Mid term prev Ans

Part A: Multiple Choice Questions
1. Which of the following is a part of microeconomics?

o a. Factor pricing (Correct Answer)
o Explanation: Factor pricing is a microeconomic concept as it deals with the
determination of prices for individual factors of production, like labor, capital,
etc., whereas national income is a macroeconomic concept.
2. Which of the following activities is not included in the calculation of the national
income of a country?
o c. A housewife performing housework chores (Correct Answer)
o Explanation: Non-market activities, like housework done by a housewife, are
not included in national income as they do not have a market transaction
value.
3. Suppose that nominal GDP in a country is $6 billion in a given year and the real
GDP for that year was $3 billion. What is the GDP price deflator?
o d. 200 (Correct Answer)
o Calculation: GDP Price Deflator = (Nominal GDP / Real GDP) * 100 = (6
billion / 3 billion) * 100 = 200
4. Which of the following is another term for the Net National Product at Factor
cost?
o b. National Income (Correct Answer)
o Explanation: National Income is another term for Net National Product (NNP)
at factor cost, representing the total income earned by a country’s factors of
production.
5. Which of the following is true for Net National Income?
o b. The Net National Income is the difference between Gross National Product
and Depreciation (Correct Answer)
o Explanation: Net National Income is derived by subtracting depreciation from
the Gross National Product.
Part B: Short Answer Questions
1. Distinguish between Micro and Macro Economics.

o Microeconomics studies individual economic units like households, firms, and
markets. It focuses on supply and demand, pricing, and resource allocation
within individual sectors.
o Macroeconomics examines the economy as a whole, focusing on national
income, aggregate demand and supply, inflation, unemployment, and
economic growth. It looks at the overall functioning and performance of an
economy.
2. Calculate the GDP of a country with only three citizens, A, B, and C, with A and
B working domestically and C working abroad. A foreign citizen D also works in
the country. Aggregate values produced are A = 1000, B = 2000, C = 2500, and D
= 4000.
o Formula for GDP: GDP = Domestic Output of Citizens + Output by
Foreigners within the Country.
o Calculation: GDP = 1000 (A) + 2000 (B) + 4000 (D) = 7000
o Explanation: The output of C (2500) is excluded as it’s produced outside the
country.
Part C: Long Answer Questions
1. Explain the circular flow of income in a two-sector model using a relevant

diagram. (6 marks)
o Detailed Explanation: The circular flow of income in a two-sector model
includes households and firms, where households own all the factors of
production (land, labor, capital, and entrepreneurship) and supply these to
firms. In exchange, firms pay households for their contribution to production
in the form of wages, rent, interest, and profit. This payment represents
households' income.
Households then use this income to purchase goods and services produced by
firms, creating a flow of spending back to firms. This spending is also known
as consumption expenditure. The firms, in turn, use this revenue to pay for
resources and maintain production, which completes the circular flow.
 Key Points:
1. Factor Market: Households provide factors of production
(labor, capital, land) to firms, receiving income in return.
2. Product Market: Firms produce goods and services which
households buy using their income.
3. Income Flow: Firms pay households for factor services,
creating an income flow.
4. Expenditure Flow: Households spend income on firms’ goods
and services, which firms use to sustain production.
o Diagram:
 Top Half (Factor Market): Households → (Factors of Production) →
Firms.
 Bottom Half (Product Market): Firms → (Goods and Services) →
Households.
 Arrows showing the flow of income (wages, rent, interest) and
expenditure.
o Conclusion: This model shows how money circulates between households
and firms, emphasizing the interdependence in an economy without
government or foreign sectors. This circular flow sustains economic activity,
where firms rely on household spending, and households rely on income from
firms.
2. Illustrate the procedure for estimating National Income through the income
method. (6 marks)
o Detailed Explanation: The income method is one of the three primary
methods to calculate national income, focusing on the total income generated
within a country from production activities over a period, typically a year. It
involves summing up all factor incomes earned by residents in the form of
wages, rent, interest, and profits.
 Step-by-Step Procedure:
1. Calculate Factor Incomes:
 Wages and Salaries: Total compensation paid to labor,
including bonuses and employer contributions to social
security.
 Rent: Payments for the use of land or property.
 Interest: Income earned by capital owners on their
invested assets.
 Profit: Earnings from entrepreneurial activities or
business profits after subtracting costs.
2. Include Net Factor Income from Abroad (NFIA):
 Add income earned by residents abroad.
 Subtract income earned by non-residents within the
country.
 This adjusts national income to reflect only the
production within national borders.
3. Adjust for Indirect Taxes and Subsidies:
 Subtract indirect taxes (e.g., sales tax, VAT) from the
total to remove the tax-induced price increase.
 Add subsidies provided by the government, as they
reduce prices and reflect the actual income at factor
cost.
 Formula:
National Income (NI)=(Wages+Rent+Interest+Profits)+Net Factor Inc

ome from Abroad−Indirect Taxes+Subsidies{National Income (NI)} =
({Wages} + {Rent} + {Interest} + {Profits}) + {Net Factor Income
from Abroad} - {Indirect Taxes} +
{Subsidies}National Income (NI)=(Wages+Rent+Interest+Profits)
+Net Factor Income from Abroad−Indirect Taxes+Subsidies
 Example Calculation: Suppose in a given year, the factor incomes in

an economy are as follows: Wages = $500 million, Rent = $100
million, Interest = $150 million, Profits = $250 million. Additionally,
Net Factor Income from Abroad is $50 million, indirect taxes amount
to $30 million, and subsidies are $20 million. Then:
National Income=(500+100+150+250)+50−30+20=1040 million{Nati

onal Income} = (500 + 100 + 150 + 250) + 50 - 30 + 20 = 1040
{ million}National Income=(500+100+150+250)+50−30+20=1040 mil
lion
o Conclusion: The income method provides a precise way to calculate national

income by accounting for the contributions of different factors of production,
adjusted for taxes and subsidies, offering a clear view of the total income
generated within an economy.

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Part A: Multiple Choice Questions

1. Which of the following is a part of microeconomics?

Part B: Short Answer Questions

1. Distinguish between Micro and Macro Economics.

Part C: Long Answer Questions

1. Explain the circular flow of income in a two-sector model using a relevant

National Income (NI)=(Wages+Rent+Interest+Profits)+Net Factor Inc

 Example Calculation: Suppose in a given year, the factor incomes in

National Income=(500+100+150+250)+50−30+20=1040 million{Nati

o Conclusion: The income method provides a precise way to calculate national

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