unexpected rise in sales directly results in unplanned decumulation.

🧠 Memory Trick

"High Sales = Low Stock."

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

11 In the product method, GDP is calculated by taking the sum total of the ________ of all the firms operating in the economy.

A Gross value added

B Intermediate expenses

C Externalities

D Planned investments

💡 Short Explanation

�� Every firm contributes Gross Value Added (GVA). �� GDP is obtained by summing the GVA of all firms. �� This avoids double counting of intermediate goods.

✅ Correct Answer Explanation

Under the Product (Value Added) Method, Gross Domestic Product (GDP) is obtained by adding the Gross Value Added (GVA) generated by all firms operating within the domestic territory during an accounting year. Mathematically, GDP = Σ Gross Value Added of all firms Since GVA measures each firm's net contribution to production, summing all GVAs provides the value of total domestic production without double counting. Therefore, Option A is correct. Intermediate expenses are deducted while computing GVA. Externalities are not included in GDP estimation. Planned investments are only one component of GDP.

❓ Why Other Options Are Incorrect

Option B → Intermediate expenses are subtracted while calculating GVA and therefore cannot be summed to obtain GDP.
Option C → Externalities generally lie outside market transactions and are not directly included in GDP.
Option D → Planned investments form only one expenditure component and do not represent GDP by the Product Method.

🎯 Strategy

Used

Elimination

Application:

Recall the Product Method identity used in NCERT.

Final Logic:

GDP equals the sum of the Gross Value Added of all firms.

🧠 Memory Trick

"Add All GVA = GDP."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Product Method (GDP by Value Added)

12 Which statement correctly represents a firm's Gross Value Added (GVA) calculation?

A GVA equals intermediate goods used plus depreciation.

B GVA is simply the total sales revenue regardless of inventory changes.

C GVA includes the value of raw materials purchased from other firms.

D GVA equals value of sales plus value of change in inventories minus value of intermediate goods used.

💡 Short Explanation

�� GVA measures the firm's own contribution. �� Inventory changes are included in production. �� Intermediate goods are deducted.

✅ Correct Answer Explanation

According to NCERT, the Gross Value Added of a firm is calculated as: GVA = Value of Sales + Change in Inventories − Value of Intermediate Goods Used The value of inventories is included because goods produced but not sold during the year are still part of current production. Intermediate goods are deducted to avoid double counting. Therefore, Option D is correct. Intermediate goods are deducted, not added. Sales alone ignore inventory changes. Raw materials purchased from other firms are intermediate goods and must be deducted.

❓ Why Other Options Are Incorrect

Option A → Intermediate goods are deducted, not added, and depreciation alone does not determine GVA.
Option B → Sales alone ignore changes in inventories and therefore do not measure total production.
Option C → Raw materials purchased are intermediate goods and must be subtracted.

🎯 Strategy

Used

Substitution

Application:

Recall the NCERT formula for Gross Value Added.

Final Logic:

GVA = Sales + Inventory Change − Intermediate Goods.

🧠 Memory Trick

"Sales + Stock − Inputs = GVA."

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

13 Arrange the steps to conceptualize GDP using the expenditure method:
1. Identify all final consumption, investment, government, and export expenditures.
2. Ensure spending on intermediate goods is excluded to avoid double counting.
3. Subtract aggregate imports from the total expenditures to isolate domestic production.
4. Sum all these domestic final expenditures to determine GDP.

A 1, 3, 2, 4

B 1, 2, 3, 4

C 2, 4, 1, 3

D 4, 2, 3, 1

💡 Short Explanation

�� Identify all final expenditure categories. �� Exclude intermediate expenditure. �� Deduct imports before obtaining GDP.

✅ Correct Answer Explanation

The logical sequence of the Expenditure Method is: First, identify all final expenditures (Consumption, Investment, Government Expenditure, and Exports). Exclude expenditure on intermediate goods to avoid double counting. Deduct imports, since they are not part of domestic production. Finally, sum all domestic final expenditures to calculate GDP. This follows the GDP identity: GDP = C + I + G + (X − M) Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Imports should be deducted after identifying and screening final expenditure.
Option C → GDP cannot be summed before identifying expenditure components.
Option D → The sequence starts with the conclusion rather than the first step.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the procedure in the same order as the NCERT explanation of the Expenditure Method.

Final Logic:

Identify → Exclude Intermediate → Deduct Imports → Sum Domestic Expenditure.

🧠 Memory Trick

"Identify → Exclude → Subtract → Sum."

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

14 Out of the variables on the right-hand side of the expenditure GDP equation (C + I + G + X − M), which component is considered the most unstable?

A Investment expenditure (I)

B Consumption expenditure (C)

C Government expenditure (G)

D Imports (M)

💡 Short Explanation

�� Investment fluctuates with business expectations. �� Consumption is comparatively stable. �� Investment causes most GDP fluctuations.

✅ Correct Answer Explanation

Among the expenditure components, Investment Expenditure (I) is generally the most volatile because it depends heavily on business expectations, interest rates, technological changes, and future profit prospects. Consumption expenditure tends to remain relatively stable, while government expenditure is largely determined by policy decisions. Imports vary with domestic demand but are generally less volatile than private investment. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Household consumption changes gradually and is comparatively stable.
Option C → Government expenditure is generally planned through budgets and is relatively stable.
Option D → Imports fluctuate but are not regarded as the most unstable expenditure component in macroeconomics.

🎯 Strategy

Used

Odd One Out

Application:

Identify the expenditure component that shows the greatest cyclical fluctuations.

Final Logic:

Investment expenditure is the most unstable component of GDP.

🧠 Memory Trick

"Investment = Instability."

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

15 The aggregate final consumption expenditure is denoted by C. A part of this is spent on ________ (denoted as Cm), which must be subtracted to find expenditure specifically on domestic firms.

A Business durables

B Exported goods

C Fixed capital

D Imports of consumption goods

💡 Short Explanation

�� Consumption includes both domestic and imported goods. �� Imported consumption does not contribute to domestic GDP. �� Therefore, imported consumption is deducted.

✅ Correct Answer Explanation

In the Expenditure Method, C represents total household consumption expenditure. However, part of this expenditure may be on imported consumption goods (Cm). Since imports are produced outside the domestic economy, they must be deducted while calculating domestic GDP. Thus: Domestic Consumption = C − Cm Therefore, Option D is correct. Business durables are part of consumption or investment depending on the purchaser. Exported goods are produced domestically and are included in exports. Fixed capital relates to investment, not consumption.

❓ Why Other Options Are Incorrect

Option A → Business durables are not represented by Cm.
Option B → Exported goods contribute to domestic GDP and are not deducted from consumption.
Option C → Fixed capital relates to investment expenditure, not household consumption.

🎯 Strategy

Used

Substitution

Application:

Recall the expenditure identity where imported consumption is excluded from domestic GDP.

Final Logic:

Cm = Consumption Imports, which are deducted from total consumption.

🧠 Memory Trick

"Cm = Consumption Imports."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Household Consumption in the Expenditure Method

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

List I	List II
1. Inventory investment	a. Addition of housing facilities
2. Fixed business investment	b. Addition to machinery, factory buildings, and equipment
3. Residential investment	c. Total addition to capital stock before depreciation
4. Gross investment	d. Rise in the value of unsold stock over a year

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

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

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

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

💡 Short Explanation

�� Inventory investment refers to changes in unsold stock. �� Fixed business investment refers to capital goods. �� Residential investment refers to housing construction.

✅ Correct Answer Explanation

The correct matching is: Inventory investment → Rise in the value of unsold stock over a year (d). Fixed business investment → Addition to machinery, factory buildings, and equipment (b). Residential investment → Addition of housing facilities (a). Gross investment → Total addition to capital stock before depreciation (c). Thus, the correct sequence is: 1-d, 2-b, 3-a, 4-c Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrectly exchanges inventory and fixed investment.
Option B → Incorrectly matches inventory investment with housing and gross investment with inventory.
Option D → Incorrectly exchanges fixed business investment and inventory investment.

🎯 Strategy

Used

Option Grouping

Application:

Recall the NCERT classification of investment expenditure.

Final Logic:

Only Option C correctly matches all four investment concepts.

🧠 Memory Trick

"Inventory–Stock, Fixed–Machinery, Residential–Housing, Gross–Before Depreciation."

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

17 The term (G − Gm) in the expenditure method equation represents:

A Government expenditure on imported capital

B Gross private domestic investment

C Total indirect taxes collected by the government

D The part of aggregate final government expenditure spent strictly on domestic firms

💡 Short Explanation

�� G represents total government expenditure. �� Gm represents expenditure on imported government purchases. �� G − Gm gives domestic government expenditure.

✅ Correct Answer Explanation

In the Expenditure Method, G denotes total government final expenditure, while Gm denotes government expenditure on imported goods and services. Since imports are not part of domestic production, they must be deducted. Therefore: G − Gm = Government expenditure on domestically produced final goods and services. Hence, Option D is correct. Option A describes only imported expenditure, not the difference. Option B refers to investment, not government expenditure. Option C is unrelated to the expenditure identity.

❓ Why Other Options Are Incorrect

Option A → This represents Gm, not G − Gm.
Option B → Gross private domestic investment is represented by I, not G − Gm.
Option C → Indirect taxes are not part of the expenditure equation.

🎯 Strategy

Used

Substitution

Application:

Interpret the notation:
Domestic Government Expenditure = G − Gm

Final Logic:

Subtracting imported government purchases leaves only domestic government expenditure.

🧠 Memory Trick

"Government − Imports = Domestic Government Spending."

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

18 If total exports (X) are Rs 4,000 crores and total imports (M) are Rs 4,200 crores, what is the value of Net Exports (X − M) added to the GDP?

A Rs 200 crores

B - Rs 200 crores

C Rs 8,200 crores

D Rs 4,000 crores

💡 Short Explanation

�� Net Exports = Exports − Imports. �� Imports exceed exports. �� Therefore, net exports are negative.

✅ Correct Answer Explanation

The formula for Net Exports is: Net Exports = X − M Given: Exports = Rs 4,000 crores Imports = Rs 4,200 crores Therefore: Net Exports = 4,000 − 4,200 = - Rs 200 crores A negative value indicates a trade deficit. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → The sign is incorrect because imports exceed exports.
Option C → Exports and imports are not added together.
Option D → This represents exports only, not net exports.

🎯 Strategy

Used

Substitution

Application:

Use the formula:
Net Exports = Exports − Imports

Final Logic:

4000 − 4200 = −200 crores.

🧠 Memory Trick

"Exports Minus Imports."

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

19 Which statement correctly outlines the core premise of the income method of calculating GDP?

A GDP is the sum of wages, profits, interest, and rent.

B GDP is calculated solely by summing all business revenues.

C GDP calculation explicitly adds transfer payments to households.

D GDP strictly ignores profits and focuses exclusively on labor wages.

💡 Short Explanation

�� Income Method sums all factor incomes. �� The four factor incomes are wages, rent, interest, and profit. �� Transfer payments are excluded.

✅ Correct Answer Explanation

The Income Method measures GDP by summing all factor incomes earned from current production. The four factor incomes are: Wages Rent Interest Profit These payments represent the income earned by labour, land, capital, and entrepreneurship. Therefore, Option A is correct. Business revenues are not GDP because they include payments for intermediate goods. Transfer payments are excluded since they are not payments for current production. Profits are an essential component of GDP.

❓ Why Other Options Are Incorrect

Option B → Business revenue includes intermediate transactions and is not equivalent to GDP.
Option C → Transfer payments do not arise from current production and are excluded.
Option D → Profit is an important component of factor income and cannot be ignored.

🎯 Strategy

Used

Elimination

Application:

Recall the four factor incomes included in the Income Method.

Final Logic:

GDP equals the sum of all factor incomes.

🧠 Memory Trick

"WRIP = Wage, Rent, Interest, Profit."

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

20 Which of the following properly establishes the relationship in the income method?
Assertion (A): In the income method, intermediate goods are not explicitly subtracted as they are in the product method.
Reason (R): The income method adds up only the final factor incomes (wages, rent, interest, profit) paid out of the net value added, inherently avoiding double counting.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

�� Income Method sums only factor incomes. �� Intermediate goods are excluded automatically. �� Double counting is avoided naturally.

✅ Correct Answer Explanation

The Assertion is true because, unlike the Product Method, the Income Method does not explicitly subtract intermediate goods. Instead, it directly sums the incomes earned by the factors of production. The Reason is also true because the Income Method includes only the factor incomes—wages, rent, interest, and profit—which arise from the net value added created in production. Since only value added generates factor incomes, intermediate goods are automatically excluded, thereby avoiding double counting. Thus, the Reason correctly explains the Assertion. Therefore, 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.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Evaluate both the Assertion and the Reason together and determine whether the Reason explains the Assertion.

Final Logic:

The Income Method avoids double counting because it sums only factor incomes arising from value added.

🧠 Memory Trick

"Income Method = Factor Incomes Only."

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

CUET UG Economics Booster Test 2 - Methods of Calculating National Income

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