The three ways to measure national income: the value added (product) method and double counting, the expenditure method (C + I + G + X − M) and the income method (wages, rent, interest, profit and mixed income), what each includes and leaves out, and why all three give the same total, with worked examples and the traps CUET sets.
National income can be measured where it is produced (value added), where it is paid out (income) or where it is spent (expenditure). Each method looks at the same circular flow at a different point, so in theory all three give the same total.
Value added
Adding every firm's value added counts each input once, by the firm that made it. That is how the method avoids double counting.
Example 1 · Wheat, flour, bread
A farmer sells wheat to a mill for ₹100 (no inputs), the mill sells flour for ₹160 and the baker sells bread for ₹250.
Value added: farmer 100, mill 160 − 100 = 60, baker 250 − 160 = 90.
Total = 100 + 60 + 90 = ₹250, exactly the value of the final good.
₹250
Two adjustments
Example 2 · One firm's accounts
Sales ₹500 lakh, opening stock 40, closing stock 60, intermediate consumption 200, depreciation 30, indirect taxes 25, subsidies 5. Find NVA at factor cost.
Value of output = 500 + (60 − 40) = 520.
GVA at MP = 520 − 200 = 320; NVA at MP = 320 − 30 = 290.
Net indirect taxes = 25 − 5 = 20, so NVA at FC = 290 − 20 = 270.
₹270 lakh
Watch out
Wages are not subtracted. They are paid out of value added; only inputs bought from other firms are intermediate consumption.
Only final spending on domestic output:
GDP by expenditure
A government building a hospital is investment, not G: the spender is the government, but the purchase is a capital good.
Example 3 · GDP from spending
C = 600, G = 150, gross fixed capital formation = 200, change in stocks = 20, exports = 80, imports = 100 (₹ crore).
I = 200 + 20 = 220; net exports = 80 − 100 = −20.
GDP at MP = 600 + 150 + 220 − 20 = ₹950 crore.
₹950 crore
The factor incomes earned in production:
Their sum is NDP at factor cost (domestic income). Depreciation and net indirect taxes are added only to reach GDP at market price.
| Included | Left out |
|---|---|
| Imputed rent of owner-occupied houses | Services of homemakers |
| Farm output kept for own use | Transfer payments (pensions, scholarships, gifts) |
| Free meals and uniforms to workers | Second-hand goods (but the dealer's commission is in) |
| Brokerage on shares | Buying shares or bonds |
| Government's free services, at cost | Capital gains, lottery prizes, illegal income |
Watch out
A transfer payment moves income from one person to another without anything being produced, so it is never a factor income.
Product
Expenditure
Income
How domestic product becomes national income, and gross becomes net, is in national income aggregates.
69 questions, grouped by type, easy to hard. Pick an answer and check it. The worked solution opens when you ask for it.
Value added by a firm is
AnswerB · value of output − value of intermediate consumption
A firm's own contribution is what it adds to the inputs it bought from other firms.
Double counting in national income means
AnswerD · counting the value of an intermediate good more than once
If the wheat, the flour and the bread are all added, the wheat is counted three times.
A farmer sells wheat to a mill for ₹100, the mill sells flour to a baker for ₹160, and the baker sells bread to households for ₹250. Farmer has no inputs. What is the total value added?
AnswerB · ₹250
Value added: farmer 100, mill 160 − 100 = 60, baker 250 − 160 = 90.
Total = 100 + 60 + 90 = ₹250, the value of the final good, bread.
Worth noting
₹510 adds every sale, so the wheat and flour are counted again.
In the same chain (wheat ₹100 → flour ₹160 → bread ₹250), what is the value added by the mill?
AnswerA · ₹60
The mill sells flour for ₹160 and bought wheat for ₹100.
Value added = 160 − 100 = ₹60.
A firm's accounts for a year:
| Item | ₹ lakh |
|---|---|
| Sales | 500 |
| Opening stock | 40 |
| Closing stock | 60 |
| Intermediate consumption | 200 |
| Depreciation | 30 |
| Indirect taxes | 25 |
| Subsidies | 5 |
What is the firm's value of output?
AnswerC · ₹520 lakh
Value of output = sales + change in stock.
Change in stock = 60 − 40 = 20, so value of output = 500 + 20 = ₹520 lakh.
Worth noting
₹600 lakh adds the closing stock itself instead of the change in stock.
A firm's accounts for a year:
| Item | ₹ lakh |
|---|---|
| Sales | 500 |
| Opening stock | 40 |
| Closing stock | 60 |
| Intermediate consumption | 200 |
| Depreciation | 30 |
| Indirect taxes | 25 |
| Subsidies | 5 |
What is the firm's gross value added at market price?
AnswerC · ₹320 lakh
Value of output = 500 + (60 − 40) = 520.
GVA at MP = 520 − 200 = ₹320 lakh.
Double counting can be avoided by
AnswerA · counting only value added, or only final goods
The value added method and the final product method both count each input only once.
Assertion (A): The sum of value added by all firms equals the value of final goods produced.
Reason (R): Each firm's value added leaves out the inputs it bought, so every input is counted only by the firm that made it.
AnswerA · Both A and R are true, and R is the correct explanation of A.
In the wheat-flour-bread chain, 100 + 60 + 90 = 250, the price of bread.
R explains why the two totals match.
Intermediate consumption of a firm includes
AnswerC · raw materials and power bought from other firms and used up in the year
Intermediate consumption is the inputs bought from other producers and used up.
Wages and interest are factor payments out of value added; a machine is investment.
Worth noting
Wages are a cost to the firm but they are paid out of value added, not subtracted from it.
Read the two statements and choose the correct option.
I. The value added method is also called the product method.
II. Under the value added method, the value of all intermediate goods is added to the value of final goods.
AnswerA · Only I
Product method and value added method are names for the same thing, so I is true.
Adding intermediate goods would be double counting, so II is false.
Match each value with how it is found.
| List I | List II |
|---|---|
| A. Value of output | I. GVA at market price − depreciation |
| B. Gross value added at market price | II. NVA at market price − net indirect taxes |
| C. Net value added at market price | III. Value of output − intermediate consumption |
| D. Net value added at factor cost | IV. Sales + change in stock |
AnswerB · A-IV, B-III, C-I, D-II
Start from sales, add the change in stock, take away inputs, then depreciation, then net indirect taxes.
A tailor buys cloth for ₹2,000 and thread for ₹100, and sells the shirts he makes for ₹3,500. His value added is
AnswerA · ₹1,400
Intermediate consumption = 2,000 + 100 = 2,100.
Value added = 3,500 − 2,100 = ₹1,400.
Worth noting
₹1,500 forgets the thread, which is also an input used up.
To go from a firm's value of output to its net value added at factor cost, which of these is NOT subtracted?
AnswerC · Wages paid to its workers
NVA at FC = value of output − intermediate consumption − depreciation − net indirect taxes.
Wages are paid out of NVA at FC; they are a part of it.
A firm's accounts for a year:
| Item | ₹ lakh |
|---|---|
| Sales | 500 |
| Opening stock | 40 |
| Closing stock | 60 |
| Intermediate consumption | 200 |
| Depreciation | 30 |
| Indirect taxes | 25 |
| Subsidies | 5 |
What is the firm's net value added at factor cost?
AnswerB · ₹270 lakh
GVA at MP = 520 − 200 = 320; NVA at MP = 320 − 30 = 290.
Net indirect taxes = 25 − 5 = 20, so NVA at FC = 290 − 20 = ₹270 lakh.
Worth noting
₹250 lakh subtracts the subsidy instead of adding it back: net indirect tax is taxes minus subsidies.
A firm's value of output is ₹900 lakh and its gross value added at market price is ₹550 lakh. Its intermediate consumption is
AnswerA · ₹350 lakh
GVA = value of output − intermediate consumption.
Intermediate consumption = 900 − 550 = ₹350 lakh.
A firm sold goods worth ₹700 lakh. Its stock fell from ₹80 lakh to ₹50 lakh during the year. It bought inputs worth ₹300 lakh. Its gross value added at market price is
AnswerA · ₹370 lakh
Change in stock = 50 − 80 = −30, so value of output = 700 − 30 = 670.
GVA at MP = 670 − 300 = ₹370 lakh.
Worth noting
₹430 lakh adds the fall in stock: some of this year's sales came out of last year's output.
Under the expenditure method, GDP at market price equals
AnswerB · C + I + G + (X − M)
Final spending by households (C), firms (I), the government (G) and foreigners net of imports (X − M).
Which of these is counted in GDP under the expenditure method?
AnswerC · A family's spending on a new scooter
Spending on a new final good is final consumption expenditure.
Shares and second-hand goods are not current output; a scholarship is a transfer.
Which of these is NOT part of private final consumption expenditure?
AnswerB · A firm's purchase of a delivery van
A firm's van is a capital good: investment.
Households' spending on goods and services is private consumption.
An economy's spending data for a year:
| Item | ₹ crore |
|---|---|
| Private final consumption expenditure | 600 |
| Government final consumption expenditure | 150 |
| Gross fixed capital formation | 200 |
| Change in stocks | 20 |
| Exports | 80 |
| Imports | 100 |
What is GDP at market price?
AnswerB · ₹950 crore
Gross investment = 200 + 20 = 220; net exports = 80 − 100 = −20.
GDP at MP = 600 + 150 + 220 − 20 = ₹950 crore.
Worth noting
₹1,150 crore adds imports instead of subtracting them; spending on imports is income of foreign producers.
An economy's spending data for a year:
| Item | ₹ crore |
|---|---|
| Private final consumption expenditure | 600 |
| Government final consumption expenditure | 150 |
| Gross fixed capital formation | 200 |
| Change in stocks | 20 |
| Exports | 80 |
| Imports | 100 |
What are net exports?
AnswerA · ₹−20 crore
Net exports = exports − imports = 80 − 100 = ₹−20 crore.
An economy's spending data for a year:
| Item | ₹ crore |
|---|---|
| Private final consumption expenditure | 600 |
| Government final consumption expenditure | 150 |
| Gross fixed capital formation | 200 |
| Change in stocks | 20 |
| Exports | 80 |
| Imports | 100 |
What is gross domestic capital formation?
AnswerC · ₹220 crore
Gross domestic capital formation = gross fixed capital formation + change in stocks.
= 200 + 20 = ₹220 crore.
Under the expenditure method, a firm's purchase of raw materials is
AnswerA · left out, because it is intermediate expenditure
Only final expenditure is counted; raw materials are already in the price of the final goods.
Worth noting
If raw materials are not used up and are added to stock, that addition is counted as inventory investment.
Match each spending with its component of aggregate expenditure.
| List I | List II |
|---|---|
| A. A family buys a mobile phone | I. Government final consumption expenditure |
| B. A firm builds a new factory shed | II. Private final consumption expenditure |
| C. The government pays salaries of teachers in its schools | III. Exports |
| D. A US company buys software from an Indian firm | IV. Gross fixed capital formation |
AnswerD · A-II, B-IV, C-I, D-III
Households' purchases are private consumption; a new shed is fixed investment.
The government buys teachers' services: government consumption. Sales to foreigners are exports.
Assertion (A): Imports are subtracted in the expenditure method.
Reason (R): Spending by households, firms and the government includes spending on goods made abroad, which is not domestic output.
AnswerA · Both A and R are true, and R is the correct explanation of A.
C, I and G are measured on all goods bought, including imported ones.
Subtracting M leaves spending on domestic output only; R is the reason.
Read the two statements and choose the correct option.
I. Government final consumption expenditure includes the salaries of government employees.
II. Government final consumption expenditure includes old-age pensions.
AnswerA · Only I
Salaries pay for services the government provides, such as teaching and policing, so I is true.
Pensions are transfer payments, not purchases of goods or services, so II is false.
Which of these is part of gross domestic capital formation?
AnswerC · A rise in the stock of unsold cars with dealers
Capital formation = fixed capital formation + change in stocks.
A rise in unsold stock is an addition to inventories.
The government builds a new hospital building. In the expenditure method this is part of
AnswerA · gross domestic capital formation
A building lasts for years and adds to the capital stock, whoever builds it.
Government consumption covers its day-to-day purchases, such as salaries and medicines.
Worth noting
The spender is the government, but what is bought is a capital good, so it is investment.
Read the two statements and choose the correct option.
I. Net exports can be negative.
II. Exports are part of domestic product even though they are bought by foreigners.
AnswerC · Both I and II
When imports exceed exports, X − M is below zero. I is true.
Exports are produced within the country, so they are domestic output. II is true.
An economy's spending data for a year:
| Item | ₹ crore |
|---|---|
| Private final consumption expenditure | 600 |
| Government final consumption expenditure | 150 |
| Gross fixed capital formation | 200 |
| Change in stocks | 20 |
| Exports | 80 |
| Imports | 100 |
If imports were ₹60 crore instead of ₹100 crore, with everything else the same, GDP at market price would be
AnswerC · ₹990 crore
Net exports = 80 − 60 = 20.
GDP at MP = 600 + 150 + 200 + 20 + 20 = ₹990 crore.
For an economy: private final consumption ₹800 crore, government final consumption ₹200 crore, gross domestic capital formation ₹300 crore, net exports ₹50 crore. GDP at market price is
AnswerD · ₹1,350 crore
GDP at MP = 800 + 200 + 300 + 50 = ₹1,350 crore.
GDP at market price is ₹2,000 crore, private final consumption is ₹1,200 crore, government final consumption is ₹300 crore and net exports are ₹−100 crore. Gross domestic capital formation is
AnswerC · ₹600 crore
I = GDP − C − G − (X − M) = 2,000 − 1,200 − 300 − (−100).
= 500 + 100 = ₹600 crore.
Worth noting
₹400 crore treats the −100 as if it were added; subtracting a negative adds 100.
Under the income method, national income is the sum of
AnswerA · compensation of employees, operating surplus and mixed income
The income method adds the factor incomes generated in production.
Operating surplus = rent + interest + profit; mixed income is earned by the self-employed.
Compensation of employees includes
AnswerB · wages in cash and kind plus employer's contributions
Free meals, housing and the employer's provident fund contribution are all part of what employees earn.
Unemployment allowance is a transfer, not a payment for work.
Which of these earns mixed income?
AnswerD · A doctor running her own clinic
A self-employed doctor provides her own labour, premises and equipment, so her income is mixed.
An employed doctor earns compensation of employees; a company earns profit; a pension is a transfer.
An economy's income data for a year:
| Item | ₹ crore |
|---|---|
| Compensation of employees | 400 |
| Rent | 50 |
| Interest | 60 |
| Profit | 120 |
| Mixed income of the self-employed | 200 |
| Old-age pensions paid by the government | 35 |
What is net domestic product at factor cost?
AnswerC · ₹830 crore
NDP at FC = 400 + 50 + 60 + 120 + 200 = ₹830 crore.
Old-age pensions are transfer payments and are left out.
Worth noting
₹865 crore adds the pensions, which are not earned by producing anything.
An economy's income data for a year:
| Item | ₹ crore |
|---|---|
| Compensation of employees | 400 |
| Rent | 50 |
| Interest | 60 |
| Profit | 120 |
| Mixed income of the self-employed | 200 |
| Old-age pensions paid by the government | 35 |
What is the operating surplus?
AnswerC · ₹230 crore
Operating surplus = rent + interest + profit = 50 + 60 + 120 = ₹230 crore.
Profit of a company is distributed as
AnswerD · dividends, corporate tax and undistributed (retained) profit
Part of profit is paid to shareholders, part as tax on the company's income, and the rest is kept.
A company pays dividends of ₹40 crore and corporate tax of ₹25 crore, and keeps ₹15 crore as retained earnings. Its profit is
AnswerD · ₹80 crore
Profit = dividends + corporate tax + undistributed profit = 40 + 25 + 15 = ₹80 crore.
Mixed income of the self-employed is so called because
AnswerA · their labour income and their property income cannot be separated
A shopkeeper working in his own shop earns for his labour, his capital and his enterprise together.
The parts cannot be split into wages, rent, interest and profit, so the income is 'mixed'.
Match each income with the category it belongs to.
| List I | List II |
|---|---|
| A. Salary of a bank clerk | I. Rent |
| B. Royalty paid to the owner of a mine | II. Interest |
| C. Income of a farmer working his own land | III. Compensation of employees |
| D. Interest earned on a fixed deposit | IV. Mixed income |
AnswerD · A-III, B-I, C-IV, D-II
A salary is compensation of employees; royalty on a mine is rent for a natural resource.
A farmer on his own land is self-employed: mixed income. Interest on a deposit is interest.
Read the two statements and choose the correct option.
I. Royalty for the use of a mine is a part of rent.
II. Free uniforms given by a hospital to its nurses are part of compensation of employees.
AnswerC · Both I and II
Royalty is payment for a natural resource, which is counted with rent. I is true.
Payment in kind is part of compensation of employees. II is true.
Assertion (A): Corporate tax is included in national income under the income method.
Reason (R): Corporate tax is paid out of profit, which is a factor income.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Profit = dividends + corporate tax + undistributed profit.
Corporate tax is a part of the profit earned in production, so A is true and R explains it.
For an economy: compensation of employees ₹1,000 crore, operating surplus ₹450 crore, mixed income ₹350 crore, depreciation ₹150 crore, net indirect taxes ₹200 crore. NDP at factor cost is
AnswerB · ₹1,800 crore
NDP at FC is the sum of factor incomes: 1,000 + 450 + 350 = ₹1,800 crore.
Depreciation and net indirect taxes are needed only to move to GDP or market price.
Worth noting
₹2,150 crore adds both depreciation and net indirect taxes, which gives GDP at market price, not NDP at factor cost.
Read the two statements and choose the correct option.
I. The employer's contribution to an employee's provident fund is part of compensation of employees.
II. The employee's own contribution to the provident fund is added again on top of the wage.
AnswerA · Only I
The employer's contribution is a benefit earned by the employee, so I is true.
The employee's contribution is paid out of the wage, which is already counted; adding it again would count it twice. II is false.
Which of these is NOT included in national income?
AnswerB · Old-age pension paid by the government
A pension is a transfer payment: nothing is produced in return in the current year.
Transfer payments are
AnswerC · payments with nothing given in return
A transfer moves income from one person to another without adding to output.
Which of these payments is part of national income?
AnswerA · Fees paid to a private coaching centre
The coaching centre produces a service, so the fee is income from production.
Pocket money and scholarships are transfers; a bond is a financial asset.
The sale of a second-hand car for ₹4 lakh through a dealer who earns ₹20,000 commission adds how much to this year's national income?
AnswerC · ₹20,000 only
The car was counted in the year it was made, so its price is not counted again.
The dealer's commission pays for a service produced this year, so ₹20,000 is counted.
Worth noting
'Nothing' forgets the dealer's service, which is current production.
Which of these is included in national income?
AnswerB · Imputed rent of a house lived in by its owner
Owner-occupied housing provides a service; its estimated rent is counted.
Homemakers' services are left out because they are hard to value; lottery prizes are windfalls; shares are financial assets.
Wheat grown by a farmer and kept for his family's own use is
AnswerD · included in national income at its estimated market value
It is current production, valued at what it would fetch in the market.
Match each item with how national income treats it.
| List I | List II |
|---|---|
| A. Brokerage paid on buying shares | I. Included: compensation in kind |
| B. Price paid for the shares | II. Excluded: a transfer |
| C. Unemployment allowance | III. Excluded: a financial asset |
| D. Free meals given to a factory's workers | IV. Included: a service produced |
AnswerA · A-IV, B-III, C-II, D-I
The broker produces a service; the shares only change owners.
The allowance is a transfer; free meals are part of what workers earn.
Assertion (A): Capital gains from selling a house at a higher price are not part of national income.
Reason (R): A capital gain is a change in the value of an existing asset, not income from current production.
AnswerA · Both A and R are true, and R is the correct explanation of A.
National income counts only incomes earned by producing goods and services in the year.
R explains why the gain is left out.
Read the two statements and choose the correct option.
I. The services of a homemaker are left out of national income.
II. The services of a paid cook are included in national income.
AnswerC · Both I and II
Unpaid work at home has no market price and is hard to value, so it is left out. I is true.
A paid cook sells a service for a wage, so it is counted. II is true.
Which of these is a transfer payment?
AnswerD · Relief given to flood victims by the government
Flood relief is paid without any service in return.
A soldier, a doctor and a landlord provide services for the payment.
Interest paid by a household on a loan taken to buy a car is
AnswerC · not a factor payment, because the loan financed consumption, not production
Interest is a factor income only when the borrowed money is used in production.
A consumer loan finances consumption, so the interest on it is treated as a transfer.
Which of these is an example of a windfall gain, left out of national income?
AnswerB · Winning ₹5 lakh in a quiz show
A prize is not earned by producing anything.
A bonus, a harvest and festival profits are incomes from production.
Which of these is excluded from national income?
AnswerB · Income from smuggling
Illegal activities are not counted in official national income.
Wages, commission and fees are payments for legal services produced.
A firm buys a computer for its office. In national income this is
AnswerC · final expenditure: investment
The computer will be used for several years; it is not used up in one year.
So it is a capital good, a final purchase counted as investment.
Which of these is included in GDP?
AnswerA · Free education provided in government schools, valued at its cost
Government services are counted at cost, as government final consumption expenditure.
Money sent home and gifts are transfers; the old flat is a second-hand asset.
Read the two statements and choose the correct option.
I. Purchase of a new house by a family is counted in GDP as investment.
II. Purchase of an old house by a family is counted in GDP as investment.
AnswerA · Only I
New residential construction adds to the capital stock and is fixed investment. I is true.
An old house was counted when it was built; buying it only changes the owner. II is false.
Assertion (A): The value of a homemaker's work is left out of national income.
Reason (R): Only goods and services that are bought and sold, or can be valued at market prices, are counted.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Homemaking is not sold in a market and there is no agreed way to value it, so it is left out.
R states the rule that explains A. (Production for own use, such as a farmer's grain, is an exception because it can be valued.)
The three methods of measuring national income are
AnswerA · the value added, income and expenditure methods
Output can be measured where it is produced (value added), where it is paid out (income), or where it is spent (expenditure).
Assertion (A): The value added, income and expenditure methods give the same national income.
Reason (R): The value of what is produced is paid out as incomes, and spending on output is the revenue that pays them.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Each method measures the same circular flow at a different point.
R explains why they must agree.
Match each method with what it adds up.
| List I | List II |
|---|---|
| A. Value added method | I. Wages, rent, interest, profit and mixed income |
| B. Income method | II. Output minus intermediate consumption at each stage |
| C. Expenditure method | III. Market value of final goods and services only |
| D. Final product method | IV. Consumption, investment, government spending and net exports |
AnswerD · A-II, B-I, C-IV, D-III
Each method adds the circular flow at a different point.
Which method of measuring national income would count the wages of a farm labourer?
AnswerC · The income method
Wages are a factor income, added directly under the income method.
The other methods include the labourer's work inside the value of the crop.
In India, the official estimates of national income are published by
AnswerD · the National Statistics Office (NSO)
The NSO under MoSPI compiles and releases India's national accounts.
Read the two statements and choose the correct option.
I. In practice, the three methods can give slightly different totals because of gaps in data.
II. In theory, the three methods give the same total.
AnswerC · Both I and II
Official estimates show a 'discrepancies' line because data are collected from different sources. I is true.
In theory, output, income and spending are one flow, so II is also true.
In a two-firm economy, firm A sells raw materials worth ₹300 to firm B and goods worth ₹200 to households. Firm B sells goods worth ₹700 to households. There are no imports, taxes or stocks. GDP is
AnswerB · ₹900
Value added: A = 300 + 200 = 500 (no inputs); B = 700 − 300 = 400.
GDP = 500 + 400 = ₹900, the same as final sales to households, 200 + 700.
NTA's Economics syllabus is three courses: Introductory Microeconomics, Introductory Macroeconomics and Indian Economic Development, each split into units with a list of topics. It prints no chapters and no split of the 50 questions across the courses. So the areas here are NTA's three courses, and the chapters inside them are ours: a unit that covers several ideas, such as consumer behaviour and demand, is split into a chapter for each, so that a chapter can be practised in one sitting. All three courses are here.