KSLU Solved Question Papers
Economic Theory and Public Finance
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 3
2016 Dec Examination
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Mumbai
B.A. LL.B. (Five Years) Sem 3 Economic Theory and Public Finance 2016 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2016 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2016 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What is national income ? Explain different concepts of national income.[16]
Answer
For full marks, cover: the classical definitions of national income given by Marshall, Pigou and Fisher, and the modern statistical definition; the basic ideas every concept uses (final goods, value added, flow, residents, depreciation, net indirect taxes, transfer payments); each concept with its meaning and formula (GVA, GDP at market price and at factor cost, NDP, GNP, NNP at market price, NNP at factor cost, personal income, disposable income, per capita income, nominal and real GDP, Green GDP); a full worked example; the uses and limits of the concepts; and a conclusion.
A. Definition of national income
1. Marshall. Alfred Marshall called national income the national dividend. In his words, "The labour and capital of the country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds". This, he said, "is the true net annual income, or revenue, of the country". Net income from investments abroad "must be added in". His definition is broad, but it is hard to apply, because much output is never sold and so has no recorded value.
2. Pigou. A. C. Pigou narrowed the idea to what money can measure. For him "the national dividend is that part of the objective income of the community, including, of course, income derived from abroad, which can be measured in money". His definition is practical. Its weakness is that it leaves out unpaid work, such as a parent's care of a child, though such work clearly adds to welfare.
3. Fisher. Irving Fisher looked at income from the side of use. "Income consists of services", he wrote, and the true income of a community is the flow of services actually enjoyed by consumers. On this view only what is consumed in a year is income. Saving and new capital are left out, which makes the idea hard to measure.
4. The modern definition. Today statisticians follow the United Nations System of National Accounts. In this sense national income is the net national product at factor cost. It is the total of the incomes earned by a country's residents in a year from producing goods and services. These incomes are wages, rent, interest and profit.
B. Ideas that every concept uses
- Only final goods are counted. Bread bought by a household is a final good. The flour the baker bought is an intermediate good, and counting it too would be double counting.
- Value added. Each producer's contribution is the value of its output less the inputs it bought from other firms.
- A flow over a period. National income is measured for a year, from 1 April to 31 March in India. It is a flow, not a stock of wealth.
- Residents. A resident is a person or firm whose centre of economic interest lies in the country, whatever their nationality.
- Depreciation. Machines and buildings wear out in use. The value used up is called depreciation or consumption of fixed capital.
- Net indirect taxes. Indirect taxes raise market prices above what the factors earn, and subsidies lower them. Net indirect taxes are indirect taxes minus subsidies.
- Transfer payments. Old-age pensions, scholarships and unemployment relief are paid without any current output in return. They are not part of national income.
C. The concepts one by one
1. Gross Value Added (GVA) at basic prices. GVA is the total value added by all producers in the country. GVA = value of output minus intermediate consumption. India publishes GVA by sector to show where growth is coming from. Since the 2011-12 base year revision, GVA at basic prices has been India's headline on the production side.
2. Gross Domestic Product (GDP) at market price. GDP is the market value of all final goods and services produced within the domestic territory in a year. Output of foreign-owned firms working in India is included. GDP at market price = GVA at basic prices plus product taxes minus product subsidies. It is the figure used to compare the size of economies.
3. GDP at factor cost. This is GDP valued at what the factors of production receive. GDP at factor cost = GDP at market price minus net indirect taxes.
4. Net Domestic Product (NDP). NDP = GDP minus depreciation. It shows the output available after keeping the stock of capital intact.
5. Gross National Product (GNP). GNP adds the earnings of residents from abroad and deducts the earnings of foreigners from India. GNP = GDP plus net factor income from abroad (NFIA). NFIA is factor income received from abroad minus factor income paid abroad. India's NFIA is usually negative, so its GNP is slightly below its GDP. Modern accounts call this measure Gross National Income (GNI).
6. Net National Product (NNP) at market price. NNP at market price = GNP minus depreciation.
7. NNP at factor cost, which is national income. NNP at factor cost = NNP at market price minus indirect taxes plus subsidies. It equals the sum of wages, rent, interest and profits earned by residents. This is national income in the strict sense.
8. Personal income. Personal income is the income that persons and households actually receive. It differs from national income in two ways. Part of the income produced never reaches households: firms keep some profit, pay corporation tax and collect social security contributions. On the other side, households receive transfer payments that pay for no current output. So personal income = national income minus undistributed profits minus corporation tax minus social security contributions plus transfer payments.
9. Disposable personal income. This is personal income left after direct taxes. Disposable income = personal income minus personal direct taxes, such as income tax. It is the sum households are free to spend or save.
10. Per capita income. Per capita income = national income divided by population. It is the usual guide to the average standard of living. It does not show how income is shared, so a rising average can hide falling incomes for the poor.
11. Nominal and real GDP. Nominal GDP values output at the prices of the current year. Real GDP values it at the prices of a fixed base year. So a rise in real GDP means more goods and services, not just higher prices. The GDP deflator links the two: real GDP = nominal GDP divided by the deflator, times 100. India moved its base year to 2022-23 in a new series released on 27 February 2026. On that basis real GDP grew 7.7 per cent in 2025-26, to over 323 lakh crore rupees (Provisional Estimates).
12. Green GDP. Ordinary GDP ignores the natural resources used up and the damage done to the environment. Green GDP = GDP minus the depletion of natural resources minus the cost of environmental degradation. India compiles environmental accounts in the United Nations SEEA framework, but it does not publish an official Green GDP figure.
D. A worked example
Suppose the following figures, in lakh crore rupees:
- GDP at market price 320; depreciation 32; NFIA minus 6;
- indirect taxes 42; subsidies 12;
- undistributed profits and corporation tax 18; social security contributions 4;
- transfer payments 10; personal direct taxes 16;
- population 146 crore.
| Concept | Working | Value |
|---|---|---|
| GDP at market price | given | 320 |
| NDP at market price | 320 minus 32 | 288 |
| GNP at market price | 320 minus 6 | 314 |
| NNP at market price | 314 minus 32 | 282 |
| GDP at factor cost | 320 minus (42 minus 12) | 290 |
| National income (NNP at factor cost) | 282 minus 30 | 252 |
| Personal income | 252 minus 18 minus 4 plus 10 | 240 |
| Concept | Working | Value |
|---|---|---|
| Disposable personal income | 240 minus 16 | 224 |
| Per capita income | 252 lakh crore divided by 146 crore | about 1.73 lakh rupees |
If prices have risen 25 per cent since the base year, the deflator is 125. Real GDP is then 320 divided by 125, times 100, which is 256.
E. Uses of the concepts
- GDP and its growth rate measure how fast the economy is expanding. Budget ratios, such as the fiscal deficit of 4.3 per cent of GDP for 2026-27, are stated against it.
- National income shows what residents earn and how it is shared between wages, rent, interest and profit.
- Personal and disposable income show what households can spend and save. They guide tax policy and forecasts of consumption.
- Per capita income compares living standards across countries and over time.
- Real GDP separates growth in output from inflation.
F. Limits of the concepts
- Unpaid household work and much informal activity are left out or only estimated.
- Averages hide inequality.
- Harm to the environment is not deducted unless Green GDP is used.
- A higher figure does not always mean higher welfare, as Fisher's stress on enjoyed services reminds us.
Conclusion. National income was defined broadly by Marshall, in money terms by Pigou and as consumed services by Fisher. Statisticians today take it as net national product at factor cost. From GVA and GDP, each concept follows by a clear step: deduct depreciation, add net factor income from abroad, and remove net indirect taxes. Personal income, disposable income and per capita income then show what reaches households. Real GDP removes the effect of prices, and Green GDP the cost to nature. Each concept answers a different question, so the right one must be chosen for each purpose.
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