Question

(a) Define Externality.

(b) Find National Income from following using expenditure method

| | | • (in crores) |
| 1 | Current transfers from rest of the world | 50 |
| 2 | Net Indirect taxes | 100 |
| 3 | Net Exports | - 25 |
| 4 | Rent | 90 |
| 5 | Private Final Consumption Expenditure | 900 |
| 6 | Net Domestic Capital Formation | 200 |
| 7 | Compensation of Employees | 500 |
| 8 | Net Factor Income from Abroad | - 10 |
| 9 | Government Final Consumption Expenditure | 400 |
| 10 | Profit | 220 |
| 11 | Mixed Income of Self Employed | 400 |
| 12 | Interest | 230 |

Answer 1

a. Externality occurs when the actions of consumers or producers give rise to negative or positive side effects on third party who are not part of these actions, and whose interests are not taken into consideration. E.g. :-

introduction of metro rail on one hand has increased the prices of property but has also saved the time and money of general public and has provided safe means of transport

b. National Income by Expenditure Method = Private Final Consumption

Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports + NFIA - NIT

National Income by Expenditure Method = v + ix + vi + iii + viii - ii

National Income by Expenditure Method = 900 + 400 + 200 + (-25 ) + (-10) - 100

National Income by Expenditure Method = Rs. 1365 Crores