A city in north west India is hit by a massive earthquake causing huge loss of property. Life of people has come to a standstill. Government of India announces a compensation to earthquake victims to meet the needs of their food, clothes and shelter.
(a) Is this expenditure included in national income ?
(b) How does it impact life in the city ?

Explanation

(a) This expenditure by the government is not included in national income as it is transfer payment and does not correspond to the flow of goods and services.
(b) Thi expenditure will help the people to get their lives back on track. It will add to their consumption expenditure. Also, if some expenditure is incurred to rebuild their houses, it will add to the capital formation in the city.