Question

(a) Is it true to say that "capital formation is a stock variable"?

(b) Find National Income from the following data:

$\begin{array}{cc}& (Rs.Crore)\\ \left(i\right)\text{Direct purchases of households from domestic market}& 1,000\\ \left(ii\right)\text{Plant and machinery purchased}& 2,500\\ \left(iii\right)\text{Residential construction}& 1,550\\ \left(iv\right)\text{Investments by Government}& 1,550\\ \left(v\right)\text{Exports by Firms}& 700\\ \left(vi\right)\text{Inventory investment}& 400\\ \left(vii\right)\text{Net factor income to abroad}& (-)40\\ \left(viii\right)\text{Depreciation}& 150\\ \left(ix\right)\text{NIT}& (-)20\\ \left(x\right)\text{Imports by households}& 200\end{array}$

OR

Will the following be a part of domestic factor income of India? Give reasons:

(i) Laptops purchased for office work

(ii) Profits earned by the Indian company located abroad

(iii) Construction of a residential building

(iv) School fees paid

Answer 1

(a) No, because capital formation is calculated over a period of time. Therefore, it is a flow variable.

(b) National Income = Direct purchases of households from domestic market + Plant and machinery purchased + Residential construction + Investments by Government + Inventory investment + Exports by Firms - Imports by households - Depredation NFIA - NIT = 1000 + 2500 + 1550 + 1550 + 400 + 700 - 200 - 150 + (- 40) - (- 20) = Rs. 7330 Crore

OR

(i) Laptops purchased for office work- Included, as it is a capital expenditure

(ii) Profits earned by the Indian company located abroad- Not included, as it is earned outside the domestic territory of India

(iii) Construction of a residential building- Included, as it is the only capital formation or expenditure by the households

(iv) School fees paid- Included, as it is an item of private final consumption expenditure