UNIT-I National Income and related aggregates
Chapter1. - Some basic concepts of national income
National income accounting is a branch of macroeconomics of which estimation of national income and
related aggregates is a part. In a closed economy, without a government or external trade, there are only two
sectors, namely households and firms.
A. Classification of Goods:-
i. Final goods:-
These are those goods which are ready to be used by their final users.
Final goods are at their final stage which is out of the process of production.
Final users can be either consumers (final consumer goods) or producers (final producer goods).
Final consumer goods are those goods which are ready to use by consumers to satisfy their needs.
Final producer goods are those goods which are used by producers in the form of assets for production.
The expenditure done by household is known as Consumption expenditure which is done to purchase
consumer goods.
The expenditure done by producer is known as Investment expenditure which is done to purchase producer
goods.
The value of final goods will be included in National Income.
ii. Intermediate goods:-
These are such goods which are not yet ready for their final use.
They have not reached its final stage and value is yet to be added.
These are the goods which are purchased by one firm from another firm in the form of raw material or for
@Commerce.bhaiya
reselling purpose.
Value of intermediate goods ultimately becomes part of the value of final goods.
Therefore, it is not included in calculation of National Income.
The same goods may be final or intermediate:-
The same goods may be final or intermediate.
It depends upon end-use of the goods.
If the goods are used by producer as raw material then they are classified as intermediate goods.
If the goods are used by producers as fixed assets they are known as final goods.
For eg: - Purchase of car. If cars are purchased by consumers, they are final goods and if purchased by retailer
then they are known as intermediate goods.
iii. Consumer goods:-
These goods are directly used by consumer to satisfy human wants.
It includes: - Durable goods: - These goods are used for several years and are of high value which remains with
consumer. For eg: - Car, scooter etc.
Semi-durable goods: - These are those goods which are used for specific time period. For eg: - Clothes, shoes
etc.
Non-durable goods: - The value of such goods will be finished after single use of goods. For eg: - Milk, etc.
Services: - The services that directly satisfy human want. For eg: - Doctor, Lawyer etc.
iv. Capital goods:-
These are the goods which are used as fixed assets by the producers.
It can be either replacement in existing capital or addition to the new capital assets.
The fixed assets, which are used as capital goods by the producers are used repeatedly and are of high value.
Any goods which are of less value and are used by producer will not be considered as capital goods. For eg: -
Nails, screws etc.
All capital goods are producer goods, but all producer goods are not capital goods.
Goods which are of high value and used for further production process are known as capital goods.
But there are certain products which are used by producers such as nails, screws etc. These are producer goods
but cannot be treated as capital goods.
Similarly, there are certain goods which can be used by producers as well as consumers.
, For eg: - Sewing machines with tailor are capital goods whereas sewing machines for household purpose are
consumer goods.
B. Concept and components of consumption expenditure:-
Consumption expenditure refers to the expenditure done for the consumption purpose by households,
government and non-profit organization.
Household: - Household incurs consumption expenditure to satisfy their needs.
Government: - Government incurs expenditure to purchase the goods which are to be distributed among
defence forces, government schools etc.
Non-profit organization: - Goods purchased for the purpose to distribute as charity.
Sum of all these components will result in consumption expenditure.
C. Concept and components of Investment:-
Investment means addition made in the existing stock of capital. So change in stock of capital is called capital
formation.
i. Fixed Investment:-
It is increase in the stock of fixed assets, which is used in the process of production for many years.
It raises the capacity of producers.
Increased capacity of producers will increase the overall production of the country.
High level of output implies high GDP.
ii. Inventory Investment:-
Inventory means stock of unsold goods.
Any changes made in stock during the year are called inventory investment.
It ensures regular supply of inputs to the producers.
iii. Gross Investment:-
It includes expenditure by the producer on the purchase of new assets as well as expenditure on the replacement
@Commerce.bhaiya
of existing assets.
Replacement of existing assets refers to depreciation.
iv. Net Investment:-
It includes expenditure by the producers only on the purchase of new assets.
It does not include expenditure on existing assets.
It generates employment opportunities, promotes efficiency of labour and accelerates GDP growth.
Concept of Depreciation:-
Depreciation means wear and tear of assets. When any assets after regular use, have some reduction in their
value or their value is reduced when the assets become obsolete, it is known as depreciation.
Because of depreciation, fixed assets are replaced.
To complete their cost of replacement, producer keeps some fund with them which is known as depreciation
reserve fund.
Net investment= Gross investment – depreciation
Depreciation= cost of capital asset-scrap value
Estimated life of capital asset
Expected obsolescence Unexpected obsolescence
It means change in value due to regular use of It means change in value due to any natural
assets. calamities.
It is a part of depreciation. It is a part of capital loss.
It can be managed by reserve fund. It can be managed through insurance.
Depreciation is also defined as:-
Consumption of fixed capital
Replacement cost of fixed capital
Part of capital asset used in production process.
, D. Stocks and Flow:-
Stock: - A stock is a quantity measured at a specific time period. It is an economic variable which is measured at
a given point of time. Stock impacts the flow of goods and services. For eg: - wealth, money supply, population,
inventories etc.
Flow: - A flow is a quantity measured over a specified time period. It is an economic variable which is measured
over a period of time. Flow is time dimensional. For eg: - consumption and investment.
Basis Stock Flow
Meaning Any variable measured at a point of time. Any variable measured over a period of time.
Time dimension It has no time dimension. It has time dimension.
Examples Capital, wealth, inventories. Per capita income, inventories speed.
Nature It is a static concept. It is a dynamic concept.
E. Circular flow of Income:-
i. Real flow: - Flow of goods and services among different sectors of the economy.
ii. Money flow: - Flow of income across different sectors of the economy.
Definition:-
It refers to continuous flow of activities of production & income across different sectors of the country.
Each activity depends upon another activity which is being flowed in different sectors of the country.
Different sectors:-
i. Household sectors: - They are the consumers of goods and services. These are also known as the owners of
@Commerce.bhaiya
factors of production.
ii. Producer sector: - It includes producing units which produce goods and services and provide it to household
sector. They are also known as hires of factors of production and provide payment of using factor services.
iii. Government sector: - Government receives tax from producer and households whereas government provides
subsidies to the society.
iv. External sector: - It includes rest of the world, which is export and import of goods and services.
Three phases of circular Flow:-
Phase-I Production:-
Production means producing goods from given raw material.
It adds value to the raw material. For eg: - Wood is converted into furniture.
Therefore, it is a process of value addition by producing sector.
The producer hires factors of production from households and uses these factors of production as factor inputs
for manufacturing goods and services.
Phase-II Income Generation:-
When consumers render services to the producer they get income in return which is factor income.
This factor income is in the form of rent, wages, interest, profits etc.
Phase-III Expenditure:-
By receiving income, consumers will dispose of consumption in the form of consumption expenditure.
This income is used for consuming goods and services produced by producing sectors.
When expenditure is made by consumer then it is known as consumption expenditure. And when expenditure is
done by producer then it is known as Investment expenditure.
Assumption of model:-
Only two sectors prevail in the country: - Household, producer.
Households spend their entire income for consumption.
No interference of government.
All the activities are carried out within the boundaries of a country.
Chapter1. - Some basic concepts of national income
National income accounting is a branch of macroeconomics of which estimation of national income and
related aggregates is a part. In a closed economy, without a government or external trade, there are only two
sectors, namely households and firms.
A. Classification of Goods:-
i. Final goods:-
These are those goods which are ready to be used by their final users.
Final goods are at their final stage which is out of the process of production.
Final users can be either consumers (final consumer goods) or producers (final producer goods).
Final consumer goods are those goods which are ready to use by consumers to satisfy their needs.
Final producer goods are those goods which are used by producers in the form of assets for production.
The expenditure done by household is known as Consumption expenditure which is done to purchase
consumer goods.
The expenditure done by producer is known as Investment expenditure which is done to purchase producer
goods.
The value of final goods will be included in National Income.
ii. Intermediate goods:-
These are such goods which are not yet ready for their final use.
They have not reached its final stage and value is yet to be added.
These are the goods which are purchased by one firm from another firm in the form of raw material or for
@Commerce.bhaiya
reselling purpose.
Value of intermediate goods ultimately becomes part of the value of final goods.
Therefore, it is not included in calculation of National Income.
The same goods may be final or intermediate:-
The same goods may be final or intermediate.
It depends upon end-use of the goods.
If the goods are used by producer as raw material then they are classified as intermediate goods.
If the goods are used by producers as fixed assets they are known as final goods.
For eg: - Purchase of car. If cars are purchased by consumers, they are final goods and if purchased by retailer
then they are known as intermediate goods.
iii. Consumer goods:-
These goods are directly used by consumer to satisfy human wants.
It includes: - Durable goods: - These goods are used for several years and are of high value which remains with
consumer. For eg: - Car, scooter etc.
Semi-durable goods: - These are those goods which are used for specific time period. For eg: - Clothes, shoes
etc.
Non-durable goods: - The value of such goods will be finished after single use of goods. For eg: - Milk, etc.
Services: - The services that directly satisfy human want. For eg: - Doctor, Lawyer etc.
iv. Capital goods:-
These are the goods which are used as fixed assets by the producers.
It can be either replacement in existing capital or addition to the new capital assets.
The fixed assets, which are used as capital goods by the producers are used repeatedly and are of high value.
Any goods which are of less value and are used by producer will not be considered as capital goods. For eg: -
Nails, screws etc.
All capital goods are producer goods, but all producer goods are not capital goods.
Goods which are of high value and used for further production process are known as capital goods.
But there are certain products which are used by producers such as nails, screws etc. These are producer goods
but cannot be treated as capital goods.
Similarly, there are certain goods which can be used by producers as well as consumers.
, For eg: - Sewing machines with tailor are capital goods whereas sewing machines for household purpose are
consumer goods.
B. Concept and components of consumption expenditure:-
Consumption expenditure refers to the expenditure done for the consumption purpose by households,
government and non-profit organization.
Household: - Household incurs consumption expenditure to satisfy their needs.
Government: - Government incurs expenditure to purchase the goods which are to be distributed among
defence forces, government schools etc.
Non-profit organization: - Goods purchased for the purpose to distribute as charity.
Sum of all these components will result in consumption expenditure.
C. Concept and components of Investment:-
Investment means addition made in the existing stock of capital. So change in stock of capital is called capital
formation.
i. Fixed Investment:-
It is increase in the stock of fixed assets, which is used in the process of production for many years.
It raises the capacity of producers.
Increased capacity of producers will increase the overall production of the country.
High level of output implies high GDP.
ii. Inventory Investment:-
Inventory means stock of unsold goods.
Any changes made in stock during the year are called inventory investment.
It ensures regular supply of inputs to the producers.
iii. Gross Investment:-
It includes expenditure by the producer on the purchase of new assets as well as expenditure on the replacement
@Commerce.bhaiya
of existing assets.
Replacement of existing assets refers to depreciation.
iv. Net Investment:-
It includes expenditure by the producers only on the purchase of new assets.
It does not include expenditure on existing assets.
It generates employment opportunities, promotes efficiency of labour and accelerates GDP growth.
Concept of Depreciation:-
Depreciation means wear and tear of assets. When any assets after regular use, have some reduction in their
value or their value is reduced when the assets become obsolete, it is known as depreciation.
Because of depreciation, fixed assets are replaced.
To complete their cost of replacement, producer keeps some fund with them which is known as depreciation
reserve fund.
Net investment= Gross investment – depreciation
Depreciation= cost of capital asset-scrap value
Estimated life of capital asset
Expected obsolescence Unexpected obsolescence
It means change in value due to regular use of It means change in value due to any natural
assets. calamities.
It is a part of depreciation. It is a part of capital loss.
It can be managed by reserve fund. It can be managed through insurance.
Depreciation is also defined as:-
Consumption of fixed capital
Replacement cost of fixed capital
Part of capital asset used in production process.
, D. Stocks and Flow:-
Stock: - A stock is a quantity measured at a specific time period. It is an economic variable which is measured at
a given point of time. Stock impacts the flow of goods and services. For eg: - wealth, money supply, population,
inventories etc.
Flow: - A flow is a quantity measured over a specified time period. It is an economic variable which is measured
over a period of time. Flow is time dimensional. For eg: - consumption and investment.
Basis Stock Flow
Meaning Any variable measured at a point of time. Any variable measured over a period of time.
Time dimension It has no time dimension. It has time dimension.
Examples Capital, wealth, inventories. Per capita income, inventories speed.
Nature It is a static concept. It is a dynamic concept.
E. Circular flow of Income:-
i. Real flow: - Flow of goods and services among different sectors of the economy.
ii. Money flow: - Flow of income across different sectors of the economy.
Definition:-
It refers to continuous flow of activities of production & income across different sectors of the country.
Each activity depends upon another activity which is being flowed in different sectors of the country.
Different sectors:-
i. Household sectors: - They are the consumers of goods and services. These are also known as the owners of
@Commerce.bhaiya
factors of production.
ii. Producer sector: - It includes producing units which produce goods and services and provide it to household
sector. They are also known as hires of factors of production and provide payment of using factor services.
iii. Government sector: - Government receives tax from producer and households whereas government provides
subsidies to the society.
iv. External sector: - It includes rest of the world, which is export and import of goods and services.
Three phases of circular Flow:-
Phase-I Production:-
Production means producing goods from given raw material.
It adds value to the raw material. For eg: - Wood is converted into furniture.
Therefore, it is a process of value addition by producing sector.
The producer hires factors of production from households and uses these factors of production as factor inputs
for manufacturing goods and services.
Phase-II Income Generation:-
When consumers render services to the producer they get income in return which is factor income.
This factor income is in the form of rent, wages, interest, profits etc.
Phase-III Expenditure:-
By receiving income, consumers will dispose of consumption in the form of consumption expenditure.
This income is used for consuming goods and services produced by producing sectors.
When expenditure is made by consumer then it is known as consumption expenditure. And when expenditure is
done by producer then it is known as Investment expenditure.
Assumption of model:-
Only two sectors prevail in the country: - Household, producer.
Households spend their entire income for consumption.
No interference of government.
All the activities are carried out within the boundaries of a country.
