11_BASIC CONCEPT OF NATIONAL INCOME class 12

 

 

 

 

ECONOMICS (CLASS-XII)

 

Chapter-11

Basic Concept of National Income

 

CONCEPT OF INCOME

1. Factor Income : (Primary Income). It refers to the income received by various factors of production in return of their productive services in the process of production. It is also called as factor payment as these payments are made to the owners of the factors of production. (land, labour, capital and entrepreneur).
2. Transfer Income : Transfer incomes are unilateral payments. These incomes are received by their receiptants without producing any goods or services.

 

Factor income is an earning concept so it is included in national income while transfer income is a receipt concept so it is not included in national income.

Difference between Factor Income and Transfer Income

Factor Income	Transfer Income
It comprises rent, wages, interest and profit	It comprises subsidies gifts, donations and scholarship
It is bilateral payment	It is unilateral income
It is earned income	It is an unearned income
It is included in national income	It is not included in national income

1. Categories the following into factor and transfer income.

            (a)        Old age pensions given to needy women.

(b)        Rent received by Mrs. Gupta from XYZ enterprise.

(c)        Donations received from abroad for medical camp.

(d)        Money received for providing goods.

(e)        Payment made for purchasing services

 

 

FINAL AND INTERMEDIATE GOODS

Intermediate Goods

Intermediate goods are those which are meant for furthering the production process and help in the production of final goods. All the goods which are used (a) as a raw material for further production of other goods (b) for resale in the same year are called intermediate goods. The value of intermediate goods is not included in the national income because the value of these goods is already included in the value of final goods.

For example : vegetables used by restaurant owner is an intermediate goods.

In defense services, some durable goods are also considered as intermediate goods. These includes :

• The weapons of destruction such as missiles, rockets, bombs etc.
• Equipment’s needed to deliver them such a vehicles, tanks, missiles carriers etc. These are treated as raw material needed for producing defence services.

Final Goods

Final products are those goods that are purchased by consumers and firms for the purpose of their own use. These products do not undergo further changes in the production process. Final goods can be of 2 types :

(a)        Consumption Products : Consumption products are those products that are purchased for the direct satisfaction of household needs and want. These can be durable and non-durable goods and services. For example; Shirts, Cigerattes.

(b)        Investment Goods : Investment goods are all goods purchased by the firm for capital formation. Capital formation can be due to purchase of durable goods or net addition to stock. From a households perspective only residential building are considered as investment.

These goods are of the durable character. Example tools, implements, machinery plants and

factories. Important characteristics are :

1. They make the production of other goods possible, they themselves do not get transformed in the production process.
2. Capital goods undergo wear and tear.

Difference between Intermediate Goods and Final Goods

Intermediate Goods	Final Goods
These goods are used for producing other goods so value is added to these goods.	These are used for final consumption and final investment
These goods have a derived demand	These goods have a direct demand
The value of these goods is not included while calculating national income	The value of these goods is included while calculating national income
These goods do not cross the production boundary	These goods cross the production boundary

 

Problem of Double Counting :

In the calculation of total output, or national income in an economy we only includes final goods and services. The value of the firm’s output also included the value of intermediate goods bought by a firm.

Value of Chocolates produced by firm A = Rs. 100

Value of ingredients

 

If the value of intermediate goods is added to national product, it will lead to overvaluation of the output of an economy or problem of double counting.

Double counting occurs when the value of commodity is counted more than one for valuing the total output of an economy. To avoid the problem of double counting, the values of only final goods are taken.

 

STOCK AND FLOW

Stock and flows are variable. A variable is measurable quantity which varies.

1. Flow Variable : A flows is quantity which is measured over a period of time. Thus, flow are defined with reference to a length of time like hour, days, weeks, month or year. National income is flow. All the economic variable which have time dimensions i.e. whose magnitude can be measured over a period of time are called flow variable. Similarly investment i.e. addition to the stock of capital is a flow. Other example are expenditure, savings, depreciation, interest, rent and profits etc.
2. Stock Variable : A stock is a quantity which is measured at a point of time capital is a stock variable. It is calculate at a point of time, which shows stock position. Thus a wealth is a stock since it can be measured at a point of time. Example : wealth, foreign debt, opening stock, money supply, population etc.

PRODUCT AT MARKET PRICE Vs PRODUCT AT FACTOR COST

If the output is valued using the prices charged by an entrepreneur, it is termed as output at factor cost. If the output is valued using the prices paid by the consumer, it is referred as output at market price. The difference in the market price and factor cost is indirect taxes and subsidies.

Indirect Taxes : Taxes are the compulsory payment by the households and firms to the government. Indirect, taxes are those where the payer of the tax is difference from the person bearing the tax. It increases the MP person bearing the tax. Indirect tax increases the market price.

Subsidies : Subsidies are the unrequired payment made by the government to the enterprises. It reduces the market prices of the commodity.

 

Net Indirect Tax = (Indirect Tax – Subsidies)

Product at Market price = Product at Factor cost + NIT

Product at Factor cost = Product at Market prices – NIT

 

GROSS PRODUCT Vs NET PRODUCT OR GROSS INVESTMENT Vs NET INVESTMENT

Investment or Capital formation means addition to capital stock of the country. It has two types :

(a)        Gross Investment : The total addition made to the given capital stock of a country is termed as “Gross Investment:. It is the expenditure on the purchase of fixed assets and unsold stock during the account years.

(b)        Net Investment : The actual addition made to the capital stock of economy in a given period is termed as ‘Net Investment’. Net Investment = Gross Investment – Depreciation. Depreciation is also known as

(i)         Current Replacement Cost

(ii)        Replacement Cost of fixed assets.

(iii)       Capital consumption allowances.

            Gross means that the value of the product include ‘depreciation’.

Depreciation : The term depreciation is also known as “Consumption of fixed capital”. It refers to fall in the value of fixed. Capital goods due to the normal wear and tear of a forseen obsolescence. However, if the value of the assets fall due to unforeseen obsolescence, it is termed capital loss and not depreciation like natural calamities theft etc.

            Net product is the measure of net availability of new products after taking into accounts the wear and tera.

DOMESTIC  PRODUCT AND NATIONAL PRODUCT

            Economic Territory

            It is the geographical territory administered by the government within which persons, goods and capital transfers freely.

It includes :

(a)        Territory lying within the political frontiers of a country. It includes territorial waters             also.

(b)        Ships and air crafts owned and managed by the residents between two or more countries.

(c)        Embassies, consulates and military establishments of the country located abroad.

It does not includes :

(a)        Territorial Embassies used by foreign government.

(b)        International Organisations (W.H.O. I.M.F. etc.) which are physically located within the             geographical boundaries of the country.

NORMAL RESIDENT

            A normal resident is said to be a person (or institution) who ordinarily (for a period of more than one year) resides in a country and whose economic interest lies in the country.

Important Points

• Normal residents covers both individual and institutions.
• International bodies are not considered residents of the country in which it operate. But        the staff of there organization is treated as residents of territory in which the international     body operates.
• Local employees working in the foreign embassies located in the country are treated as         normal residents.
• Workers from across the borders who cross the border in the morning to work in the             country are not the normal resident of the country in which they work.

DOMESTIC PRODUCT

            The money value of all the final goods and services produced within the economic territory of a      country in a given accounting year is called domestic product.

NATIONAL PRODUCT

            It is defined as the value of the production or income earned by the residents of the country within the given time period.

NET FACTOR INCOME FROM ABROAD (NIFA)

            Income through factor services rendered by the normal residents of the country to the rest of the      world less factor services rendered to them by the rest of the world.

NFIA = Factor income from abroad – Factor income to abroad

Components

1. Net Compensation of Employee : Income from work can be earned by working in the domestic territory of other country e.g. wages and salaries.
2. Net income from property and entrepreneurial (Rent, Interest and Profile) : Income can also be earned through ownership of property, financial assets etc. in other country. also profit is earned by undertaking entrepreneurial activities.
3. Net retained earnings of the resident companies abroad : It is the undistributed profits.

REAL GDP AND NOMINAL GDP

Real GDP

            If GDP is valued over different years keeping prices same over the years then it is termed as GDP at constant price or real GDP. It changes because of changes in output. It is a real indicator of economic growth.

Nominal GDP

            Using the price of the year in which the output is produced is termed as valuing the GDP at current price. It changes because of changes in both prices and output. It is not a real indicator of economic growth.

It measures the average price level of all the goods and services that constitutes GDP in an economy.

National Income at Current Prices / Nominal National Income	National Income at Constant Prices / Real National Income
It is the current money value of all the final nominal national income goods and services produced by normal residents during a year.	It is the money value of all the final goods and services produced by normal resident in a year calculated at base year prices.
It can change even when these is no change in output	It will change only when there is a change in output of an economy
It is not a true indicator of economic growth.	It is a true indicator of economic growth of a country
It cannot be compared with base year national income	It can be compared with base year NI.
Current prices × Current output	Base year prices × Current output

National Income at Constant Price