a. Define externalities.

b. Find National Income from following using expenditure method

OR

Will the following factor income be included in domestic factor income of India? Give reasons for your answer:

(i) Compensation of employees to the resident of Japan working in the Indian embassy in Japan.

(ii) Payment of fees to a Chartered Accountant by a firm.

(iii) Rent received by an Indian resident from the Russian embassy in India.

(iv) Compensation is given by an insurance company to an injured worker.

a) Externalities are the unintended or uncompensated benefits or expenses arising out of different economic activities. It is the expenses or benefits incurred by parties who do not choose to incur the cost or benefit. It is the effects of production or consumption impacting other people who are not directly related to it. The absence of externalities ensures efficient market functioning. There are two types of externalities:

• Positive externality: It is the unintended benefits that are enjoyed by the third parties because of the different economic activities of consumption and production.

E.g. health campaigns

• Negative externality: It is the uncompensated cost and expenses that are incurred to the third parties because of different economic activities of consumption and production.

E.g. pollution

b) National income = PFCE + GFCE + Net domestic capital formation + Net exports +NFIA

= 900+400+900+25+10 = 2235

OR

i) Compensation of employees can be in the form of cash or kind. It can be wages, salaries, other social security benefits or compensations given to the employees or their family. It will be included in the calculation of the national income as Indian embassy is within the territorial boundary of India even though it is in Japan.

(ii)

Compensation of employees can be in the form of cash or kind. It can be wages, salaries, other social security benefits or compensations given to the employees or their family. Payment of fees to a Chartered Accountant by a firm will be included in the calculation of the national income. This will be included in compensation to employees.

(iii)

Rent is an important component considered while calculating the national income. Rent received by an Indian resident from the Russian embassy in India will not be included in the calculation of the national income as Russian embassy is not within the territorial boundary of India even though it is in India.

(iv)

Compensation of employees can be in the form of cash or kind. It can be wages, salaries, other social security benefits or compensations given to the employees or their family. Compensation given by the insurance company to an injured worker will be included in the calculation of the national income. This will be included in compensation to employees.