a) State any two precautions that must be taken into consideration while estimating national income by the value-added method.

b) In an economy, the following transactions took place. Calculate the value of output and value added by Firm B:

i. Firm A sold to firm B goods of 80 crores; to firm C 50 crore; to household

30 crore and goods of value 10 crores remain unsold

ii. Firm B sold to firm C goods of 70 crores; to firm D 40 crore; goods of value

30 crore were exported and goods of value 5 crores were sold to the government.

OR

Differentiate between National Income at Current Prices and National Income at Constant Prices. Which of the two presents a better view of the economic growth of an economy and why?

a) National income estimates are one of the best indicators of the economic growth of the economy. The difference between the value of inputs and outputs at each stage of production is called the value-added method. It is the value added by each industry to the raw materials and finished goods.

Precautions to be taken while estimating national income

• imputed rent of the self-occupied house

The owner must include the value of the house occupied by him. The national income must include the income from all sources. If the imputed rent is not valued it will underestimate the national income of the economy.

• Sale and purchase of second-hand goods

When the second-hand goods are sold, it should not be included. It is not included because it does not involve any factor production. If these include it will lead to the double counting in the national income.

b) Value-added = Value of output (VO) + intermediate consumption (IC)

Value added by firm B = VO of B +IC of B

Value of output (firm B) = Sales of a firm to different firms and individuals

= 70+40+30+5

= 145

Intermediate consumption (firm B) = 80

Value added = VO – IC

= 145 – 80

= 65.

OR

National income at Current price is well known as Nominal Income. Nominal income is the money value of the final goods and services measured at the current year prices. Thus, it is also called national income at current prices. It is measured according to the prices prevailing in the current period in which the commodities and services were produced. It does not show the true picture of the economic growth of a country as an increase in nominal national income may be due to a rise in price level without any change in physical output.

National income at constant price is also known as Real Income. Real income is the money value of the final goods and services measured at the base year prices. The base year is any pre-determined year that is considered as the basis for computation of national income. It is also called national income at constant prices. It depicts the real growth in national income over the period of time. It shows the true picture of the economic growth of a country as an increase in real national income is due to an increase in output only.

Nominal income is converted into real income by constructing index numbers for the base yeas and the current year. Real income can be found from nominal income using the following formula:

Real income = (Nominal income/ Index number for the current year)*100

The most necessary to depict the growth of the economy is National income at the constant price that is real income. It does not show the inflated GDP and it only shows the growth in real output of the economy. Nominal income cannot be termed as a better indicator of growth because there are chances of huge values of income due to inflation that is prevalent in the economy. Therefore that national income at constant cost can only be termed as an indicator of growth since it shows the true picture of the economy.