National Income – Questions and Answers

Subject Title: Economics Revision Kit

TOPIC: National Income

QUESTION 1
April 2022 Question Three
(i) Explain four assumptions underlying the theory of imperfect competition.
(8 marks)
(ii) With an aid of a diagram, explain the long run equilibrium of a firm operating in imperfect competition. (6 marks)
Explain six factors that influence the mobility of labour as a factor of production.
(6 marks)
QUESTION 2
December 2021 Question Six B
The following data relate to the nominal and real gross national product (GNP) levels for a hypothetical economy for
the years 2011 and 2019:
Year Nominal GNP Real GNP
“Sh.billion” “Sh.billion”
2011 1,185.90 1,185.90
2019 2,633.00 1,474.00

Required:
The implicit GNP price deflator for the years 2011 and 2019. Interpret your results. (5 marks)
The inflation rate of the economy, using year 2011 as the base year. (5 marks)

QUESTION 3
August 2021 Question Three B
With the aid of an illustration, describe the circular flow of income for a closed economy with the existence of the government. (8 marks)

QUESTION 4
August 2021 Question Four A and C
(a) Identify three uses of consumer surplus. (6 marks)
(c) Highlight five implications of a deflationary gap in an economy. (5 marks)

QUESTION 5
August 2021 Question Five C
You have been provided with the following data for country Z:
Gross national product at current market prices $400 million
Price subsidies $10 million
Depreciation $24 million
Indirect taxes $60 million

Required:
Determine the value of each of the following:
(i) Gross national product at factor cost. (3 marks)
(ii) Net national product at factor cost. (3 marks)

QUESTION 6
The data below represents the national income of a certain economy in trillions of shillings:
Y = C+I+G+ (X – M)
C = 100 + 0.6Y^d
T= 10+0.2Y
I = 40
G = 50
(X — M) = 30
Where: Y = National Income
C = Consumption expenditure
I = Investment
G = Government expenditure
Y^d = Disposable income
T = Taxes
X = Exports
M = Imports
Required:
The equilibrium level of:
(i) National income. (5 marks)
(ii) Consumption. (3 marks)
(iii) Taxes. (2 marks)

QUESTION 7
November 2020 Question five B
Explain the relationship between the multiplier and the accelerator. (4 marks)
Evaluate four benefits that might accrue to an economy as a result of accelerator effect. (8 marks)

QUESTION 8
November 2019 Question Four A
The per capita income of a hypothetical country increased by 20% from the year 2015 to year 2018.

Despite this increase in per capita income, the residents of the country felt that their living standards were deteriorating.

Required:
Discuss five reasons that might have led to this feeling by the residents. (10 marks)

QUESTION 9
November 2019 Question Four B
Describe three methods that could be used to measure the national income of a country.
(6 marks)
QUESTION 10
November 2019 Question Four B
The following are the consumption and investment functions of country Y in Sh. “Billion”.
C=200+0.8Y
I=400
Where:
C is Consumption
Y is Income
I is Investment

Required:
Calculate the aggregate spending at equilibrium level. (4 marks)

QUESTION 11
May 2019 Question five D
The following data relate to the consumption function of a hypothetical economy in millions of shillings:
C=300+0.6y
Where:
C is the consumption function
Y is the national income.

Required:
(i) The investment function. (1 marks)
(ii) Discuss seven factors that determine the level of consumption in an economy.
(7 marks)
QUESTION 12
May 2019 Question seven A
(a) Argue six cases against the use of national income statistics to compare the standards of living between countries. (6 marks)

QUESTION 13
November 2018 Question Four C
The marginal propensity to save of a certain hypothetical economy is given as 0.25.

Required:
The change in the equilibrium level of national income, if the level of investments for the economy increases by Sh.300 million. (3 marks)

QUESTION 14
November 2018 Question Six B
Examine seven determinants of the level of national income of a country. (7 marks)

QUESTION 15
November 2018 Question seven C
The data provided below represent economic transactions for a hypothetical country in billions of shillings:
Total output Intermediate purchases
Agricultural sector 55,000 24,000
Manufacturing sector 96,000 63,000
Service sector 71,000 42,000

The indirect taxes and fixed assets depreciation amount to Sh.22,000 billion and Sh.26,000 billion respectively.

Required:
(i) The Gross National Product using the value added approach. (2 marks)
(ii) Net Domestic Product at market price. (2 marks)
(iii) Net Domestic Product at factor cost. (2 marks)

QUESTION 16
May 2018 Question Six B
In a hypothetical economy X. autonomous consumption equals to 800 and the marginal propensity to save equals to 0.25.

Required:
(i) Formulate the consumption function. (2 marks)
(ii) If the level of investment increased by Sh.1,000 million, determine the change in equilibrium national income. (4 marks)

QUESTION 17
November 2017 Question Six C
Using well labelled diagrams, distinguish between “inflationary gap” and “deflationary gap” as used in national income statistics. (10 marks)

QUESTION 18
November 2017 Question Seven C and D
The data provided below represent estimated national income figures for a hypothetical economy in millions of shillings:
Gross National Product (at market price) 3,992
Depreciation allowance 570
Indirect taxes less subsidies 524
Business taxes 214
Personal income taxes 763
Government transfers 693
Retained profit 230

Required:
(i) Net National Product at market price. (2 marks)
(ii) Net National Product at factor cost. (2 marks)
(iii) Personal income. (2 marks)
(iv) Disposable income. (2 marks)

QUESTION 19
November 2017 Question Seven D
Outline six challenges encountered by economic planners when using the income approach to estimate the level of national income in developing countries. (6 marks)

QUESTION 20
May 2017 Question Three D
The following data relate to the nominal and real gross national product (GNP) levels of a certain economy for the years 2011 and 2016:
Year Nominal GNP Real GNP
(Sh. billion) (Sh. billion)
2011 1.085 1,085
2016 1.850 1.275

Required:
(i) The gross national product implicit price deflator for the years 2011 and 2016. Interpret your results. (3 marks)
(ii) Using year 2011 as the base year, determine the inflation rate for the economy.
(4 marks)
QUESTION 21
May 2017 Question five D
(i) Distinguish between the “multiplier” and the -accelerator” as used in national income statistics. (2 marks)
(ii) Explain four factors that could limit the application of the multiplier in developing countries. (4 marks)

QUESTION 22
November 2016 Question Four C
Discuss ten limitations of using national income statistics to compare the standards of living between different countries. (10 marks)

QUESTION 23
November 2016 Question Seven D
The economy transaction for a hypothetical economy in thousands of shillings are given as follows:
Sector Total output Intermediate purchaser
Sh.”000″ Sh.”000″
Service 76,000 37,000
Agricultural 55,000 23,000
Manufacturing 111,000 69,000

Indirect taxes and fixed assets depreciation amount to Sh.21,000,000 and Sh.22,000,000 respectively.

Required:
(i) Gross national product using the value added approach. (2 marks)
(ii) Net domestic product at market price. (1 mark)
(iii) Net domestic product at factor cost. (1 mark)

QUESTION 24
May 2016 Question Five A
Explain five factors that determine the macroeconomic level of consumption in an economy. (10 marks)

QUESTION 25
May 2016 Question Five B
The following data relate to the commodity and money markets of a hypothetical closed economy without government intervention, in millions of shillings:
C = 204 + 0.7Y
1 = 300-100r
MDT= 0.25Y
MDS= 248-200r
Ms = 600
Where:
C is the consumption function.
Y is the national income.
I is the investments function.
r is the rate of interest.
MDT is the precautionary and transactionary demand for money.
Mps is the speculative demand for money.
Ms is the money supply.

Required:
(i) Equilibrium level of interest rate. (7 marks)
(ii) Equilibrium level of national income. (3 marks)

QUESTION 26
November 2015 Question Four A
Outline five problems associated with the expenditure approach of measuring the national income of a country. (5 marks)

QUESTION 27
November 2015 Question Four C
The following information relates to savings and investments of a certain economy in millions of shillings:
S = – 500+0.36Y
I=8,000
Where:
S = Savings function.
Y = National income.
I= Investments function.

Required:
(i) The consumption function. (3 marks)
(ii) The equilibrium level of national income. (3 marks)
(iii) The multiplier. Interpret your result. (4 marks)

QUESTION 28
November 2015 Question Seven C
The data provided below represent estimated national income figures for country -X” in trillion of shillings:
Gross National Product (at market price) 620.4
Government transfers 78.6
Business taxes 18.2
Personal income taxes 56.1
Depreciation allowance 42.3
Indirect taxes less subsides 36.5

Required:
(i) Net National Income at factor cost. (2 marks)
(ii) Net National Product at market price. (1 mark)
(iii) Personal income. (1 mark)
(iv) Disposable income for country “X”. (1 mark)

QUESTION 29
September 2015 Question One A
(i) Distinguish between “gross domestic product” and “gross national product”.
(4 marks)
(ii) Give the reasons for the lower value of the gross national product in the less developing countries. (1 mark)

QUESTION 30
September 2015 Question One A and B
The following data represents economic transactions of a hypothetical economy:
Sh. “million”
General government final expenditure 6,750
Taxes on expenditure 4,250
Transfer payments 675
Social security contributions 2,500
Net property income from abroad 250
Consumers expenditure 18,500
Subsidies 750
Gross domestic fixed capital formation 5,750
Corporate income tax 750
Undistributed profits 500
Personal income tax 1,000
Imports of goods and services 9,250
Exports of goods and services 8,750
Depreciation 3,500

Required:
Calculate:
(i) Gross national product. (2 marks)
(ii) Net national product. (2 marks)
(iii) National income. (2 marks)
(iv) Personal income. (2 marks)
(v) Disposable income. (2 marks)

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