Statement I: In national income accounting, depreciation is the annual allowance for the wear and tear of capital goods.
Statement II: Under a flexible exchange rate, depreciation means a fall in the price of the domestic currency in terms of the foreign currency.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both Statement I and Statement II are true.
The same word has two meanings in two chapters.
Statement I: In national income accounting, depreciation is the annual allowance for the wear and tear of capital goods. — True. It is the cost of a capital good spread over the years of its useful life.
Statement II: Under a flexible exchange rate, depreciation means a fall in the price of the domestic currency in terms of the foreign currency. — True. The domestic currency then buys less foreign currency than before.
The two are different ideas: one is the using up of capital goods, the other a change in the exchange rate. This question uses National Income Accounting and Open Economy Macroeconomics together.
NCERT (2026-27): “2.1 Some Basic Concepts of Macroeconomics … Depreciation is thus an annual allowance for wear and tear of a capital good. In other words it is the cost of the good divided by number of years of its useful life. …” Glossary: “Depreciation – A decrease in the price of the domestic currency in terms of the foreign currency under floating exchange rates. It corresponds to an increase in the exchange rate.” |