Class Notes of Chapter 2: National Income Accounting
Class 12th Economics
Macroeconomics
Macroeconomics
National Income Accounting
Topics:
- Important Notes
Important Notes
1. Final Goods These are those goods which have crossed the boundary line of production and are ready for use by their final users.
Final goods are often classified as
(i) Final consumer goods.
(ii) Final producer goods.
2. Intermediate Goods These are those goods which have yet not crossed the boundary line of production. Example Shirts purchased by firm x from firm y for resale are intermediate goods.
3. Consumption Goods These are those goods which are directly used for the satisfaction of human wants. These are not used in the production of other goods. Example Ice cream and milk used by the households.
Consumption goods are classified into four categories.
(i) Durable Consumer Goods: TV, radio, car etc.
(ii) Semi-Durable Consumer Goods: Clothes, furniture’s etc.
(iii) Non-Durable Consumer Goods: Bread.
(iv) Services: Doctor, lawyer etc.
4. Capital Goods These are those goods which are used in the process of production for several years and which are of high value. Example Plant and machinery
5. Investment: Investment is a process of capital formation or a process of increase in the stock of capital. Investment has two Components
(i) Fixed investment (ii) Inventory investment
6. Gross Investment: Expenditure on the purchase of fixed assets during the accounting year + Expenditure on the inventory stock during the accounting year.
7. Net Investment Gross investment – Depreciation (Consumption of fixed capital)
8. Stock A stock is a quantity of any economic variable which is measured at a particular point of time. e.g., 100 crores population of India in 2001.
9. Flow A flow is a quantity of any economic variable which is measured during a period of time. e.g., Monthly wages of a worker.
10. Depreciation: Depreciation refers to the loss of value of fixed assets in use on account of
(i) Normal wear tear
(ii) The normal rate of accidental changes
(iii) Expected or foreseen obsolescence.
The annual amount of depreciation = Original value of the machine /Number of years of the life of the machine
11. Circular Flow of Income It refers to the unending flow of the activities of production, income generation and expenditure involving different sectors of the economy.
There are three phases of circular.flow
(i) Production (ii) Income generation (iii) Expenditure
12. Money Flow It refers to the flow of money across different sectors of the economy.
13. Real Flow It refers to the flow of goods and services across different sectors of the economy.
14. Condition for Equilibrium. in Four Sector Economy
C + S + T = C + I + G + (X – M)
Here, C = Consumption
S = Saving
I = Investment
T= Tax revenue
G = Government expenditure
X = Exports
M=Import
(X- M) = Net Exports
15. Injection It refers to the additions to the circular flow injections causes expansion of the circular flow. Example of Government expenditure, export and investment.
16. Leakages It refers to the withdrawals from the circular flow leakages cause contraction of the circular’ now.
17, Normal Residents of a Country These are the people who (i) normally reside in the country concerned and (ii) whose centre of economic interest lies in the country concerned.
18. Domestic Territory of a Country It refers to that area of economic activity which generates domestic income.
19. Factor Incomes These are the income received by the owners of factors of production for rendering their factor services to the producer.
20. Transfer Payment This arc all those unilateral payments corresponding to which there is no value-addition in the economy. Example Gifts, donations etc.
21. Methods of Measurement of National Income
- Product or Value Added Method
- Income Method
- Expenditure Method
22. Value Added Value of output – Intermediate consumption
- Value of output = sales + change in stock
- Change in stock = closing stock – opening stock
23. Planned Change in Inventories It means that the actual change in inventories is just equal to what was planned.
24. Unplanned Change in Inventories Unexpected rise in inventories during a year is termed as an unplanned change in inventories.
25. Components of Domestic Factor Income
- Compensation to Employees it includes following components-wages and salaries in cash, compensation in kind, employer’s contributions to social security scheme.
- Operating Surplus It has two main components
(a) Income from Property
(b) Income from entrepreneurship - Mixed income of the self-employed
26. Final Expenditure The main components of final expenditure are
- Private final consumption expenditure
- Gross domestic capital formation
- Government final consumption expenditure
- Net export (X-M)
28. Domestic Income It is the sum total of factor income generated with in the domestic territory of the country no matter it is the income accruing to residents 0r non-residents of the country. National Income at Current Price It is the money value of all final goods and services measured at current prices.
29. National Income at Current Price It is the money value of all final goods and services measured at current prices.
30.GDP It is the sum total of
(i) Compensation of employees
(ii) Operating surplus
(iii) Mixed income
(iv) Consumption of fixed capital with in the domestic territory of the country during the period of one year.
31. NNP at Market Price It refers to the market value of final goods and services produced during the year inclusive of net factor income from abroad but exclusive of depreciation.
32. NNP at Factor Cost It is the sum total of factor incomes earned by normal residents of a country during the period of one year.
33. Private Income It is the total income from all sources that accrue to the private sector during the period of one year.
34. Personal Income It is the income actually received by the individuals and households from all sources in the form of current transfer payment and factor incomes.
35. Personal Disposable Income It is the personal income remaining with individuals after deduction of all taxes levied
against their income and their property as well as payment miscellaneous fees and fines.
36. National Disposable Income It is the income from all sources available to residents of a country for consumption expenditure or for saving during a year.
37. Nominal GDP It refers to GDP at the current price.
38. Real GDP It.refers to GDP at the constant price.
39. GNP Deflator The GNP deflator measures the average level of the prices of all goods and services that make-up GNP. GNP deflator is measured as the ratio of nominal GNP to real GNP.
40. Consumer Price Index (CPI) This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI has generally expressed in percentage terms.
41. Externalities It refers to the benefits a firm or an individual causes to another for which they are not paid.
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