NOTES -MACROECONOMICS CHAPTER -1 NATIONAL INCOME AND RELATED AGGREGATES
MACROECONOMICS
CHAPTER -1
NATIONAL INCOME AND RELATED AGGREGATES
NOTES
Final goods-
Meaning:
Those goods which are meant for final use and will not pass through any more stages of production or transformation are called final goods.Features:
Meant for final consumption or investment It will not undergo any further transformation at the hand of any producer
Once it has been sold it passes out of the active economic flow
These are not meant for resale
If any good meant for intermediate but does not used in the same year and remain for another year , it qualifies for final good
It does not make any Value Addition
Example: Milk purchased by house hold , Tea Brewing Machine purchased by the restaurant
Implications:
Value of the final goods are included in the Domestic as well as National Income
Intermediate goods:
Meaning:
Those goods which are meant for resale or further production and will pass through more stages of production or transformation are called intermediate goods.Features:
Meant for resale or further production It will undergo further transformation at the hand of any producer
It remain within the active economic flow
Mostly used as raw materials or inputs (Non factor inputs) for production of other commodities
If any good meant for intermediate it should be used up in the same year to qualify for intermediate good
It makes Value Addition
Example: Milk purchased by a restaurant for preparing tea , Tea Brewing Machine purchased by the machine dealer for resale
Implications:
Value of the intermediate goods are not included in the Domestic as well as National Income
Note: The same good may be final good or intermediate good , it depends on the nature of its economic use. Hence it is not the nature of the good rather its nature of economic use which makes it final good or intermediate good.
Types of final goods:
Final goods are divided in to two types.(a) Consumption Goods
(b) Capital Goods
Consumption Goods
Those goods which are consumed when purchased by their ultimate consumers are called consumer goods.
Example: Milk, bread, food etc.
Capital Goods
Those goods which are durable in nature and used in the production process to make production of other goods feasible, but they themselves do n ot get transformed in the production process.Example: Machines,Tools and implements
Note: All goods used by the producer (Produce Goods) are not capital goods , but all capital goods are Producer goods.
STOCKS AND FLOWS
Stocks:
Meaning: Those variables which are measured at a point of time are called stock variables
Example: The population of India as on 31st March 2017Flows:
Meaning : Those variables which are measured over a period of time are called flow variables
Example: the population of India during the year 2017Investment:
Investment refers to the addition to the stock of capital. It is also called capital formation.Gross Investment
It is the total addition to the capital stock of the economy including depreciationNote:
A significant part of the current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods
This is because the existing capital stock suffers wear and tear and needs maintainance and replacement
A part of the capital goods produced in the current year goes for replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment
This replacement investment is called DEPRECIATION.
Depreciation:
It refers to the annual allowance for normal wear and tear of a capital good It is calculated annually
It is pre-determined. Hence it is always positive
It is calculated by:
The other names are Consumption of Fixed Capital, Replacement Investment, Capital Consumption Allowances etc.
Net Investment:
It is the addition to capital stock in an economy during a year excluding depreciation.Net Investment = Gross Investment – Depreciation
Example:
Suppose a company has 5 machines and 20% of each machine is depreciated annually. This year the company has purchased another 3 machines. So the Gross Investment is 3 machines. But actually 1 machine is meant for replacing the existing machines. Hence net investment is 2 machines.
CIRCULAR FLOW OF INCOME IN TWO SECTOR ECONOMY
Meaning:
A pictorial illustration of the flow of income and product among various sectors of the economy is called Circular Flow of Income.Assumption:
There are only two sector in the economy , namely Household and Firm
Household is the sole consumer and Firm is the sole producer in the economy
There are no leakages and injections in the economy
Basic principles:
In any exchange process the seller or producer receives the same amount that the buyer or consumer spends
Goods and services flow in in direction (Real Flow) and money payment to acquire these flow in the return direction, thereby causing a circular flow.
PHASES OF CIRCULAR FLOW
There are three phases of circular flow Generation: Production of goods and services by the firms
Distribution : Flow of factor income from firms to households
Disposition: Consumption expenditure by household on the goods and services produced by firms.
MEASUREMENT OF NATIONAL INCOME
Basic AdjustmentsDomestic + NFIA = National
National – NFIA = Domestic
Gross – depreciation = Net
Net + depreciation = Gross
MP – NIT = FC
Page | 6
FC + NIT = MP
** NFIA : Net Factor Income from Abroad
= Factor income received from abroad – Factor Income paid to abroad
** NIT : Net Indirect Taxes
= Indirect Taxes – Subsidies
Methods of Measuring National Income:
(a) Value Added Method
GVAMP = Value of Output – Intermediate cost
Value of output = Sales + Change in stock
Change in stock = Closing stock – Opening Stock
**Intermediate Cost is the Non factor input cost
(b) Income Method:
NDPFC = C + O + M
C = Compensation of Employees
= Wages and salaries (in kinds and money)
+ Employer‘s contribution to Social Security Scheme
O = Operating Surplus
= Rent + Interest + Royalty + Profit
** Profit = Dividends + Corporation taxes + Retained earnings/saving of pvt. Corporate/ Undistributed Profit
M = Mixed Income of self employed
© Expenditure Method:
GDPMP = C + I + G + (X-M)
C = Pvt./Personal/Domestic final consumption expenditure
I = Gross Investment/ Gross Domestic Capital Formation
G = Govt. final consumption expenditure
X- M = Net Exports
= Exports – Imports
** Gross Capital Formation
= Gross fixed capital formation + change in stock/Inventory Investment
Steps for calculating National Income:
(a) Value Added Method:
Step-1: Identify various sectors of the economy as Primary, secondary and tertiary
Step-2: Calculate GVAMP in all sectors by
GVAMP = Sales + Change in Stock – Intermediate cost
Step-3: Subtract the value of depreciation from GVAMP and find NVAMP
NVAMP = GVAMP – Depreciation
Step-4:Add the value of NFIA with NVAMP and get NNPMP
NNPMP = NVAMP + NFIA
Step-5 : Subtract the value of Net Indirect Taxes from NNPMP and get NNPFC or the National Income
National Income/NNPFC = NNPMP – NIT
Step-6: Add the National income of all sectors and find the National Income of the economy.
(b) Income Method:
Step-1: Identify various sectors of the economy as Primary, secondary and tertiary
Step-2: Calculate NDPFC in all sectors by
NDPFC = Compensation of Employees + Operating Surplus + MI
Step-5 : Add the value of NFIA with NDPFC and get the National Income
National Income/NNPFC = NDPFC + NFIA
Step-6: Add the National income of all sectors and find the National Income of the economy
© Expenditure Method:
Step-1: Identify various sectors of the economy as Primary, secondary and tertiaryStep-2: Calculate GDPMP in all sectors by
GDPMP = C + I + G + (X-M)
Step-3: Subtract the value of depreciation from GDPMP and find NDPMP
NDPMP = GDPMP – Depreciation
Step-4: Add the value of NFIA with NDPMP and get NNPMP
NNPMP = NDPMP + NFIA
Step-5 : Subtract the value of Net Indirect Taxes from NNPMP and get NNPFC or the National Income
National Income/NNPFC = NNPMP – NIT
Step-6: Add the National income of all sectors and find the National Income of the economy.
PROBLEM OF DOUBLE COUNTING:
Meaning:
Problem of double counting refers to adding the value of one output more than once while estimating National Income.Problem: Due to this the National Income is over estimated
Methods of avoiding:
This can be avoided by two methods
(a) Final Output Method
In this method only the value of final output are included The value of intermediate cost are not included
In the above example the value of bread is only included as the value of wheat , flour are include in it
(b) Value Added Method:
In this method the value added in various stages of production are taken in to account ting while estimating National Income instead of adding value of output in each stage The value of the final ,output is equal to the sum of the value added in various stages of production
Value of Final Output = Σ Value Added
Precautions while estimating National Income:
(i) Value Added Method
Avoid double counting : Only value of final goods to be included and thje value of intermediate goods are to be excluded to avoid double counting
Sale of Second hand goods not to be included : Sale of Second hand goods is not a production activity. Its value have already been included in the year it produced
Self consumed output to be included; As these are produced through economic activities. (Self services not to be included)
Change of stock to be included; As these are a part of capital formation
Imputed value of own occupied house to be included : These have values in the market
(ii) Income Method:
Transfer income to be avoided: As no economic activities are performed against it Capital gain to be avoided: These are not production transactions
Financial Transactions are to be avoided : Financial transactions like sale of shares , bonds are not to be included as there is only change of title , no production activity
Income from sale of second hand goods to be avoided: As its value are already included in the year in which it was produced and sold , But commission on sale of second hand goods to be included as it is a part of production activity
Windfall gains are to be avoided : as there is no production activity
Taxes not be included : As these are transfer income
(iii) Expenditure Method:
Avoid intermediate expenditure : It leads to double counting Avoid Transfer Expenditure
Avoid expenditure on Sale of Second hand goods
Expenditure on own account production to be included
Purchase of financial assets like share and bonds not to be included
Real and Nominal GDP
Nominal GDP:
If the GDP is measured in terms of current market prices , then it is called Nominal GDP
Real GDP :
If the GDP is measured in terms of constant market prices , then it is called Real GDP.
Advantages of Real GDP
It is useful in finding out the effect of increased production of goods and services on the real development capacity of the economy in general It enables one to make a year to year comparison of the changes in the growth of output
It is also used in making international comparisons of economic performance across the countries
GDP and Welfare:
Higher level of GDP of a country may be treated as an index of greater well being of the people of that country, but there are certain reasons why this may not be correct.(a) Distribution of GDP
If the GDP of a country is rising , the welfare may not rise as a consequence This is because the rise in GDP may be concentrated in the hands of very few individuals
For the rest , the income may infact have fallen
In such cases the welfare of the entire country cannot be said to have increased
(b) Non Monetary Exchange
The value of non-monetary transactions like services of housewife , kitchen gardening are not included while calculating GDP due to non availability of data These have also certain values and which measures economic welfare
By non-inclusion of these values in the estimation of GDP there is underestimation of GDP
Hence GDP calculated in the standard manner may not give us a clear indication of the productive activity and well-being of the country
(c) Externalities:
Externalities refers to the benefits (or harms) a firm or an individual causes to another for which they are not paid (of penalized) – benefits called positive externalities and harms called negative externalities Externalities do not have any market in which they can be bought and sold
The value of externalities are not taken in to account while estimating national income
Positive externalities under estimate the national income and negative externalities over estimate the national income
Comments
Post a Comment