this has one of the most important topics of macro economics and with the help of this document it can save you a lot of time as it is very much understandable and eliminated the reading of lengthy textbook .it covers all the topics like majorly final ,producer goods and all other types of goods ,c...
Chapter – 2
NATIONAL INCOME ACCOUNTING
National income is defined as the sum total of all final goods and
services produced in a country during a given year. National
income measures the rate of economic growth of a nation. It
helps us to know the relative contribution of all sectors of an
economy. Hence national income estimates are necessary for
economic policy formulation and planning.
BASIC CONCEPTS OF NATIONAL INCOME:
1. FINAL GOODS:
Goods which are purchased for final use are called as final
goods. For example: television, wrist watch, sugar, car, and
etc. while computing national income, only the value of final
goods and services is taken into consideration.
A final good is an item that is meant for final use and
which will not pass through any more stages of production or
transformation is called as a final good.
Why is a final good called so?
Because once it is sold it passes out of the active
economic flow. It will not undergo any further transformation
at the hands of any producer.
Some final goods undergo transformation after they
reach the ultimate consumers. Example: tea leaves after the
final purchase are not consumed directly but are converted
into a drinkable form through the cooking process.
FINAL GOODS AND ECONOMIC ACTIVITY:
Is cooking an economic activity? No, it is not if cooking
is done at home as the cooked food is not sold in the market.
But is cooking or brewing of tea is done in a restaurant then
it is considered an economic activity.
CLASSIFICATION OF FINAL GOODS:
FINAL GOODS
Consumer or Producer or captial
consumption goods goods
, Consumption Goods: Goods like food, clothing, services
like recreation that are consumed when purchased by the
ultimate consumer are called as consumer goods. It also
includes services but for the sake of convenience we term
them as consumer goods.
Capital Goods: Producer goods also are known as capital
goods. They are used in the production of other goods.
Example: machines, equipment etc. These are durable goods
which are used in the process of production. These will
include tools, implements, machines etc. They are also
called final goods, yet they are not final goods to be
ultimately consumed, as they are used to produce other
goods. It is also noteworthy that a capital good is subjected
to wear and tear but only after repeated use over a period of
time.
Consumer Durables: There is another set of commodities
like TV’s, automobiles, computers, although they are used
for ultimate consumption, they have one common
characteristic with capital goods i.e., they are durable and
can be used again and again. They have relatively longer life
as compared to consumer goods like food, clothes, etc. they
too undergo wear and tear after repeated use.
2. INTERMEDIATE GOODS:
Some goods are used as material inputs in producing other
goods. These are mostly used as raw materials. Example:
steel sheets used in making automobiles, copper in the
making of utensils, wool used in sweaters, etc. (They are raw
materials that are completely used up in the process of
production.)
Measurement of Goods:
In order to analyze the total flow of production in the
economy we need quantitative measurement. We need a
common measuring rod of MONEY.
, Why do we consider only the final goods while assessing
total production?
Though intermediate goods are a significant part of the
production process we consider the final goods only to avoid
the problem or error of DOUBLE COUNTING.
(The problem of double counting occurs when a good is
accounted for twice- once in the process of production and once
in its final stage. This gives a falsified or distorted picture of the
real GDP of a country)
CONCEPT OF STOCK AND FLOW:
1. Stock:
A stock is a variable which is measured at one specific period
of time. It is a static concept. Stock refers to a quantity
existing at a particular point of time. It may have
accumulated from the past. Example: total number of
machines in a factory say as on 31 st Dec, 2018 OR total
furniture in a college as on 31st Dec, 2019.
2. Flow:
Flows are additions made to the stock. Flow is a variable
which is measured over a period of time. Flow is a dynamic
concept. Example: a new machine purchased in a particular
year is a flow.
Suppose we are filling a bucket with water coming from
a tap. The amount of water which is flowing into the bucket
say per minute from the tap is a flow. But the water which is
in the bucket at a particular point time is a stock.
Example for stock: foreign exchange reserve, total
borrowings, food grain stock.
Example for flow: national income, foreign currency earned
through exports, new investments, imports and exports.
Concept of Gross Investment and Net Investment:
Gross Investment: The total investment is called as gross
investment. The total investment will not only contain the
purchase of new goods but also has expenditure on the
repair of old goods. Thus, the total investment is called the
GROSS INVESTMENT.
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