CUET UG Economics Booster Test 2 - Macroeconomic Aggregates and Identities -

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CUET UG Economics Booster Test 2 - Macroeconomic Aggregates and Identities

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 2 - Macroeconomic Aggregates and Identities

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QUESTION 1 OF 20

Consider the following statements about GDP:
I. It is a stock variable because it measures value at a point in time.
II. It measures the aggregate production of final goods and services taking place within the domestic economy during a year.
Which is/are correct?

Answer Review

1 Consider the following statements about GDP:
I. It is a stock variable because it measures value at a point in time.
II. It measures the aggregate production of final goods and services taking place within the domestic economy during a year.
Which is/are correct?

A I only

B Neither I nor II

C II only

D Both I and II

💡 Short Explanation

GDP is a flow variable, not a stock variable. It measures production over an accounting year. Therefore, only Statement II is correct.

✅ Correct Answer Explanation

Gross Domestic Product (GDP) measures the aggregate market value of all final goods and services produced within the domestic territory during a specific accounting year. Since it is measured over a period of time, GDP is classified as a flow variable, not a stock variable. Thus: Statement I is incorrect because stock variables are measured at a particular point in time (e.g., wealth, inventories). Statement II is correct because GDP measures the value of final goods and services produced within the domestic economy during a year. Hence, Option C is the correct answer.

❓ Why Other Options Are Incorrect

Option A → Incorrect because Statement I is false.
Option B → Incorrect because Statement II is true.
Option D → Incorrect because Statement I is false.

🎯 Strategy

Used

Elimination

Application:

Evaluate each statement independently using the definitions of stock and flow variables.

Final Logic:

GDP is a flow variable measured over one year, making only Statement II correct.

🧠 Memory Trick

"GDP Flows; Wealth Stays."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Meaning of GDP and Flow Variable

2 Assertion (A): Profits earned by a Korean-owned Hyundai car factory in India are excluded from India's GDP.
Reason (R): GDP only includes production by citizens of the country, regardless of geographical location.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

GDP depends on location of production, not nationality. Hyundai's production in India is included in India's GDP. Both the Assertion and Reason are incorrect.

✅ Correct Answer Explanation

GDP includes all production taking place within the domestic territory, irrespective of whether the producer is a resident or a foreign-owned company. Therefore: The profits generated by a Hyundai factory operating in India arise from production within India's domestic territory and contribute to India's GDP. GDP does not depend on citizenship; it depends on where production takes place. Hence: Assertion is false. Reason is also false. 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 false.
Option D → Incorrect because the Reason is also false.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall that GDP is based on domestic territory, whereas GNP is based on national ownership.

Final Logic:

Production within India contributes to India's GDP regardless of ownership.

🧠 Memory Trick

"GDP = Place, GNP = People."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Domestic Territory and GDP

3 If Firm A has a total production of Rs 500 and uses intermediate goods worth Rs 200, its Gross Value Added (GVA) is:

A Rs 700

B Rs 300

C Rs 200

D Rs 500

💡 Short Explanation

GVA measures the firm's own contribution. Intermediate goods are deducted. Formula: GVA = Output − Intermediate Consumption

✅ Correct Answer Explanation

The Gross Value Added (GVA) is calculated as: GVA = Value of Output − Value of Intermediate Goods Given: Output = Rs 500 Intermediate Goods = Rs 200 Therefore, GVA = 500 − 200 = Rs 300 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect because intermediate goods have been added instead of deducted.
Option C → Incorrect because it represents only the value of intermediate goods.
Option D → Incorrect because it ignores intermediate consumption.

🎯 Strategy

Used

Substitution

Application:

Substitute the values directly into the GVA formula.

Final Logic:

500 − 200 = Rs 300.

🧠 Memory Trick

"GVA = Output − Inputs."

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

4 Arrange the components of the expenditure method in the correct sequence as they appear in the standard identity: GDP ≡ C + I + G + X – M.
1. Final investment expenditure
2. Final consumption expenditure
3. Net exports (Exports - Imports)
4. Final government expenditure

A 1, 2, 4, 3

B 4, 2, 1, 3

C 2, 4, 1, 3

D 2, 1, 4, 3

💡 Short Explanation

Follow the standard GDP expenditure identity. Consumption comes first. Net exports come last.

✅ Correct Answer Explanation

The expenditure identity is: GDP = C + I + G + (X − M) where: C = Final Consumption Expenditure I = Final Investment Expenditure G = Final Government Expenditure X − M = Net Exports Thus, the correct sequence is: 2 → 1 → 4 → 3 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Begins with investment instead of consumption.
Option B → Government expenditure is incorrectly placed first.
Option C → Government expenditure appears before investment.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the standard expenditure identity exactly as given in NCERT.

Final Logic:

GDP follows the sequence C → I → G → (X − M).

🧠 Memory Trick

"CIG-XM"

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

5 Match the factors of production in List I with their corresponding remunerations in List II based on the income method.

List I	List II
1. Human labour	a. Rent
2. Capital	b. Profit
3. Entrepreneurship	c. Interest
4. Fixed natural resources (Land)	d. Wage

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

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

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

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

💡 Short Explanation

Labour earns wages. Capital earns interest. Entrepreneurship earns profit. Land earns rent.

✅ Correct Answer Explanation

Under the Income Method, factor incomes are: Human Labour → Wage Capital → Interest Entrepreneurship → Profit Land → Rent Thus, the correct matching is: 1 → d 2 → c 3 → b 4 → a Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Labour does not earn profit, and entrepreneurship does not earn wages.
Option C → Capital does not earn wages, and land does not earn profit.
Option D → Incorrectly matches all four factors.

🎯 Strategy

Used

Option Grouping

Application:

Recall the standard factor-remuneration pairs from NCERT.

Final Logic:

Labour–Wage, Capital–Interest, Entrepreneurship–Profit, Land–Rent.

🧠 Memory Trick

"LWIPR – Labour-Wage, Interest-Capital, Profit-Entrepreneur, Rent-Land."

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

6 According to the circular flow of income model, the aggregate spending of the economy must be exactly equal to the aggregate ________ earned by the factors of production.

A Depreciation

B Income

C Subsidies

D Inventories

💡 Short Explanation

Aggregate expenditure equals aggregate income. This is a fundamental national income identity. Factor incomes collectively equal total spending in the economy.

✅ Correct Answer Explanation

According to the circular flow of income and the income method of national income accounting, every expenditure made on final goods and services becomes someone else's income. Thus, Aggregate Expenditure = Aggregate Income = Aggregate Output The incomes earned by the factors of production (wages, rent, interest, and profit) together equal the economy's aggregate spending. Therefore, Option B is correct. Depreciation is a capital consumption allowance. Subsidies are government transfers to producers. Inventories represent unsold stock and are not equal to aggregate spending.

❓ Why Other Options Are Incorrect

Option A → Depreciation measures wear and tear of capital goods and is not equal to aggregate expenditure.
Option C → Subsidies are government payments and do not represent total factor income.
Option D → Inventories are stock variables and not equivalent to aggregate income.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the fundamental macroeconomic identity presented in the circular flow model.

Final Logic:

Aggregate spending always equals aggregate income.

🧠 Memory Trick

"Spending = Income = Output."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Circular Flow and Equality of Income, Output and Expenditure

7 Which of the following is NOT included when calculating GDP at Factor Cost?

A Wages

B Profits

C Net product taxes

D Rent

💡 Short Explanation

GDP at Factor Cost includes only factor payments. Net product taxes are excluded. Wages, rent, interest and profit are included.

✅ Correct Answer Explanation

GDP at Factor Cost measures the income received by factors of production. It includes: Wages Rent Interest Profit Net Product Taxes are added later when converting to GDP at Market Prices. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Wages are payments to labour and form part of factor cost.
Option B → Profits are factor income earned by entrepreneurs.
Option D → Rent is the income earned by landowners and is included in factor cost.

🎯 Strategy

Used

Odd One Out

Application:

Identify the option that is not a factor payment.

Final Logic:

Net product taxes are government receipts, not factor incomes.

🧠 Memory Trick

(Wages, Rent, Interest, Profit)

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Factor Cost and Market Price

8 Which equation correctly represents the transition from factor cost to market price?

A Market Price = Factor Cost + Net Indirect Taxes

B Market Price = Factor Cost - Depreciation

C Market Price = Factor Cost + Subsidies - Indirect Taxes

D Market Price = Factor Cost - Net Product Taxes

💡 Short Explanation

Market price includes indirect taxes. Subsidies reduce market prices. Net indirect taxes bridge factor cost and market price.

✅ Correct Answer Explanation

The correct conversion formula is: Market Price = Factor Cost + Net Indirect Taxes where Net Indirect Taxes = Indirect Taxes − Subsidies This converts the income earned by factors into the price actually paid by consumers. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Depreciation converts gross measures into net measures, not factor cost into market price.
Option C → The signs are reversed. Subsidies are subtracted while calculating net indirect taxes.
Option D → Net product taxes alone do not convert factor cost directly into market price.

🎯 Strategy

Used

Substitution

Application:

Recall the standard NCERT conversion identity.

Final Logic:

Market Price = Factor Cost + Net Indirect Taxes.

🧠 Memory Trick

"Market = Factor + NIT."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Market Price and Factor Cost

9 The Central Statistics Office (CSO) replaced GDP at factor cost with GVA at basic prices in 2015. What distinguishes basic prices from factor costs?

A Basic prices include net product taxes

B Basic prices include depreciation

C Basic prices include net production taxes

D Basic prices exclude all taxes and subsidies

💡 Short Explanation

Basic prices lie between factor cost and market price. They include net production taxes. Product taxes are added later.

✅ Correct Answer Explanation

According to the revised national accounting framework adopted by the CSO: GVA at Basic Prices = GVA at Factor Cost + Net Production Taxes Basic prices include production taxes minus production subsidies, but they do not include net product taxes. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Net product taxes are added later while arriving at GDP at Market Prices.
Option B → Depreciation distinguishes gross and net measures, not factor cost and basic prices.
Option D → Basic prices include net production taxes and therefore do not exclude all taxes.

🎯 Strategy

Used

Elimination

Application:

Differentiate between production taxes and product taxes.

Final Logic:

Basic Prices = Factor Cost + Net Production Taxes.

🧠 Memory Trick

"Basic = Factor + Production Taxes."

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

10 Which of the following taxes is considered a "production tax" (paid independent of the volume of production)?

A Excise tax

B Import duty

C Service tax

D Stamp and registration fee

💡 Short Explanation

Production taxes are independent of output. They are payable even if production volume changes. Stamp and registration fees are examples.

✅ Correct Answer Explanation

Production taxes are taxes imposed irrespective of the quantity of goods produced. Examples include: Stamp duty Registration fee Land revenue Licence fee Excise duty, import duty and service tax are generally classified as product taxes because they depend on production, sale or import of goods and services. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Excise tax is levied per unit of product and is a product tax.
Option B → Import duty is imposed on imported goods and is treated as a product tax.
Option C → Service tax is levied on the provision of services and is treated as a product tax.

🎯 Strategy

Used

Odd One Out

Application:

Separate taxes linked to production activity from those linked to units of output.

Final Logic:

Only Stamp and Registration Fee is independent of production volume.

🧠 Memory Trick

"Production Tax = Pay Even Without Producing."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Production Taxes and Product Taxes

11 Unlike production taxes, product taxes such as excise duty are paid or received per ________.

A Employee

B Unit of product

C Square foot of land

D Financial year

💡 Short Explanation

Product taxes are levied on each unit of output. Excise duty is a common example of a product tax. The amount depends on the quantity produced or sold.

✅ Correct Answer Explanation

Product taxes are taxes paid or received for every unit of a product produced, sold, imported, or exported. Examples include excise duty, GST (on products), import duty, and export duty. Unlike production taxes, which are independent of output, product taxes vary with the quantity of goods or services. Therefore, Option B is correct. Employee has no relation to product taxes. Square foot of land relates to property or production-related charges. Financial year is merely an accounting period.

❓ Why Other Options Are Incorrect

Option A → Product taxes are not levied per employee.
Option C → Taxes based on land area are not product taxes.
Option D → Product taxes are levied per unit of output, not per financial year.

🎯 Strategy

Used

Elimination

Application:

Recall the definition of product tax in NCERT.

Final Logic:

Product taxes are imposed per unit of product.

🧠 Memory Trick

"Product Tax = Per Product."

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

12 If NNP at market prices is Rs 2,000 crores, indirect taxes are Rs 200 crores, and subsidies are Rs 50 crores, what is the NNP at factor cost?

A Rs 1,850 crores

B Rs 1,750 crores

C Rs 2,150 crores

D Rs 2,250 crores

💡 Short Explanation

Net Indirect Taxes = Indirect Taxes − Subsidies. NNP at Factor Cost = NNP at Market Price − Net Indirect Taxes. Apply the values directly.

✅ Correct Answer Explanation

Formula: NNP at Factor Cost = NNP at Market Price − (Indirect Taxes − Subsidies) Given: NNP at Market Price = Rs 2,000 crores Indirect Taxes = Rs 200 crores Subsidies = Rs 50 crores Net Indirect Taxes = 200 − 50 = Rs 150 crores Therefore, NNP at Factor Cost = 2,000 − 150 = Rs 1,850 crores Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect calculation of net indirect taxes.
Option C → Incorrectly adds taxes instead of deducting them.
Option D → Incorrectly adds subsidies and taxes.

🎯 Strategy

Used

Substitution

Application:

Substitute the values directly into the conversion formula.

Final Logic:

2000 − (200 − 50) = 1850 crores.

🧠 Memory Trick

"Market → Factor = Minus NIT."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Conversion of NNP at Market Price to NNP at Factor Cost

13 Consider the following statements:
I. GVA at basic prices includes net product taxes.
II. GVA at basic prices includes net production taxes.
Which statement(s) is/are correct?

A I only

B II only

C Both I and II

D Neither I nor II

💡 Short Explanation

GVA at Basic Prices includes net production taxes. It excludes net product taxes. Therefore, only Statement II is correct.

✅ Correct Answer Explanation

According to NCERT, GVA at Basic Prices = GVA at Factor Cost + Net Production Taxes Net Product Taxes are added later while calculating GDP at Market Prices. Thus, Statement I is incorrect. Statement II is correct. Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A → Incorrect because Statement I is false.
Option C → Incorrect because Statement I is false.
Option D → Incorrect because Statement II is true.

🎯 Strategy

Used

Elimination

Application:

Differentiate between production taxes and product taxes.

Final Logic:

Basic Prices include production taxes, not product taxes.

🧠 Memory Trick

"Basic = Production Taxes."

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

14 Based on CSO revisions, the measure now simply called "GDP" corresponds to:

A GDP at market prices

B GDP at factor cost

C GVA at basic prices

D GVA at factor cost

💡 Short Explanation

Since the CSO revision, GDP refers to GDP at Market Prices. GVA at Basic Prices is reported separately. GDP at Factor Cost is no longer the standard measure.

✅ Correct Answer Explanation

Following the revision in the national accounts by the Central Statistics Office (CSO) in 2015, the official measure termed GDP refers to GDP at Market Prices. While GVA at Basic Prices is also published, the commonly reported GDP corresponds to GDP at Market Prices. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → GDP at Factor Cost is no longer the official headline measure.
Option C → GVA at Basic Prices is a separate production measure.
Option D → GVA at Factor Cost is not the official GDP measure.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the 2015 CSO revision in national income accounting.

Final Logic:

Official GDP now refers to GDP at Market Prices.

🧠 Memory Trick

"Today's GDP = Market Price."

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

15 Match the aggregate with its formula.

List I	List II
1. GNP	a. Gross Investment − Depreciation
2. NNP at Market Prices	b. Sum total of Gross Value Added by all firms in the economy
3. GDP	c. GNP − Depreciation
4. Net Investment	d. GDP + Net Factor Income from Abroad

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

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

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

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

💡 Short Explanation

GNP = GDP + NFIA. NNP = GNP − Depreciation. Net Investment = Gross Investment − Depreciation.

✅ Correct Answer Explanation

The correct matching is: GNP → GDP + Net Factor Income from Abroad (d) NNP at Market Prices → GNP − Depreciation (c) GDP → Sum total of Gross Value Added by all firms in the economy (b) Net Investment → Gross Investment − Depreciation (a) Therefore, the correct sequence is: 1-d, 2-c, 3-b, 4-a Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrectly matches GNP and GDP.
Option B → Incorrectly matches NNP and GDP.
Option D → Incorrectly pairs all four aggregates.

🎯 Strategy

Used

Option Grouping

Application:

Recall the standard formulas for GDP, GNP, NNP, and Net Investment.

Final Logic:

Only Option D correctly matches all four identities.

🧠 Memory Trick

"GDP → GNP → NNP → Net Investment."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Macroeconomic Aggregates and Identities

16 An Indian citizen earning a wage in Saudi Arabia contributes to:

A India's GDP and Saudi Arabia's GNP

B India's GDP and India's GNP

C Saudi Arabia's GDP and India's GNP

D Saudi Arabia's GNP and India's NNP

💡 Short Explanation

GDP is based on domestic territory. GNP is based on national ownership (residency). Income earned by an Indian in Saudi Arabia is included in Saudi Arabia's GDP and India's GNP.

✅ Correct Answer Explanation

GDP measures production within a country's domestic territory, irrespective of the nationality of the producer. Since the Indian citizen is working in Saudi Arabia, the production takes place within Saudi Arabia and is included in Saudi Arabia's GDP. However, because the worker is a normal resident (national) of India, the wage earned abroad is included in India's Gross National Product (GNP) through Net Factor Income from Abroad (NFIA). Therefore, Option C is correct. Option A is incorrect because the production does not occur in India. Option B incorrectly includes the income in India's GDP. Option D is incorrect because the income contributes to Saudi Arabia's GDP, not Saudi Arabia's GNP.

❓ Why Other Options Are Incorrect

Option A → India's GDP includes only production within India.
Option B → GDP is based on location, not nationality.
Option D → Saudi Arabia's GNP measures income of Saudi residents, not Indian residents.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Differentiate clearly between GDP (location) and GNP (ownership/residency).

Final Logic:

Production occurs in Saudi Arabia, while the income belongs to an Indian resident.

🧠 Memory Trick

"GDP = Place, GNP = Person."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: GDP, GNP and Net Factor Income from Abroad

17 When we deduct the value of ________ from Gross National Product, we obtain the measure of aggregate income called Net National Product.

A Depreciation

B Net indirect taxes

C Subsidies

D Personal taxes

💡 Short Explanation

Gross measures include depreciation. Net measures exclude depreciation. NNP is obtained after deducting depreciation from GNP.

✅ Correct Answer Explanation

Depreciation, also known as Consumption of Fixed Capital, represents the loss in value of fixed assets due to wear and tear during production. The relationship is: NNP = GNP − Depreciation Thus, by deducting depreciation from Gross National Product, we obtain Net National Product. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Net indirect taxes are used to convert Market Price into Factor Cost.
Option C → Subsidies are not deducted to calculate NNP.
Option D → Personal taxes are not part of the computation of NNP.

🎯 Strategy

Used

Substitution

Application:

Recall the standard gross-to-net conversion formula.

Final Logic:

Gross − Depreciation = Net.

🧠 Memory Trick

"Gross minus Wear = Net."

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

18 Assertion (A): Depreciation is an annual allowance for the wear and tear of a capital good.
Reason (R): Capital goods gradually undergo wear and tear and are repaired or replaced over time to maintain the capital stock.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

Depreciation accounts for wear and tear. Capital goods lose value over time. The Reason correctly explains the Assertion.

✅ Correct Answer Explanation

The Assertion is true because depreciation is the annual allowance made for the reduction in the value of capital goods due to wear and tear, accidental damage, and obsolescence. The Reason is also true because machinery, buildings, and equipment gradually deteriorate through use and must eventually be repaired or replaced. This physical and economic deterioration is precisely why depreciation is deducted in national income accounting. Therefore, the Reason correctly explains the Assertion. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect because both statements 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 the Assertion and determine whether the Reason logically explains it.

Final Logic:

Capital goods wear out over time; therefore depreciation is necessary.

🧠 Memory Trick

"Wear & Tear = Depreciation."

📚 Class XII – Introductory Macroeconomics – Chapter: National Income Accounting – Topic: Depreciation (Consumption of Fixed Capital)

📄 Passage

"We can further subdivide the National Income into smaller categories. Out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. Similarly, Corporate Tax will also have to be deducted from the NI. We also deduct net interests paid by the households to the firms and government, and add transfer payments."

Based on the passage, what is the starting measure from which deductions are made to calculate Personal Income (PI)?

A Personal Disposable Income

B Net National Product at Market Price

C Gross Domestic Product

D National Income (NNP at Factor Cost)

💡 Short Explanation

Personal Income is derived from National Income. Certain deductions and additions are made. National Income is the starting point.

✅ Correct Answer Explanation

The passage clearly states that Undistributed Profits, Corporate Tax, and certain interest payments are deducted from National Income, while transfer payments are added to arrive at Personal Income (PI). Thus, the starting measure is National Income (NNP at Factor Cost). Therefore, Option D is correct. Personal Disposable Income is calculated after deducting personal taxes from PI. NNP at Market Price is converted into National Income before calculating PI. GDP is not the direct starting point for Personal Income.

❓ Why Other Options Are Incorrect

Option A → Personal Disposable Income is calculated after Personal Income.
Option B → NNP at Market Price must first be converted to National Income.
Option C → GDP is not directly used to calculate Personal Income.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the passage carefully to identify the starting aggregate.

Final Logic:

The passage explicitly states that deductions are made from National Income.

🧠 Memory Trick

"NI → PI → PDI."

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

📄 Passage

According to the passage, why are Undistributed Profits (UP) deducted from National Income to calculate Personal Income?

A Because they are paid to the government as taxes

B Because they do not accrue to the households

C Because they represent depreciation

D Because they are transfer payments

💡 Short Explanation

Undistributed profits remain with firms. They are not received by households. Therefore, they are excluded from Personal Income.

✅ Correct Answer Explanation

Undistributed Profits (UP) are profits retained by firms rather than distributed to shareholders or households. Since Personal Income measures the income actually received by households, undistributed profits must be deducted because households do not receive them. Therefore, Option B is correct. They are not government taxes. They are unrelated to depreciation. Transfer payments are added, not deducted.

❓ Why Other Options Are Incorrect

Option A → Undistributed profits are retained earnings, not taxes.
Option C → Depreciation is a separate concept dealing with capital consumption.
Option D → Transfer payments are added while calculating Personal Income.

🎯 Strategy

Used

Elimination

Application:

Identify which option directly matches the statement in the passage.

Final Logic:

UP is deducted because it does not accrue to households.

🧠 Memory Trick

"UP Stays with Firms."

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

CUET UG Economics Booster Test 2 - Macroeconomic Aggregates and Identities

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