NATIONAL INCOME ACCOUNTING
PART-1 BASIC CONCEPTS
- Circular flow of Income :
Income generation process in an economy depends on circular flow of goods and services. In every economy there are four sectors namely a) Household sector, b) firm sector, c) Govt sector and d) Rest of the world sector. These sectors depends on each other economically (for demand and supply) and technically (for input and output).
Hence, the flow of goods and services between different sectors of an economy and the resultant flow of income among themselves is known as circular flow.
Note: In class XII only two sectors flows ie., between Frims and Household secotrs are discussed.
The following flow chart explain the process of income generation in a two sector economy
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Producers (firms) and households are the constituents in a two sectors economy.
Households give factors of production to firm and firms in turn supply goods and services to households.
There are two types of flows takes place btween Households and firms :
- a) Money flow : It refers to the flow of money between different sectors of the economy such as firm, household etc. Eg. Flow of factor income from firm to house hold and consumption expenditure from house hold to firm.
- b) Real flow : It refers to the flow of goods and services between different sectors of the economy. Eg. Flow of factor services from household to firm and flow of goods and services from firm to household..
Injections and leakages in circular flow of income :
Injections are the inner flows in circular flow like investment, export, subsidy .These are additions to the circular flow of income and cause positive impact on the production process and income generation
Leakages are the outer flows in circular flow like savings, import and tax. These are withdrawals from the circular flow of income and cause negative impact on the production process and income generation.
- Types of goods :
- a) Consumption goods:- Are those which are bought by consumers as final or ultimate goods to satisfy their wants. Eg: Durable goods car, television, radio etc.
Non-durable goods and services like fruit, oil, milk, vegetable etc.
Semi durable goods such as crockery etc.
b) Capital goods – capital goods are those final goods, which are used and help in the process of production of other goods and services. E.g.: plant, machinery etc.
- c) Final goods: Are those goods, which are used either for final consumption or for investment. It includes final consumer goods and final production goods. They are not meant for resale. They are ready to use and doesn’t require further processing. So, no value is added to these goods. Their value is included in the national income. Ex. Milk, Bread, Scooter used by household.
- d) Intermediate goods Are those goods, which are used either for resale or for further production. They are not ready to consume and require further processing . Their value is not included in national income as they lead to double counting . Example for intermediate good is- milk used by a tea shop for selling tea.
- Factor income and Transfer income :
Factor income are receipts received by factors of production with tendering/producing any type of goods or services ,in the form of wages, rent, interest and profits etc.,. These are bilateral receipts and are included in the national income
Transfer income/ receipts are receipts received without tendering/producing any goods or services, e.g., old age pension scholarships, gifts etc.,. These are unilateral receipts and are not included in the national income.
- Stock and Flow :
Stock: – Quantity of an economic variable which is measured at a particular point of time.
Stock has no time dimension. Stock is static concept. Eg: wealth, water in a tank.
Flow: Flow is that quantity of an economic variable, which is measured during the period of time.Flow has time dimension- like per hr, per day etc. Flow is a dynamic concept.
Eg: Investment, water in a stream.
5.Investment (or) Capital formation :
Investment (or) Capital formation is the net addition made to the existing stock of capital.
It has two components .
Gross Investment (or) Gross Capital formation = Gross Domestic capital formation + Depreciation .
Gross Domestic capital formation = Gross fixed Capital formation + change in stock
Net Investment/Net Domestic Capital formation = Gross investment – depreciation.
- Depreciation(or) Consumption of fixed capital (or) Capital consumption allowance :
Depreciation refers to fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence.
Depreciation is added while measuring Gross values like Gross domestic product(GDP), Gross national Product(GNP),Gross value added(GVA) etc.,
Depreciation is subtracted while measuring net values like net domestic product(NDP), net national product(NNP, net value added (NVA) etc.,
GROSS = NET + DEPRECIATION
NET = GROSS -DEPRECIATION
- Concept of domestic (economic) territory
Domestic territory is a geographical territory administered by a government within which persons, goods and capital circulate freely. (Areas of operation generating domestic income, freedom of circulation of persons, goods and capital)
Scope identified as
*Political frontiers including territorial waters and air space.
*Embassies, consulates, military bases etc. located abroad but including those locates within the political frontiers.
*Ships, aircrafts etc., operated by the residents between two or more countries.
*Fishing vessels, oil and natural gas rigs etc. operated by the residents in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction.
8.Resident (normal resident):-
Normal resident is a person or an institution who ordinarily resides in that country and whose centre of economic interest lies in that country.
(The Centre of economic interest implies 😦 1) the resident lives or is located within the economic territory. (2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location 3. His centre of interest lies in that country.
- Non Residents :
Those individuals and institutions who are not the normal residents of a country and they are the foreign nationals comes to a country for short term duration with specific pursposes like treatment, sports, education etc.,
- MEANING OF NATIONAL INCOME, GROSS DOMESTIC PRODUCT(GDP), GROSS NATIONAL PRODUCT (GNP):
National Income is the Money value of final goods and services produced by the normal residents of a country during a year from within the domestic territory and net factor income from abroad.
GDP is the factor income generated by the normal residents of a country during a year only from within the domestic territory. It is also called domestic income
GNP is the factor income generated by the normal residents of a country during a year from within the domestic territory as well as net factor from abroad (NFIA) (or) rest of the world. It is Gross national income
GNP = GDP + NFIA
- Net Factor income from abroad :
Net factor income from abroad (NFIA) is the difference between factor income from abroad and the factor income paid to abroad.
NFIA = FIFA – FITA
Note; If NFIA is positive then National income is greater than domestic income and if the NFIA is negative then the domestic income is greater than the National income.
Value of NFIA differentiate between domestic income and national income
NATIONAL INCOME = DOMESTIC INCOME + NFIA
DOMESTIC INCOME = NATIONAL INCOME – NFIA
- Money(or) Nominal GNP and Real GNP(or) national Income :
National income being the indicator of Economic Growth the distinction between money and real national income (or) GNP is essential.
Measuring the value of final goods and services at current year prevailing market prices, it is known as money or Nominal national income. Since this aggregate measures the value of goods and services at current year prices, GNP will change when volume of product changes or price changes or when both changes. Therefore it is not a true indicator of economic growth.
When the value of final goods and services of the current year is measured at the base year (or) constant prices, it is known as real national income .Real GNP is computed at the constant prices. Under real GNP, value is expressed in terms of prices prevailing in the base year. This measure takes only quantity changes. Real GNP is the indicator of real income level in the economy and economic growth.
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