Question

Read the following text carefully:
“A country’s total National Income (NI) at the end of the year is ₹ 80,000 crore. During the same year, the Gross Domestic Product (GDP) increased by ₹ 2,00,000 crore. Price index for capital goods at the end of year is ₹ 15 lakh crore. Additionally, country invested ₹ 8,000 crore in new capital goods industries.”
In the light of the above text, classify the items as ‘stock’ or ‘flow’ variables with valid arguments. OR The value of Nominal Gross National Product (GNP) of an economy was ₹ 2,500 crore in a particular year. The value of Gross National Product (GNP) of that country during the same year, estimated at the prices of base year was ₹ 3,000 crore.

• [(i)] Estimate the Gross National Product (GNP) deflator (in percentage).
• [(ii)] “The price level has risen between the base year and the year under consideration.” Defend or refute the statement with suitable argument.

Hint:

Deflator<100 → price fall
Stock = at a point, Flow = over time

Answer 1

Step 1: Understanding the Concept:
Stock variables are measured at a specific point in time.
Flow variables are measured over a period of time.
Step 2: Detailed Explanation:
1. Total National Income at the end of the year (₹ 80,000 crore): This is a Stock variable because it is specified at a particular point in time (at the end of the year).
2. Increase in GDP (₹ 2,00,000 crore): This is a Flow variable because the word "increase" implies a change occurring "during the year" (a period of time).
3. Price Index for capital goods at the end of the year: This is a Stock variable as it represents the price level at a specific point in time.
4. Investment in new capital goods (₹ 8,000 crore): This is a Flow variable because investment is the addition to the stock of capital made during a particular period.
Step 3: Final Answer:
Stock variables: National Income (at a point), Price Index.
Flow variables: Increase in GDP, Investment.
B
Step 1: Understanding the Concept:
The GNP Deflator (or Price Index) measures the change in the price level of all goods and services produced in an economy relative to a base year.
Step 2: Key Formula or Approach:
\[ \text{GNP Deflator} = \frac{\text{Nominal GNP}}{\text{Real GNP}} \times 100 \]
Step 3: Detailed Explanation:
Given:
Nominal GNP (Current Prices) = ₹ 2,500 crore
Real GNP (Base Year Prices) = ₹ 3,000 crore
Calculation:
\[ \text{GNP Deflator} = \frac{2500}{3000} \times 100 \]
\[ \text{GNP Deflator} = \frac{25}{30} \times 100 = \frac{5}{6} \times 100 \]
\[ \text{GNP Deflator} \approx 83.33% \]
Step 4: Final Answer:
The GNP deflator is approximately 83.33%.
C
Step 1: Understanding the Concept:
We use the GNP Deflator calculated in the previous part to assess the change in the price level.
Step 2: Detailed Explanation:
The base year price index is always taken as 100.
In this case, the calculated GNP Deflator is 83.33%.
Since 83.33% < 100%, it means the general price level has fallen by approximately 16.67% (100 - 83.33) compared to the base year.
Therefore, the statement that "the price level has risen" is factually incorrect based on the data provided.
Step 3: Final Answer:
Refuted. The price level has fallen, not risen, as indicated by a deflator value less than 100.