National Income Accounting Class 12 Notes
National Income Accounting Class 12 Notes
Macroeconomics
Now that you are familiar with the basic idea of macroeconomics,
let’s understand a few concepts. Macroeconomics is a vast subject and
a field of study in itself. However, some quintessential concepts of
macroeconomics include the study of national income, gross domestic
product (GDP), inflation, unemployment, savings, and investments to
name a few. Let’s discuss a few concepts.
Unemployment
Macroeconomic Policies
Now that you are familiar with some of the basic concepts of
macroeconomics, let’s try and understand some macroeconomic
policies. The two main macroeconomic policies that a government
may apply to bring about stability are the monetary policy and the
fiscal policy.
Monetary Policy
Fiscal Policy
Usually, economists prefer the monetary policy over the fiscal policy.
This is because the monetary policy is under the control of the central
bank of a country, which is an independent organization. The fiscal
policy is under the control of the government, which can be affected
by political intentions.
a. GDP
b. GNP
c. NNP
d. All of the above
What goes around comes around right? Have you ever wondered
where the money your parents earn comes from? And after you have
spent it, where will this money end up? As you may have figured it
out, money in our economy flows in circles. We call this the circular
flow of income. Let us learn more.
Flow of Money
In an open economy, there are a lot more factors that affect the
circular flow of income. In addition to household consumption and
business production, an open economy also takes into account the
government spending and foreign trade.
Now that you are familiar with the concept of the circular flow of
income, let’s understand the methods of calculating national income.
Calculating and measuring national income is important because that’s
how we can assess an economy’s growth rate. There are several
methods of calculating national income. Let’s briefly look at each
method.
Income Method
We can then calculate the national income by adding all these types of
income. Another important source of income is mixed income. Mixed
income refers to the income generated by self-employed professionals
and sole proprietors.
National Income = C + G + I + NX
Value-Added Method
The value-added method of calculating national income focuses on the
value added to a product at each stage of production. To calculate the
national income using this method, we will have to first calculate the
net value added at factor cost (NVAFC). And to calculate the
(NVAFC), we will have to deduct the net indirect taxes.
a. Salaries
b. Rent
c. Profit from sale of second-hand goods
d. Mixed income
In your basic accounts lessons, you must have learned the concepts of
income and expenditure, assets and liabilities, profit and loss, and so
on. Now, these concepts are important because they set the financial
foundations for a successful business. However, it doesn’t stop there.
These concepts are equally important for an economy as a whole.
Let’s look at Income method and Expenditure Method of calculating
National Income.
National Income
The three most common methods are the value-added method, the
income method, and the expenditure method. The value-added method
focuses on the value added to a product at each stage of its production.
Income Method
The income method of calculating national income takes into account
the income generated from the basic factors of production. These
include the land, labor, capital, and organization. And in addition to
income accrued from these factors of production, another important
component of income is mixed income. Now let’s discuss all these
components in detail.
Rent is the money you pay for the use of land. While calculating
income, rent refers only to the income earned from using any land.
Rent paid for the use of machinery and other equipment is not
accounted for as rent.
Interest on Capital
Interest refers to the charges you pay for using borrowed capital. Now,
this includes the interest paid when a company takes a loan for an
investment. Similarly, when a family invests in a property or a house,
they take a loan from a bank and pay an interest for the same while
repaying the loan over a period of time. However, while calculating
national income, economists consider only the interest paid by
production units.
Profits by Organizations
Mixed Income
Expenditure Method
Now that you are familiar with the income approach of calculating
national income, let’s understand the expenditure approach. The final
expenditure approach focuses on the expenditure involved in the
production of goods and services. Now you can classify expenditure
based on consumption and investment.
“Royalty received by an organization for the use of its coal mines can
be considered as a source of income while computing national income
using the income approach.”
● True
● False
Correct Answer: True. Royalty is a form of income and it should be
accounted for while calculating national income using the income
approach.
You must have gone through several articles that discuss various
macroeconomic concepts such as foreign trade, exports and imports,
and goods and services. Now, these concepts are important as they
affect the gross domestic product or GDP of the economy as a whole.
However, in addition to GDP, there are several other very important
macroeconomic identities that measure economic growth. These
include the gross national product or GNP and the net national product
or NNP.
Now, the GNP measures the total value of all final goods and services
produced within a specific period of time by a country’s residents and
enterprises. While calculating GNP, economists deduct the income
earned domestically by foreign individuals and companies and add the
income earned by residents and companies working abroad.
And that is the basic difference between GNP and GDP. While Gross
National Product considers the ownership, GDP measures the total
value of all goods and services produced in a country regardless of
foreign or domestic ownership. Let’s now understand the various
components of Gross National Product.
Now let’s understand the net national product or the NNP. The NNP
takes into account the depreciation factor. What is depreciation?
Depreciation is the wear and tear of fixed assets. And in this context, it
also refers to capital used to maintain existing stock.
And NNP is the total value of all final goods and services produced by
the factors of production of a country within a given specific time
minus depreciation. In other words, NNP is GNP – depreciation. Now
while calculating the NNP, economists take into consideration two
very important factors—indirect taxes and subsidies.
Private income is the final value of all incomes received by the private
sector. In this context, the private sector refers to the residents and
enterprises of a country. Private income also includes the national debt
interest, the net factor income from abroad, the current transfers from
the government, and the net transfers from the rest of the world.
In your everyday routine, there are several things that you need to get
through the day. As a student, you may require your subject books,
your art equipment, or your mechanical drawing set. Needs are
different for different people and what satisfies these needs are goods
and services. And you pay a price for these goods. Consequently, you
create a market for these goods and help in contributing towards the
GDP of your country’s economy. And all these put together affect the
economy in many ways. So, let’s try and understand these concepts in
detail.
Goods
Now, we already know that goods are products that satisfy human
wants and needs. In the context of economics, we can define goods as
materials that provide a utility. Now, you can classify goods into
different categories such as tangible and intangible goods and
intermediary and final goods.
Tangible goods are the goods that you see and touch. You can transfer
these goods from one place to another. Examples of tangible goods
include automobiles, garments, and grocery items. Intangible goods,
on the other hand, are goods that you can’t feel or touch. Medical,
architectural, law or engineering services are all examples of
intangible goods.
Consumer goods are goods that directly satisfy human needs. These
include durable (fuel, bread, milk, rice) and non-durable goods
(garments, cars, fans). Producer goods include goods that you can
further use to produce other goods. These include goods such as
machines and agricultural raw materials.
Intermediate goods are goods that one production unit sells to another
for resale or further production. For instance, a farmer may sell wheat
to a company. A company may then buy that wheat and further
process it to create bread. Here wheat is an intermediary product.
Final goods are goods that are produced for final consumption or
investment and not for resale. It is very important for you to
understand the difference between an intermediary product and a final
product. When a municipal corporation provides electricity to a
production unit or a company, then it is an intermediary good.
However, when the same electricity is supplied to households for
direct consumption, it becomes a final good.
Prices
Now that you are familiar with the concept of goods in economics,
let’s try and understand the concept of price. You can define price as
the compensation you pay to another party in return for one unit of
goods or services. The price of a product or a service usually depends
on its supply and demand. And the demand and supply factors in an
open economy usually balance on their own.
When a product’s supply is excessive, then the prices are usually low.
This causes the production to decrease to a point where there is a
balance between the demand and supply. When the demand for the
same product increases and doesn’t match the supply, the price of the
product increases. This entire system of price based on demand and
supply factors is also referred to as the price theory.
Now that you have understood the concepts of goods and prices, let’s
see how they affect the GDP of an economy. Let’s first understand
what’s GDP? You can define GDP as the total value of goods and
services produced in a country within a specific period. The GDP is
usually calculated on an annual basis.
Correct answer: False. Beach sand is freely available. It does not have
a monetary value associated with it and is hence a non-economic
good.