(a) What is meant by the problem of double counting? Discuss briefly the two approaches to avoid this problem.

(b) Define ‘Capital goods’.

OR

Given the following data, find the values of ‘Operating Surplus’ and ‘Net Exports’ :

i) Double counting means counting the value of the same product more than once. In the calculation of the national income, the value of the final goods and services produced by all the production units of a country during the year are counted. The value of intermediate goods is excluded. When we calculate the value of final goods, the value of intermediate goods is included. Every producer considerS his good as the final product irrespective of whether it will be used as an intermediate good or a final good.

For example, a company produces raw cotton and sells it for Rs 100 to another company. It converts it into cotton yarn and sells it to another company for Rs 200. The next company produces it into cotton clothes and sells it to Rs 300. The final firm sells it to the final consumers for use for Rs 400. So, if we add the total amount of 100+200+300+400, it will be Rs 1000. But this is the case of double counting as the value of the previous good is being counted twice. So, the actual value to be used for calculating national income is Rs 250.

The two approaches to correct the problem of double counting are:

a.Final output method: In this method, only the value of the final goods is included. Final goods are the goods which are ready for direct consumption or use. The value of the final output is calculated by subtracting the value of intermediate goods from the value of output.

B. Value-added method: The total sum of the value added by each producing unit of the country should be taken into consideration while calculating the national income. Value added is the difference between the value of output and the value of intermediate consumption

b. Capital goods are the goods which are purchased not for meeting the immediate need of the consumer but are in fact used for the production of other goods. For example, purchasing machinery.

OR

i)Operating surplus = National Income-Net Factor Income from Abroad-Mixed Income of Self-Employed-Wages and Salaries

Operating surplus = 4200-200-400-2400

= Rs 1200 crore

ii) Net exports = National Income-Private Final Consumption Expenditure-Government Final Consumption Expenditure-Gross Domestic Capital Formation + Consumption of Fixed Capital + Net Indirect Taxes - Net Factor Income from Abroad

Net exports = 4200-2000-1000-1100+100+150-200

= Rs 150 crore